by Jim Collins
• Multiplied revenue 2.7X (from $2.8 billion to $7.7 billion) in five-year period from 1992 to 1997, with an average growth rate of 22 percent per year.
• Committed to building CarMax as an exciting new business. By 1997, CarMax had grown from zero to $510 million in revenue. Issued $412 million equity in 1997 to fund growth, with the goal of expanding to more than 80 CarMax stores by 2002.197
• Began development of Divx, a new home video technology that would allow for a no-return, rental-like system for home movie viewing.198
* * *
HP, Stage 2: 1992–1997
• Multiplied revenue 2.6X (from $16.4 billion to $42.9 billion) in five-year period from 1992 to 1997, resulting in faster average growth than that achieved in the 25-year period from 1966 to 1991.199
• Accelerated new product development. By 1993, 70 percent of HP’s orders came from products introduced in the previous two years, up from 30 percent a decade earlier.200
• In 1996, picked as the “Best Performing Company” in America by Forbes, edging out GE, Johnson & Johnson, and Intel. The article was titled, “Top Corporate Performance 1995: ‘Boy Scouts on a Rampage.’”201
• CEO Lew Platt waged war on complacency and built HP for innovation. “Fear of complacency is what keeps me awake at night,” he said. “You must anticipate that whatever made you successful in the past won’t in the future.” Platt believed that the best defense was preemptive self-destruction and renewal. “It’s counter to human nature, but you have to kill your business while it is still working,” he said. “My job is to maintain an environment that encourages healthy paranoia.”202
• Dominated the printer industry with an Intel-like cycle of brutalizing competitors: come out with the next generation of better products just as your competitors catch up to your current generation, devastate your competitors with ferocious pricing, and then repeat the cycle, fast. Applied this model to personal computers and moved from #11 to #3 in four years.203
• Made a significant move into e-commerce by buying Verifone.204 Advanced the concept of an “information utility” to link digital devices with the ease of plugging appliances into a wall and moved into digital photography.205
* * *
Merck, Stage 2: 1993–1998
• In 1993, acquired Medco Containment Services, Inc., for $6 billion (on a 1992 revenue base of $9.7 billion). Medco was acquired to control distribution in profit-hostile environment.206
• Established #1 business objective as being a top-tier growth company. Planned to achieve growth by investing in fundamental R&D for potential breakthrough drugs, achieving the full potential of managed pharmaceutical care, and preserving the profitability of the core pharmaceutical business.207
• Maintained scientific advancement, on track to patenting more new compounds than any other pharmaceutical company.208
• Instituted significant organizational change, creating “worldwide business strategy teams,” each focused on key diseases, to drive product and market development.209
* * *
Motorola, Stage 2: 1990–1995
• Sought to double in size every five years.210 From 1990 to 1995, grew revenue from $11 billion to $27 billion.
• Positioned itself strongly for trends: wireless, cellular, electronics, and globalization, with farsighted investments made in China (by 1996, had the largest stake in China of any U.S. company).211
• Took Iridium satellite-communications project into full development (spun it into separate LLC in 1991).212
• Made major bet on PowerPC microprocessor (in partnership with IBM and Apple) to challenge Intel.213
• Demonstrated high levels of innovation, increasing its patents from 613 in 1991 to 1,016 in 1995.214
• Heralded as “The Company that Likes to Obsolete Itself.”215
• Pioneered Six Sigma quality, one of the first companies to pursue 3.4 defects per million in its products.216
• Encouraged a combative “cult of conflict” to ensure that the best technology and market ideas won.217
* * *
Rubbermaid, Stage 2: 1980–1993
• Increased revenues more than six times and earnings nearly fifteen times from 1980 to 1993, at one point generating forty consecutive quarters of earnings growth.218
• Created an innovation machine. By 1991, generated more than 30 percent of its revenue from products introduced in the previous five years.219 In 1992, introduced on average one new product every day, 365 days a year.220
• In the early 1990s, aimed to add one new market segment every 12 to 18 months.221
• Cultivated an intense drive for growth and self-reinvention. “We have to reinvent ourselves continuously.”222 “Our major growth objective is to double our sales, earnings, and earnings per share every five years.”223
* * *
Scott Paper, Stage 2: 1962–1970
• Instituted diversification program to fuel new growth. Bought a textbook paper manufacturer, plastic-coating company, and company that made teacher training kits for K–12 education. Launched a disposable-products company, with creative ideas like disposable paper dresses and graduation gowns. Made a move into resorts and poolside/patio furniture.224
• Adopted a brand management model, with brand managers responsible for their own products’ earnings and for their own research, manufacturing, advertising, and sales—a significant change from the previous approach.
• At the same time, Scott did not respond aggressively to the threat from P&G during the early 1960s (some evidence indicates that it had a “genteel” culture that lacked a fighting spirit).225
* * *
Zenith, Stage 2: 1966–1974
• Achieved ambition to become #1 in U.S. black-and-white television market by 1959.226
• Achieved ambition to overtake RCA to become #1 in color televisions by 1972.227
• Made a big bet on the visionary idea of pay TV. Didn’t succeed, largely because Zenith was nearly two decades ahead of its time.228
• From 1970 to 1973, invested in significant capacity expansion, with new plants in Taiwan, Hong Kong, along the Mexican border, and elsewhere.229
• Poured money into automating plants in the United States as way to compete in tough global economic conditions.230
• Developed a reputation for being a fast follower in new technologies; once a new approach had been proven, would aggressively adopt it.231
* * *
Cases Demonstrating Significant Complacency A&P, Stage 2: 1958–1963
• Became known as the “Hermit Kingdom,” with a reputation for isolation and resistance to any change. “You can’t quarrel with a hundred years of success” became a common internal refrain.232
• Forty percent of founder stock allocated to Hartford Foundation, which demanded high dividends. From 1958 to 1962, turned record-high profits into record-high dividends, paying out more than 90 percent in dividends.233
• Invested less in new stores than competitors. In 1962, “with 33 percent of the volume and 36 percent of the total number of stores, expended only 18 percent of the capital investments in stores made by the top ten chains.”234
• Allowed stores to fall into disrepair. Stuck with an outdated store format, while competitors began investing in larger store formats that would eventually become superstores.235
Appendix 4.B:
Evidence Table—Grasping for Salvation
A&P
Falling in the early 1970s, set off an industry price war—what one industry competitor called “a desperation effort that is throwing the industry into chaos”—converting more than four thousand A&P stores to a new format called WEO (short for “Where Economy Originates”) and driving prices below costs to regain market share.236 Hired a charismatic savior CEO from the outside. Bet on a new division of “Family Mart” combination stores, selling everything from televisions to bread, milk, and beer. Launched new advertising and image-making campaigns. A
fter a brief return to profitability, fell into a string of losses, which further eroded the balance sheet. Lurched for other saviors, including an investment from a German company and yet another outside CEO.237
Addressograph
In the early 1970s, experienced significant decline in profits due to product failures and lured an outside CEO from Honeywell with a large cash signing bonus and stock grant who failed to reverse the decline. Turned to another charismatic outsider who threw the company into a traumatic reinvention. Pinned hopes on a savior strategy, leaping into the Office of the Future. (The strategy, according to an Addressograph executive just a few years later, was “to leapfrog from where [Addressograph] was in the mid-1970s to maybe 15 years into the future. The leap did not go as planned.”238
Ames
After the Zayre acquisition, fell into bankruptcy protection. New CEO brought in a team of hired guns to save the company. Emerged from bankruptcy with yet another new CEO in place, who wrote in his first annual report, “Prior to and during Chapter 11, Ames attempted various merchandising and marketing strategies that may have confused many traditional Ames customers.” Within two years, brought in yet another CEO, who began a “fundamental transformation” of the company, changing strategy again, this time to “opportunistic purchasing and micro-marketing,” deemphasizing the everyday-low-price model in favor of focusing on being in stock and putting in place new flashy programs with taglines like “55 Gold” and “Bargains by the Bagful.” In 1998, embarked on the acquisition of Hills Department Stores, nearly doubling the size of the company overnight. Liquidated less than four years later.239
Bank of America
In the mid-1980s, began to visibly tumble. Made extensive use of external culture consultants, putting almost 2,000 employees through what Fortune called “a series of corporate encounter groups.” Banker Magazine reported that the “wide-ranging programme . . . involves a total revision of its philosophy, tactics, strategy and regional priorities.” Launched a $5 billion program in new technology to rush into the Information Age. Cut the dividend for the first time in more than five decades. CEO resigned and the board brought a former CEO back out of retirement to save the company; he then brought in former Wells Fargo officers to help turn things around.240
Circuit City
Facing declining revenue in 2002, launched a new logo and program tagged “We’re with you” with a major advertising campaign. In early 2003, made a drastic move to eliminate commissioned sales; terminated more than 3,000 experienced, higher-paid salespeople in favor of less-experienced, lower-cost, hourly people. Replaced “sales counselors” with “product specialists.” Posted losses in 2003 and 2004. Launched new branding campaign in 2004 under the tagline “Just What I Needed” and yet another new brand dubbed “Firedog” in 2006. Hired an executive from Best Buy who became president in 2005 and CEO in 2006. In 2008, considered a potential sale to salvage something for its shareholders, only to see a bid from Blockbuster evaporate.241
HP
In the late 1980s, appeared to be falling behind relative to the technology bubble and began to perform below Wall Street expectations. CEO resigned and the board hired a high-profile, charismatic leader from the outside. Launched a radical cultural and strategic transformation, built around the Internet. Then in 2001, bid to buy Compaq Computer at a cost of approximately $24 billion, advancing its case with dramatic rhetoric: the “best and fastest way to increase the value” . . . “in one move, we dramatically improve” . . . “enable us to quickly address” . . . “we immediately double” . . . “in a single strategic move” . . . “will allow HP to accelerate” . . . “will transform our industry” . . . and so on. Earnings became erratic. In early 2005, the board fired its CEO and hired a replacement from the outside.242
Merck
Never reached Stage 4.
Motorola
Upon falling into visible decline in the late 1990s, bet on “harnessing the power of wireless broadband and the Internet”—right at the height of the telecom and dot-com boom. Later admitted that “like others, we inopportunely chased the dot-com and telecom boom.” Aimed to recast itself from being a hardware-oriented to a software-oriented company. Made a $17 billion acquisition of General Instruments. Undertook radical cultural and strategic change; “Everything has been modified or changed at the company.” Bet on a new program called “Intelligence Everywhere.” Began researching a move into biotechnology. Overhauled the wireless business three times in four years. In late 2003, hired a savior CEO from the outside who lasted fewer than four years.243
Rubbermaid
In the fourth quarter of 1995, not long after appearing as the #1 “Most Admired Company” in America, reported a loss. Announced its first major restructuring, cutting nearly six thousand product variations, closing nine plants, and eliminating 1,170 jobs.244 At the same time, made one of the largest acquisitions in its history. Announced the sale of its office-products business, reversing a strategic imperative set just a few years earlier. Launched a radical marketing bet on the Internet as “a renaissance tool,” yet profits dropped again, triggering a second major restructuring. Launched the biggest new marketing campaign in its history. Recast incentive compensation, with stronger links to its stock price. Made another big acquisition to quadruple European sales. Lost its independence to Newell Corporation in 1998.245
Scott Paper
From 1981 to 1988, embarked on a dramatic turnaround, a revolutionary transformation designed to shock the company out of its stupor. Instituted more pervasive incentive pay. Put hundreds of managers through retreats to imbue them with a new mindset, making the company “dynamically reborn.”246 Hired strategy consultants to help reshape direction.247 Initial results looked good, but then profits dropped. Fell into restructuring doom loop, with $167 million in restructuring charges in 1990, followed by a $249 million restructuring charge in 1991, followed by another $490 million restructuring charge in early 1994, totaling nearly $1 billion.248 Brought in a fix-it CEO from the outside who slashed jobs, cut costs, and sold the company to archrival Kimberly-Clark.
Zenith
In 1977, posted its first loss in decades. CEO resigned. Leapt after a whole bunch of new opportunities at the same time. “If we have any plan at all, it’s that we’ll take a shot at everything,” said a Zenith senior leader. Over a three-year period, moved into VCRs, videodiscs, telephones that linked through televisions, home-security video cameras, cable TV decoders, and personal computers (via the acquisition of the computer company Heath). To fund all these moves, doubled its debt-to-equity ratio.249
Appendix 5:
What Makes for the “Right People” in Key Seats?
While the specifics regarding who would be the right people for key seats vary across organizations, our research yields six generic characteristics:
1. THE RIGHT PEOPLE FIT WITH THE COMPANY’S CORE VALUES. Great companies build almost cult-like cultures, where those who do not share the institution’s values find themselves surrounded by antibodies and ejected like a virus. People often ask, “How do we get people to share our core values?” The answer: you don’t. You hire people who already have a predisposition to your core values, and hang on to them.
2. THE RIGHT PEOPLE DON’T NEED TO BE TIGHTLY MANAGED. The moment you feel the need to tightly manage someone, you might have made a hiring mistake. If you have the right people, you don’t need to spend a lot of time “motivating” or “managing” them. They’ll be productively neurotic, self-motivated and self-disciplined, compulsively driven to do the best they can because it’s simply part of their DNA.
3. THE RIGHT PEOPLE UNDERSTAND THAT THEY DO NOT HAVE “JOBS”; THEY HAVE RESPONSIBILITIES. They grasp the difference between their task list and their true responsibilities. The right people can complete the statement, “I am the one person ultimately responsible for . . .”
4. THE RIGHT PEOPLE FULFILL THEIR COMMITMENTS. In a culture of discipline, people view commitments as sacred—th
ey do what they say, without complaint. Equally, this means that they take great care in saying what they will do, careful to never overcommit or to promise what they cannot deliver.
5. THE RIGHT PEOPLE ARE PASSIONATE ABOUT THE COMPANY AND ITS WORK. Nothing great happens without passion, and the right people display remarkable intensity.
6. THE RIGHT PEOPLE 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. Yet when things go awry, they do not blame circumstances or other people for setbacks and failures; they point in the mirror and say, “I’m responsible.”
Appendix 6.A:
Decline and Recovery Case IBM
SYNOPSIS: IBM grew to become one of the most admired and successful corporations of the twentieth century under the leadership of Thomas J. Watson, Sr., and Thomas J. Watson, Jr.; they led IBM for a total of fifty-seven years (1914–1956 for Watson Sr. and 1956–1971 for Watson Jr.). IBM became a dominant force in computing, making huge leaps with programs like the IBM 360 project. From 1926 to 1972, IBM beat the general stock market by more than seventy times; a $1,000 investment in IBM in 1926 would have returned more than $5 million by 1972. In the mid-1980s, however, IBM began a steady slide and then plummeted in the early 1990s, posting its first losses in more than seven decades, losing more than $15 billion from 1991 to 1993. In 1993, the board hired Lou Gerstner as CEO, who turned IBM around and then set the foundations for IBM to become a great company once again.250
I’ve outlined IBM’s recovery through the lens of the good-to-great concepts below. (For an explanation of these concepts, see Appendix 7.)