In Search of Excellence - 25th Anniversary

Innovation

Thomas J. Peters and Robert H. Waterman Jr. (1988). In Search of Excellence: Lessons from America's Best-Run Companies. (New York, NY: Warner, 360 p. [orig. pub. 1982]). Management Consultants (McKinsey & Co.). Industrial management--United States.

This is the book which, in my opinion, gave life to the business book genre, titles published by business professionals, journalists, consultants and academics for 'popular' consumption. It was one of the biggest selling and most widely read business books ever published; sold 3 million copies in its first four years; most widely held library book in the United States from 1989 to 2006.

Yet, there is great irony. The book was heavily criticized and its 'Best-Run Companies' were shown to be anything but best-run. How, then, could the book have done so well? Probably because the market business was growing: revenue for published business books, number of MBAs graduating from business schools, number of undergraduates earning business degrees; readers seeking books on business for fun, profit, and instruction.

The book began as a McKinsey project on teams and organizations in business. No publishing efforts had been planned. Then, corporate customers began to pay for the conclusions of the study.

The authors: 1) identified 43 companies between 1961-1980 which, in their opinion, constituted a blueprint for success, based on several criteria: asset growth, equity growth, return on total capital, return on equity, return on sales, market/book value [where was realized returns to shareholders?]; 2) distilled the results into eight common themes which, they argued, were responsible for the success of the chosen 43 corporations:

1. A bias for action, active decision making - 'getting on with it'.
2. Close to the customer - learning from the people served by the business.
3. Autonomy and entrepreneurship - fostering innovation and nurturing 'champions'.
4. Productivity through people- treating rank and file employees as a source of quality.
5. Hands-on, value-driven - management philosophy that guides everyday practice - management showing its commitment.
6. Stick to the knitting - stay with the business that you know.
7. Simple form, lean staff - some of the best companies have minimal HQ staff.
8. Simultaneous loose-tight properties - autonomy in shop-floor activities plus centralised values.

BUT...Excellent companies these were not.

A) Daniel T. Carroll was the first to weigh in with a stinging rebuke of the book and its conclusions. He was former president of Booz Allen Hamilton’s Management Consulting Division, former chief operating officer and president of Gould, Inc., former chief executive officer of Hoover Universal (later merged with Johnson Controls), both Fortune 500 companies; founder of The Carroll Group, Inc., a management consulting firm.

He published his conclusions in "A Disappointing Search for Excellence," Harvard Business Review, November-December 1983, pp. 78-88. He criticized the lack of deep research, heavy reliance on anecdotes and secondary sources, and superficial conclusions. He seemed to be proved right as a number of the supposedly excellent companies did poorly with a year of the book's being published. The 'lessons' suggested in the book were highly suspect.

B) Business Week (November 5, 1984) published an article, titled, "Oops. Who’s excellent now?". It observed that, of the 43 'excellent' companies in the Peters/Waterman book, one-third were in financial difficulties within five years, particularly in the high technology sector.

C) Michelle Clayman (Oxford BA, Stanford MBA), founder and managing partner of New Amsterdam Partners, an institutional money management firm ($6 billion under management), published a startling contrast in the Financial Analysts Journal (May-June, 1987). titled “In Search of Excellence: The Investor’s Viewpoint.” The author studied 5-year performance (1981-1985) of Peters/Waterman companies vs. "unexcellent companies" (in search of disaster companies) - 39 companies from the S&P 500 which ranked in bottom third of all Peters/Waterman criteria from 1976-1980: asset growth (21.78% vs. 5.93%, equity growth (18.43% vs. 3.76%), return on total capital (16.04% vs. 4.88%, return on equity (19.05% vs. 7.09%, return on sales (8.62% vs. 2.49%). Classic growth vs. value choice.

Her results showed that Peters/Waterman companies largely tracked the S&P 500 market index (market returns) while her 'disaster' companies generated returns in excess of the market returns of 12%. She concluded that so-called 'good companies' don't always make good investments. It would seem that the future cash-generating ability of the 'excellent' companies may have already been factored into the prices of their shares. No so for the 'disaster' companies.

Peters and Waterman focused on innovation (product or process) without regard to: 1) execution of that innovation into real, sustainable, competitive advantage(s) or 2) translation of that innovation into realized returns for shareholders. They focused on financial criteria, not economic results.

I consider that unacceptable. Innovation without 'economic value added', especially in the form of increases in profitability and realized returns to shareholders seems an empty exercise, sort of like 'profitless prosperity' (rising sales without rising profit). Profitability is the key to value - if innovation cannot or does not contribute to increases in a company's future cash-generating ability, then the exercise should be questioned as a waste of time and resources.