Book value

Why there are no excellent companies, and why you shouldn't try to turn yours into one

  • Creative Destruction, by Richard Foster and Sarah Kaplan (Doubleday/Currency, April 2001)
  • The Myth of Excellence, by Fred Crawford and Ryan Mathews (Crown Business, July 2001)
  • The Sum of our Discontent, by David Boyle (Texere, June 2001)

Tom Peters said it more than a decade ago, even though he was contradicting his own previous work. In Thriving on Chaos, a book he wrote just five years after his classic In Search of Excellence started popping up on corporate bookshelves everywhere, Peters declared on the first page, "There are no excellent companies."

It wasn't only that the businesses that Peters and coauthor Robert H. Waterman Jr. had identified in Excellence as exemplars of innovation had fallen by the wayside -- remember Digital Equipment and Data General? Rather, Peters was commenting on a broader trend. It seemed then, as it does now, that as soon as a company is held up as the poster child for how to create a successful business, it falls on hard times. (Cisco springs to mind as a recent example.)

The question, of course, is why.

In Creative Destruction: Why Companies That Are Built to Last Underperform the Market -- and How to Successfully Transform Them, Richard Foster and Sarah Kaplan take a big step toward explaining the rise-and-fall phenomenon. Foster, a senior partner and director at the consulting firm McKinsey & Co., and Kaplan, a former McKinsey employee who is now a doctoral student at MIT, point out a major flaw in a fundamental tenet of American business: contrary to conventional wisdom, managers shouldn't focus on designing a company so it can withstand the test of time. Although there's nothing wrong with the goal of corporate longevity, they contend, markets move too quickly for traditional management structures to keep up.

Foster and Kaplan build their case on the ideas of economist Joseph Schumpeter, who explained in the 1930s and 1940s that capital markets weed out underperformers so that new companies can take their place -- a concept Schumpeter described as "creative deconstructionism." The authors argue that successful companies tend to institutionalize the thinking that caused them to thrive. The inevitable consequence, they say, is that those companies can't change quickly enough to respond to market forces.

Elements of that philosophy have been kicking around for nearly 15 years, advanced by such authors as Peters and Andy Grove, but Foster and Kaplan's painstaking research, which examines the performance of more than 1,000 companies over four decades, has crystallized the argument.

Unfortunately, the authors' recommendations on how to manage for long-term success aren't very fresh. They advise managers to increase the pace of change within their organizations, open up the decision-making process, and relax conventional notions of control. Still, their book raises significant questions about the worthiness of long-term success as an organizational goal.

Of course, if you're going to start addressing questions about the aim of lasting excellence, you may as well begin by asking what it means to be excellent in the first place. So say consultants Fred Crawford (who works at Cap Gemini Ernst & Young) and Ryan Mathews (who works at Connecticut-based consultancy First Matter) in The Myth of Excellence: Why Great Companies Never Try to Be the Best at Everything. They claim that what you think customers want your business to do excellently and what they actually do want are two separate things.

Crawford and Mathews begin by reminding us of the five components of every commercial transaction: price, product, service, access, and overall experience. Then they go on to say that most corporations act as though they need to excel in all five areas.

The problem is, nobody has bothered to spend sufficient time with customers to find out if they expect excellence across the board, according to the authors. It turns out that they don't.

Consumers have come to expect a basic level of quality and service in every transaction -- and their expectations have risen steadily over time. Given that baseline, the authors say, what customers want is for a company to truly excel -- to be world-class -- in one of the five major areas of a transaction and to be above average in a second area. If a business does that much -- and then performs adequately in the other three parts of the transaction -- customers will stick with the company for life.

What's more, it doesn't matter what area a business chooses to excel in. Wal-Mart stresses price; Target concentrates on product offerings. The key is to dominate in some aspect of the transaction.

Clearly, a company that excelled in all five areas would also win. But implicit in the consultants' argument is that you don't have to work that hard -- and that you'll fail if you try. Wal-Mart's secondary attribute is its wide selection of products; Target's number two selling point is its prices. Based on feedback from consumers, the consultants rank both retailers as merely average in the other three transactional categories, but the companies' strengths in the top two categories provide enough competitive advantage for them to thrive.

The interesting thing about that argument -- though the authors never make it explicitly -- is that by stressing one characteristic, a company reinforces its brand. It tells consumers what it stands for.

But as long as we're questioning things, why not question the very numbers we use to measure excellence in the first place? David Boyle provides plenty of enjoyable ammunition in The Sum of Our Discontent: Why Numbers Make Us Irrational. (If ever an academic work could be said to be entertaining, it's this one.) Boyle, who works for something called the New Economies Foundation and lives in London, has compiled an engaging history of numbers, which he uses to demonstrate the futility of trying to use numbers to consistently control, or even explain, the world around us. As Boyle points out, "It's hard to object to any [measurements] by themselves, but taken together they represent a massive loss of faith in our own judgment, intuition and our trust in other people."

So strike another blow for gut instinct. But did you really need convincing?

Paul B. Brown is the author or coauthor of 10 books and editor-in-chief of DirectAdvice.com.


Executive Reader

Charlie Horn
Six-time entrepreneur and chairman and CEO of ScriptSave, a $12-million manager of prescription-drug benefits in Tucson

His business bible
The Last Word on Power, by Tracy Goss. "This book is teaching me how to create breakthroughs in an organization -- and how to create those breakthroughs at will," Horn says.

Recent fave
The Experience Economy, by B. Joseph Pine, James H. Gilmore, and B. Joseph Pine II. "This book takes you beyond experience and into transformation. What people are really willing to pay for is transformation. Obvious examples of transformational businesses are health clubs, weight-loss centers, and so forth. But most businesses can create transformation not only for their customers but for themselves as well," says Horn.

On his nightstand
Ishmael, by Daniel Quinn. "A fascinating story about how our culture is destroying the earth. It changed my thinking about a lot of things," he says. --Elaine Appleton Grant


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