Confessions of a big-company man

I n Search of Excellence had no such name, and I had no book contract, on the day it was born in February 1979. The wind-chill factor, as I recall, made the temperature about 70 degrees below zero. I had flown into the Twin Cities on a red-eye from San Francisco and, after a quick shower, had taken a cab to St. Paul, arriving almost on time for my morning interview with Tait Elder, then head of the new-ventures division at 3M Co.

Three years later, in the book's "A Bias for Action" chapter, Bob Waterman and I tried to capture what I saw and felt that day. Something about the place was different, beginning with Elder himself, a Fortune 500 division general manager who acted like a person and was treated like a mortal. He sat in a small, open office with four-foot-high partitions. People who weren't even vice-presidents dropped by unannounced, just to chat. Problems were handled in seconds, with nary a "send me a memo" or a "let's set a meeting on that." After a decade I am still at a loss trying to describe how strange these goings-on struck me at the time.

My world, after all, was the Fortune 500, whose minions I had served as a consultant for McKinsey & Co. since the early 1970s. Those were the days, moreover, when GM's market share was still close to 50%; IBM had nearly 70% of the large-scale computer market; and no one in the Kodak Tower could even pronounce the word Fuji. I myself had been working closely with Xerox Corp., which owned roughly 100% of the copier market and from a distance looked fairly similar to 3M. Inside, however, they had nothing in common.

I remember, for example, a week I spent shadowing a Xerox executive whose title was something like vice-president for strategic pricing. Every morning he would find on his desk an index card listing all the day's meetings (usually close to a dozen), including three or four pre-meetings with a few $70,000 staffers to prepare him for the real meetings. My report on the week thus became a tally of endless meetings, along with a list of decisions delayed, made, and then in more than 90% of the cases overturned.

That was Xerox in the mid-1970s: a hopelessly sluggish bureaucracy. It attracted world-class analytic talents, the best and the brightest, and put them on committees where they spent their time analyzing the wrong stuff. They agonized over incursions by IBM and Eastman Kodak at the high end of the copier market, for instance, and overlooked what was happening at the other end, where such companies as Savin and Canon were making their mark. The analyses were brilliant, no question. And they always led to more brilliant analyses and then brilliant counteranalyses. What they didn't lead to was action, and action was what I saw at 3M.

But why? What was it that gave 3M its "bias for action"? What made it look, smell, and feel so different from its Fortune 500 peers? How did it get that way, and was it possible for the others to change? What would it take for them to do it, and what would happen if they didn't?

In one form or another, those are the questions I've been struggling with for the past 10 years. Along the way, I've gone from bubbling optimism to near despair and back so many times that I'm dizzy -- and I'm still not sure what I think. Lately, however, I've begun to examine the questions in a new light. As I've watched what is happening both here and abroad, I've noticed a theme emerging, a single economic issue around which most of the others seem to coalesce. Looking back, I sometimes wonder why it took me so long to see it.

I'd probably have to go all the way back to Vietnam to find the beginning of the thread -- back to my U.S. Navy Seabee battalion in Da Nang, where I served as an assistant operations officer and ensign in 1966 and 1967. It was there that I received one of my earliest lessons in organizational dynamics. The Viet Cong had overrun a nearby Army Special Forces camp, and my battalion was ordered to form three detachments to go into the hills and build hardened camps for Special Forces outfits in our area.

The job wasn't a day at the beach, but I still remember the spirit and productivity of our 50-man teams. Later I took a 30-man detachment on a hut-building assignment for the Marines near the city of Hue. Such a group would usually complete 20 to 25 huts a week. After just two weeks we were averaging 75 and (with the promise of a rare day off as an incentive) hit the 107 mark in the fourth week. We liked breaking records and enjoyed one another's company.

But the world of the Seabees was not my lot for long. A couple of good overseas tours landed me in Washington, where I spent the last two years of my navy career at the Pentagon. It was quite a change. Room after room was chockablock with former combat battalion, air squadron, and destroyer commanders now spending their days passing papers back and forth, up and down. What a waste. After all, these guys were a lot like the ones with whom I'd broken hut-building records in Vietnam. What was the difference? Why did people who were so productive in one setting become such bureaucrats in another?

I found it a paradox, and the memory of it stayed with me in the years following my discharge from the navy. Along the way, a pair of Stanford business degrees and a stint as President Nixon's White House drug adviser crept onto my resume. While completing my Ph.D. dissertation, I started to work at McKinsey, and the question presented itself again.

To be honest, it came up as a kind of afterthought. McKinsey wasn't much interested in such issues back then. By 1977 we were thoroughly caught up in the strategy craze that was sweeping the world of big-time consulting. The prevailing wisdom held that clever strategies were the key to business success; everything else was subordinate, including people and organization. But while we were having no trouble devising all kinds of clever strategies, our clients were having a devil of a time trying to implement them. The question was, why?

Our new managing director, Ron Daniel, thought the answer might have something to do with organizational structure. This was not an unreasonable hypothesis. As strategies had grown more and more complex -- to deal with an increasingly competitive marketplace -- organizations had been forced to follow suit. Thus was born the matrix, an amazingly complicated organizational structure that had become quite the rage. My erstwhile McKinsey colleague, Allan Kennedy, had a model of one such matrix, which he later kept on his desk as a reminder of those days. Called a decision grid, it measured two feet by three feet by six inches and weighed in at about 10 pounds. The model specified the responsibility of every executive in the company for every decision that was to be made. Nothing was left to chance. It was the ultimate expression of the rational, mechanical approach to giant-company administration.

Thanks to the recency of my doctorate, I drew the assignment to study what effect all this might be having on strategy execution. I accepted reluctantly -- engrossed as I was in computer-based oil-exploration models -- and began the work that eventually led to In Search of Excellence.

My first published article, which appeared in the journal Business Horizons, was an out-and-out attack on the silliness of the matrix structure. Considered daring at the time, this line of thinking eventually evolved into the McKinsey 7-S Model (strategy, structure, systems, style, and so forth), the point being that organizations are too messy to be reduced to a series of charts and boxes. That may seem obvious today, but it was a hard sell back then and prompted open derision in some circles.

The Europeans were somewhat more receptive. Royal Dutch/Shell and West Germany's Siemens even put up money to finance some "excellence" research. They were monumentally unimpressed, however, when we presented our preliminary findings in mid-1979 and early 1980. Shell's managing board heard our report in stony silence. Our Siemens contacts barely gave us the time of day. (They were distracted by a torrid love affair with the Boston Consulting Group.) As for McKinsey's senior consultants, they couldn't care less about our research, believing that the sun rose and set on such arcane issues as the correct number of boxes in a portfolio strategy model. (McKinsey said 9, Boston Consulting Group 4, Arthur D. Little 24.)

But the general indifference we encountered didn't really bother me. By that time, I had already paid my visit to Tait Elder at 3M.

Eventually, In Search of Excellence was written. For a host of reasons that add up to good timing, it went all the way to the stars. But what exactly was the book about?

According to popular perception, it was a declaration that all was right with America, a sugary tribute to our largest enterprises. One reporter labeled me "the Dr. Feelgood of American management." Such remarks tended to bolster a suspicion I had: a lot more people bought the book than read it. For In Search of Excellence was definitely not about American excellence. Rather it was about a few rare pearls in a sea of growing despair. We contended that bureaucracy and narrow, linear thinking were doing us in, that the typical U.S. company had largely forgotten about execution, quality, innovation, and people. We then went on to offer a few examples of companies that were bucking the tide.

My hope, I suppose, was that those examples would inspire some serious rethinking in corporate America -- big corporate America, that is. Big was really all that I understood at the time. I didn't know anything about entrepreneurship, and I didn't pay much attention to the new, growing companies that were beginning to make waves. If it wasn't Fortune 500, it wasn't -- at least as far as I was concerned.

So I missed the significance of the early reaction to the book. The people who seemed most responsive were not at all those I'd expected. I recall, for example, a two-day Young Presidents Organization (YPO) seminar in Princeton, N.J. Don Burr, of People Express, showed up. So did Don Williams, the operating boss of Trammell Crow, and Manny Garcia, who was running a string of wildly successful Burger King restaurants in Florida. Then there was a YPO chapter meeting in Columbus, Ohio, where I met John McCoy, chairman designate of the city's innovative Banc One; he later introduced me to Worthington Industries, The Limited, and other local stars. Supergrocer Stew Leonard came to a seminar for the American Management Association, with son Stew Jr. in tow. At Leonard's behest, chicken man Frank Perdue sought me out after a meeting of the National-American Wholesale Grocers' Association in Florida.

These guys were not just paying their respects, either. They would hound me. Perdue was so offended by my answering machine and tardy response that he finally left a blistering message, saying, "If you're gonna yap about service, you might consider giving it," or words to that effect (most of which contained four letters). There was no gap between ideas and actions in his mind.

But despite their persistence, the broader message did not sink in. I continued to think my real audience was the Fortune 500.

Meanwhile, I had started a little consulting practice in Palo Alto, Calif., with two partners and a part-time secretary. My goal was a more relaxed life and a $60,000-a-year income. Our first part-time assistant quit because the job was too boring. I gave speeches and an occasional seminar and was reasonably happy. Then in 1984 we bowed to pressure from clients and created a five-day implementation seminar, which we called a Skunk Camp in honor of Kelly Johnson's fabled Skunk Works at Lockheed. With McKinsey economics and tastes in my background, we set the attendance fee at about $4,000, in hopes of attracting CEOs, vice-presidents, even a chairman or two -- all, of course, from the Fortune 500.

Well, a few big-company denizens did come to our first soiree that September, but they were mavericks: Tait Elder and Ken Schoen, from 3M; Ken Stahl, head of Xerox's Skunk Works, whose new products almost singlehandedly kept that company alive during its doldrums; crazy Nancy Badore, a renegade at Ford; Ren McPherson, Dana's former chairman; and a handful of others. But about two-thirds of the attendees were these other people -- Burr; Perdue; Williams; McCoy; Leonard; Vieve and Bill Gore, from W. L. Gore & Associates; Don Vlcek, from Domino's Pizza; Joe Stegmayer and John McConnell Jr., from Worthington Industries; and so on. Not that we had held back on inviting the Fortune 500. They just hadn't shown up.

Nor did the meeting proceed as my partner, Bob Le Duc, and I had planned. We wanted to talk theory. ("Just what is excellence, anyway?") The entrepreneurs wanted action. Leonard would take dozens of pages of notes during the day and then implement half the damn things before dawn. Perdue was on the phone from California to Maryland at 3 a.m. each morning, bellowing orders. (As a direct result of the meeting, Perdue Farms Inc. installed a new, quality-based compensation system for executives and later started a corporate training college.) And our poor Fortune 500 attendees! In their own world, they were the action faction, but here they were constantly taken to task for being insufficiently practical.

Yet somehow I managed not to see what was happening, and I kept not seeing it, even though the patterns didn't change. In the following months and years we continued to wait for the big companies to descend on us, but they never came. Today, after 23 such sessions, our most loyal Skunk Camp customer is Buckman Laboratories -- a $128-million specialty-chemical manufacturer headquartered in Memphis.

On the other hand, I couldn't ignore the evidence about the economy, and the deepening troubles of the giant firms. I read The Wall Street Journal, after all. I also read Business Week's famous "OOPS!" cover article, which reported the sagging fortunes of some of our In Search of Excellence superstars. The magazine didn't get it quite right -- singling out Digital Equipment, Hewlett-Packard, and Walt Disney as prototypical stumblers, for example. (They have all made brilliant comebacks.) But I had to admit there was much truth to the criticisms. We had done our research in 1979, when many of these companies were still living off the fat of past successes achieved in a placid environment. We had badly misjudged the coming instability and the difficulty they would all have in adjusting, from IBM to Kodak to Intel.

My direct contacts with them did nothing to ease my concerns. There was, for example, a 1985 meeting with IBM's national accounts division, the elite corps of salespeople who deal "top to top" with a Sears or a GM. They epitomized the Watson principles of customer-relationship management -- and they were totally unsuited to compete in a world dominated by decentralized computing. In retrospect, it was like attending a buggy-whip manufacturers' convention three years after the first Model T rolled off the line.

Seminars with Fortune 500 managers also filled me with despair. They came. They applauded. They bought my books and tapes. But they were a desolate lot. Though I talked common sense -- telling stories about Stew Leonard, Frank Perdue, Carl Sewell, and the like -- it was not the kind of common sense their companies practiced, and they knew what they were going back to. In an odd way, I found the semi-optimists among them most depressing. They would regale me during the breaks with little success stories. Then they would invariably say something like, "Of course, top management doesn't get it. They just stare."

But the nadir for me was a humid evening in Palm Beach, Fla., in December 1983. Gilbert Kaplan, founder of Institutional Investor magazine, had pulled together a horde of Fortune 500 chieftains and their spouses for his magazine's annual gala. I was the hors d'oeuvre, the opening-night dinner speaker. From the look of the crowd, you would not have guessed these companies had any troubles at all. I've never seen so many diamond necklaces in one place at one time. It was a scene reminiscent of Nero's Rome -- with the Dr. Feelgood of American management as designated fiddler.

I gave my speech, saving time for questions as we had agreed. I had actually been looking forward to exchanging views with the nation's business elite. Unfortunately, no views were forthcoming: there was total silence. Finally, one brave woman jingled a diamond-bedecked hand in the air and said, "Well, we all certainly believe all this. But how do we get our workers to start acting right?" I don't recall what I mumbled in response. Game, set, match. Take it away, Tokyo. I was stunned.

Fortunately, I had a seminar in Tampa the next morning, where I was joined by Don Estridge, then the leader of IBM's personal-computer group, and Wayne Calloway, soon to become chairman of PepsiCo. Estridge told stories about the team of castoffs that had developed the PC. Calloway talked of the $500 mother-to-son investments that had launched both Frito-Lay and Taco Bell. As I listened to them, the gloom of the previous evening began to wear off.

But I still couldn't read the message.

What the hell was going on? What was the significance of all this change roiling about us? I was confused. I needed time to think. My wife and I had bought a lovely farm in Vermont. I managed to shake a month free from my calendar, and in July 1985 we retreated East with piles of books.

Two of the books made a particularly strong impression. One was The Second Industrial Divide by MIT professors Michael I. Piore and Charles F. Sabel, who argue persuasively that mass production is neither the inevitable nor the ultimate form of industrial organization. There are other paths, they show, which other economies have taken.

The second book was How the West Grew Rich by Nathan Rosenberg, an historian of technology, and legal scholar L. E. Birdzell Jr. Covering more than a thousand years of economic history, they explain how the West pulled away from the East, northern Europe from southern Europe, and the United States from Europe. They insist that the giant-company domination of recent decades is an anomaly. Our success -- like the success of earlier societies -- owes more to decentralization and entrepreneurship, they conclude.

All this contemplation eventually produced a 100-page paper called "Hail the New American Competitor." Although never published, it marked a turning point in the evolution of my thinking. There was, for example, a 20-page section reviewing the winners and losers in almost every major industry. In each case, the giants (IBM, Sears, U.S. Steel) were struggling, while the upstarts (Apple Computer, The Limited, Nucor) were surging. The other examples I cited were drawn from a whole new cast of companies, with names like Snap-On Tools, Safety-Kleen, FlightSafety International, and A. T. Cross. In effect, and unintentionally, I had written a tribute to growing companies.

Looking back now, I can see that the change had begun much earlier. My second book, A Passion for Excellence, which appeared in 1985, was brimming with vignettes from growing companies; I just hadn't noticed. Nor had I paid much attention to the evolution of my annual television show on PBS. The first one, in 1983, was dominated by Walt Disney, McDonald's, IBM, and 3M. By 1985 we were touting Worthington Industries, The Limited, Federal Express, the Louisville Redbirds baseball team, and University National Bank & Trust, a small bank in Palo Alto. The shift in focus was not planned or even conscious. We had simply asked ourselves, "Who are the stars?" After much debate, five entrepreneurial companies just happened to emerge.

As time went by, however, I began to see clearly what made them stars. It was their flexibility, which seemed more and more to be a condition of doing business in the emerging economy. I was (and am) awed by the revolution in technology, the impact of which we have only begun to see in the last three or four years; by the general intensification of competition; by the new vitality in world financial markets; by the shrinking of the globe; and on and on. Change, clearly, was becoming our way of life, and only the most adaptable companies were emerging as the winners.

So, by the time I sat down to write Thriving on Chaos in the early winter of 1987, I had a whole new set of role models. The heroes of In Search of Excellence -- IBM, Hewlett-Packard, 3M -- had given way to the likes of Chaparral Steel and Weaver Popcorn. My obsession with change had turned into a passion for flexibility, and the heat of that passion rose as the thermometer reading on our Vermont barn plunged. I even tacked a sign over my desk, reminding myself in bold felt-tip pen: CONNECTION WITH FLEXIBILITY The sign is still there.

Yet in one way, I had not changed much since In Search of Excellence. After all, I was still focusing on the need to reverse the decay in big companies. There was one step I hadn't yet taken. For that, it turned out, I had to go to China.

It is the spring of 1988. In the midst of a five-week lecture tour, my wife and I find ourselves at a large, state-run hotel in the heavy-industrial city of Taiyuan. We have escaped our hovering chaperons and plan to head for the streets to see the real China up close. First, however, we want to change some money -- $10 -- at the hotel cashier's desk. After a long wait in line, we are told there's not enough change available. Why don't we try the large, state-run Friendship Store a few blocks away? So we head out into the chilling March rain. When we get there, we are misdirected several times before arriving at the third-floor change counter. Sorry, we are told, not enough change here, either. I start to fume. I can see the change. "It's not antiforeigner behavior," says my wife, Kate Abbe, who speaks Mandarin and has been here before. "It's just that they don't feel like changing the money." She's undoubtedly right: the money changer is having her hair cut by a fellow employee, who does not miss a snip.

We leave the store, defeated, and find ourselves on one of Taiyuan's so-called entrepreneur streets. The contrast is breathtaking. We pass hundreds of stalls, shops, and miniature factories. Vendors grab us, offering free samples of food and pulling us into their stores. A couple of merchants get into a tussle as they compete to sell us goldfish -- to take home to America, I suppose. Could this be the same city where, a few minutes before, we couldn't even get our $10 changed?

Learning, they say, is a matter of timing. You acquire knowledge when you're ready to receive it. Perhaps the scene on the entrepreneur street prepared me for Guangzhou (formerly Canton), the next stop on our itinerary, for that is where I had my epiphany.

Guangzhou is in southern Guangdong, a coastal province and a showcase for China's economic reforms. Except for the rare free-market street, those reforms seemed scarcely to have touched the inland cities such as Taiyuan, still dominated by large, state-run manufacturing enterprises. But Guangzhou was an altogether different story. In place of the drab grays and blues of Taiyuan, there were seas of bright reds and yellows. The energy on the streets was palpable. For me, it was close to a religious experience. I felt as though I were seeing capitalism for the first time. Yes, I had lived in a capitalist society for 45 years and had studied and written about capitalist enterprises for 25. But I had never experienced the system's vitality as I did in those first 10 minutes on the streets of Guangzhou.

I returned from China a born-again devotee of Adam Smith. Something had happened. An important piece of the puzzle had fallen into place. I spent the next six weeks or so trying to figure out what it all meant. I reread David L. Birch's Job Creation in America and Piore and Sabel's The Second Industrial Divide. I devoured Burton H. Klein's unconventional Dynamic Economics, which relates macroeconomic growth to company vitality. I went over and over the manuscript of The Third Century, a paean to entrepreneurship and immigrant vitality by Joel Kotkin and Yoriko Kishimoto.

And little by little, it dawned on me that there was an economic issue I had been badly underestimating all these years: the issue of scale. The truth is that I had never considered size per se a decisive factor in business. What I admired about the small and midsize growth companies was the way they conducted business, not the scale on which they conducted it. But now the lock-step relationship between the two became apparent.

I thought about the Seabees and the Pentagon. Didn't scale help to explain the difference? Weren't we so productive in one instance because we operated in small teams and so lethargic in the other because we functioned as cogs in a bureaucracy? And what about Tait Elder and 3M? What was it that had dazzled me on that cold day in February 1979? We had written about 3M's lack of bureaucracy, its radical decentralization, its speed of innovation, and its responsiveness to customers. Weren't those the very qualities it shared with entrepreneurial businesses rather than its Fortune 500 peers? As one seminar participant had put it, 3M was a company that had "grown big without acting big."

I thought about the week I had spent shadowing Xerox's vice-president of strategic pricing. He wasn't a bad guy. On the contrary, he was one of the best. Like many of his colleagues, he had come to Xerox after a stellar career at IBM. He was bright, competent, and conscientious. So, for that matter, were his staffers. I remember one, a young economist, with whom I used to engage in endless debates about "marginal cross-elasticities." (If you introduce product X+1 at price Y, will it destroy older product X at price Z?) Our eyes sparkled, but it all added up to less than zero, because the company was paralyzed by bloat.

Then I thought about watching the first film clips from Stew Leonard's grocery store. And standing for the first time in the spotless service bay at Sewell Village Cadillac. And seeing Frank Perdue, untrammeled by bureaucracy, rush to the phone after a Skunk Camp session, so that he could instantly implement ideas he had just picked up from Milliken & Co.'s restless president, Tom Malone. I thought about driving with Mike Weaver from Indianapolis to Van Buren, Ind., on a spring day in 1986, listening as he explained how Weaver Popcorn had cornered two-thirds of the Japanese popcorn market. I thought about spending a day at Johnsonville Foods' sausage factory in Sheboygan, Wis., where hourly workers told me how they'd developed new products from scratch, studied economics and computers and statistics, visited vendors to scope out new equipment for their production line.

I compared all this with the depressing sessions at Fortune 500 companies, and the terrible evening with the corporate elite in Palm Beach. And I thought about the clerk in the Friendship Store and the goldfish entrepreneurs and about Taiyuan and Guangzhou. Everywhere I looked, I saw the issue of scale.

And so I took the last step. In my office, we turned in our long-standing skunk logo, which we had used in honor of the renegades in big companies. We still honor them, and we still support them, and we certainly wish them well. But our new logo features a gazelle -- the symbol of the upstart companies that are leading the U.S. transformation.

And make no mistake, our economy is being transformed. Is it happening fast enough? I honestly don't know. I look at our largest companies, and I become terribly pessimistic. Then I look at the legions of small and midsize companies, and I feel a glow of hope. In any case, I know that the future does not belong to the companies I grew up with, the elephants that I used to serve. These wild and woolly times call for a new species of competitor -- fast, agile, thriving on change. I'll cast my lot with them.

Welcome, Tom Peters, to the Age of the Gazelle.