It’s no secret that the road to the holy grail of business management is tricky. Although a number of faithful Lancelots and management consultants have went up in battle against the dragons that protect every management secret, few have come out alive.

This remained true until 1982, which was when Tom Peters and Robert H. Waterman Jr. made the decision to draw Galahad’s sword and aim right at the heart. No, the secret wasn’t hidden in a castle. Instead, it could be found with those who managed the most accomplished businesses in the history of America. If the writers didn’t end up finding the holy grail of business management, then that may mean that it just shouldn’t be found. However, they did definitely conquer several myths on their journey.

In Search of Excellence, readers learn about the outcome of their quest. This immediately turned classic goes into depth about how those amazing businesses became successful and how they dealt with every block on their road to success.

Upon completing this article, you’ll have a better understanding of

How to evolve without giving up a small company’s flexibility and creativity;
How come walking around can establish a solid management strategy; and
How come Procter & Gamble allow their brands to go into competition with one another.

For decades, people have debated the best way to manage a company.

Each business leader is keen on knowing the ultimate way to run their business. However, how come there is such a large variety of methodologies and teachings?

The thing is, management theory has been a subject matter of overall uneasiness as well as disagreement in the academic world. In the 1930s, Harvard’s Chester Barnard rebuffed well-known thoughts regarding bureaucratic management that had been started in the past by thinkers such as Max Weber. Barnard’s work had initiated a debate regarding whether management was an abstract, impartial, and exact science, or whether it was more so an art that depended on charismatic leadership.

In the 1970s, when the authors had started their research, a main area of worry in the minds of management theorists was the competition abroad, since in countries such as Japan, businesses were expanding much quicker.

Researchers realized that Japan’s deficiency in business schools had created another form of management culture unlike the one prevalent in the United States. This realization had caused questions to arise in regards to whether America had supported an excessively theoretical approach due to all of their management classes.

The authors made the decision to try to get some solid answers in the midst of all of the opinions. Therefore, they created a list of the top 15 businesses in America, selected from 43 contenders that they had picked out. During the duration of six months, they conducted interviews and made some research to understand their common points. Their conclusions became well-known to the public in the first edition of the book, which was published in 1982.

The 15 businesses had been chosen on the basis of two main criteria:

Their reputation amongst businessmen, consultants, as well as business academics.
Their elementary measures of growth and long-term wealth creation such as the average return on investments or on sales, in more than a 20 year span.
The businesses were concluded to be great if they had remained in the top half of the original standings of the 43 businesses for those measure over the entire timespan.

Therefore, in 1982, based on that criteria, the top 15 American businesses ended up being:

Bechtel, Boeing, Caterpillar Inc., Dana, Delta Airlines, Digital Equipment, Emerson Electric, Fluor, Hewlett-Packard, IBM, Johnson & Johnson, McDonald’s, Procter & Gamble and 3M.

However, what features did each of these businesses have in common?

Excellent companies know how to get things done.

So, what exactly do successful businesses share in common? The authors realized that the best businesses that they had examined had an action bias. This means that they were capable of getting things completed. It didn’t matter how difficult the job was.

Even though the majority of businesses want to think that they’ve got an action bias, most of them don’t. On the contrary of completing things, the majority of business end up getting all caught up in bureaucracy. Anyways, when a never ending number of committees have to approve any sort of decision, this blocks a lot of action from ever occurring.

Great businesses have to handle this problem by taking up organizational fluidity. This means that businesses are capable of handling problems, especially those that need several levels of bureaucratic attention.

For instance, the best businesses would need to put a system into position in order to effectively deal with an item problem that needed information and suggestions from a number of departments like the product, legal, as well as advertisement team.

These organizations build fluidity by pushing forward large informal networks for communicating such as open door policies. For instance, at IBM, the chairman deals with any complaints that he gets from any of his 350,000 employees on his own.

United Airlines has a policy like it titled, “Management by Walking Around”, which inspired fast, casual conversations regardless of the business level.

These types of informal communication measures made opportunities for businesses to handle problems fast and with no unnecessary bureaucracy.

Chunking, which means to break things down, is another method used by businesses in order to inspire action as well as optimize organizational fluidity.

Since they make little groups such as task teams with less than ten people that are specialized in handling certain issues, businesses can swiftly handle issues as soon as they come up.

Even though those task teams usually don’t come up on formal organization charts, which show more conventional units such as departments and divisions, little groups are usually the real backbone of great businesses.

Take, for instance, Canon, which had created a task team in order to work on creating and executing the commencement of the AE-1 camera in the span of two and a half years. Today, that camera is well known as a revolutionary technological advancement.

Top businesses stay close to their customers.

As Lew Young, the previous editor-in-chief of Businessweek first observed, there are too many businesses that think of the customer as just an annoying headache that ruins well made business plans. However, great businesses have a different strategy.

America’s best businesses are obsessed with service. This means that what the customer needs goes into each aspect of the company, whether in be research, sales, or accounting.

Those businesses might seem overly committed to their customers, however, they’re taking advantage of that service obsession in order to cover the other areas that they lack in.

IBM, for instance, hasn’t been the top in the technology department for many years now. However, because their brand is linked closely with their service, they have kept their standing as one of the industry leaders.

Assistants at lots of businesses end up getting coffee or pushing paper each day while entry level IBM employees end up dealing with customer complaints their first three years. These complaints have to be fixed in a matter of 24 hours. This method gives them a better understanding of which items and services the business needs to have in order to make their customers happy.

On top of that, the policy creates customer loyalty. IBM strives to fix all problems as fast as possible, so many companies have depended on them for all software and hardware necessities.

However, solid customer service doesn’t only help a business fix their problems and create a customer base. It additionally helps with innovation.

Take, for instance, Procter & Gamble. They are one of the most persistently successful businesses ever and they were also the initial consumer goods corporation that had placed a toll-free phone number on their items. Employees had later said that this step had caused the majority of business item improvements to occur. Research done at MIT regarding innovation of scientific instruments corroborates P&G’s experience: having studied 11 new inventions, researchers concluded that they were first conceptualized by the end users, not by those who created the instruments.

Therefore, the best businesses understand that customers offer value way after the final sale.

Big firms can maintain their edge by promoting experimentation and internal competition.

Where you aware that little companies create 24-times more innovation per dollar than the bigger ones?

So how about the great and big multinational corporations that had been researched by the authors?

Even though those businesses are large, they also act like they’re little when it comes to innovation.

How is this done? Internal competition plays a big part since it creates a sense of autonomy as well as entrepreneurship, even inside of the big corporate build.

Autonomy and entrepreneurship are key to innovation since they are what give staff members the platform to come up with creative ideas that go out of the scope of their position.

Internal competition makes the space for that type of creativity. It brings the competitive outside market into the business, which helps push innovation and stops inactivity.

IBM, for instance, utilizes the “performance shoot-out” method, which is when proposed items are put in opposition with one another. This causes real performance comparisons amongst prototypes.

Procter & Gamble also goes in a fascinating direction when it comes to embracing internal competition. In 1931, the business had created and set a formal policy that let their various brands actively compete. Managers usually can’t get a hold of information about other P&G brands apart from the information available to the public.

This competitiveness encourages brands to constantly work on bettering their items. In the end, this is advantageous to P&G’s overall sales.

There’s another main characteristic that pushes innovation in the large businesses that were researched for the study: those businesses had accepted failure by supporting experimentation as well as the entrepreneurial spirit. Whenever something doesn’t go right, those businesses just go onto the next thing.

3M is a good example. For instance, when a new ribbon material that they were working on failed, they tried to use it as material for a brassiere. When that also ended up failing, they still didn’t end up giving up. In the end, it became the typical material used in safety masks that government workers wear.

Therefore, you can conclude that by pushing internal competition and supporting experimentation, even big businesses can make sure that innovation occurs.

The most successful companies sincerely care about their employees.

Another aspect that great businesses share is that there is a deeply-rooted respect for each and every employee.

This means that businesses truly care about their staff members, thus they make work spaces that are based off of what their team would like. Management really respects each worker by putting in time as well as money into their development and they also give them fair expectations.

A lot of businesses fake that they’re people-oriented, so on the outside, they look like they care about their staff, but in reality it’s all just a show. This type of approach often has two types of management disaster outcomes:

The lip service disaster: Even though management states that they care about their team, they actually hardly care about them. An example of this would be not giving their staff the proper training that they should receive.
The gimmick disaster: In this case, management depends on fads and enticements such as the “employee of the month” award. Those types of gimmicks usually go away with time, however should they get carried on, they don’t do much to alter the atmosphere between management and the employee.

Since that’s what insincere people-orientation is like, how do great businesses show their staff that they truly care?

Those best businesses usually incorporated people-oriented policies way before it became a popular concept to implement. For instance, those businesses were one of the first that had incorporated training programs. Additionally, they supported the communication of both employees and managers on a first-name basis, which at the time, the usual business culture went after a more formal setting.

Hewlett-Packard is a really good example of a people-oriented business. In individual interviews with twenty of the HP executives. 18 of them had claimed that the business’s people oriented philosophy was the main reason why they were so successful.

The thing is, “HP Way” has a pretty big history. In the 1940s, executives had come to the conclusion that they didn’t want HP to end up being a “hire and fire” type of business. Therefore, instead of getting rid of the staff in the 1970s recession, the whole business took a 10% pay cut. As a result, HP lasted through the entire recession without firing one employee.

Excellent companies are powered by inspiring values.

If you’re the manager, what would you do in order to copy some of the most successful businesses out there? A good place to start would be by setting a few company values.

This is due to the fact that great businesses establish qualitative values that are directed at encouraging the staff at each level of the business.

The writers refer to research done by McKinsey & Co. that had also taken a look at the best businesses, but at the company values, in particular. The outcome showed that the majority of those businesses that had been questioned had really clear guiding values.

One of those values at Dana Corporation, for instance, was the inclusive management type that placed simplicity above everything else.

The businesses that had done much worse had similar characteristics that made them who they were.

The ones that did have clear objectives paid more attention on features that could be quantified with ease like earnings per share.

This could look counterintuitive since the businesses who had values that were mostly financially oriented as well as quantifiable ended up turning out much worse than those with broader qualitative values like customer service, for instance.

Additionally, the broader qualitative value that all of the best businesses have in common is the commitment towards innovation, regardless of the level of the employee.

It’s also crucial to take into consideration that innovation is important in all types of businesses, whether it’s a technology one such as Apple or Hewlett-Packard, a manufacturing one such as 3M, or a consumer goods one such as Johnson & Johnson.

This value is defined by the knowledge that innovation is a pretty random and uncertain aspect of business. Therefore, because it’s not possible to be planned from the middle or given off to a certain department, it ends up having to be the goal of the entire business.

The fundamental belief in this case is that each person is able to be innovative. This doesn’t have to apply to only the research or development departments. This kind of mentality leads to a company-wide atmosphere where any person could be responsible for the “next big thing”.

As a result, the forward-thinking approach aides businesses with growing at a constant rate.

When excellent companies branch out, they build on their core strengths.

Whenever a business gets more successful, it’s always tempting to try to buy out a competitor or go out into other markets or sectors.

This is diversification. It can be accomplished by making new items or purchasing a business in another sector, with the ultimate goal of getting even more money.

Apple is a really good example of diversification done right. Take a moment and think about how they’ve moved their item range from computers, to music players, all the way to phone. Currently, they’re even making watches!

However, to be honest, it’s typically not a very simple process since it’s not really connected to profitability.

This is what Michael Gort, an economist, figured out when he made the initial systematic study of diversification in American companies. Even though he did realize a slight positive correlation between the amount of new items that a business brought in and boosts in sales, he also noticed that there wasn’t any positive relationship with the new item introductions and the actual amount of money made.

However, actually, there is a secret revolving profitable diversification. It’s called “sticking to your knitting”, which is when a business diversifies, but make their new items and services constant with their main skills as well as strengths.

This idea arose from Richard Rumelt’s seminal study on diversification. Here, it was concluded that successful businesses would only be able to go out into other markets when they could just work on and improve the strengths and competences that they currently have.

Those businesses would get a 12.4 percent return on the money that they had spent, which means that they’d get 30% more than those businesses that diversified carelessly.

3M, for instance, has more than 50,000 items, with 100 new items added every single year. However, every single item depended on the business’s notorious coating and bonding technology.

However, 3M isn’t the only one. Whether it be Boeing or Walmart, the dominant method to diversification across all of the best businesses is one staying with core strengths.

Even large companies run best with a simple, lean organizational structure.

Success comes with its own difficulties. One of the disadvantages to growth is that a business ends up growing, which means it gets more staff, thus causing departments to expand, eventually finding itself with a very complicated organizational build.

Think about a little business that has a functional organizational structure. Staff are divided based on what they do, whether it’s marketing, legal work, or sales. In this type of build, it’s obvious who should be reporting to who, oftentimes being the manager of the CEO.

However, as the business expands, it has to ease out of that strict build. It ends up becoming ineffective for each staff member to report to the head each time since it stops individual staff from handling unforeseen or time-sensitive problems.

Businesses attempt to deal with this problem by incorporating a matrix organizational build, which makes an individual team responsible for certain items and functions. Therefore, for instance, Item Team A works with Legal Team A as well as Sales Team A.

However, this could become confusing very fast because there are various managers that manage various teams, which causes staff members not to know who to report to.

Great businesses, though, figured their way around that confusion by taking on a basic strategy- stable and constant organizational builds, along with lean staff.

“Lean staff” embodies the least amount of administrative, managerial, as well as executive layers. At these businesses, there’s always one manager or a department leader, on the contrary of having several members that staff has to go to.

Despite Johnson & Johnson being a $5 billion business with 150 independent divisions, all of which a worth at an average of $30, it’s the best example of that type of organizational simplicity.

Every division is given the term “company” and they all have their own “chair of the board”. Although the “companies” don’t have their own stocks and they are definitely still linked to J&J’s top management, they all still have a very crucial part.

The chairmen protected their sections from undesirable bureaucratic interference. Additionally, because every division is in charge of its own marketing, distribution, as well as research, it pushes better and more effective decision-making, and really doesn’t need as many people.

Final summary

The main idea:

People have argued for a long time about the best way that a business should be run. The thing is, great businesses share a lot of similarities: The best companies place a premium on customer service. They also truly care about their staff members and support experimentation across the business.

Practical advice:

Allow your staff members to use the business’s resources and tools whenever they’ve got some spare time. If you’d like to encourage innovation within your business, support your team to use the business’s resources to their advantage, such as laboratory or manufacturing equipment, when they aren’t working or are on a break. By allowing them to “play” around with the tools of the trade without a clear and certain goal, it may lead to a shocking and unanticipated breakthrough.