“PLAYING WITH FIRE” (WHAT ABOUT BANKRUPT VISIONARY COMPANIES?)
Our research would not capture companies that have visionary characteristics yet fail. Might it be that a higher percentage of companies that share the visionary characteristics go bankrupt than those companies that do not share the visionary characteristics? To use an analogy, suppose we studied the climbing techniques of two groups of mountain climbers: “visionary climbers” who successfully climb Mount Everest and “comparison climbers” who do not successfully climb Mount Everest. Further suppose that we found differences between the two groups (such as in philosophy, in training, or in risk taking). It’s entirely possible that the “visionary climbers” die at a more frequent rate than the “comparison climbers,” but since we’re only studying climbers that lived, we wouldn’t catch that fact in the study. So, although we could give good guidance as to what it takes to be a visionary climber, we might (unwittingly) also be giving guidance that increases the odds of death. Similarly, suppose having the characteristics of a visionary company results in a 75 percent bankruptcy rate (allowing that 25 percent do go on to become super-premier institutions) and having comparison company characteristics results in only a 50 percent failure rate (allowing that the surviving 50 percent do not become super-premier institutions). Under these circumstances, perhaps some managers would want to forgo being visionary and increase the chances of simple survival.
We have two responses to this concern. First, some climbers do indeed die while trying to climb Mount Everest, but only those who fully try to climb Mount Everest (whatever the risks) do in fact ever reach the summit. We cannot deny the possibility that some companies with visionary characteristics have died out there on the corporate landscape. But so what? We’re not writing about mere survival in this book. We don’t find mere survival to be a very interesting topic. We’re interested in how companies might attain entrance to that special category of premier institutions, and we readily admit that it might require a risky path to get there.
But—and this is our second response—we believe (although we cannot prove) that the visionary characteristics might actually increase both the odds of greatness and the odds of survival. We return again to our historical perspective. We’re not writing about one-shot companies here. We’re writing about enduring companies that have faced massive change and prospered for decades. If being visionary is risky, then why has this risk not caught up with these companies and killed them at some point during their very long lives?
IS “VISIONARY” JUST ANOTHER WORD FOR “SUCCESSFUL”?
Using the CEO survey implicitly assumes financial success. We readily acknowledge this. After all, would CEOs describe unprofitable companies as highly visionary? Probably not. This raises a legitimate chicken-and-egg question: Do we simply ascribe the term “visionary” to any company that turns out to be successful? No. There are many financially successful companies that did not show up on our list of visionary companies. We did an extensive analysis of corporate performance of Fortune 500 companies for the decade prior to our survey. This analysis showed that the visionary companies were not the only highly successful companies during that time frame. In fact, if you just took the top eighteen companies in the Fortune 500 Industrial plus Fortune 500 Service listings in terms of return to investors during the period 1978—1988 (the decade preceding our survey), the list looks quite different than our visionary company list, as shown below.
Top 18 Fortune Industrial and Service Companies
Return to Investors, 1978—1988
1. Hasbro
2. The Limited
3. Wal-Mart*
4. Affiliated
5. Tele-Communications
6. Giant Food
7. Toys “R” Us
8. Marion Laboratories
9. State Street Boston Corp
10. Berkshire Hathaway
11. DCNY
12. Macmillan
13. Cooper Tire & Rubber
14. Tyson Foods
15. Philips Industries
16. MCI Communications
17. Dillard Department Scores
18. Food Lion
*Visionary company
The evidence suggests that our surveyed CEOs saw a visionary company as more than just a highly profitable company (else we would have simply had a one-for-one linkage between the top financial performers in 1978—1988 and the CEO responses). Of course, from the period 1926—1990, our visionary companies outperformed just about everyone. This suggests that if the CEOs were thinking only in terms of financial success, they were thinking in terms of very long-term success, which fits with our picture of a visionary company as an enduring great institution.
CAN WE TRUST THE CEO SURVEY TO GIVE US THE RIGHT COMPANIES?
Doing a survey—even a survey of highly thoughtful and knowledgeable people such as leading CEOs—is an imperfect method. Our survey attempted to minimize bias, but did not eliminate bias entirely. For one thing, companies that received significant positive press coverage around the time of the survey may have received undue representation in the survey results. For example, American Express received fabulous press—some of it labeling the company as “visionary”—in the few months immediately prior to the survey. This perhaps influenced some of the CEO responses and gave American Express unduly high representation in the survey data. As we compare American Express to the other companies on our list, it shares fewer characteristics of a visionary company.
We also acknowledge that relying on a survey assumes that visionary companies are, by definition, widely known and admired. This, in turn, introduces a bias toward large, publicly held companies. (Notice that all of the companies in our final sample set are publicly traded.) But might there be highly visionary companies (perhaps even more visionary than those in our study) that prefer to remain small or out of the public eye? For example, L.L. Bean and Granite Rock (1992 winner of the Malcolm Baldrige quality award—quite a feat for a rock quarry) appear to share many of the traits of our visionary companies, but they remain privately held and somewhat secluded institutions.
Though acknowledging these difficulties, we still believe that the CEO survey, while less than perfect, was the best available method for constructing a study set. Since we didn’t know ahead of time the key characteristics of a visionary company (that’s what we were trying to find out!), we couldn’t construct a precise scientific screening device. Most important, the survey had the benefit of a wide population of discerning judges who didn’t share our idiosyncratic prejudices.
In a related point, some have asked whether our survey merely recreated Fortune magazine’s list of “Most Admired” companies (which also uses a CEO survey), rather than a list of “visionary companies.” No. We thoroughly analyzed the Fortune “Most Admired” lists for the years 1983—1990 and, although the visionary companies are well represented in the Fortune survey, we did not find a one-for-one correlation. In 1989 all of the visionary companies common to both lists fell in the top 30 percent of the Fortune list, but not in a one-for-one correlation with the top eighteen. (Only two of the comparison companies showed up in the top 30 percent of the Fortune list.) Of course, the visionary companies are admired (as we would expect), but visionary companies are not merely a regurgitation of the Fortune “Most Admired” list.
CORRELATIONS VERSUS CAUSES
We identified certain characteristics that tend to distinguish the visionary companies from the comparison companies in this particular sample set. We can therefore claim that there is a correlation between these differences and the visionary companies. However, we cannot claim a causal link. We cannot prove that the characteristics of visionary companies will necessarily lead to enduring success in all cases. Nor do we know definitively that the companies in our study have discovered an optimal approach to business—perhaps there are a number of privately held companies that no one has studied that were even more successful for longer periods of time, yet relied on a different set of dynamics. We cannot claim to have definitively found cause and effect. Tightly controlled experiments simply do not exist in the real world of corporations, and it is therefore impossible to ever claim cause and effect with 100 percent certainty. Our comparison analyses give us greater confidence that we have identified causes and not just random correlations than we would have had without comparisons, but they cannot give us certain confidence.
We’d like to emphasize, however, that the basic elements we found to distinguish the visionary companies usually appeared in the companies long before they became hugely successful premier institutions. Indeed, the fact that such characteristics generally preceded ultimate success (a fact that shows again the power of the historical approach) gives us confidence that we have found more than chance correlations.
TROUBLED TIMES AT THE VISIONARY COMPANIES
In the early 1990s, the majority of the visionary companies in our study were undeniably premier institutions in their industries. Nonetheless, a few of the visionary companies were having difficulty. Does this undermine the basic validity of our findings? We don’t think so, for two reasons.
First, it’s important to keep in mind that all the highly visionary companies in our study, even the ones doing well in the 1990s, received black eyes at points in their history. Highly visionary companies are not immune to setbacks and difficult times, yet they display resiliency and have built remarkable long-term track records.
Consider IBM, for example. Whatever IBM’s problems in the 1990s, the company had an impressive seven-decade track record that included two world wars, the Depression, and the invention of computers. No company in the business machines industry matched IBM stride for stride over that seventy-year period. Even in IBM’s darkest hours, the business press referred to it as “a national treasure.” A company does not attain such status by accident, and we believe that there are many lessons to be learned from IBM’s history—its successes and its difficulties. What lessons should IBM learn from its own past? What does it need to do to regain its prior status?
Second, keep in mind that throughout our study we continually compared one company to another. So, although no company is perfect (all have their warts), some companies do attain superior status over the long haul. For example, when Burroughs languished and lost its own unique identity, no one wrote about the demise of “a national treasure.” For most people, Burroughs was just another company. Why did IBM rise to an elevated status while Burroughs never reached a similar status in the American psyche or world economy? Whatever their imperfections, the fact remains that the visionary companies have outshined the general market and a carefully selected control set of comparison companies over the long course of history. We can learn much from the contrast.
LARGE COMPANIES VERSUS SMALL COMPANIES
Is the study biased toward large companies? Yes and no. Yes, the list consists only of large corporations. But every single company on the list was once a small company. We looked at these companies not only when they were large, but also when they were small, and we sought to gain insights that would apply to small companies as well as large companies. Keep in mind that we also surveyed CEOs of small to midsize companies (from the Inc. 500 and Inc. 100); even the small-company CEOs wanted to learn lessons from companies that became large.
UNEVEN INFORMATION
The quality and quantity of historical information varied across companies. Some companies, such as Hewlett-Packard and Merck, opened their archives to us and provided multiple boxes of primary source materials. Most companies (even the comparison companies) cooperated freely, although the quality of information varied. In a few cases, however, the company refused to cooperate in the study and we therefore relied entirely on secondary sources. Furthermore, the secondary sources varied in quality and quantity across the companies. For example, we found no books written specifically about Nordstrom, but we found stacks of books on such companies as Ford, IBM, Disney, and GE. We did our best to locate all possible sources on each and every company, and we found substantial sources on all but one company (Kenwood). There is no such thing as perfect information. But, given the magnitude of information we did have, we’re confident that our findings would not change significantly given perfect information. If anything, we suspect they would be further reinforced.
UNITED STATES BIAS
We surveyed only American CEOs and only examined one pair of non-U.S. companies (Sony versus Kenwood). We believe that the basic dynamics of being a visionary company will hold up across cultures and nationalities, but we also suspect that the flavor of those dynamics will vary—perhaps dramatically—across cultures. We freely acknowledge this fact and encourage future research into cross-cultural differences in visionary companies.