Chapter 1
The Best of the Best
As I look back on my life’s work, I’m probably most proud of having helped to create a company that by virtue of its values, practices, and success has had a tremendous impact on the way companies are managed around the world. And I’m particularly proud that I’m leaving behind an ongoing organization that can live on as a role model long after I’m gone.
WILLIAM R. HEWLETT, COFOUNDER, HEWLETT-PACKARD COMPANY, 19901
Our commitment must be to continue the vitality of this company—its growth in physical terms and also its growth as an institution—so that this company, this institution, will last through another 150 years. Indeed, so it will last through the ages.
JOHN G. SMALE, FORMER CEO, PROCTER & GAMBLE, CELEBRATING P&G’s 150TH BIRTHDAY, 19862
This is not a book about charismatic visionary leaders. It is not about visionary product concepts or visionary market insights. Nor even is it about just having a corporate vision.
This is a book about something far more important, enduring, and substantial. This is a book about visionary companies.
What is a visionary company? Visionary companies are premier institutions—the crown jewels—in their industries, widely admired by their peers and having a long track record of making a significant impact on the world around them. The key point is that a visionary company is an organization—an institution. All individual leaders, no matter how charismatic or visionary, eventually die; and all visionary products and services—all “great ideas”—eventually become obsolete. Indeed, entire markets can become obsolete and disappear. Yet visionary companies prosper over long periods of time, through multiple product life cycles and multiple generations of active leaders.
Pause for a moment and compose your own mental list of visionary companies; try to think of five to ten organizations that meet the following criteria:
• Premier institution in its industry
• Widely admired by knowledgeable businesspeople
• Made an indelible imprint on the world in which we live
• Had multiple generations of chief executives
• Been through multiple product (or service) life cycles
• Founded before 1950*
Examine your list of companies. What about them particularly impresses you? Notice any common themes? What might explain their enduring quality and prosperity? How might they be different from other companies that had the same opportunities in life, but didn’t attain the same stature?
In a six-year research project, we set out to identify and systematically research the historical development of a set of visionary companies, to examine how they differed from a carefully selected control set of comparison companies, and to thereby discover the underlying factors that account for their extraordinary long-term position. This book presents the findings of our research project and their practical implications.
We wish to be clear right up front: The “comparison companies” in our study are not dog companies, nor are they entirely unvisionary. Indeed, they are good companies, having survived in most cases as long as the visionary companies and, as you’ll see, having outperformed the general stock market. But they don’t quite match up to the overall stature of the visionary companies in our study. In most cases, you can think of the visionary company as the gold medalist and the comparison company as the silver or bronze medalist.
We chose the term “visionary” companies, rather than just “successful” or “enduring” companies, to reflect the fact that they have distinguished themselves as a very special and elite breed of institutions. They are more than successful. They are more than enduring. In most cases, they are the best of the best in their industries, and have been that way for decades. Many of them have served as role models—icons, really—for the practice of management around the world. (Table 1.1 shows the companies in our study. We wish to be clear that the companies in our study are not the only visionary companies in existence. We will explain in a few pages how we came up with these particular companies.)
Yet as extraordinary as they are, the visionary companies do not have perfect, unblemished records. (Examine your own list of visionary companies. We suspect that most if not all of them have taken a serious tumble at least once during their history, probably multiple times.) Walt Disney faced a serious cash flow crisis in 1939 which forced it to go public; later, in the early 1980s, the company nearly ceased to exist as an independent entity as corporate raiders eyed its depressed stock price. Boeing had serious difficulties in the mid-1930s, the late 1940s, and again in the early 1970s when it laid off over sixty thousand employees. 3M began life as a failed mine and almost went out of business in the early 1900s. Hewlett-Packard faced severe cutbacks in 1945; in 1990, it watched its stock drop to a price below book value. Sony had repeated product failures during its first five years of life (1945–1950), and in the 1970s saw its Beta format lose to VHS in the battle for market dominance in VCRs. Ford posted one of the largest annual losses in American business history ($3.3 billion in three years) in the early 1980s before it began an impressive turnaround and long-needed revitalization. Citicorp (founded in 1812, the same year Napoleon marched to Moscow) languished in the late 1800s, during the 1930s Depression, and again in the late 1980s when it struggled with its global loan portfolio. IBM was nearly bankrupt in 1914, then again in 1921, and is having trouble again in the early 1990s.
Visionary Company | Comparison Company |
3M | Norton |
American Express | Wells Fargo |
Boeing | McDonnell Douglas |
Citicorp | Chase Manhattan |
Ford | GM |
General Electric | Westinghouse |
Hewlett-Packard | Texas Instruments |
IBM | Burroughs |
Johnson & Johnson | Bristol-Myers Squibb |
Marriott | Howard Johnson |
Merck | Pfizer |
Motorola | Zenith |
Nordstrom | Melville |
Philip Morris | RJR Nabisco |
Procter & Gamble | Colgate |
Sony | Kenwood |
Wal-Mart | Ames |
Walt Disney | Columbia |
Indeed, all of the visionary companies in our study faced setbacks and made mistakes at some point during their lives, and some are experiencing difficulty as we write this book. Yet—and this is a key point—visionary companies display a remarkable resiliency, an ability to bounce back from adversity.
As a result, visionary companies attain extraordinary long-term performance. Suppose you made equal $1 investments in a general-market stock fund, a comparison company stock fund, and a visionary company stock fund on January 1, 1926.3 If you reinvested all dividends and made appropriate adjustments for when the companies became available on the Stock Exchange (we held companies at general market rates until they appeared on the market), your $1 in the general market fund would have grown to $415 on December 31, 1990—not bad. Your $1 invested in the group of comparison companies would have grown to $955—more than twice the general market. But your $1 in the visionary companies stock fund would have grown to $6,356—over six times the comparison fund and over fifteen times the general market. (Chart 1.A shows cumulative stock returns from 1926 to 1990; Chart 1.B shows the ratio of the visionary companies and comparison companies to the general market over the same period.)
But the visionary companies have done more than just generate long-term financial returns; they have woven themselves into the very fabric of society. Imagine how different the world would have looked and felt without Scotch tape or 3M Post-it notepads, the Ford Model T and Mustang, the Boeing 707 and 747, Tide detergent and Ivory soap, American Express cards and travelers checks, ATM machines pioneered on a wide scale by Citicorp, Johnson & Johnson Band-Aids and Tylenol, General Electric light bulbs and appliances, Hewlett-Packard calculators and laser printers, IBM 360 computers and Selectric typewriters, Marriott Hotels, anticholesterol Mevacor from Merck, Motorola cellular phones and paging devices, Nordstrom’s impact on customer service standards, and Sony Trinitron TVs and portable Walkmans. Think of how many kids (and adults) grew up with Disneyland, Mickey Mouse, Donald Duck, and Snow White. Picture an urban freeway without Marlboro cowboy billboards or rural America without Wal-Mart stores. For better or worse, these companies have made an indelible imprint on the world around them.