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Chapter One

The "Right" People or the "Right" Organization?

     What's the most important factor for success in today's knowledge-based economy--at least according to some in the media and many consultants? Attracting and retaining great people! McKinsey & Company, the large global consulting company, has dubbed this "the war for talent." The company maintains that "superior talent will be tomorrow's prime source of competitive advantage." "In the new economy, competition is global, capital is abundant, ideas are developed quickly and cheaply, and people are willing to change jobs often. In that kind of environment all that matters is talent. Talent wins." This realization has led to more emphasis on selection--there are now lots of books about hiring right--more emphasis on effective recruiting, such as using the Internet to generate more applicants, and more emphasis on retention, for instance, through higher pay and better working conditions and benefits.

    At first glance, the logic seems compelling. We do live in a world in which knowledge, rather than physical capital, is increasingly important. Therefore, we need smart people who can do great things--increase productivity, build new products and services--and do so ever more quickly. Consequently, we need great people. It all seems so sensible.

    But we don't agree with the basic premise. Of course, companies that want to succeed need great people, and recruitment, selection, and retention are obviously important. But companies need something else that is even more important and often more difficult to obtain: cultures and systems in which these great people can actually use their talents, and, even better, management practices that produce extraordinary results from almost everybody. The unfortunate mathematical fact is that only 10 percent of the people are going to be in the top 10 percent. So, companies have a choice. They can all chase the same supposed talent. Or, they can do something even more useful and much more difficult to copy--build an organization that helps make it possible for regular folks to perform as if they were in the top 10 percent.

    You don't think this is possible? Certainly you have worked at, or at least seen, companies that are filled with smart, motivated, hardworking, decent people who nevertheless don't perform very well because the company doesn't let them shine and doesn't really capitalize on their talent and motivation. Maybe you have even worked at such a place yourself and could describe, in agonizing detail, all the myriad things that happened that prevented you and your colleagues from doing your best for the business. What could those places accomplish if they just stopped undermining the performance of their people? And you have, we're sure, seen other places where somehow things just hum, even though the people don't, at first glance, seem to be particularly smarter, nicer, or harder working. Maybe you've even seen companies that have gone from being the first kind of place, where talent is wasted, to the second, where the potential of the company and its people is more fully realized. (You'll see such a company, NUMMI, later in this book.) Hiring and retaining talent is great. Building a company that creates and uses talent is even better.

    This book is about building a high-performance company. But it is also a series of mystery stories--mysteries that we invite you to help us solve. In the chapters that follow, we describe some companies that have succeeded even though they have not followed conventional strategic wisdom for their industries and even though they have faced difficult, challenging, competitive conditions. Here's the mystery: They achieved this extraordinary level of success with people who really aren't that much different or smarter than those working for the competition. These companies have won the war for talent not just by being great places to work--although they are that--but by figuring out how to get the best out of all of their people, every day. In a sense, they haven't outrecruited other companies--they've left the competition in the dust by being better at unleashing the energy and talent of the people they have. And by the way, these places are also better at attracting and retaining people as a byproduct of how they operate. That is because great people want to work at places where they can actually use their talents, where they are treated with dignity, trust, and respect, and where they are engaged by the values and culture of the organization.

    What makes this a particularly interesting mystery is how these companies have done this. As you will see, the secret to their success is at once both obvious and puzzling. Each of these companies has succeeded by engaging the knowledge, experience, skills, and energy of their people. In this sense, what they are doing is understandable. In a world in which there is a war for talent and in which knowledge work is increasingly important, being able to attract, retain, and energize people seems like an obvious recipe for success. But, like many mysteries, the issue isn't whodunit but uncovering how they did it. This is what we invite you to understand--how these firms have outwitted sometimes larger and more powerful competitors in ways that their competition has been unable to imitate. These firms have redefined the competitive landscape in their markets using methods that are as powerful as they are difficult for many managers to understand and use. We hope that in solving these mysteries, you will see and, more important, understand how it is possible to achieve extraordinary results with ordinary people--to unlock the value hidden in all organizations and in all people.

    How unusual are these companies? Consider the following.

• Southwest Airlines is a well-known success story. The press is full of accounts about how Southwest has vanquished larger competitors such as United and Continental in short-haul markets and is currently fighting Delta and USAir's MetroJet division. In a cutthroat business in which all the competitors know their strategy and costs down to the penny, Southwest has succeeded not through clever strategic moves and sophisticated technology but by the painfully obvious method of leveraging the company's people for competitive advantage. CEO Herb Kelleher is characteristically blunt when he says:

What keeps me awake at night are the intangibles. It's the intangibles that are the hardest thing for a competitor to imitate, so my biggest concern is that ... we lose the esprit de corps, the culture, the spirit. If we ever do lose that, we will have lost our most valuable competitive asset.

• Cisco Systems is a $12 billion high-tech success story, achieving a market capitalization of more than $100 billion in twelve years, something that took Microsoft twenty years to reach. But its real success is not in the technology it uses, for it has no "technology religion," but in how it manages its 26,000 employees. Although the average Silicon Valley company has an employee turnover rate of close to 30 percent, Cisco is at 8 percent. In an industry in which the average product life cycle approximates that of the fruit fly, Cisco's abilities to retain people, control costs, manage hypergrowth, and change on a dime are key to its success. Cisco has kept up technologically by buying smaller companies with leading-edge ideas. But when you buy a company for its know-how, that intellectual capital can (and often does) walk out the door. In a world in which most acquisitions fail to provide any value, Cisco has mastered the art of not only doing deals but making the deals work after they close. How has the company accomplished this? CEO John Chambers credits a culture that values frugality, listening to the customer, teamwork, and embracing change:

The key to success is having a culture with the discipline to accept change and not fight religious wars.... I did five layoffs totaling 5,000 people. It nearly killed me. I vowed never to do that again to employees or shareholders.... I learned a long time ago that in team sports or in business, a group working together can always defeat a team of individuals. Even if the individuals, by themselves, are each better than your team.... If you're going to empower people and you don't have teamwork, you're dead.

• The Men's Wearhouse is the nation's leading retailer of off-price tailored men's clothing, with sales over a billion dollars in 1999. This is a tough, low-margin business in a slow-growth or even declining industry where increased sales come from taking market share away from competitors. George Zimmer, the founder and CEO, has grown the company to more than 430 stores and 6,000 employees by emphasizing service, teamwork, empathy, and positive attitudes. Unlike its competitors in retailing, the company invests heavily in its people, offering extensive training, free substance-abuse programs, and sabbaticals. Zimmer, a child of the 1960s, believes:

Most business practices repress our natural tendency to have fun and socialize. The idea seems to be that in order to succeed, you have to suffer.... I believe an organization that is authentically built on servant leadership, where people are not just trying to acquire for themselves and where they see cooperative effort that is all around them, ends up affecting things in very metaphysical ways. When people feel connected to something with a purpose greater than themselves, it inspires people to reach for levels they might otherwise not obtain.... Our business is based on human potential.

• SAS Institute is a $1 billion privately held software company that has been described as "the world's sanest company." In a business noted for long hours, little company loyalty, high turnover, and outrageous pay packages, SAS emphasizes thirty-five-hour work weeks, provides on-site day care and health care free of charge, has its own high school for children of the employees and from the community, and has a turnover rate of less than 4 percent. What SAS does not have is strategic planning, hierarchy, or even stock options. In founding the company, Jim Goodnight, the CEO, believed in treating employees the way he wants to be treated. Says David Russo, formerly vice president of human resources, who was with the company almost from the beginning:

To some people, this looks like the Good Ship Lollipop, floating down a stream. It's not. It's part of a soundly designed strategy.... Jim's idea is that if you hire adults and treat them like adults, then they'll behave like adults.

CEO Goodnight's financial strategy is "just to take in more money than we spend."

• PSS World Medical is a distributor of medical supplies that in fifteen years has grown to almost $2 billion dollars in revenues and 4,500 employees. It has done this by explicitly avoiding policy manuals and memos, opening the books to all employees, and allowing employees to "fire" their bosses. CEO Patrick Kelly claims:

Business people don't like to talk about values. But without these, all business is about is making money.... To me, achieving business goals is great. But no business goal is worth sacrificing your values. If you have to treat people poorly, or cut corners in your dealings with customers, forget it.... You can build an organization based on mutual loyalty, even in today's economy. But you can't do it if you treat people as disposable.

• AES is a radically decentralized power generation company operating more than 100 plants in nineteen countries. All plants, from Kazakhstan to Argentina to Pakistan, are run by teams. AES has more than 10,000 employees and operates with a headquarters staff of fewer than 30 people--all this in a highly regulated industry in which bureaucracy flourishes in most companies. With a view that shocks Wall Street and many business school faculty, CEO Dennis Bakke says:

My own choice for the reason corporations do and should exist--their ultimate purpose--is to steward resources to meet the needs of the world.... Don't get me wrong. Profits are an important aspect of a successful business. They provide compensation to shareholders for their equity capital, as well as provide an objective measurement of a company's ability to steward its resources.... This is an integral part of any successful business, but it is not the primary reason a business exists.

• New United Motor Manufacturing, Inc. (NUMMI) is the Toyota--General Motors joint venture located in Fremont, California. In 1982, GM closed its assembly plant in Fremont. In 1984, the plant was reopened under Toyota leadership. More than 85 percent of the new GM consisted of the old GM employees, they used the same equipment, and the plant was still organized by the United Automobile Workers' Union. Today, NUMMI is one of the most efficient automotive assemblers in the United States and has won J.D. Power quality awards. Under the old system, absenteeism averaged almost 20 percent and the union filed more than 5,000 grievances per three-year labor contract. Today, with the same union, there is labor-management harmony and absenteeism is around 3 percent, even as the rest of GM struggles with high costs and sour union-management relations. This remarkable transformation was not one of technology but of values, culture, and the unleashing of the power of the workforce. Tatsuro Toyoda explains:

The emphasis in Fremont is not on technology. Not on robots. Our emphasis is on people. People working together to accomplish common goals. That is the basis of New United Motors.... At NUMMI our success, or our failure, as a company will depend upon people, our team members.

    How these companies have achieved what they have is the mystery that needs to be solved by those who seek to emulate them. At a superficial level, the answer is easy: Each of these organizations is based on a set of values that energize their people and unleash the intellectual capital potentially available in all organizations. As Phil Jackson, the very successful basketball coach (at one point he coached the Chicago Bulls), has stated, "[T]he most effective way to forge a winning team is to call on the players' needs to connect with something larger than themselves." But an answer at this level of detail is not particularly helpful. Telling a manager that he or she should tap the intellectual capital of the workforce by promulgating energizing values is akin to telling a parachutist whose chute has failed that birds fly by flapping their wings. Although true, it isn't helpful because it doesn't provide enough specifics to answer the question of how . The companies we describe in this book have figuratively learned to fly. This book gives you enough information about the management practices of each company so that you can answer the question of how and then use these insights in your own company.

    The firms that we describe have turned the typical logic of strategic management on its head. Instead of beginning with a business strategy, aligning the organization with this strategy, and hiring people to fit the organization, they have begun by being absolutely clear about their values and how these values will define their organizations and determine how they run. As the quotes given earlier from these companies' leaders suggest, values come first. Only then do the companies ensure that the strategy is consistent with people's values. This logic violates the "business first" mentality so common in today's organizations. But by doing things this way, these companies have been able to align the company's purpose with the spirit of their employees, capturing their emotional as well as intellectual energies. This is a far cry from the "me generation" or "virtual organization" celebrated and lamented so often in the business press. These companies don't believe that loyalty is dead, that the war for talent has mostly losers, and that labor markets are essentially spot markets for economic transactions. These organizations offer their employees more than a job: They offer a sense of community, security, and mutual trust and respect.

    As you will see, as out of favor as these concepts are, they are at the heart of what it means to unlock the value hidden in organizations. Moreover, this "hidden value" is not scarce or unique, but rather can be found in all companies. It resides in the intellectual and emotional capital of the firm and is in the power of the minds and hearts of its people. Although the organizations we describe have used this potential to achieve great success, most companies squander this resource. even as they bemoan its scarcity.

WHY POPULAR MANAGEMENT FADS FAIL TO

PROVIDE COMPETITIVE ADVANTAGE THAT LASTS

Why is there so much current interest in the war for talent? There seem to be several explanations. First, a number of observers, including the consulting firms McKinsey and Watson Wyatt, have noted that in the United States the coming demographic reality is that the relative size of the workforce in their so-called prime career years (aged thirty-five to forty-five) will be smaller: "In 15 years, there will be 15% fewer Americans in the 35- to 45-year-old range than there are now. That sets the stage for a talent war." Although the demographic facts are unassailable, the implications that have been drawn for individual companies don't necessarily follow. Unless you are planning to employ a significant fraction of the U.S. labor force, labor market trends at the macro level may have relatively little impact on your company, just as sales growth trends at the industry level have little ability to predict an individual company's growth prospects. There is already enormous variation in the ability of companies to attract, retain, and deploy talent. Companies need to be better at these tasks regardless of the size of the nation's workforce. Those companies that have developed positive and constructive, as opposed to toxic, workplaces won't ever notice a talent drought because they currently enjoy, and will continue to enjoy, a surfeit of applicants and loyal employees.

    Second, there is so much attention to "talent" because of the striking obsession, particularly in the United States, with the importance of individual (as contrasted with organizational or collective) ability and motivation. The classic formulation in industrial psychology is that performance is a consequence of ability times motivation. Not only is this inadequate to explain individual performance, it is much too simplistic for organizations, where performance is also a consequence of the environment in which individuals work and how they work together. Even in sports, this simple-minded dictum of the importance of individual talent fails. All-star teams often lose to teams of people who have played together and learned to work effectively as a team . Sports teams comprising the best individual talent do not always triumph over teams that have complementary skills and a system that brings out their collective best. This fact--that context and environment, not just individual attributes, matter--is even more relevant for companies, where performance is a consequence of the interdependent interactions of many individuals as they jointly produce products and services. In our view, the emphasis on hiring individual stars is another fad that will pass as companies realize that their success depends on what they do with and to their talent, not just on acquiring it.

    Why is it that the history of business is one of fads and fashions, with the war for talent being just the latest? The past twenty years have been marked by a succession of miracle cures, beginning with In Search of Excellence and the famous eight characteristics claimed to describe the most successful U.S. companies and proceeding through Theory Z, Total Quality Management, empowerment and self-managed teams, re-engineering, globalization and boundaryless organizations, core competencies, customer intimacy, visionary management, open book management, EVA (economic value added), the balanced scorecard, and a host of other management concepts--including the occasional acknowledgment by a repentant author or consultant that the previous advice was wrong. A recent survey by a major consulting firm showed that the average big company had adopted over a dozen of twenty-five current management techniques. That's not to say that these various concepts were incorrect or that they didn't focus management attention on important issues. It's just that few of them provided the long-term, long-lasting benefits companies sought.

    It would be wrong to blame managers for this pattern. As a group, leaders are not enamored of fads or easily sold on new fashions. What drives managers to grasp for new solutions is a deadly serious need on their part: the need to find ways that will enable their organizations to survive and prosper in an increasingly competitive world. Leaders understand too well how many organizations, even those that have been successful in the past, can eventually fail. Their search is for ways to gain an edge over their competitors--preferably an edge that will last a while. Unfortunately, as readers of business books know, these new approaches, although well intentioned and occasionally helpful, almost always fail to provide organizations with a sustainable competitive advantage.

    A moment's reflection will suggest why these "new" approaches seldom provide an enduring edge. If your competitors can readily adopt the same approaches, how can there be any long-term competitive advantage? Think about it. If the same consulting firm that helps one organization implement the hottest new approach then goes to a competitor and implements it there (except they may do it better because they learned a thing or two while helping the first client), how can this offer any real advantage? This leads to a predictable pattern: Each management technique, having been adopted by the competition, is simply replaced by a new one, with consulting firms and management gurus vying to be first with the new wave.

    What makes these organizational innovations so easy to imitate? Ironically, the same things that make them so intellectually appealing. They are often based on readily understood conceptual frameworks that can be presented on a set of overheads or slides. They frequently have some catchy new terminology associated with them, such as re-engineering, the learning organization, the seven S framework, or the five forces. They often have checklists of things to do. They are, in a word, easily understood. If they weren't easily grasped, then they wouldn't generate consulting business. If they couldn't be graphically presented, they couldn't form the basis for the seminars and books that are the consultants' chief marketing tools. And most important, if they couldn't be readily taught and transmitted, the firms couldn't turn over the execution of those ideas to newly minted graduates, thereby leveraging the ideas into a revenue stream.

    Another problem exists. The techniques are seldom presented in a way that makes doing them seem very difficult. Unfortunately, the key to success isn't in simply knowing something but in implementing it. "When you think about it, most executives regard getting their workforces to carry out their plans as the most challenging part of enacting strategy. This is because they don't know how to do it." Most fads ignore the boring, mundane details of implementation, but these are the key to actually doing something that others can't easily imitate. In today's world, executives "are more knowledgeable and confident spending money or cutting costs, adding technology or buying a new product line" than they are aligning management practices so that innovation, implementation, and the use of knowledge actually happen. Anyone can learn the theory of golf and what a golf swing should be. Actually implementing a golf swing so that the ball travels a long distance in the desired direction is something much more difficult to accomplish and much more difficult to imitate.

    Therefore, what the successful companies that we describe do is common sense and conceptually easy to comprehend. However, how they execute what they do is what makes these companies successful and is why so many firms fail when trying to copy them. This is why even managers who know what they should do seldom are able to do it. But when organizations are able to implement, not just discuss, these approaches, the results are simply amazing, as you will see.

    So, what is the secret? The answer is not just in how these firms manage their people, but in the importance of their values and the alignment they achieve between their values, strategies, and their people. It sounds too simple. How can companies in industries as disparate as airlines, automobile manufacturing, medical supply distribution, power generation, retailing tailored men's clothing, and computers use the same approach to achieve sustainable competitive advantage? How can something as simple as alignment be the key to the success of businesses that range from high tech to no tech, and from products to services? One answer is that alignment isn't so simple. Aligning values, strategies, and management practices may be simple to understand and simple to talk about, but it is very difficult to actually implement. Another answer is found as we consider how an emphasis on values and alignment builds capabilities that permit companies to redefine the competitive dynamics in their industries.

(Continues...)

Copyright © 2000 President and Fellows of Harvard College. All rights reserved.