The 10 Greatest CEOs of All Time Fortune July 21, 2003

by Jim Collins

http://www.jimcollins.com/lib/articles.html#

It's a familiar scene. An industry under fire. A congressional committee demanding answers. A corporate CEO called to testify.

Yet the familiarities, in this case, end there. When Boeing CEO Bill Allen appeared before a House subcommittee—addressing charges that military aircraft makers had improperly inflated profits at the government's expense—there was no lawyer whispering in his ear. There were no notes before him. There was no hint that he wasn't personally responsible for Boeing's actions. And when he had finished his quietly forthright explanation, there was no question that Boeing—far from gouging the government to pad executives' bonuses—had in fact been laying the foundations for future greatness, plowing profits into research and development. The committee's response now seems unimaginable: It erupted into a standing ovation.

That image, from 1956, kept popping to mind whenever someone asked me about the business meltdowns of 2001 and 2002. What, went the questions, should be done about governance? What should Congress do? What should boards do? What, what, what?

I usually declined to comment, feeling I had little to say that had not already been said. But as the Allen image lingered, I came to realize that I did have something to say. It's just that my answer wasn't a what answer. It was who.

When the debates over governance mechanisms and procedural reform are all said and done, one question will still tower above all others: Who should we choose to run our corporations? In the 1990s, it's now clear, boards increasingly gave the car keys to the wrong people. Like doctors bleeding patients to death in the 1600s, the boards weren't trying to do harm. They were simply using the wrong models.

Yet where, these days, are the right models? For good reason, we've become cynical about CEOs. There seem to be no heroes left standing, no one to emulate or believe in. There's an increasingly gloomy sense that we should simply throw up our hands and give up on corporate leadership.

I disagree. Having spent years studying what separates great companies from mediocre ones, I can say unequivocally: There are role models to learn from—albeit not the ones you might expect. It's what inspired me to go back to my research and assemble my list of the ten greatest CEOs of all time.

Who made the cut? Some names on the list will be familiar, while several you might expect to see—names like Gates, Grove, Welch, and Gerstner—weren't eligible for a

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simple reason: Great CEOs build organizations that thrive long after they're gone, making it impossible to judge their performance until they've been out of office at least ten years. That criterion—legacy—was one of four I used to winnow a universe of more than 400 CEOs. I also scored the top candidates on impact (presiding over innovations—whether technical or managerial—that changed things outside the company's walls), resilience (leading the company through a major transformation or crisis), and financial performance, measured by cumulative stock returns relative to the market (or other financial metrics in the case of pre-IPO companies) during the CEO's tenure.

So what, exactly, made these ten so great? Strikingly, many of them never thought of themselves as CEO material. The second-greatest CEO on the list initially refused the job on the grounds that he wasn't qualified. No. 9 described herself as "scared stiff." No. 5 was once told flatly, "You will never be a leader." Striking, too, is the sheer scale of their time frames. Surrounded by pressures to manage for the quarter, they managed for the quarter-century—or even three-quarters of a century. The No. 4 CEO shaped a company that would average 15% earnings growth for an astonishing 75 years.

Yet if one thing defines these ten giants, it was their deep sense of connectedness to the organizations they ran. Unlike CEOs who see themselves principally as members of an executive elite—an increasingly mobile club whose members measure their pay and privileges against other CEOs'—this group's ethos was a true corporate ethos, in the original, nonbusiness sense of the word corporate: "united or combined into one." They understood the central paradox of exceptional corporate leadership: On the one hand, a company depends more on the CEO than on any other individual. Only the CEO can make the really big decisions. Yet a company equally depends on the CEO's understanding that his or her role still represents less than 10% of the total puzzle. Much depended on them, but it was never about them.

Inclusion on this list would surprise, if not horrify, more than a few of them. But if the question is how to identify more of the right leaders—and how a new generation can learn to become the right leaders—there is no better answer than these ten. In an age of diminished standards, those they set loom larger than ever.

No. 10: David Packard Rejected the CEO club

His eulogy pamphlet identified the Hewlett-Packard co-founder as 'Rancher, etc.' In 1949, 37-year-old David Packard attended a meeting of business leaders. Fidgeting while they discussed how to squeeze more profit from their companies, he was finally unable to contain himself. "A company has a greater responsibility than making money for its stockholders," he asserted. Eyes turned toward his six-foot-five-inch frame. "We have a responsibility to our employees to recognize their dignity as human beings," Packard said, extolling his belief that those who help create wealth have a moral right to share in that wealth.

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To his elders, Packard's ideas seemed borderline socialist if not outright dangerous. "I was surprised and shocked that not a single person at that meeting agreed with me," Packard reflected later. "It was quite evident they firmly believed I was not one of them, and obviously not qualified to run an important enterprise."

That was just fine with David Packard. He never wanted to be part of the CEO club; he belonged to the Hewlett-Packard club. In an era when bosses dwelt in mahogany-paneled sanctums, Packard took an open-door workspace among his engineers. He practiced what would become famous as "management by walking around." Most radical of all for the time, he shared equity and profits with all employees.

What set Packard apart, in other words, is that he wasn't a person set apart. His idea of a good time, according to a co-worker, was to get together with friends and string barbed wire. Despite being one of Silicon Valley's first self-made billionaires, he continued to live in the small, understated house he and his wife had built in 1957. And though he donated (with Hewlett) to Stanford University an amount comparable to the present value of Jane and Leland Stanford's original endowment, he never allowed his name to appear on any of its buildings while he was alive. By defining himself as an HP man first and a CEO second, Packard did more than demonstrate humility. He built a uniquely dedicated culture that became a fierce competitive weapon, delivering 40 consecutive years of profitable growth.

While Packard's values have since waned within HP, he did more to create the DNA of Silicon Valley than perhaps any other CEO. Like the heritage left by the architects of democracy in ancient Athens, the spirit of his and Hewlett's system lives on, far beyond the walls of the institution they built.

No. 9: Katharine Graham Wasn't afraid of fear

The Nixon White House threatened her, but the chief of the Washington Post Co. didn't flinch. On Aug. 3, 1963, Katharine Graham heard the crack of a gunshot within her house. She ran downstairs to discover that her husband, Philip, lay dead by his own hand.

On top of the shock and grief, Graham faced another burden. Her father had put the Washington Post Co. in her husband's hands with the idea that he'd pass it along to their children. What would become of it now? Graham laid the issue to rest immediately: The company would not be sold, she informed the board. She would assume stewardship.

"Steward," however, would not describe Graham's approach to her new role. At the time, the Washington Post was an undistinguished regional paper; Graham aimed for people to speak of it in the same breath as the New York Times. A crucial decision point came in 1971 when she confronted what to do with the Pentagon Papers—a leaked Defense Department study that revealed government deceptions about the Vietnam war. The

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Times had already incurred a court injunction for publishing excerpts. If the Post published, it risked prosecution under the Espionage Act. That, in turn, could jeopardize the company's pending public stock offering and lucrative television licenses. "I would be risking the whole company on this decision," Graham wrote in her memoir, Personal History. Yet to opt for assured survival at the cost of the company's soul, she concluded, would be worse than not surviving. The Post published.

Eventually vindicated by the Supreme Court, it was a remarkable decision for an accidental CEO who suffered from lifelong feelings of insecurity; phrases like "I was terrified" and "I was quaking in my boots" pepper her memoir. That anxiety would soon reach a crescendo as Post reporters Bob Woodward and Carl Bernstein doggedly investigated what became known as Watergate. Today we take that story's outcome for granted. But at the time, the Post was largely alone in pursuing it. In choosing to publish, Graham built a great paper and, in turn, a great company—one that ranks among the 50 best-performing IPOs of the past quarter-century and earned the investment of Warren Buffett. Graham never awarded herself much credit, insisting that, with Watergate, "I never felt there was much choice." But of course, she did choose. Courage, it's said, is not the absence of fear, but the ability to act in its presence. By that definition, Katharine Graham may be the most courageous CEO on this list.

No 8: William McKnight Disciplined creativity

He gave fledgling ideas freedom to grow at 3M—but insisted they learn to stand on their own.

The early giants of industry tend to fall into one of two camps: Individual innovators (think Walt Disney) and system builders (think John D. Rockefeller). 3M's William McKnight falls into neither. Beginning in 1929, the bookish accountant fused the two models into something entirely new: a company that turned innovation into a systematic, repeatable process. While you couldn't predict exactly what McKnight's system would create, you could predict with certainty that it would create.

Many know the story of the 3M scientist who blasted a hole in his basement to house the machine that made his little sticky tabs—a product that had failed market tests—and how, like a drug dealer, he created a base of addicted users by distributing free samples to headquarters staff. It's one of many 3M stories that celebrate the lone spirit who persists against all odds. The oft-overlooked lesson, though, is the "all odds" part. It's precisely because 3M entrepreneurs must battle attempts to kill off their ideas that a handful of winners like Post-its emerge. Without this creative tension—freedom vs. discipline, innovation vs. control—all you have is chaos, or worse. Enron was a highly innovative culture that lacked discipline, innovating itself right out of existence.

"The test of a first-rate intelligence," wrote F. Scott Fitzgerald, "is the ability to hold two opposed ideas in the mind at the same time and still retain the ability to function." By that

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definition, McKnight was not just a first-rate intelligence, but a genius—a genius whose company was lucky by design.

No. 7: David Maxwell Turned a turnaround into art

Fannie Mae was losing $1 million a day when he arrived—'an opportunity to make [it] into a great company.' In 1981, as the stock of Chrysler hit an all-time low, America was beginning its enthrallment with the man hired to save it. Lee Iacocca would soon be a national icon—bestselling author, star of more than 80 commercials, and everyone's image of a turnaround artist.

That same year, as the stock of Fannie Mae hit an all-time low, a different executive was hired to save the deeply troubled mortgage lender. David Maxwell would not become a national icon—nor even a recognizable name. Yet by the time both men retired in the early 1990s, Maxwell's Fannie Mae had beat the stock market at a rate more than twice that attained by Chrysler under Iacocca.

More inspired than inspiring, more diligent than dazzling, Maxwell took a burning house and not only saved it but built it into a cathedral. Some steps, such as selling off $10 billion in unprofitable mortgages, were classic fireman stuff. But his deepest genius was to frame the rebuilding around a mission: strengthening America's social fabric by democratizing home ownership. If Fannie Mae did its job well, people traditionally excluded from owning homes—minorities, immigrants, single-parent families—could more easily claim their part of the American dream. If turnaround is an art, Maxwell was its Michelangelo.

No. 6: James Burke Acted before crisis hit

The former Johnson & Johnson boss is a legend revered—for the wrong reason. Ask people to single out a courageous CEO action, and many will cite James Burke's decision to pull Tylenol capsules off the shelves in response to the cyanide-poisoning crisis of 1982, taking a $100 million hit to earnings along the way. It's a wonderful story. But it misses the point.

Burke's real defining moment occurred three years before, when he pulled 20 key executives into a room and thumped his finger on a copy of the J&J credo. Penned 36 years earlier by R.W. Johnson Jr., it laid out the "We hold these truths to be self-evident" of the Johnson & Johnson Co., among them a higher duty to "mothers and all others who use our products." Burke worried that executives had come to view the credo as an artifact—interesting, but hardly relevant to the day-to-day challenges of American capitalism.

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"I said, 'Here's the credo. If we're not going to live by it, let's tear it off the wall,' " Burke later told Joseph Badaracco and Richard Ellsworth for their book Leadership and the Quest for Integrity. "We either ought to commit to it or get rid of it." The team sat there a bit stunned, wondering if Burke was serious. He was, and the room erupted into a debate that ended with a recommitment. Burke and his colleagues would conduct similar meetings around the world, restoring the credo as a living document.

No one could have predicted the act of terrorism perpetrated on J&J customers in 1982. But J&J's response was predictable. It didn't need to debate whether customer safety outweighed short-term financial concerns, because the debating was already done. Burke makes the list not because he led J&J through crisis; he makes it because he led in the absence of it.

No. 5: Darwin Smith Asked questions and moved rocks

The Kimberly-Clark chief was told 'You'll never be a leader' by the Army's officer-training school. Lois Smith could tell a big decision was afoot at Kimberly-Clark whenever she heard the rumbling of a backhoe in the middle of the night. That was Darwin again, moving rocks from one pile to another. This was how her husband mulled over big decisions—and to judge by the huge piles still standing sentinel at Gotrocks Farm in Wisconsin, Smith was a champion muller.

When he became CEO of Kimberly-Clark in 1971, Smith faced a brutal fact: The company languished in mediocrity, the bulk of its capital tied up in giant paper mills. Yet Smith offered no vision statement, no splashy acquisition, no hoopla-laden change program. Instead he posed questions. What, he pressed his colleagues, could Kimberly-Clark be passionate about? What could it be best at in the world? What could improve its economics? For months he continued to ask questions and move rocks.

This was not Smith being indecisive. Diagnosed with nose and throat cancer shortly after becoming CEO, he told Lois what he'd learned from his illness. "If you have a cancer in your arm, you've got to have the guts to cut off your arm." He paused. "I've made a decision," he continued. "We're going to sell the mills."

The decision had grown out of one of Smith's dialogues in which a fellow executive noted that Kleenex, a sideline product, had become a brand synonymous with its category, like Coke or Band-Aid. In what a Kimberly-Clark director called the "gutsiest decision I've ever seen a CEO make," Smith jettisoned 100 years of corporate history, right down to the original mill in Kimberly, Wis. Analysts derided the loss of revenue. The stock took a hit. Forbes predicted disaster. But Smith's ruminations had equipped him with quiet steel.

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A CEO must be willing to act boldly, yet boldness is worthless if you're wrong. It's an obvious point, but one routinely ignored by those caught up in the fanfare of big action. Smith grasped that it is better to be right than to be impressive.

And Smith got it right. Twenty-five years after becoming CEO, Kimberly-Clark was the world's No. 1 paper-based consumer-products company—its stock outperforming the market by a factor of four over that span—and owned its main rival, Scott Paper, outright. Smith moved rocks and, in the end, moved a rock that nobody thought could be moved.

No. 4: George Merck Put profit second

The Merck & Co. boss didn't worry about Wall Street—and grew profits 50-fold. Late one afternoon in 1978, Dr. William Campbell did what all great researchers do: He wondered at the data. While testing a new compound to battle parasites in animals, he was struck with the idea that it might be effective against another parasite—one that causes blindness and itching in humans so horrific that some victims have committed suicide. Campbell might have simply scribbled a note in the files and gone to lunch. After all, the potential "customers"—tribal people in remote tropical locations—would have no money to buy it. Undaunted, Campbell penned a memo to his employer, Merck & Co., urging pursuit of the idea. Today 30 million people a year receive Mectizan, the drug inspired by his observation, largely free of charge.

The most exceptional part of the story is that it wasn't an exception. "Medicine is for people, not for the profits," George Merck II declared on the cover of Time in August 1952—a rule his company observed in dispensing streptomycin to Japanese children following World War II. Yet fuzzy-headed moralistic fervor wasn't George Merck. Austere and patrician, he simply believed that the purpose of a corporation is to do something useful, and to do it very well. "And if we have remembered that, the profits have never failed to appear," he explained. "The better we remembered, the larger they have been." It's the mirror image of CEOs whose unhealthy fixations with Wall Street have served neither people nor profits: Merck served shareholders so well precisely because he served others first.

No. 3: Sam Walton Overcame his charisma

'I have the personality of a promoter,' the Wal-Mart founder wrote, but 'the soul of an operator.' A Brazilian businessman once told me how he'd sent letters to the heads of ten U.S. retailers in the1980s, asking to visit to see how they ran a retail operation. Most didn't bother to reply, and those who did sent a polite "No, thank you." All except Sam Walton.

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When the Brazilian and his colleagues stepped off the plane in Bentonville, Ark., a white-haired man asked if he could help. "We're looking for Sam Walton," they said, to which the man replied, "That's me." Walton led them to his truck and introduced his dog, Roy. As they rumbled around in the front cab of Walton's pickup, the Brazilian billionaires were pummeled with questions. Eventually it dawned on them: Walton had invited them to Bentonville so that he could learn about South America. Later Walton visited his friends in Sao Paulo. Late one afternoon there was a phone call from the police. Walton had been crawling around in stores on his hands and knees measuring aisle widths and had been arrested.

The story encapsulates some of Walton's greatest strengths, notably his hunger for learning. But it also points to his biggest liability: his singularly charismatic personality. Companies built around a cult of personality seldom last. After Sam, would Wal-Mart decline like a church that loses its inspirational pastor?

Yet Walton himself refused to let his colorful personality distract from his central message: to make better things ever more affordable to people of lesser means. And before his death in 1992, he made two brilliant moves to ensure that idea would outlast him. First, he set a goal that he knew would be unachievable in his lifetime: to grow annual sales from less than $30 billion to $125 billion by the year 2000. Second, so that no personality would become bigger than the idea, he picked a successor who had seemingly undergone a charisma bypass. Under David Glass, Wal-Mart blew right past the $125 billion goal, clocking in at $165 billion in 2000.

Walton knew better than anyone the dangers of charismatic leadership. He proved that, like any other handicap, it can be overcome.

No. 2: Bill Allen Thought bigger

'Don't talk too much,' Boeing's new chief admonished himself. 'Let others talk.' Its planes helped win the war—yet victory in 1945 looked like death for Boeing. Revenues plummeted more than 90% as orders for bombers vanished overnight. And bombers, everyone knew, were what Boeing was all about.

Everyone, that is, but its new leader. An understated lawyer who said he wasn't qualified for the job, Bill Allen never saw Boeing as the bomber company. It was the company whose engineers built amazing flying machines. In 1952 he bet heavily on a new commercial jet, the 707. At the time, Boeing had no business being in the commercial market, or at least that's what potential customers said. ("You make great bombers up there in Seattle. Why don't you stick with that?") Yet Allen's time frames were bigger too. He saw that Boeing could compete by changing the industry. Under his leadership, Boeing built the 707, 727, 737, and 747—four of the most successful bets in industrial history. At a board meeting described by Robert Serling in Legend & Legacy, a director said that if the 747 was too big for the market to swallow, Boeing could back out. "Back

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out?" stiffened Allen. "If the Boeing Aircraft Co. says we will build this airplane, we will build it even if it takes the resources of the entire company." Like today's CEOs, he endured the swarming gnats who think small: short time frames, pennies per share, a narrow purpose. Allen thought bigger—and left a legacy to match.

No. 1: Charles Coffin Built the stage on which they all played

General Electric's first president didn't see himself as a genius; he came from the shoe business. Most people have never heard of Charles Coffin—and that's the ultimate testimony to his greatness. His predecessor had something to do with this. No CEO finds it easy to take over from a founding entrepreneur; now imagine that founder holds patents on the electric light, the phonograph, the motion picture, the alkaline battery, and the dissemination of electricity. But Coffin knew his job was not to be the next Thomas Edison—though Coffin, too, would prove a master inventor. His invention was the General Electric Co.

Coffin oversaw two social innovations of huge significance: America's first research laboratory and the idea of systematic management development. While Edison was essentially a genius with a thousand helpers, Coffin created a system of genius that did not depend on him. Like the founders of the U.S., he created the ideology and mechanisms that made his institution one of the world's most enduring and widely emulated.

Edison's wouldn't be the only name to overshadow his. Coffin's era (1892-1912) became known as the "Steinmetz era," in homage to the brilliant GE electrical engineer Charles P. Steinmetz. What little name recognition Coffin did enjoy would then be obliterated by the likes of Swope, Cordiner, Jones, and Welch—GE CEOs who became giants in their own day.

Jack Welch's stature, in particular, reached a point where GE was called the House That Jack Built. In fact, Welch was as much a product of GE as vice-versa. Certainly Welch vastly improved the system, and history will likely judge him a great executive. He was a master at developing general managers and steadily increasing profit per unit of executive talent. But Welch did not invent this concept; he inherited it.

The same cannot be said of Charles Coffin. More than any other leader, Coffin made GE into a great company, creating the machine that created a succession of giants. For that reason, he stands a notch above the CEOs whose names eclipsed his. He built the stage on which they all played.

Copyright © 2003 Jim Collins, All rights reserved.

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August 28, 2000

The Timeless Physics of Great Companies (published as "Perspectives: Don’t Rewrite the Rules of the Road") Business Week

by Jim Collins

I had just finished sharing the results of 10 years of rigorous research into what makes enduring, great companies with a gathering of Internet executives when a hand shot up. “How do you respond to the idea that nothing from your research applies in the New Economy?” asked the exec attached to it. He was challenging the whole idea of learning from the past. If this truly is a New Economy, he wondered, don’t we need to throw out all the old concepts and start from scratch?

Well, yes and no. Yes, the specific methods of building companies in coming years will be dramatically different than in the past. But that does not mean we should toss aside the timeless principles that made great companies great. What’s the difference? Think of it like this: While the practices of engineering continually evolve, the laws of physics remain relatively fixed.

The immutable laws of management physics include some simple yet important concepts: Do only those things that you can be the best in the world at; those things you can be passionate about; things that make simple economic sense. Take the axiom that you need to “put the right people on the bus.” The best executives have always focused first on getting people who share their values and standards. They understood that vision and strategy cannot compensate for having the wrong people. Once you have the right folks in place, it’s much easier to steer the bus as conditions change.

That’s exactly the idea that Bill Hewlett and David Packard had in mind when the two young engineers met to form their company in 1937. The minutes of that meeting begin by stating their intention to manufacture innovations in the general field of electronics, but they then go on to say, “The question of what to manufacture was postponed.’’ In fact, the whole founding concept of the company was not so much what, but who. They were best friends in graduate school and simply wanted to work together and create a company with people who shared their values and standards.

As Hewlett and Packard scaled up, they stayed true to this guiding principle. After World War II, they hired a whole batch of fabulous people streaming out of government labs, without anything specific in mind for them to do. Packard grasped the subtle truth that a great company will always generate more opportunity than it can handle, and that growth is ultimately constrained only by the ability to get enough of the right people. At the same time, if he picked the wrong person—someone misaligned with the company’s values or unable to deliver results—Packard would throw him off the bus, and in a hurry.

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Yes, the Internet requires significant changes in the way we manage and lead. But if you don’t have the right people, it doesn’t matter what you do with the Internet; you still won’t have a great company. If, for example, Value America had spent less on advertising ($69 million in 1999 on a revenue base of $183 million) and invested even half that in assembling an army of the best possible people, then perhaps it would have avoided the distinction of becoming the consummate dot-com implosion. Iacocca-style advertising and a snazzy Web site are all fine and good, but Packard’s Law still holds, even in the Internet economy: Growth in revenues cannot exceed growth in people who can execute and sustain that growth.

In fact, our bigger problem today lies not in the fact that we live in a time of change. Rather, like people in the 1500s groping to understand the natural world, we have only limited understanding of the physics of great companies. Worse, we inconsistently apply what we do understand.

My group recently completed a four-year project to answer the question, “Can a good company become a great company?’’ We began our research with 1,435 companies that had been among the 500 largest, going back to 1965. We then searched for companies that made a shift from good to great performance—meaning they generated cumulative shareholder returns greater than three times the market average over 15 years. How many do you think we found?

The answer: eleven.

Despite the rise of first-class business schools and the explosion of management literature, only 11 of 1,435 companies showed a sustained and verifiable shift from good to great. In analyzing the good-to-great CEOs, two things became clear. First, they had a firm grasp on a few basic principles, such as getting the right people on the bus. Second, they were fanatically consistent in applying those principles. When in doubt, they would not hire, no matter what the pressure to get a warm body on board. And when they knew they had to make a personnel change, they would not make the mistake of waiting for a more convenient moment; they acted.

The truth is, there’s nothing new about being in a New Economy. Yes, the Internet is a big deal, but electricity was bigger. And in each evolution of the economy over the past 150 years, the best executives have adhered to the same basic principles, with rigor and discipline.

I can’t tell you exactly what a corporation will look like 50 or 100 years from now. But I can promise this: If you toss out all the time-proven fundamentals, you’ll have no chance whatsoever of building an enduring, great company.

Copyright ©2000 Jim Collins. All rights reserved.

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January 1995

The Ultimate Vision Across the Board

by Jim Collins and Jerry I. Porras Visionary leaders die. Visionary products become obsolete. Visionary companies go on forever.

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 10 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? 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. Yet as extraordinary as they are, the visionary companies do not have unblemished records. Walt Disney Co. faced a serious cash-flow crisis in 1939 that forced it to go

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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 Co. had serious difficulties in the mid 1930s, the late 1940s, and again in the early 1970s when it laid off more than 60,000 employees. 3M Co. began life as a failed mine and almost went out of business in the early 1900s. Hewlett-Packard Co. faced severe cutbacks in 1945; in 1990, it watched its stock drop to a price below book value. Sony Corp. had repeated product failures during its first five years of life (1945-1950), and in the 1970s it saw its Beta format lose to VHS in the battle for market dominance in VCRs. Ford Motor Co. posted one of the largest 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 Corp. was nearly bankrupt in 1914, then again in 1921, and is having trouble again in the 1990s. 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 even now. 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 Jan. 1, 1926. If you received all dividends and made appropriate adjustments for when the company 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 Dec. 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—more than six times the comparison fund and more than 15 times the general market. 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 traveler’s 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 Select typewriters, Marriott Hotels, anticholesterol Mevacor from Merck, Motorola cellular phones and paging devices, Nordstrom’s impact on customer-service standards, and Sony Trinitron televisions 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.

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The exciting thing, however, is to figure out why these companies have separated themselves into the special category that we consider highly visionary. How did they begin? How did they manage the various difficult stages of corporate evolution from tiny start-ups to global institutions? And, once they became large, what characteristics did they share in common that distinguished them from other large companies? What can we learn from their development that might prove useful to people who would like to create, build, and maintain such companies? Answers to these questions are suggested by a dozen common myths that were shattered during the course of our research. MYTH 1: It takes a great idea to start a great company Reality: Starting a company with a “great idea” might be a bad idea. Few of the visionary companies began life with a great idea. In fact, some began life without any specific idea and a few began with outright failures. Furthermore, regardless of the founding concept, the visionary companies were significantly less likely to have early entrepreneurial success than the comparison companies in our study. Like the parable of the tortoise and the hare, visionary companies often get off to a slow start but win the long race. In all, only three of the visionary companies begin life with the benefit of a specific, innovative, and highly successful initial product or service—a “great idea”: Johnson & Johnson Inc., General Electric Co., and Ford. And even in the GE and Ford cases, we found some slight dents in the great idea theory. At GE, Edison’s great idea turned out to be inferior to Westinghouse’s great idea. Edison pursued a direct current (DC) system, whereas Westinghouse promoted the vastly superior alternating current (AC) system, which eventually prevailed in the U.S. market. In Ford’s case, contrary to popular mythology, Henry Ford didn’t come up with the idea of the Model T and then decide to start a company around the idea. Just the opposite. Ford was able to take full advantage of the Model T concept because he already had a company in place as a launching pad. MYTH 2: Visionary companies require great and charismatic visionary leaders Reality: A charismatic visionary leader is absolutely not required for a visionary company and, in fact, can be detrimental to a company’s long-term prospects. Some of the most significant CEOs in the history of visionary companies did not fit the model of the high-profile, charismatic leader—indeed, some explicitly shied away from the model. Like the founders of the United States at the Constitutional Convention, they concentrated more on building an enduring institution than on being a great individual leader. They sought to be clock builders, not time tellers. And they have been more this way than CEOs at the comparison companies. If you’re a high-profile charismatic leader, fine. But if you’re not, then that’s fine, too, for you’re in good company right along with those that built companies like 3M, Procter & Gamble Co., Sony, Boeing, HP, and Merck & Co. Inc. Not a bad crowd. MYTH 3: The most successful companies exist first and foremost to maximize profits Reality: Contrary to business-school doctrine, “maximizing shareholder wealth” or “profit maximization” has not been the dominant driving force or primary objective

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through the history of the visionary companies. Visionary companies pursue a cluster of objectives, of which making money is only one—and not necessarily the primary one. Yes, they seek profits, but they’re equally guided by a core ideology—core values and a sense of purpose beyond just making money. Yet, paradoxically, the visionary companies make more money than the purely profit-driven comparison companies. A detailed pair-by-pair analysis shows that the visionary companies have generally been more ideologically driven and less purely profit-driven than the comparison companies in 17 out of 18 pairs. This is one of the clearest differences we found between the visionary and comparison companies. MYTH 4: Visionary companies share a common subset of “correct” core values Reality: There is no “right” set of core values for being a visionary company. Indeed, two companies can have radically different ideologies yet both be visionary. Core values in a visionary company don’t even have to be “enlightened” or “humanistic,” although they often are. The crucial variable is not the content of a company’s ideology but how deeply it believes its ideology and how consistently it lives, breathes, and expresses it in all that it does. Visionary companies do not ask, “What should we value?” They ask, “What do we actually value deep down to our toes?” In most cases, a core value can be boiled down to a piercing simplicity that provides substantial guidance. Notice how Sam Walton captured the essence of Wal-Mart’s number 1 value: “[We put] the customer ahead of everything else. . . . If you’re not serving the customer, or supporting the folks who do, then we don’t need you.” Notice how James Gamble simply and elegantly stated P&G’s core value of product quality and honest business: “When you cannot make pure goods of full weight, go to something else that is honest, even if it is breaking stone.” Notice how former HP CEO John Young captured the simplicity of the HP Way: “The HP Way basically means respect and concern for the individual; it says ‘Do unto others as you would have them do unto you.’ That’s really what it’s all about.” The core value can be stated a number of different ways, yet it remains simple, clear, straightforward, and powerful. Although certain themes show up in a number of the visionary companies (such as contribution, integrity, respect for the individual employee, service to the customer, being on the creative or leading edge, or responsibility to the community), no single item shows up consistently across all the visionary companies:

• Some companies, such as Johnson & Johnson and Wal-Mart Stores Inc., made their customers central to their ideology; others, such as Sony and Ford, did not.

• Some companies, such as HP and Marriott, made concern for their employees central to their ideologies; others, such as Nordstrom Inc. and Disney, did not.

• Some companies, such as Ford and Disney, made their products or services central to their core ideology; others, such as IBM and Citicorp, did not.

• Some companies, such as Sony and Boeing, made audacious risk taking central to their ideology; others, such as HP and Nordstrom, did not.

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• Some companies, such as Motorola Inc. and 3M, made innovation central to their ideology; others, such as P&G and American Express Co., did not.

MYTH 5: The only constant is change Reality: A visionary company almost religiously preserves its core ideology—changing it seldom, if ever. Core values in a visionary company form a rock-solid foundation and do not drift with the trends and fashions of the day; in all cases, the core values have remained intact for well over 100 years. And the basic purpose of a visionary company—its reason for being—can serve as a guiding beacon for centuries, like an enduring star on the horizon. Yet, while keeping their core ideologies tightly fixed, visionary companies display a powerful drive for progress that enables them to change and adapt without compromising their cherished core ideals. Walt Disney didn’t leave its core ideology up to chance; it created Disney University and required every single employee to attend “Disney Traditions” seminars. Hewlett-Packard didn’t just talk about the HP Way; it instituted a religious promote-from-within policy and translated its philosophy into the categories used for employee reviews and promotions, making it nearly impossible for anyone to become a senior executive without fitting tightly into the HP Way. Marriott didn’t just talk about its core values; it instituted rigorous employee-screening mechanisms, indoctrination processes, and elaborate customer-feedback loops. Nordstrom didn’t just philosophize about fanatical customer service; it created a cult of service reinforced by tangible rewards and penalties—“Nordies” who serve the customer well become well-paid heroes, and those who treat customers poorly get spit right out of the company.

MYTH 6: Blue-chip companies play it safe Reality: Visionary companies may appear strait-laced and conservative to outsiders, but they’re not afraid to make bold commitments to Big Hairy Audacious Goals (BHAGs). Like climbing a big mountain or going to the moon, a BHAG may be daunting and perhaps risky, but the adventure, excitement, and challenge of it grabs people in the gut, gets their juices flowing, and creates immense forward momentum. Visionary companies have judiciously used BHAGs to stimulate progress and blast past the comparison companies at crucial points in history. All companies have goals. But there is a difference between merely having a goal and becoming committed to a huge, daunting challenge—like a big mountain to climb. Think of the moon mission in the 1960s. President Kennedy and his advisers could have gone off into a conference room and drafted something like “Let’s beef up our space program,” or some other such vacuous statement. The most optimistic scientific assessment of the moon mission’s chances for success in 1961 was 50-50, and most experts were, in fact, more pessimistic. Yet Congress agreed (to the tune of an immediate $549 million and billions more in the following five years) with Kennedy’s proclamation on May 25, 1961, “that this nation should commit itself to achieving the goal, before this decade is out, of landing a man on the moon and returning him safely to earth.” Given the odds, such a bold commitment was, at the time, outrageous. But that’s part of what made it such a powerful mechanism for getting the United States, still groggy from the 1950s and the

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Eisenhower era, moving vigorously forward. MYTH 7: Visionary companies are great places to work, for everyone Reality: Only those who “fit” extremely well with the core ideology and demanding standards of a visionary company will find it a great place to work. If you go to work at a visionary company, you will either fit and flourish—probably couldn’t be happier—or you will likely be expunged like a virus. It’s binary. There’s no middle ground. It’s almost cult-like. Visionary companies are so clear about what they stand for and what they’re trying to achieve that they simply don’t have room for those unwilling or unable to fit their exacting standards. A cult-like culture can actually enhance a company’s ability to pursue BHAGs, precisely because it creates that sense of being part of an elite organization that can accomplish just about anything. IBM’s cultish sense of itself contributed greatly to its ability to gamble on the IBM 360. Disney’s cult-like belief in its special role in the world enhanced its ability to launch such radical BHAGs as Disneyland and EPCOT Center. Without Boeing’s dedication to being an organization of people who “live, breathe, eat, and sleep what they are doing,” it could not have successfully launched the 707 and 747 projects. Without Sony’s almost-fanatical belief that it was a unique organization with a special role to play in the world, it could not have taken its bold steps with transistors in the 1950s. Merck’s cultlike dedication to its ideology gave its people a sense that they were part of something more than just another corporation—and it is largely out of this sense that they were inspired to put forth the effort required to establish Merck as the preeminent pharmaceutical company in the world. Myth 8: Highly successful companies make their best moves by brilliant and complex strategic planning Reality: Visionary companies make some of their best moves by experimentation, trial and error, opportunism, and—quite literally—accident. What looks in retrospect like brilliant foresight and pre-planning was often the result of, “Let’s just try a lot of stuff and keep what works.” In this sense, visionary companies mimic the biological evolution of species. We found the concepts in Charles Darwin’s The Origin of Species to be more helpful for replicating the success of certain visionary companies than any textbook on corporate strategic planning. The central concept of evolutionary theory—and Darwin’s great insight—is that species evolve by a process of undirected variation (“random genetic mutation”) and natural selection. Through genetic variation, a species attains “good chances” that some of its members will be well-suited to the demands of the environment. As the environment shifts, the genetic variations that best fit the environment tend to get “selected” (that is, the well-suited variations tend to survive and the poorly suited tend to perish—that’s what Darwin meant by “survival of the fittest”). The selected (surviving) variations then have greater representation in the gene pool and the species will evolve in that direction. In Darwin’s own words: “Multiply, vary, let the strongest live, and the weakest die.” MYTH 9: Companies should hire outside CEOs to stimulate fundamental change

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Reality: In 1,700 years of combined life spans across the visionary companies through 1990, we found only four individual incidents of going outside for a CEO—and those in only two companies: Philip Morris Inc. and Disney. Homegrown management rules at the visionary companies to a far greater degree than at the comparison companies (by a factor of six). Time and again, they have dashed to bits the conventional wisdom that insignificant change and fresh ideas cannot come from insiders. As companies like GE, Motorola, P&G, Boeing, Nordstrom, 3M, and HP have shown time and again, a visionary company absolutely does not need to hire top management from the outside in order to get change and fresh ideas. MYTH 10: The most successful companies focus primarily on beating the competition Reality: Visionary companies focus primarily on beating themselves. Success and beating competitors come to the visionary companies not so much as the end goal, but as a residual result of relentlessly asking the question, “How can we improve ourselves to do better tomorrow than we did today?” And they have asked this question day in and day out—as a disciplined way of life—in some cases for more than 150 years. No matter how much they achieve—no matter how far in front of their competitors they pull—they never think they’ve done “good enough.” Comfort is not the objective in a visionary company. Indeed, visionary companies install powerful mechanisms to create discomfort—to obliterate complacency—and thereby stimulate change and improvement before the external world demands it. General Electric institutionalized internal discomfort with a process called “work out.” Groups of employees meet to discuss opportunities for improvement and make concrete proposals. Upper managers are not allowed to participate in the discussion, but must make on-the-spot decisions about the proposals, in front of the whole group—they cannot run, hide, evade, or procrastinate. Boeing created discomfort for itself with a planning process that we came to call “eyes of the enemy.” It assigns managers the task of developing strategy as if they worked for a competing company with the aim of obliterating Boeing. What weaknesses would they exploit? What strengths would they leverage? What markets could be easily invaded? Then, based on these responses, how should Boeing respond? MYTH 11: You can’t have your cake and eat it too Reality: Visionary companies do not brutalize themselves with the “Tyranny of the Or”—the purely rational view that says you can have either A OR B, but not both. They reject having to make a choice between stability OR progress; cult-like cultures OR individual autonomy; homegrown managers OR fundamental change; conservative practices OR Big Hairy Audacious Goals; making money OR living according to values and purpose. Instead, they embrace the “genius of the AND”—the paradoxical view that allows them to pursue both A AND B at the same time.

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Irrational? Perhaps. Rare? Yes. Difficult? Absolutely. But as F. Scott Fitzgerald pointed out, “The test of a first-rate intelligence is the ability to hold two opposed ideas in the mind at the same time, and still retain the ability to function.” This is exactly what the visionary companies are able to do. MYTH 12: Companies become visionary primarily through “vision statements” Reality: The visionary companies attained their stature not so much because they made visionary pronouncements (although they often did make such pronouncements). Nor did they rise to greatness because they wrote one of the vision, values, purpose, mission or aspiration statements that have become popular in management today (although they wrote such statements more frequently than the comparison companies, and decades before it became fashionable). Creating a statement can be a helpful step in building a visionary company, but it is only one of thousands of steps in a never-ending process of expressing the fundamental characteristics we identified across the visionary companies. A visionary company is like a great work of art. Think of Michelangelo’s scenes from Genesis on the ceiling of the Sistine Chapel or his statue of David. Think of a great and enduring novel, like Huckleberry Finn or Crime and Punishment. Think of Beethoven’s Ninth Symphony or Shakespeare’s Henry V. Think of a beautifully designed building, like the masterpieces of Frank Lloyd Wright or Ludwig Mies van der Rohe. You can’t point to any one single item that makes the whole thing work; it’s the entire work—all the pieces working together to create an overall effect—that leads to enduring greatness. And it’s not just the big pieces, but also the itty-bitty details—the turn of phrase, the change in pace at just the right moment, the perfect off-center placement of a window, a subtle expression sculpted into the eyes. As the great Mies van der Rohe put it, “God is in the details.”

Copyright © 2002 Jim Collins, All rights reserved.

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