All things are interwoven with one another; a sacred bond unites them; there is scarcely one thing that is isolated from another. Everything is coordinated, everything works together in giving form to the one universe.
At the beginning of this century, an English scientist working in India conducted a bold and dramatic experiment that confounded the medical profession. He selected a herd of healthy Indian cattle, designed hygienic accommodations for them, and fed them a properly blended diet along with clean, fresh water. When veterinary officials came to inoculate the animals, he refused to permit it. To the surprise of the veterinarians and the neighboring farmers, his animals did not catch any of the diseases prevalent even among inoculated cattle in the area. And to the utter amazement of everyone, his animals remained free of disease even when they were put in physical contact with diseased animals. His animals were so healthy that the disease that scourged the countryside could not affect them. That is the power of harmony within.
Survival and Growth in Hard Times
There are equally astonishing stories about companies that maintained their position or even continued to grow in an unsupportive or hostile business environment because of the harmony they had established within their organizations and their capacity for rapid adjustment to changes in the world around them. When Alfred Sloan took over as president of an ailing GM in 1920, the company was in chaos and struggling for survival. Within five years he built it up into the world's largest automaker, surpassing Ford, which was entering a period of decline. Sloan transformed GM into America's first decentralized big business organization based on centralized policy making, strategic planning, sophisticated systems of financial and operating controls, and market forecasting. He created a high level of internal harmony by coordinating all activities within each subsidiary and integrating many diverse businesses within a single, unified organizational structure.
Sloan regarded periodic business slumps as inevitable and believed that the true test of an organization was its ability to prosper during these difficult periods. When the Great Depression set in, GM sales tumbled by two-thirds in three years. But by this time the company had built up its systems for coordination to such an extent that it was able to respond quickly to the disastrous slump in the market and adjust its purchasing, production, inventory, and employment levels accordingly. As a result, GM made profits and paid dividends every year during the 1930s, a period that almost proved fatal to Ford Motor Company.
GM's remarkable performance was possible because of its high level of internal coordination coupled with its very close contact with the market, utilizing sophisticated market-forecasting techniques first developed at Du Pont. In other words, the company had developed internal harmony and harmony with its market—harmony within and harmony without.
While Otto Doering was tying the golden knots that bound Sears' mail-order system together, something equally or more important for the company was taking place down in Panama, where Robert Wood was working on the construction of the Panama Canal under General Goethals. Due to the scarcity of good books in Panama, Wood developed the habit of perusing successive annual editions of the U.S. statistical abstracts; and between the monotonous columns of figures, he observed three significant trends: the automobile was making America mobile, farmers were migrating to the cities, and the urban working class was acquiring middle-class tastes, purchasing power, and buying habits.
The net result of Wood's unusual taste in books was that when he joined Sears in 1924, he reformulated the company's mission. "We're going to offer values to the great middle class buying public of American citizens."2 Then he opened the first of Sears' large suburban retail stores, conveniently accessible to the increasingly mobile middle class. By 1929 Sears had 268 stores with combined sales of $175 million, which represented 40 percent of the company's total revenues.
During the early years of the depression, retail trade in the United States dropped by nearly 50 percent. Even department stores, which were usually located in downtown urban areas, suffered a 40 percent fall in sales, and it took them a decade to recover to their predepression level. Yet throughout this period, Sears' sales and income continued to grow. By 1931 its retail business had larger revenues than its mailorder division. Sears succeeded because it sensed the changing temper of the times. It attuned itself to meet an unfulfilled need of the society that was increasing, even at a time when the economy as a whole was shrinking. Harmony without has an extraordinary power.
A Gigantic Golden Gap
Another good thing happened to Wood while he was in Panama. He discovered the importance of reliable supply lines and learned how to establish them. General Goethals put Wood in full charge of supplies for building the canal, with one simple admonition: "The day we run out of cement, you're fired."3
This fortuitous circumstance placed on Wood the burden of recruiting, housing, and feeding nearly 50,000 people while simultaneously maintaining an uninterrupted supply of cement, which could not be stored for any length of time owing to the tropical climate. His experiences under Goethals formed the inspiration for the unique buying system that Wood introduced at Sears—a system based on harmony with suppliers.
By this time, mass production and mass distribution were both established systems of activity in the United States; yet the link between these two powerful but independent systems was tenuous. Wood discovered a golden gap in the interface between them that contained far more gold than Otto Doering's integrated mail-order systems.
The basis of Wood's buying system was the principle that both the mass manufacturer and the mass distributor could make more money if they worked together harmoniously for their common benefit. By purchasing raw materials in bulk on behalf of all its suppliers, Sears was able to obtain substantial discounts on the huge volume of materials it required, which none of its suppliers could get by purchasing the materials themselves. By working closely with the manufacturers to improve the quality of their products and the efficiency of production techniques, Sears was able to buy better merchandise at a lower price, and the manufacturers were able to earn more on what they produced. By guaranteeing manufacturers orders far in advance, suppliers were able to maintain more stable production schedules and avoid the costly waste from frequent start-ups and shutdowns. By eliminating the need for advertising and large sales divisions, the manufacturers cut their total costs by 15 percent to 20 percent on sales to Sears and could pass on part of that savings to their customer.
The cumulative result of these mutual advantages was that both Sears and the manufacturers prospered beyond anyone's expectations. In one dramatic instance, Wood offered financial assistance and a guaranteed market to an ailing manufacturer of locomotive parts if it would switch over to the production of refrigerators instead. The descendant of that company is Whirlpool Corporation, which ranks among the top 150 industrial firms in the United States, with $2.6 billion in revenues. The benefit that Sears derived was even more dramatic. Competitors simply could not match the merchandise values and prices Sears could offer because of its harmonious system.
Wood guided the destiny of Sears from 1924 to 1954. Even at the time that he assumed command, the company was the nation's largest retailer. During the next three decades, its sales grew 15-fold, from $206 million to $3 billion, and its profits grew 10-fold, from $14 million to $141 million. This phenomenal expansion, which took place despite the intervention of the Great Depression and World War II, was largely the result of one thing, harmony without—harmony with a rapidly changing society and harmony with suppliers.
A New Frontier
Over the decades Sears has displayed a remarkable ability to perceive, before most other companies, the significance of changes in society and to adopt new strategies suited to tap the commercial opportunities that these changes opened up. This capacity to remain in harmony with the needs of society has unquestionably been the company's greatest strength.
When Wood opened Allstate Insurance Company units in retail stores, the financial experts of the day were highly skeptical of the move. Today, under the direction of Edward Telling, Sears is in the process of an even more dramatic shift in strategy to take advantage of what it perceives to be an enormous untapped commerical opportunity created by changes in society. The recent acquisition of Dean Witter Reynolds Inc., one of the largest U.S. securities brokerage firms, and Coldwell Banker, the nation's largest full-service real estate company, and the establishment of integrated financial-service centers in its retail stores are the core of that strategy.
What prompted Sears' most recent new departure? Edward R. Telling, chairman and CEO of Sears, explains: "We are facing up to the new realities of the American marketplace. The American economic, political, and social condition has undergone a radical change; a change that calls out for new products…new services…new ways of doing business."4 A major Sears strategy to respond to these changes is a new approach to the marketing of financial services.
As in the past, many people have scoffed at or been bewildered by what seems to be a sudden shift in Sears' strategy. Even the companies that Sears acquired did not fully comprehend the underlying rationale for the move and the incredible potentials it has uncovered until some months after the acquisitions had taken place. There were many so-called sophisticated New Yorkers who even laughed at the idea that a commoner from Chicago could possibly understand something about financial markets that Wall Street failed to perceive. But laughter is rapidly giving way to a mixture of awe and fear.
Sears is quick to present its credentials for such a venture. After all, the company started offering installment credit on farm equipment and major appliances without collateral way back in 1911, at a time when most banks refused to make such loans. Wood started Allstate Insurance Company in 1931 to sell car insurance through Sears' retail stores and mail-order catalog with an initial investment of $700,000. Fifty years later Allstate is the second largest property-casualty insurer in the country, with more than $12.7 billion in assets, $8 billion in revenues, and earnings of $555 million in 1983. Sears has also operated a commercial real estate company since the 1950s, and it owns saving banks in California and Delaware. In addition, the company presently lends $12 billion to American consumers through its credit-card system.
But all these qualifications are really secondary. Sears' best credential for the move is its historic capacity to stay in tune with the needs of middle America. It is not any extraordinary acumen that enables it to do so. Sears possesses the objectivity, humility, and common sense to maintain harmony with the world in which it lives, grows, and prospers. Carl Hulick, vice-president of Dean Witter, calls it "a self-effacing intelligence."
Sears simply looked at the numbers and read the writing on the wall. About 85 percent of all American households with incomes of $30,000 or more, 70 percent of those with incomes of $36,000 or more, and nearly 75 percent of all households doing business with New York Stock Exchange firms are current Sears customers.
The typical customer of the investment houses is in the upper-income, higher-net-worth group. But there are millions of prosperous American households with billions of dollars in savings that find the off-the-street, uptown New York or downtown Beverly Hills investment firm inaccessible and too imposing to approach freely. But when you put that account executive in a Sears' store, the psychology changes, and a powerful chemical reaction occurs.
Since the first Sears financial center was opened, Dean Witter has found that 35 percent to 40 percent of all its new business is coming from the stores, and the average account executive in the stores is opening twice as many new accounts as those in Dean Witter's own offices. About 62 percent of these new accounts are first-time customers of a brokerage firm, and another 18 percent are reactivated accounts—that is, 80 percent are additional customers for the investment industry. More than half of them are women. As a test case, Sears opened one financial center in a middle-income, blue collar neighborhood in Chicago. This store turned out to be the most successful of the initial eight centers. As Hulick said, in that store "we had discovered a pocket of mattress money." And the same results repeated in other cities around the country.
Sears has been able to capitalize not only on its retail store infra-structure and its ongoing relationship with half of all American households but also on the familiarity and confidence customers feel in dealing with the company renowned for its money-back guarantee. One lady walked into one of the financial centers and said she had never invested money before because she did not trust brokers. When the broker explained that he was a Dean Witter stockbroker, she replied: "No, you aren't. You're with Sears!" What Allstate's Chairman Donald Craib said of his company is proving true for Sears' new partners, too: "Our greatest strength is our affiliation with Sears, Roebuck and Company. It was, is, and will be, because we draw from that same core of customers, and it's a huge one and a loyal one."
The move into financial services signifies a further modification in Sears' corporate mission. The company is broadening its scope to serve more of the needs of the American household—merchandising, insurance, real estate, brokerage, and consumer credit. Sears hopes that it can sell Americans their homes, furniture, and automobile spares, as well as insurance, stocks, and bonds, and ultimately become a consumer bank. Hulick recalls when the magnitude of Sears' idea suddenly dawned on him. "I can remember sitting in the meeting when the light bulb went on. There is an absolutely huge potential. My gut feeling is that it could be bigger than anyone can conceive of right now."
The potential Sears has uncovered was not created by the invention of a new technology or the production of a new product. It is the result of an effort that every company can make—an effort to establish greater and wider harmony with the ever changing needs of society.
Tomas Bata was fond of telling the story of two shoe salesmen who went to explore the market potential in an African country. One cabled back to the home office: "No one here wears shoes. No market." The other cabled: "Everyone here is barefoot. Infinite potential." Bata saw that potential long before much bigger firms in the West and went on to create the largest shoe company in the world.
One need not go to Africa in search of such potentials. They are there all around us in every industry for every company. For some it may be creating a new product or developing a new technology. But there are equally vast opportunities to be tapped simply by changing one's perspective, one's strategy, or one's attitude. Sears has done it very consciously three times in its 100 years of business, Coca-Cola did it almost accidentally in the last century, when its product came to be identified with the social aspirations of the common people.
The phenomenal development of the personal computer market was not simply the result of a new technology for reducing the size and price of computers. It was the product of a revolutionary new way of thinking about the computer and its role in society. Even long after new technologies were available for bringing down the price and simplifying use of the computer, the traditional computer makers were slow to see the potential.
Computers were originally thought to have applications only for big businesses and governments. In the late forties the most reliable market research indicated that the world market could absorb 1,000 computers by the year 2000. By the midseventies 50,000 computers had been installed around the world. In 1984 alone computer sales were about 2 million units. This incredible expansion was due to the capacity of companies like Apple to identify themselves with the needs of social groups that fell far outside the traditional market for computers—the individual, the family, the small business, and the school.
While companies and educational institutions were gearing up to the onerous task of teaching people how to communicate with the computer in a multitude of strange languages, Apple was doing an admirable job of simplifying the interface between people and computers. Apple bridged the intellectual and psychological gap that separated people from the machine. According to Fortune, "No company has done more than Apple to dispel the notion that computers are inscrutable beasts."5 Apple's Macintosh personal computer, writes Business Week, "is so easy to handle that many people do not even bother to read the instruction manual.…"6
Companies that exploit existing markets reap rewards in proportion to their efficiency, the size of the market, and the strength of the competition. But companies that convert unseen market potential into actualities expand at a phenomenal rate, as Apple has.
What Apple has done in a product business, Federal Express has done in a service industry. It identified a need that stalwarts in the field had failed to meet. It created a new $1.4 billion business for itself and a new $5 billion overnight-delivery industry out of the existing parcel-delivery industry that UPS entered in 1907.
Marriott is now making a parallel move with its life-care communities, which are designed to cater to the needs of America's growing population of healthy senior citizens. This service combines the independence of the private residence with the convenience and security of centralized recreational, food, and medical facilities. It is a natural extension of Marriott's existing business and a natural outgrowth of changing social requirements.
Exploding the Myth of Limits
The concept of a fixed, limited market is an illusion. When a new product is introduced that caters to a real need of the society—such as the automobile, telephone, radio, TV, or computer—the market grows until it saturates the society at one level. Introduce one new variable—like lower price, new applications, better quality, smaller size, more pleasant service, greater convenience—then the need for the product increases, and a new market opens. To be in harmony means to discover these latent needs of the marketplace and adapt the product to meet them.
The same thing is true of service businesses as well. There are two parts to the delivery of any service: a physical part, like food or a seat on an airplane, and a social part, which relates to satisfying the customers through courtesy, convenience, and personal attention. There is a balance between these two. The fast-food restaurant delivers a low-cost product. Speed and price are primary. The high-class restaurant serves better-quality food, but it also places greater emphasis on comfort, elegance, and pleasant behavior. There is only so much you can do to the physical quality or the desirability of a hamburger or a seat on an airline. But there is infinite scope for varying and improving the social and psychological qualities surrounding the service. The most successful service companies are those that put themselves in harmony with the nonphysical needs of their customers. Delta does it through warmth and friendliness, Disneyland through cheerfulness, Dow Jones & Company, Inc. through authenticity, and McDonald's through cleanliness and courtesy.
Society not only has physical needs; it has social and psychological needs as well. At a time when the family has been fragmented, personal isolation is constantly increasing, and nervous tension has become endemic, the nonmaterial needs of modern society are as great and pressing as the physical requirements of many developing countries. Companies can address these needs by providing job security for their employees; creating a family feeling in the office; offering friendly, personalized service to customers; acting as genuine agents of goodwill in the society; or providing products and services that entertain, educate, and relax consumers and protect their health.
How well is American business tuning in to its environment? According to a survey by Opinion Research Corporation released in 1984, there is ample scope for improvement. Only 14 percent of those polled expressed a high level of trust and confidence in large American companies. Large companies rated very poorly on ethics and morality, job creation, protecting the environment, and meeting the needs of society. The survey revealed that 69 percent of the public believe that business is a social as well as an economic entity, that it has an obligation to help society, and that it is presently neglecting society's problems.7
The answer to this negative image is not more or better public relations activity or greater philanthropic activity, however worth-while that activity may be in its own right. The greatest service that business can perform for the nation is to meet its seen and unseen, felt and unfelt real needs more and more efficiently, effectively, honestly, pleasantly, and harmoniously. As Drucker has written, business has to learn "how to convert the major social challenges facing developed societies today into novel and profitable business opportunities.…"8 The opportunities for that conversion are as rich and vast as American society itself.
When a company is in harmony with society, the growth potential is unlimited; the scope for expansion is infinite. Take the greatest commercial successes in American history and plug them into the formula. A good number have done nothing more spectacular than to serve.
The lesson of harmony is a very simple one. But too often it is forgotten. Chrysler blatantly ignored it during the 1960s and 1970s by alienating its customer base with drastic changes in styling and by overloading most of its intermediate-size cars with 500-horsepower gas-guzzling engines, even after the fad for the racer image had ended and the oil crunch had begun. The crisis that the company passed through a few years ago was a direct result of this error and, one would think, enough to teach anyone the lesson. Chrysler's president, Harold Sperlich, constantly repeats a new refrain: "You really have to cooperate with your environment.…You have to cooperate with the market."9 Cooperation means harmony.
Chrysler really saw the power of harmony in 1980 when it approached the very brink of bankruptcy. Literally the entire society came to its rescue. The U.S. government granted $1.5 billion in federal loan guarantees, and Canada gave $200 million more. Banks provided the company with $642 million in new loans, deferred interest, or interest give-ups. State and local governments came up with $357 million in support. Suppliers and dealers granted $63 million in concessions. And the United Auto Worker's agreed to a three-year labor contract that would save Chrysler $462 million in wages and benefits.
None of these benefactors was acting solely out of philanthropic compassion for an ailing company. All of them recognized that they constitute a single, unified, productive entity called society and that their interests are inseparably intertwined. The positive attitude of cooperation and support has been generally ignored by experts trying to explain Chrysler's successful recovery. Harmony between many interdependent units was the essential key to it all.
Life Without Limit
Throughout this book we have drawn an analogy between the life of an individual and the life of an organization. However, in one critical respect the person and the company differ. The life of the individual is limited; the life of a company can continue as long as the society in which it lives. It can continue even longer perhaps by transplanting itself to another society, as Bata Shoe Company did when the Communists took over in Czechoslovakia.
At the time of their birth, both the individual and the organization are children of the society in which they are born. They acquire its ideas, values, attitudes, norms, customs, habits, behaviors, and life-style. These things form the basis for the development of their personalities. But meanwhile, the society continues to change. It accepts new ideas, modifies its values, adopts new customs, accepts new forms of behavior, and so forth. The individual finds after four or five decades that the beliefs and values so easily accepted in youth are no longer prevalent. Many people discover the truth in the adage that a person can move from being a flaming liberal to a deep conservative to a complete reactionary in one lifetime, frequently without any fundamental change in viewpoint. The individual may remain the same, but society moves on. As the gap widens between the two, the individual is relegated to a back seat, so that another generation can carry on the forward march.
Old age and obsolescence are not inevitable for an organization if it continues to remain in harmony with its parent society. Companies can and do extend their lives, revitalize their energies, and transform themselves to meet new challenges and opportunities, as Sears and AT&T are doing today. This process of renewal is the process of corporate evolution, a constant inner growth and continuous outer adaptation to ongoing changes in society. It opens up the possibility for the organization to continuously expand and develop as the society expands and develops without end or limit.