Building Up the Corporate Body
It is said that the true greatness of a poet lies in the capacity to express a great inspiration in simple, ordinary language. There is a story about an Englishwoman who attended a literature course in her later life to make up for a complete lack of childhood education. When she read Shakespeare for the first time, she remarked: "This writer takes all the most common English phrases and stuffs them into his books." The woman did not realize that it was Shakespeare who created all those common phrases. Shakespeare possessed the capacity to express his profound insights about human nature and life in vivid phrases that have enriched the everyday English language and come to be taken for granted.
The true greatness of a corporation is measured in the same way—by the capacity to express its highest values in the smallest physical details and most ordinary, routine acts of daily life, which everyone takes for granted. A small, thoughtful innovation on the dashboard of your car, a typewriter that operates silently without vibration or hesitation, a computer instruction manual that is very simple and easy to understand, spotless rest rooms in a crowded public building, a telephone that is answered with a friendly voice on the first ring—these are the finer expressions of the art of corporate excellence.
You can tell a lot about an individual's personality and character from his or her appearance or smallest act, if only you are perceptive enough to observe carefully. When Sherlock Holmes was first introduced to Dr. Watson, he astonished Watson by discerning his profession and his recent tour of military duty in Afghanistan from Watson's speech, clothes, and gestures.
The perceptive person can learn just as much about a company by observing the appearance of its facilities, the quality of its products or services, and the way it handles materials, money, and machines. Of course, these material things, which constitute the physical body of a corporation, represent only a small part of what a company really is. (SeeFigure 5.) Behind these things, controlling them and expressing itself through them, is the personality of a living organization. The more developed and integrated that personality is, the more fully and clearly its values will be expressed in the most mundane material aspects of its existence.
Figure 5. The role of the corporate body in the corporate personality.
The health and performance of the corporate body—like those of human body—depend very much on the way they are cultured and used or neglected and abused. Hygiene is as important to the proper functioning of an office or a factory as it is to the health of a person. Exercise and proper diet are as essential to the performance of equipment and machinery as they are to the organs of the human body. The vitality of both the person and the company depend on the proper selection and absorption of the right qualities and quantities of raw materials and the proper elimination of wastes. The quality of a product and service depends as much on these things as the quality of a person's life and actions. Let us consider some of the uses and abuses of the corporate body.
The Corporate Home
You can learn a lot about people by visiting their homes and seeing the way they live. The same is true of companies. The layout of offices, the cleanliness and maintenance of buildings and machines, the orderliness of files and inventory, and the atmosphere speak louder than corporate pronouncements.
Winston Churchill once said: "We shape our buildings and after-wards our buildings shape us."1 Two companies that firmly believe in that principle are Levi Strauss & Company, the world's largest clothing manufacturer, and Deere & Company, the largest producer of farm machinery in the world.
Levi Strauss was a family-owned company for 121 years, until it went public in 1971; and in spite of becoming a $2.5 billion business, it still retains much of its traditional family character. One of Levi Strauss' central beliefs is that "the well-being of the company and the well-being of its people are one and the same."2
For almost 70 years Levi Strauss lived in a warm, cozy, four-story building on Battery Street in downtown San Francisco, where it moved after the 1906 earthquake destroyed its previous residence. But rapid growth in the 1960s strained the facility to the bursting point, so in 1973 the company moved to a modern high rise at the Embarcadero Center. Levi Strauss employees were stationed on the lower floors and executives on the twenty-eighth floor, which was accessed by different elevators. Suddenly, executives and subordinates were no longer meeting each other in the halls. People started complaining of a cold, isolated feeling in their glass-enclosed cubicles. A survey of employees revealed that the family feeling and close interpersonal relations were suffering.
Even though the lease had another 13 years to run, the company decided to build its own headquarters complex on an eight-acre site at the foot of Telegraph Hill overlooking San Francisco Bay. Levi Strauss' new home consists of five red brick buildings, which blend into the slope of the hill behind. When you enter Levi Strauss' offices, you have the feeling you are really in a home. On every floor there are three or four very large open-area lounges with cushioned chairs, couches, and kitchenettes, which cover a total area of about 5,000 square feet. Fifty percent of the office space is open, and half of the window exposure is in open areas. In addition, there are dozens of open-air balconies, a 7,000-square-foot health club, and a park. One woman, who was sitting on the lawn eating her lunch, summed up the attitude of employees toward the new offices: "This is mine!"
What was the price the company paid for this luxury? First, Levi Strauss got a building that was 10 percent more efficient in terms of usable office space than the one at Embarcadero. Second, it got higher productivity. Howard Friedman, consulting architect for the company, said: "There's no question. It's very easy arithmetic. There is less employee turnover. The waiting list is tremendous. That's a key. If you reduce your turnover, you increase your productivity." Friedman says that Levi Strauss has made the same effort to humanize its 50 factories around the country, through selection of attractive rural settings; comfortable lighting; good acoustics; air conditioning; pleasant eating and lounge areas; and personal, domestic-type toilets.
In contrast to Levi Strauss' relaxed, casual, people-oriented atmosphere, the headquarters of Deere in Moline, Illinois, radiates an aura of quality and precision engineering, two of the company's dominant corporate values. Levi Strauss shunned the steel-and-glass look; Deere consciously adopted it to express values of simplicity, functional efficiency, cleanliness, endurance, and strength. The building has been called the "Versailles of the cornfields" and is generally considered the best piece of corporate architecture in the country.
Friedman says that Deere's building reflects the belief that "people should work in surroundings that have the same care and attention to design that they give to the products they make and that the character of the place you work [in] is an absolute reflection of the caliber and quality of the product." Deere applies the same principle to its manufacturing plants, even the traditionally smoke-and soot-filled foundries. According to an article in The Boston Globe Magazine, "Deere may run the only foundries in North America with not even a cigarette butt on the floor.…At Deere, the emphasis on a quality environment for the workers is almost fanatic."3 Levi Strauss and Deere mean what they say. They carry their highest values down to the most material level.
Anyone familiar with the history of the leather industry knows that tanneries are as infamous for their dirt and gloom as foundries are for their smoke and dust, especially the tanneries of central Europe 50 years ago. But not all the tanneries. Tomas Bata was so obsessed with cleanliness that he had all his workers wearing clean shirts every day, installed showers, and insisted that every machine and window be washed once a week. One day he walked through one of his tanneries wearing white gloves and rubbing the black machinery as he passed by. After seeing the soot on his gloves, he ordered that all the machinery should thereafter be painted white. He instituted a system for keeping all his factories so clean that it was difficult to find a single piece of wastepaper on the miles of pavement. Even the power plant that he installed before 1911 was kept spotlessly clean. A half-century later his son Thomas explained why: "Cleanliness is something that we have always valued. It maintains a certain discipline in assuring a quality attitude. If you create a clean environment, people react differently. It's something we strive for."
What is so special about cleanliness? Nothing except that the most successful companies seem to take it very seriously and many others just take it for granted. Contrast Bata's factories 50 years ago with this American factory:
[There is] garbage throughout the plant, since very few employees ever get in the habit of using the garbage barrels provided for their use.…Water and oil on the floor will always be a problem in plants. These items were not considered when equipment installations were made; of course there is no excuse for stock on the floor, disorderly stock arrangement, or miscellaneous items lying all over the place.…Every time we expected a visit from one of the top officers we spent a minimum of $20,000 to dress up the plant.
This description by a Chrysler plant supervisor in the early 1970s contrasts dramatically with Fortune's description of IBM's "wholly immaculate factories"5—in 1940! It is a funny thing how cleanliness and prosperity seem to go together. Cleanliness has a power.
As a corporate value, cleanliness is closely linked with other values. At Anheuser-Busch, Inc. cleanliness is absolutely essential for maintaining the highest-quality beer. "I couldn't impress upon you enough the importance of cleanliness," says Jerry Ritter, corporate vice-president of Anheuser-Busch Companies, Inc. "Cleanliness is probably the most important expression of what you think of yourself, what you think about your product, and what you say to other people. This company has had that attitude from the very beginning. It runs throughout the company. It starts at the top and goes right through the rest of the organization."
At Du Pont cleanliness is closely linked to safety. "You can't have one without the other," says John Page. It is also a key value at General Mills. Gene Sailer, director of manufacturing in the Package Food Operations Division, says, "If you walk through an environment where you feel good—because the parking lot is clean, the yards are clean, the maintenance shops are orderly (we like to say there should be no dust in the air!)—it really sets the tone for the work. It's a signal."
We all associate cleanliness with the value of customer service, so it is not surprising to learn that cleanliness is a high priority in Marriott's hotel lobbies, guest rooms, and restaurants. But Joe Uhl, assistant office manager at a Marriott hotel, says: "The whole hotel, even behind the scenes in the back offices, in the storerooms—everything has to be clean." Why is cleanliness important in places where the customer never goes? Bill Marriott, Jr., says: "It's an indicator of commitment, an indicator of being on top of your job—you know, the Marine Corps policy of polishing your shoes. It's spit and polish. It's indicative of trying to do a good job. We look under the beds. We look in the corners. We look at the back lot.…"
The power of cleanliness is best illustrated by instances in which it is not expected at all. Cleanliness was never traditionally associated with low-priced-fast-food restaurants until McDonald's made it one of the firm's primary corporate values. McDonald's clean restaurants convey what no amount of advertising can; namely, that "McDonald's food is really clean and sanitary and healthy—even for the middle class!" Walt Disney Productions did the same thing for amusement parks, making Disneyland into even an upper-class attraction. The clean environment of the park tells customers that they are visiting a respectable, acceptable, wholesome place just like home.
Everything in this world responds to attention. Recognition of abilities and development of talents are forms of attention to people; cleanliness and proper maintenance are expressions of attention to machines. In Zen and the Art of Motorcycle Maintenance, Robert Pirsig writes about the personality of machines and relates how they, like people, respond to attention: "Each machine has its own, unique personality.…The new ones start out as good-looking strangers and, depending on how they are treated, degenerate rapidly into bad-acting grouches or even cripples, or else turn into healthy, good-natured, long-lasting friends."6
Of course, all American companies know the importance of proper attention to machinery. Well, judging from this description of a Chrysler plant 15 years ago, perhaps not quite all:
Much of the equipment was in need of replacement and another large percentage of it in need of repair.…It was a constant battle to try to stop the scrap.…Failure to keep equipment in good operating condition also caused another big expensive waste of manpower and performance—repairs were excessive. When the repair bank is high, the scrap rate is high. We worked night and day to get defective material repaired. We were well aware that to stop defective material at the source was the real solution to reduce the repair bank. It is very serious in many ways: one, it created excessive inventory that ran into millions of dollars; two, extra manpower required to repair the defective material cost millions of dollars. The equipment did not get bad overnight; we had built 12 million engines on this equipment. We had no preventive maintenance program.
The realization of high corporate values and goals requires the support of a firm physical foundation. Proper maintenance of equipment is one essential component. Like cleanliness, the value of maintenance is intimately related to other corporate values. At Anheuser-Busch, Inc. and General Mills, machinery maintenance is an integral part of quality control. As one executive at the beer manufacturer said: "The more shutdowns you have, the more quality-maintenance problems you have. We'd like to have a minimum number of unscheduled, unplanned shutdowns." General Mills is installing a computerized preventive-maintenance program so it can keep more accurate track of all the moving parts in its plants—with a standard part-numbering system! Good preventive maintenance is essential not only for quality but for maintaining punctuality on production schedules. Gene Sailer, of General Mills, says: "A key to reliability of the system is preventive maintenance. A good preventive-maintenance program is worth 5 to 10 percent in terms of the reliability of the systems."
At Du Pont good maintenance is essential for realizing the corporate value (we're sure you know by now). Safety is also a core value at Delta, and Delta's preventive-maintenance program is unsurpassed in the industry. Delta's senior vice-president for technical operations, Don Hettermann, tells his maintenance crew that "safety is every-body's business, not just the inspector or the foreman, but everyone's." Speaking of reliability, Delta's mechanical-dispatch reliability is 99.49 percent—that is the percentage of flights that are not subject to any delay because of maintenance problems. Delta defines a delay as anything more than one minute, whereas some airlines consider a flight delayed only after 15 minutes.
Good maintenance is also closely connected with good customer service at Delta. It is an important reason why Delta has had the best consumer-complaint record among the major U.S. airlines in all but one of the last 14 years—it finished a close second in 1973—and usually has one-third to one-tenth as many complaints per 100,000 passengers as other carriers.
It is well known that the quality of food a person eats is highly correlated with life expectancy and resistance to disease. A similar relationship exists between the raw materials that a company consumes and its long-term financial health. Find a company in financial difficulties and you are likely to find one that is ordering materials it does not require, paying too much for what it orders, accepting defective materials or materials of the wrong specifications or materials it has not even ordered, or perhaps all of these together. When there is a shortage of raw materials or a shortage of funds to purchase them, it is usually a signal that raw materials are being wasted or not utilized as efficiently as they should be.
The problem of high inventory costs has plagued manufacturers ever since the early days of mass production. Henry Ford was the first to devise an efficient solution by creating a moving inventory system. The idea was to project the precise timing of the assembly-line operation and then schedule procurement of raw materials to conform to that schedule, so that there was no need to store them. GM improved on Ford's system by forcing suppliers to conform to production schedules at their own risk.
Coordination of purchasing and production has been lifted to the status of a fine art by the Japanese, with the "just in time" inventory system. Materials and components are ordered to arrive at precisely the time they are required for production, thereby reducing inventory costs to an absolute minimum.
Controlling inventory to minimize production costs sounds easy enough. But to raise the value of cost efficiency through the "just in time" system requires raising performance throughout the corporation, from top to bottom. Planning, marketing, purchasing, and production systems all must be refined and precisely coordinated. Intel introduced the system in 1982. Before that, the firm used to reschedule production runs and orders to vendors every time it got a new order from a customer. Now it projects future orders and sticks to the production schedule. Vendors have become far more reliable and offer Intel lower prices because its orders are reliable. In the process, Intel has reduced its inventory levels by 40 percent, and its own production reliability has increased from 80 percent to 99 percent. Good digestion requires some thought.
The Thing Itself
You can learn a lot about a company from its products, too. People sometimes talk about quality as if it were something that is actually determined on the factory floor, but that is no more true of quality than of profitability. Quality is not something produced by quality circles. Quality is a value. Achieving it depends on the company's total commitment to that value, the strength of its will, the establishment of clear standards, the creation of effective systems, the acquisition of precision skills, the design of appropriate production facilities, the proper maintenance of machinery, the purchase of the right materials, the coordination and integration of these factors, and above all, a corporate attitude at all levels of the company like that expressed by Jerry Ritter of Anheuser-Busch: "The quality of our product is absolutely the ultimate and the No. 1 thought in our minds at all times."
Making quality the No. 1 priority is not quite so simple as it may sound. To really put the importance of the product or service above the importance of profits requires an enormous commitment by management that will be tested every day and can never withstand the pressure to compromise unless quality really is more important to the company than money. As Peters and Waterman discovered in their study of excellent companies, "Profit is a natural by-product of doing something well, not an end in itself.…"8
In each company we visited, there were values that were placed far above the value of money—in practice as well as in principle. At Merck quality and integrity come first. Quality begins with research. As former Chairman John Horan described Merck's guiding belief: "If you produce something worthwhile, money will follow."9 Merck's strategy has been to attract top-notch research scientists from the universities and give them a wide latitude of freedom to pursue every lead, regardless of its potential for profit. In the 1940s Merck invested $20 million on an eight-year research project to find a cure for Addison's disease, knowing full well that the drug could never repay the investment. But what researchers actually discovered was cortisone, a revolutionary breakthrough for the treatment of arthritis. This discovery, together with the synthesis of vitamin B12 and streptomycin, launched Merck on its way to the top. Merck invests nearly twice as much on research as the average company in the industry—11 percent of sales versus 6.7 percent for the industry in 1983 and a total of $400 million in 1984. For Merck, quality research comes first; the rest follows naturally.
The quality of a product consists of several components: the quality of the materials used to make it, the quality of the workmanship, and the quality of the technology. Whenever a new product comes out on the market, the Japanese practice is to buy one, call all the experts to gather around, and try to make as many tiny improvements on the original as possible. By the time they are finished, the improved version far surpasses the original. That is the infinite potential of technology.
The quality of almost every product can be improved 100 percent by this procedure, especially when those who try to refine it were not involved in the original development and can take a completely fresh approach. Although commercial custom condones such practices and law does not always prohibit them, the act of imitating another's invention, in which enormous investment has been made in research and development, is fundamentally dishonest. It may be a successful strategy for short-term growth, but not for enduring success. American business is founded on the values of creativity and individual initiative, not imitation. Even if we could, we should not imitate the Japanese in this regard—it would kill our creative impulse. What we can do to protect ourselves is to introduce a similar practice within our own companies to improve our own technologies—a department of R, D, & I (research, development, and innovation)—bringing in outside experts to provide fresh perspectives and new ideas before the Japanese do.
As a physical asset, money constitutes part of the corporate body, and, like the other parts, it responds to proper attention. Attention to money is given in the form of proper accounting. Accounting is a system to help the manager understand his or her operations better. When properly used, it is the most effective tool for monitoring corporate performance.
In the 1860s the Pennsylvania Railroad was the largest business operation in the world, and it pioneered many of the management techniques that have since become commonplace. As the first of the big publicly owned enterprises in the United States, the railroads were answerable to a large number of investors, who had the right to know exactly how the firm spent their money. The Penn was the first to introduce modern principles of cost accounting and did it so effectively that a stockholders' committee marveled to find that "a charge or entry of a day's labor, of the purchase of a keg of nails, of the largest order goes through such a system of checks and audits as to make fraud almost an impossibility."10 Cost accounting enabled the Penn to accurately measure its cost on each and every operation and pinpoint precisely which ones made money and which ones did not. It also made possible cost-based pricing, to assure a profit on every rate it fixed. This apparently mundane achievement was quite a feat for a huge business, at a time when many companies had no idea of whether they were earning or losing until they closed the accounts at the end of the year.
Andrew Carnegie learned cost accounting and other managerial techniques as a superintendent for the Penn and went on to apply them even more effectively at the Carnegie Steel Company, forerunner of the United States Steel Corporation. When he founded his company, he was surprised to learn that none of the steel companies was in the habit of calculating the costs of each production process. Carnegie introduced a comprehensive accounting system to accurately measure the cost of each and every process. This system enabled him to eliminate inefficient processes, rationally evaluate alternatives, replace less efficient equipment, even if it were newly purchased, and thereby bring down his production costs to the lowest level in the world—from $56 per ton in 1872 to $11.50 per ton by 1900.
Long after Carnegie had retired, cost accounting remained a rare phenomenon. Henry Ford despised accounting as "a seedy offshoot of the banking conspiracy"11 and refused to let accountants touch the company's books. Once he sent a nocturnal raiding party to clear out the offices of a new accounting department, which his son Edsel had installed in his absence. Until Ford's retirement in 1945, no one in the company knew the cost of anything it made or did or even whether the company made a profit or loss the previous year.
Of course, American business has come a long way since Henry Ford, hasn't it? Well, shortly after taking up his new job, Iacocca discovered that "Chrysler had no overall system of financial controls. To make matters worse, nobody in the whole place seemed to fully understand what was going on when it came to financial planning and projecting. Even the most rudimentary questions were impossible for them to answer."12 Each company can judge for itself whether Chrysler is an exceptional case or not.
The real issue is not whether a company maintains cost accounts but the extent to which these accounts accurately reflect and precisely reveal actual activities at the lowest level of operations. Even today many corporations are not able to break down their numbers to declare precisely how much money each activity, operation, product, or service is earning or losing. Aggregate lump-sum figures provide only a general impression of overall performance. Accounting becomes a powerful and sensitive instrument only when it reflects the actual cost of each separate activity. To do so, accounting systems must be integrated with the production process and based on detailed records of what actually takes place in the factory, store, or office.
Sears is probably one of the best-controlled companies in the United States. It employs a very sophisticated cost-accounting system that is sensitive to minute changes in the performance of each individual department of every store. Standards have been fixed for virtually every item of expenditure, such as stationery supplies per thousand sales transactions, the number of minutes required by the accounting department to balance a cash-register account, cleaning supplies per 1,000 square feet, and so on. The company is constantly working to bring down every cost, even the most routine. In 1984 the cost of janitorial supplies was projected to decrease by 5 percent due to standardization of the products used.
The numbers on a balance sheet are most frequently employed to understand a company's profitability; but they lend themselves to many other uses. More precisely than any other factor, money reflects the amount of energy expended on a product or activity, the direction the company is moving in, and the level of employee enthusiasm. When carefully studied, these figures can reveal at a very early stage of production, or even during the planning phase, whether a product will generate a profit or a loss. If one knows all that numbers can reveal, the soundness of a decision can be tested in no time by casting it into monetary figures. There is no process, no activity, no direction, no result of a company that cannot be revealed by the numbers, provided that the policy, principles, and practices of accounting are properly adapted and organized.
Geneen describes the power of numbers quite dramatically:
Anyone in business, if he sets up the proper kinds of controls—controls that tell him when any segment of his company is not doing what he expected, and tell him this promptly enough and in enough detail so that he can go back behind the numbers and analyze precisely where it is that he has to take action—then he (or anyone else not mentally incompetent) could run a progressive, profitable, and growth-oriented company. That's what a good set of numbers will do for you.
The true health of the human body is not measured by its size, strength, and outer appearance, but by certain vital signs that are indicators of the harmonious and efficient functioning of the organs and systems inside and even of the psychological condition of the individual. The sound of the heartbeat, color of the cheeks, and clarity of the eyes tell a physician much more about a person than height and weight. The vital signs of health are the same for all, independent of age and size. A healthy six-month-old infant and a healthy grandmother both have a body temperature of 98.6° F.—it does not vary even a little this way or that.
The same is true of companies as well. There are vital signs of corporate health, which are independent of a company's size and financial strength and more accurately reflect its vitality. A company that regards an open file drawer as a safety hazard, a flight that leaves a minute behind schedule as late, a room with a single piece of paper on the floor as filthy, the number of square feet a janitor cleans as a crucial aspect of productivity, an excessive consumption of paper clips as a cause for concern, a phone call answered on the first ring and a letter replied to on the same day as minimum standards of courtesy, and a machine that starts to murmur a little as an urgent case for repair—that company, regardless of its size, shows the vital signs of excellent health, because its values are actually real. And any company that does not exhibit these signs—regardless of its size—certainly has scope to improve its health.
No one can afford to ignore health. The survival and good health of the body is the essential condition for achievement or enjoyment. But mere physical health is not the be-all and end-all of life. Those who focus an inordinate attention on muscle building and controlled nutrition forget that these are only the means for living and not the aim of life.
The same is true for a company. Corporate bodybuilding is a means to an end, not an end in itself. In the 1920s Ford amassed a huge corporate body, with $700 million in surplus cash, only to come to the brink of bankruptcy a decade later—because the firm forgot that the corporate body is only the most external form of something living, which is inside.
The ultimate value of an organization cannot be measured by its size, the number of buildings it owns, the number of products it makes, or even the wealth it accumulates. The achievements of great individuals, great institutions, and great nations are not measured in these terms. The first duty of a company is to survive, as Drucker said; and for that, profits are essential. But that is only its first duty, not its ultimate goal. We must look beyond the outer physical form for that higher purpose.