The Living Organization

There are two common misconceptions about the dramatic recovery of Chrysler in the early 1980s. First, the magnitude of Lee Iacocca’s achievement has been grossly underestimated. Those who refer to the record $3.3 billion in profits that Chrysler earned between 1982 and 1984 are 50 percent short of the mark. In actual fact, Chrysler earned $6.6 billion during this period. This error arises because people forget that during the years 1979 to 1981, the company was generating a record $3 million a day (in losses, that is)—a total of $3.3 billion over three years. Iacocca not only overcame a $3.3 billion deficit but capped it with another $3.3 billion profit between 1982 and 1984. That represents a net gain of $6.6 billion, or an average increase in earnings of $6 million per day over the previous period.

Coming to the second misconception, there is an important unsung hero in the Chrysler story. While no one can overstate Iacocca’s remarkable achievement, there is another person at least equally de-serving of our attention. In 1979 the financial experts were unanimous in their diagnosis that Chrysler was all but dead. Has anyone ever actually explained how they could have been so wrong? What the experts failed to perceive was the huge reservoir of vitality trapped within the organization and waiting for an opportunity to pour forth. One of Iacocca’s greatest acts was to peel away the encrusting layers of dead habits, vested interests, outmoded strategies, and inertia and remove the lid on an enormous reservoir of productive energies. He did it by firing 33 of the company’s 35 vice-presidents and allowing long-suppressed ideas, energies, and talents to rise to the surface.

Where did all that vitality come from? It came from within the organization itself. It had been there all the time as an untapped potential. In the process of housecleaning and reorganization, Iacocca stumbled upon an unsung hero—the enormous hidden powers of organization.

Accounts of great human inventions usually begin with the pot or the wheel and work their way up to the transistor and the silicon chip. Most of them omit one of the greatest discoveries of all time—organization. A discovery usually brings into use hidden potentials that were previously unknown, or it creates new possibilities that were hitherto unimagined. Organization does both. Organization makes possible the productive and efficient utilization of ideas, resources, energies, and opportunities.

Had the young man accepted his lawyer’s advice, the story would have ended there; but J. Willard Marriott did not. His story was only just beginning. Marriott believed what the lawyer said about control, but he felt there must be a solution. Until then the company had consisted of several restaurants run by crews under Marriott’s direct supervision. The only real link between his five Hot Shoppes was Bill Marriott himself. In other words, there was no real organization. If he was going to expand further, he could not continue to visit every location every day and personally supervise all important operations. He realized that what he needed was a unifying structure to accomplish two things that up until then had been done by his direct personal supervision and management: It must maintain the quality of the product and service, and it must also encourage and motivate employees at each restaurant as he had done in the past by his friendly personal attention.

Marriott accomplished the first objective by centralization and specialization. He established a carefully supervised central commissary to purchase food and other materials in bulk, process and portion raw food into individual servings, and prepare certain standard items like soup and coleslaw for distribution to all the shops. He then hired a professional food consultant to develop tested and standardized recipes for each dish on the Hot Shoppes menu, and he printed detailed cooking instructions in a small book so that dishes could be prepared in exactly the same way each time they were cooked, regardless of which shop they were prepared in. He also developed systems to reduce the work of each shop to a set of standard operating procedures, which covered every aspect of the shops’ functioning.

To accomplish the second objective, motivating restaurant staff, Marriott introduced a policy of promotion from within and performance-based bonuses, and he lavished attention on his employees. He learned to delegate authority and decision-making responsibility at the restaurants to experienced managers who had started as busboys and worked their way up in the shops. He followed the practice of never opening a new shop until he had an experienced person to run it. He recruited his employees carefully—only "good, clean-cut, decent people" who were willing to work hard—treated them in a friendly and fair manner, won their loyalty, and then entrusted the work to them. Shop managers and staff were paid annual bonuses based on the profitability of their shops.

In 1937 a crew member from an Eastern Air Transport flight stopped at Hot Shoppe No. 8 for a quart of coffee to take on the flight to New York. Soon passengers started to come by before their flights to purchase sandwiches and drinks. Before long the Hot Shoppe was supplying box lunches to the airline for service during its flights, and within a year it was servicing all 22 daily flights from the Washington airport. The in-flight catering business had been born utilizing the same structure and systems developed for service in the restaurants.

There was nothing unique or original about the organization Bill Marriott developed. It combined centralization to ensure quality control and decentralization to encourage entrepreneurship and individual initiative. Yet to Marriott, who had begun as a sole proprietor doing everything for himself, there must have been a little bit of magic in the idea that something as intangible as an organization could produce such tangible results.

In 1929 Marriott employed 80 people in three Hot Shoppes and had revenues of about $500,000. A year after Bill Marriott met with his lawyer, gross sales approached the $1 million mark. During the next 20 years, Marriott grew to include 45 restaurants, 3,000 employees, and an in-flight catering service for a dozen airlines. Gross sales in 1952 were just under $20 million. Five years later there were 75 locations, 6,000 employees, and revenues of $36 million a year. This 76-fold expansion had all been based on the simple structure and systems introduced for the opening of Hot Shoppe No. 6.

It was not money that made possible Marriott’s phenomenal growth. Though Bill Marriott borrowed $1,500 to start the first root beer stand, thereafter for 25 years he very seldom borrowed a dollar more. It was not any new technology that brought this success, either. Marriott identified a need in the market for fast, clean, convenient roadside service and devised an efficient way to meet it. His success was based on the values of hard work, quality control, cost efficiency, and friendly service; but these ideas could not have achieved anything by themselves. They needed a structure and a system to deliver them to the market. That is the power of an organization.

By 1957 Marriott had reached the pinnacle of success and was already grooming his eldest son to succeed him. But the organization he created had only just begun to reveal its power. In that year the company acquired its first hotel, in Arlington, Virginia. The rest is history. In the following 27 years, Marriott grew to become the eighth largest U.S.-based hotel chain in the world, with more than 60,000 rooms; the third largest server of food in the United States, with food service management operations, Roy Rogers, Bob’s Big Boy, and airport restaurants; and the largest airline caterer in the world, with 37 percent of the U.S. market and 12 percent worldwide.

Something, of course, has changed at Marriott. Bill, Jr., took over from his father and has managed the company through its second phase of expansion. But the basics remain the same. Gary Wilson, executive vice-president and chief financial officer at Marriott, says:"The common thread we see running through the whole business is the origin we had as a small restaurant company and the centralized systems that Mr. Marriott, Sr., put into his first restaurants, which we really developed as we grew into a larger chain. And as we moved into the hotel business, the same type of systems were used. We have a very strong centralized management system."

The organization still serves the same two basic functions—to control quality and motivate people. Quality is controlled through centralization and systemization. In most hotel chains each hotel is run by a general manager in the style of an independent entrepreneur with little control from above. But at Marriott there are regional multidisciplinary management teams, each of which controls the operations of about ten hotels from a central office. The hotel managers work under the team, which visits each hotel frequently and possesses expert knowledge in all specialized areas of hotel operations—food and beverage, marketing, controller, engineering, personnel, and so on. This concept of centralization and specialization had its origin in the company’s original commissary. The first specialist was a food consultant. Today the company has specialists in almost every relevant field. "Management has expert resources," explained John Dixon, general manager of the company’s flagship hotel in downtown Washington. "It has three people studying everything."

As in the old days, quality is controlled through a set of finely tuned systems and standard operating procedures (SOPs). Cliff Erhlich, senior vice-president for human resources, summed it up well: "We are the biggest SOP company in the universe. SOPs have been our absolute survival during the period of rapid growth."

Marriott has SOPs for literally everything—even friendliness. For years we have been impressed by the friendly, informative limousine drivers who take you from the airports to Marriott hotels. It is an SOP. When the bellhop explains the buttons on the elevator as he or she escorts you to your room, it’s an SOP. When the lifeguard at the hotel pool removes the "Pool Closed" signs in the morning, it is only one of 14 SOPs for opening the pool, which is only one of his or her nine major daily responsibilities. When the lifeguard replies to your question about the nearest movie theater or the best place to dine, that is an SOP, too. One hotel manager who had previously worked for another major hotel group remarked, while gesturing with his hands to show one pile two feet high and another one inch thick, "SOPs here are like a mountain compared with other hotels."

It is the same in food service. There are now over 6,000 recipe cards in the Marriott collection, each containing such clearly detailed instructions that senior executives periodically try their hand at preparing dishes in one of the company’s kitchens. The card system precisely indicates the quantity of each ingredient and the size of each portion down to the detail of where the parsley is to be placed on the plate. Marriott runs its airline catering kitchens like factories. Every meal must look exactly like the others. Why? On your next flight, catch yourself glancing over to see what is on your neighbor’s plate and you will know why.

The company’s systems are equally effective in managing costs. Centralized systems and centralized food procurement have enabled Marriott to achieve substantially higher profit margins on food service than its hotel competitors. A very tight system of financial reporting enables management to control costs and to diagnose problems anywhere in the company at an early stage. "We make more money in the hotel business because we’re able to squeeze more profit out of the dollars that we get than any other company," explained Wilson. "We are able to get more on the bottom line because of our centralized systems."

We usually associate tight discipline, systems, and controls with a rigorous military atmosphere. Yet Marriott has also succeeded in maintaining a high level of employee morale, motivation, and job satisfaction. Employees are trained to regard the systems as a way to help them do their jobs better, which is the key to upward mobility in this company, where about a third of all managers were originally recruited as hourly workers. Marriott believes in discipline, but not force. "You cannot order anything from anybody," says Bill Marriott, Jr. "They’ve got to do it because they want to do it. They’ve got to do it because they see that it’s important. A lot of these people are really entrepreneurs, particularly the waiters and waitresses. They realize that they can make more money for themselves if they follow the procedures. The name of the game is to convince them that it is in their own interests to do that."

The key to the high morale and motivation is the personal attention given to employees. Fred Malek, executive vice-president and head of the hotel division, believes: "The major thing is making them feel good about themselves and what they are doing, giving them opportunities for recognition and promotion, by recognizing their good work, by giving them some attention, by not just treating them as workers, but as colleagues, treating them with respect, with dignity, treating them as partners in the enterprise." This is the way Bill, Sr., related to his staff of 80 when there were only three Hot Shoppes. The same attitude has been passed down to his sons and institutionalized through personal example. When Bill, Jr., visits a Marriott hotel, his most important work is to shake hands with as many employees as possible. He says: "We have to be friendly with our people. Then they’ll be friendly with the customers."

Marriott employs a highly centralized, specialized, and systematized organizational structure to maintain uniform quality standards, keep costs to a minimum, and provide what many people consider the friendliest service in the industry. It is now extending the same approach to provide lodging and food, recreational facilities, and health care to senior citizens at its life-care communities. Marriott’s revenues in 1984 reached $3.4 billion, nearly 175 times the 1952 level, and the company’s goal is to triple its size over the next six years in order to reach $10 billion by the end of the decade. Fred Malek makes it sound easy. "Everybody can do it. It just takes a will and a systematic effort." That is the power of an organization.

There is a power generated by the proper combination of unrelated things. When salt, glucose, and water are mixed together in the right proportions, they constitute a very simple but highly effective cure for the dehydration caused by diarrhea. Hailed as "potentially the most important medical advance in this century," oral rehydration offers an inexpensive, readily available remedy for an ailment that kills some 5 million to 8 million children every year in developing countries. Since this formula was popularized in India a few years ago, the mortality rate due to diarrhea has dropped by 40 percent. The proper combination of three very ordinary substances generates a power that none of them possesses in isolation. The combination of the foot soldier and the work horse to produce a mounted cavalry enabled the ancient Scythians to sweep like a terror over Greece and other countries that did not know the technique of riding. The highly mobile horse soldier transformed the art of warfare and the organization of battle. The combination of the horse carriage and the motor to create the first automobiles had a similar impact. When two or more forces are combined in the proper fashion, they possess a power that is far greater than the sum of their parts. The discovery of techniques for preserving food in bottles gave Napoleon’s army great mobility and a strategic advantage over opponents who were constantly dependent on provisions supplied from behind the lines. Gunpowder plus the sailing ship enabled Europe to dominate the entire globe. The linking of the television screen, type-writer, and silicon chip in computers has produced an enormous power for administration, research, and production—a power that none of these things possesses in isolation. When they are combined with the telephone, their power is multiplied a thousandfold, and their reach extends around the world.

The same is true of people. There are some things that two people can do that a single person could never accomplish alone, no matter how long or hard the effort. Many a great kingdom was founded on the strength of a warrior king combined with the wisdom of a minister or priest. Many of today’s great companies are the product of the fortuitous combination of a skilled inventor and a clever financier. As the number of people involved increases, the available talents, and therefore the potential power, increase exponentially rather than arithmetically.

The combination of Richard Sears and Julius Rosenwald was the perfect blend for commercial success. Sears was a freewheeling promotional genius with a flair for writing advertising copy—untarnished by reality—that appealed to rural, small-town America and with a knack for making deals on closeout merchandise on especially favorable terms. But otherwise he was a poor businessman and an inept manager, with little knowledge of business finance and systematic operations. Rosenwald, on the other hand, was a person with high ethical standards and a keen insight into the needs and untapped potentials of the market. He brought to Sears the money-back guarantee and a more systematic marketing strategy. Together their abilities spurred a 13-fold growth of the fledgling mail-order business between 1895 and 1900. They were soon joined by Otto Doering, a master at operating systems. The happy confluence of these three bright stars was the alchemy that propelled a 23-fold growth of the company over the next 20 years.

Materials, energy, technology, money, people—when combined with each other—generate a power that none of them possesses by itself. The same is true of ideas, systems, and skills. An organization combines all of these resources in new ways to generate a virtually limitless creative power—a power that far exceeds the sum total of all its inputs.

According to scientific reports, the solar energy falling on the earth’s atmosphere is sufficient to meet the entire world’s energy needs 2,000 times over for the next few million years. The task of science is to discover a way to effectively harness that energy. The power of organization holds equally great potentials for humanity that are barely even glimpsed today, as the power of the atom was undreamt of until less than a century ago. When even a little of this power is released, an organization comes alive and begins to take off.

What makes an organization take off? Consider the airplane. What is the secret of its capacity for flight? Like the car or the train, its engine has a capacity for creating thrust in only one direction. Yet it is able to use this thrust to lift itself off the ground against the powerful opposition of gravity. It does this by means of wings, which convert the force resisting its forward movement into a lifting power to raise it off the ground. A slight shift in the angle of the wing makes all the difference in the world.

Organizations are similar. But whereas airplanes travel in only one direction at a time, organizations are multidimensional. They move in many directions simultaneously. As the wings of an airplane can be tilted to exactly the best angle for flight, there are countless points in an organization that can be adjusted to convert a problem, or resistance, into an opportunity, or uplifting force. When these points are touched and properly tuned, the organization comes alive and takes off. The challenge before us is to identify these points and discover how they can be made into so many wings for the company’s ascent.

Organization is the sum total of many powers, a treasure house of creative potential, a vibrant organism with an existence, life, and personality of its own. As the secrets of the human mind and heart and soul have remained unseen and concealed from the searching eye of science, mysteries as great today as ever they were in the past, humanity remains blind to another great mystery, unknown though seen by all—the unveiled enigma of the living organization. Even its founders do not know what they create. Even its leaders do not know the power they wield. Even the society it serves does not know its infinite capacity for service.

When Tomas Bata returned from the conference of Czech industrialists in 1922, he carried back with him a value and a goal. The value was a commitment to job security for his employees during a severe recession. The goal was to reduce the price of his shoes by 50 percent. The only way he could achieve either was to bring down his cost of production to less than half its present level. Like Marriott, Bata discovered the enormous hidden powers of organization. But the structure Bata adopted was quite different from Marriott’s, because his values and objectives were different. For Marriott the central value was quality control, and the primary objective was growth. For Bata the values were employment security and cost control, and the primary objective was survival. Bata had first of all to save a business, not to build one. Despite the differences in structure, their results were remarkably similar.

Through this organization, Bata succeeded in enlisting the interest and releasing the energies of his employees. Between 1922, when he introduced it, and 1932, when he died in an airplane crash, his company expanded from 2,200 employees producing about 8,000 pairs of shoes a day to 18,200 employees producing 144,000 pairs. A 9-fold increase in workforce generated an 18-fold increase in production. Productivity had doubled. At the same time, the average weekly wages of Bata’s workers rose more than 3-fold, while Bata’s sale prices dropped to one-sixth their 1922 level. Even during the worst years of the Great Depression, Bata continued to expand. By 1932 the company was manufacturing shoes in 28 countries. That was the power of Bata’s organization.

The real test of the Bata Shoe organization was yet to come. In the fall of 1938, Czechoslovakia was first dismembered at the Munich Conference and the rest of it invaded by Germany in March 1939. All communications with the outside world were cut off. Young Thomas Bata was in Western Europe at the time and then proceeded to Canada, where he managed to gather round him a few other Bata Shoe Company executives who had been able to leave Czechoslovakia before the Nazi invasion. During the course of the war, no civilian communication was possible between this group and the parent company or most of the overseas companies. When the war ended, the Communists seized power in Czechoslovakia and appropriated all the assets of the Bata Shoe Company. Almost the entire Bata staff was trapped forever within the country.

In 1945 Thomas Bata called a meeting in Canada of his country managers from all over the world to find out what remained of what had once been the world’s largest shoe company. To his surprise, he discovered that in most of the countries where it had manufacturing facilities, the firm was thriving. Tomas Bata’s goal of an organization that would function automatically had been achieved. The autonomy of local profit centers had evolved into a decentralized structure of autonomous country operations, which functioned efficiently without any direction from the head office. Although the company’s production had fallen to 40 percent of the prewar level—from 55 million to 20 million pairs—within five years Bata was once again the largest manufacturer of footwear in the world.

Since the end of the war, the company has extended its operations to 93 countries, where it now produces 300 million pairs of shoes annually; but it still retains the decentralized structure developed 60 years ago. As Chairman Thomas Bata says, "The thing is being held together by local dynamism rather than by any constant edicts from a center."

The original profit centers still exist in Bata factories all over the world—even the employee cafeterias are run as separate profit centers within each plant. The system of hourly and daily financial reporting introduced by the founder continues as well. Every morning Bata executives in Toronto meet to discuss production and sales figures coming in from around the world. The reporting system has been an important tool for staying in touch with overseas operations and for exercising control, wherever necessary.

In spite of their marked differences, the organizations created by the Marriotts and the Batas have several things in common. Both combine centralization in some areas with decentralization in others. Both employ well-developed systems to maintain uniformity and consistency. Both impose strict discipline in some areas to maintain control. Both allow wide freedom in other areas to encourage entrepreneurship and individual initiative. Marriott’s highly centralized organization and Bata’s highly decentralized one appear at closer range as variations on a single model. The power they have both discovered issues more from organization itself than from the particular form that organization takes in one company or another.

It was not the market that fueled the expansion of these two companies; it was the release of forces from within themselves. They were not driven by the potentials of the market, but by the limitless potentials of organization, to which the market responded. They did not have to seek out opportunities in life. They discovered opportunities within the organization, and life unfolded more rich potentials than either of them ever dreamed of.

What is this thing that we call organization? It is actually the organizing and executing will of the corporate personality. It is the character of the corporation. In the individual, character collects, harnesses, and directs all the energies and capacities of the personality to fulfill its quest for self-actualization. Corporate character works the same way. It gathers together, mobilizes, and directs all the resources of the company to fulfill the values, mission, and objectives of the psychic center. It is the link between idea and action.

The character of an organization has two aspects, one structural and the other functional. The structural aspect determines the form of the organization, the hierarchy of levels. It is like the skeletal system in the human body, which determines the size and shape of the body and provides a structure to which the muscles are attached and in which the organs rest. The structure of an organization—with its various departments, divisions, and levels of hierarchy—plays a similar role. In another sense, the structure of an organization is like the circulatory system in the body, consisting of a matrix of interconnecting vessels of various diameters. These vessels are the channels or path-ways through which energy, information, money, and materials are transported within the company. The size of each vessel determines how much it can carry. Its connections with other vessels determine the destination of the things it transports.

But this structure constitutes only the passive and external component of corporate character, the one depicted in organization charts. Character also has an active functional aspect. It exercises authority. This functional aspect is like the field general who is in charge of directing an army during battle. The broad aims and objectives of the war, as well as the strategy to be pursued in the battle, are established by the chief of staff. The field general’s task is to execute the battle plan according to the plans and strategies received from above. That task involves coordinating the actions of armored divisions, artillery, air support, and infantry to ensure that they act in unison and not at cross-purposes; without the field general, the movements of these various forces might not coincide properly, and there is even the possibility of aerial or artillery bombardment’s endangering the general’s own army, a thing quite common in war and not unheard of in business.

In this sense, character is the organizing and executing will of the corporate personality that releases all its energies, mobilizes all its resources, and coordinates all its actions to fulfill its mission and objectives in accordance with its central beliefs and values. It does not fix the goals—that is done by the psychic center—but it directs all the company’s capacities to realize them. People, ideas, skills, systems, money, technology, machinery, and materials are like the armed forces that the field general commands. In the absence of a central authority, they tend to act on their own, independently of the rest and often in conflict with one another.

What is the source of an organization’s incredible power? There is not one source, but many. When Bill Marriott, Sr., ran Hot Shoppe No. 1 with the help of his wife, Allie, and a few employees, he was all things to his business—a worker, a supervisor of others’ work, and a decision-making manager. When Hot Shoppe No. 2 was added, he and Allie could station themselves simultaneously or successively in one shop or the other carrying out the same functions as before. But when Nos. 3, 4, and 5 were added, Bill’s job changed in character. It was no longer possible for him to personally oversee all the work going on in all the shops all the time. Therefore, Bill had to select one from among the group of employees at each shop to act as an extension of his senses and watch over things in his absence. Bill ceased to be a worker or even a supervisor. He now had to devote most of his time to making decisions and leave supervision to someone permanently located at each shop. Gradually, he found it possible to delegate decision-making authority on routine items of work to his shop supervisors, thereby freeing himself from most of the repetitive, ordinary operational decisions so that he could concentrate his attention on general management issues like finding locations for additional shops or thinking up some new advertising strategy. In the process, his supervisors were upgraded into managers. Bill’s evolution from worker to supervisor to manager to general manager coincided with the establishment of a multitiered hierarchy in his company and the delegation of authority to personnel at lower levels of the organization. The net result was an enormous increase in his personal productivity and a fivefold expansion of the business. The creation of a hierarchical structure and the delegation of authority are two of the primary powers of organization.

When Tomas Bata started his business, shoemaking in Czechoslovakia was still a cottage handicraft in which each cobbler performed all of the tasks involved in making shoes, usually in the family kitchen. Inspired by the idea of mass production, Bata took a group of people and divided their work into specialized tasks along a production line. This division of labor made them each far more productive and efficient than any individual cobbler. It enabled Tomas and his father to start their business in 1894 with 50 employees instead of one cobbler and to expand to 120 by 1900. Specialization is another primary power of organization.

Although technology was gradually changing shoemaking from a manual into a machine-driven trade, the organization of production still followed the old pattern of the cobbler’s shop. Bata introduced new machinery and developed a lot of his own, but his real innovation was the Bata system. He introduced automated production conveyors as Ford did for cars. Then he developed innumerable systems for procurement of raw materials, inventory control, planning, production, distribution, and marketing. These systems enabled him to produce far more efficiently than the machine-driven factories based on the traditional pattern. He also introduced various types of records and reports, which enabled him to supervise, monitor, and control a far larger operation. Systems and reporting are also fundamental powers of organization. They enabled Bata to expand his daily production another tenfold between 1900 and 1910.

As Bata’s business expanded, it came to encompass a whole series of related activities, which no individual cobbler minus an organization could undertake. Bata sent out purchasing officers to scour the country—and, later, foreign countries—in search of good-quality, low-priced leather. He established tanneries so that he could process the leather himself. He set up machine shops to build and repair his equipment. He developed more efficient means of transporting his shoes to the market. He created new channels of wholesale and retail distribution within the country and overseas. All these activities had to be closely coordinated in order to ensure a smooth flow of work.

Bata’s organization also expanded vertically to include several more layers between the proprietor and his executives at the top and the thousands of purchasing agents, production workers, technicians, salespeople, and clerks at the bottom. It became essential to integrate activities at each level with those above and below, to ensure that what the planners decided was carried out at all the lower levels in all departments within the country and overseas and to ensure that all significant events at lower levels were reported and acted upon by management.

Coordination ensures that the hand and mouth work in unison. Integration ensures that the mouth eats what the mind approves, the taste enjoys, and the body can digest. Coordination and integration are higher powers of the organization that unfolded for Bata a rich creative potential for growth. Daily production in 1932 was nearly 50 times greater than it was in 1910 and 3,000 times greater than it was in 1894. Productivity per worker had grown from an average of one pair of shoes per day to an average of eight pairs per day.

Marriott underwent a similar line of horizontal expansion and vertical development. It gradually expanded its activities from root beer to Mexican food, from drive-in restaurants to in-flight service, from hotels to life-care communities. As it grew, it also developed a much deeper hierarchy than the three-tiered structure that ran the first Hot Shoppes. This growth was made possible by the close coordination of related activities and the integration of different levels of the organization through a sophisticated matrix of systems for reporting, monitoring, controlling, and executing work.

Coordination and integration enable Marriott to operate a wide range of businesses and expand rapidly while maintaining high standards of service. For instance, the hotel division has opened between 10 and 20 major hotels every year for the last five years and had them operating up to Marriott standards almost immediately.

When structure and systems are coordinated and integrated, as at Marriott, the organization begins to function like a well-tuned Mercedes engine or a precisely made Rolex watch. Movements become smooth and swift. Interactions are frictionless and trouble-free. Productivity increases enormously. Frustration, irritation, conflict, and confrontation are minimized. People become relaxed, even-tempered, cooperative, and cheerful. An atmosphere of harmony is established.

One of the things that impressed us about Marriott was that the firm’s friendly, personalized service is delivered through a highly complex system of procedures and controls. The smooth-running systems make everyone’s job clearer and easier. They reduce friction and confusion. As one vice-president explained, "We try to develop systems that help make an experience pleasant instead of detracting from it."

Harmony depends on recruiting the right kind of people, imparting the right kind of training, and communicating the right values and attitudes to all employees. Harmony, too, is a power of organization—potentially more powerful than all those that come before it and make it possible—because when harmony is present, employees will go to great lengths to serve, and customers will go to great lengths to seek out that service.

For thousands of years great leaders have searched for the key to the infinite power of people. The pharaohs resorted to force and fear of death to mobilize people to work. But all they obtained was the merest physical labor in return for a minimum level of sustenance. Napoleon succeeded for a while in winning the hearts of his young, illtrained recruits with the glorious battle cry "Vive la France." Gandhi awakened an entire nation and made it rise up unarmed against the might of the British Empire with the inspiring call for the liberation of Mother India. But these were only brief moments in history, when a leader or an ambition or an event released the powers latent in people, more often for destruction than for creation. The real challenge is to release those powers for continuous production.

How do organizations harness the power of people? They do it through an effort of will, through the exercise of authority. The real character of a corporation is expressed in the way it exercises authority, the manner in which it exerts its will to influence people. Every organization must exercise authority in order to survive. There was a time when this was done almost entirely through negative means, through discipline and threat of punishment. Today discipline is not a very popular concept; yet no organization can exist without it.

When Lee Iacocca arrived at Chrysler for his very first day on the job, he observed several clear signs that the organization was in deep trouble.

Without discipline, the energies and talents of an organization cannot be fully harnessed and put to work.

Every company, even the most people-oriented, has areas where it insists on obedience and discipline. Wherever high performance levels are considered absolutely critical, negative forms of authority are employed. At Du Pont the surest way to get fired is to ignore safety regulations. At Merck it is to give erroneous or exaggerated information to a physician. At Bata, if any inventory is found missing from a company-owned store, the store manager is personally responsible for compensating the company for the loss. Sears really means business about the way customers are to be handled. Mistreating a customer is a quick way out the door.

IBM has been known for its Marinelike discipline since the days when Tom Watson, Sr., forbade his employees to drink alcohol on or off the job—even prior to national Prohibition—discouraged smoking among his employees, and insisted that salespeople wear dark business suits and white shirts. Although the Watsons are gone, the codes of behavior remain, and most of them are still in force. The old dress code is no longer a strict regulation, but most IBM sales reps stick to it. Drinking off the job is a personal matter now, but those who drink at lunch are expected to take the rest of the day off.

At IBM the commitment to after-sale service is taken so seriously that the company considers it a grave lapse if any one of its customers give up IBM equipment in favor of another brand. IBM has a policy to ensure that account representatives fully understand the importance of follow-up customer service and act on it. If an IBM customer switches to another brand, the present account representative for the customer’s territory has to refund to the company out of his or her salary and bonus the full amount of the commission paid on that customer’s original order, even if that commission had been paid to a previous representative who is no longer covering the same territory.

Soon after taking over as president of a middle-sized corporation, a former IBM vice-president launched a program to cut overheads. During one of the executive meetings, he asked for a copy of the individual records maintained by all executives for long-distance calls from company phones. The executives looked at the new president in surprise and bewilderment, and one of them asked, "Do they keep such records at IBM?" The president replied, "Of course, they do. Don’t you do it here?" To which another executive responded, "We are trying to follow the latest practices here. We never thought that companies like IBM still did such things."

Intel is also in an industry in which you have to be clean, at least in the plants where the chips are made. In Intel’s plants cleanliness is an absolute must; chips are manufactured in an environment where the air is a hundred times cleaner than the air in a hospital operating room. So far, it all makes sense. But cleanliness at Intel does not stop there. It spills over into the administrative environment, too. About twice a month, teams of three or four people in each building inspect every work station and rank it in terms of cleanliness. Composite scores are calculated for each building. "Mr. Clean," as the teams are called, is quite effective. Financial and administrative officers at most companies are known for their cluttered desks, but Intel’s Larry Hootnick keeps his office so neat and orderly that we actually could not find a single piece of paper in sight.

There is also a corrective action program at Intel. Any employee who does not perform up to expectations is called in for a discussion, and a specific program is drawn up to solve the problem. Ninety days later performance is reviewed to determine whether the program has been successful. If it has not, the employee better look for a new job, either inside or outside the company.

There are also semiannual reviews of hourly employees and annual reviews of salaried personnel, in which the individual is rated on a scale ranging from "superior" to "does not meet requirements." Even superior performers will have areas where they can improve, and individual programs will be charted out for that purpose.

This does not mean that there is always someone looking over your shoulder at Intel. Discipline has become institutionalized as a custom. Although there are rules and peer pressure, to a great extent discipline has been internalized as a self-critical attitude in people. Rebecca Wallo, of the company’s public information department, explained: "The people are very self-critical here. If you talk to people who have been here awhile, they would say they are as critical of themselves as they would expect others to be."

Financial control is an area that is strictly enforced at almost all the companies we visited. Travel expenses must be precisely accounted for. Bills for long-distance calls are monitored to eliminate unnecessary or unsanctioned use of the phone. At Intel nobody, including the chairman, flies first class. The same is true at Marriott, where even Bill Marriott, Jr., flies economy class.

We have already referred to the strict cost control at Delta, but in nonfinancial matters Delta is not exactly the sort of company you would associate with strict discipline. Then, again, companies are not quite so stereotyped as we often portray them. When it comes to Delta’s core values, the company does not compromise.

The personal appearance of flight attendants is governed by fairly strict regulations. Being overweight is grounds for dismissal, because good service depends so much on an attendant’s agility in narrow, crowded aisles. For men, whether or not to wear a tie "isn’t one of the things you can decide on. You wear it."

Punctuality is also an important value at Delta, because it is a critical factor in providing on-time customer service. Delta has the lowest delayed-flight rates in the industry. There is no late list, but if an employee comes in late five times, his or her manager will sit down with the employee to find out what the problem is. About 95 percent of the people arrive before the 8:00 A.M. opening time and return from lunch promptly by 1:00 P.M. There is a strong atmosphere of peer pressure at Delta. Even if the boss is not around, other employees are. "If the boss doesn’t know, the troops know," remarked Dennis Schmidt, general manager for methods and training. "If people have not held up their end of the deal and they are looking for support, they won’t find it."

Managers deal with individual problems like punctuality on a one-to-one basis with the individual rather than by an impersonal memo or a 90-day written contract for improvement. Delta practices what it calls "progressive discipline"—in which the individual and his or her manager work together to clearly understand what the problem is and devise ways to remove it. We asked President Ron Allen what is the best way for an employee to get in trouble at Delta. "Acts of dishonesty," he replied. "That’s something that we don’t tolerate." Although discipline is enforced in many areas, sometimes Delta’s own employees feel the company is not being tough enough. One executive commented, "Our people tell us we go too far in giving employees a second, third, and fourth chance to change."

Delta tries to enforce discipline less through the threat of punishment than through what it calls "an atmosphere of approval." There is a positive milieu in which everybody knows what is expected and is motivated to live up to the standard. Allen says: "We don’t want people to be afraid that if they don’t come to work on time or don’t do this or that, then they will really get in trouble. Instead we want them to feel good about doing things correctly and giving of their best. That doesn’t mean that people don’t get in trouble at Delta, but we want our managers to manage people through this environment of approval. It is the value of the person. Our managers recognize the value of the individual." One past president of Delta summed up the company’s policy this way: "You can do anything around here that you don’t think you’ll get fired for."

Recently a lot of attention has been paid in management circles to the value of using positive reinforcement through rewards and attention to motivate people and get work done rather than negative reinforcement through fear and punishment. But this should not obscure the critical importance of maintaining discipline. As a rule, the more developed the corporate personality becomes, the more clearly defined are the policies, rules, and procedures for monitoring and enforcing authority in areas of central importance. The form of authority and the manner of enforcing it may vary with the character of the corporation, as Intel differs from Delta, but the critical commitment to discipline will be there. Companies that feel it is "unprogressive" to insist on punctuality and accurate travel accounts, or look the other way when staff members bypass traditional lines of authority, mistakenly confuse laxity and indiscipline with the freedom necessary to achieve enduring success. The two are vastly different concepts. Even when a company gets away with lax discipline in a few instances or for a short while, it tends to undermine the whole edifice of organizational character. A breath of fresh air may seep in through a crack in the hull of a surfaced submarine, bringing relief to the crew in a stuffy engine room; but when the ship is submerged, water will pour in through the same crack.

How, then, should we understand all the talk about positive reinforcement, freedom, autonomy, individual initiative, open doors, informal communications, flexible working hours, visible management, and the like, which are practiced with apparent success by many of the most respected corporations? Discipline and freedom are the two ways in which the corporate character exercises its will to accomplish work—one by restricting employees’ freedom of action, the other by asking employees to practice self-restraint.

The proper dividing line between discipline and freedom, between negative and positive forms of authority, depends on social custom, geographic location, the laws governing employment, the extent of the employees’ economic dependence on the firm, and alternative job opportunities; but most especially it depends on the strength of the corporate character. If every American company abolished time clocks and fixed working hours and removed the locks on their laboratory storerooms as Hewlett-Packard has down, a good number would find their factories empty, except on pay day, and their storerooms permanently vacant.

In a well-balanced organization, the foundations and structure are established by discipline and control, while expansion and development are based on self-discipline and freedom. Survival and preservation are imposed from above; growth and dynamism are released from below. The company that fully establishes discipline in all core sectors and fully enlists the cooperation and self-restraint of its employees for expansion functions successfully at the peak of performance. Its opportunities for growth are endless.

What is the secret of this perpetual renewal that has made General Mills the most profitable and admired company in its industry? General Mills has learned how to harness the creative power of people through positive authority. It all began in 1928, when James Bell, the president of a 60-year-old flour mill, consolidated five independent companies to create the largest flour-milling company in the world, General Mills. The mills were all well-established operations spread throughout the country, so there was no need to centralize their management and little advantage in doing so. After the merger, the mills continued to operate very much as before, like independent entrepreneurial businesses.

When you enter the home of Betty Crocker, you somehow expect to find an atmosphere as old as the name—traditional, conservative, and more than a little stodgy. But that image hardly fits General Mills today, any more than the first portrait of Betty Crocker in 1936 resembles her latest remodeling. The company may be old in years, but it is very young in spirit. The atmosphere is intense, alive, saturated with a wholesome vitality and dynamism. It feels more like a gymnasium than a kitchen. Its employees are reminiscent of John Wooden’s fast-break, full-court-press basketball teams at UCLA during the 1960s—competitive team players with high morale.

The most visible expression of the company’s exuberant atmosphere is the brand manager system. Every year the company recruits about 40 graduates of the nation’s top business schools. In the first year the new recruits may be assigned to one of those products that the theorists say should not exist anymore. Old-timers like Wheaties (introduced in 1924), Cheerios, and Kix (circa 1940) are reinvigorated and rejuvenated by the energy, enthusiasm, ambition, and ideas of a youthful MBA. The product may be half a century old, but for the fledgling marketing assistant it is brand new. The advertising budget may be well structured and controlled, but for someone right out of graduate school, helping to manage it is a big responsibility and a big challenge. The marketing assistants also realize that experienced marketing professionals with General Mills can earn a performance bonus of 20 percent or more on what is already a handsome base salary. Couple these factors with the knowledge that a significant percent of the new marketing assistant’s "classmates" will not be with the company a year or two later—either because some could not make the grade or stand the speed or because they were lured away by one of the many companies that prize General Mills’ "graduates"—and you have a formula for dynamic action.

A recent issue of the company’s employee publication carries a cartoon of a young marketing assistant with briefcase in hand flying through the office. The cartoon is entitled "General Milieu." That pretty well captures the atmosphere. Maybe the brand managers do not have very much real authority. Perhaps often they do not really do anything very different from the way their predecessors operated—just a little change in the package here or in the advertisement there. But that little bit of alchemy is often enough to transmute an aging product into a rising star, and so the process of renewal is repeated year after year.

The system often fails, with old products and new ones, but failure is not something that is frowned on too much at General Mills. As one executive put it, "We fail more than others, because we try more new things." The positive atmosphere does result in more than an equal number of success stories. The company still makes acquisitions, but usually small ones that it builds up. Over $1.5 billion of General Mills’ revenues in 1984, and about one-third of its profits, came from eight operations that had average sales of only $8 million in their first year with the company. In 1977 a little cottage cheese factory in Michigan with a French recipe for yogurt was purchased for $3 million. It is now a $150 million product called Yoplait.

One thing that struck us about the company was the apparent invisibility of top management, which was expressed as an enormous latitude of freedom for personal growth at lower levels. After listening for a while to Chris Steiner, a marketing director in the foods division who joined the company as a marketing assistant eight years ago, we began to wonder who actually runs this place or if anyone really does. Steiner constantly referred to "I" and "we" but never once mentioned any "they" who sit above her and tell her and her colleagues what to do. "There is nobody looking down over your head and asking you if you did this or that," she explained. The same view of management was expressed by John Machuzick, a sales operations manager in Grocery Products Sales. "They let people run their own businesses. They get involved in the major decisions, but for the everyday business going on, we are allowed to make the decisions. Young managers have a lot of authority in this company." It requires an enormous self-restraint and confidence to give freedom for others to make decisions and act. That is the corporate character of General Mills and one of the keys to its continuing momentum and enduring success.

The entrepreneurial spirit at General Mills is not confined to consumer foods or even the marketing end of that organization. Innovation and entrepreneurship pervade the entire organization. In manufacturing, innovation is encouraged at the very lowest level. Small teams study problems that individually may not involve more than $1,000 in operating costs, in an effort to improve efficiency. In the process, people get involved and enthused, and they begin to think creatively. In another striking example of the entrepreneurial spirit, the company was one of the first to employ a whole series of new investment techniques. Treasurer Jim Weaver proudly explains how he earned excellent returns on arbitrage transactions involving zero-coupon bonds popular in the Eurobond market.

Discipline is a word you do not hear much at General Mills. Authority is felt as a constant pressure to excel. "The company makes great demands on us," Chris Steiner explained. "They demand excellence in terms of the product and the profit. So there is always that kind of demand. You’ve got to do it better." The company relies more on an atmosphere of expectation than on rules and regulations to enforce appropriate conduct. Executive Vice-President Paul Parker confirmed: "We are loose and relaxed. Peer pressure will force people into a proper behavior pattern."

A lot of the pressure at General Mills issues from the commitment to the company’s financial objectives—a return on equity of 19 percent or more and an annual growth rate at least 6 percent above the rate of inflation. The company has maintained a five-year compound growth rate of 11.3 percent in earnings per share. In a slow-growing field, this performance has made it what Fortune called "the toast of the industry."

The systems and controls for financial reporting constitute one area where discipline is rigorously enforced. "We do insist on very stringent rules in the accounting and control function," Parker said. "There is no deviation. You have to have figures you can trust." When we asked Steiner how people get in trouble at General Mills, she echoed the same view. "If you aren’t honest with someone, if you try to hide something or misrepresent information, that is the only thing I can think of that leads to real serious trouble."

Despite the go-go pace of the brand manager system, the people are surprisingly warm, relaxed, informal, and friendly at General Mills. They really seem to enjoy their work and feel excited about it rather than feeling the stress and strain of a highly competitive race. Freedom, individual involvement, and enormous opportunities for personal growth mitigate the pressures of the fast pace.

The key to General Mills’ youthful exuberance is its ability to release the energies of its employees through positive rather than negative means. The positive forms of authority fall into a gradation ranging from purely material incentives to purely psychological ones. The basis of positive authority is attention to people, recognition of achievement, respect for the individual, and freedom for self-expression. Its most common form is the use of material rewards to motivate people.

For a long time it was commonly believed that monetary incentives were the key to maximizing individual performance. General Mills employs generous monetary incentives; but long before most companies, it recognized that nonmaterial, or psychological, incentives can motivate as nothing else can. Tom Watson, Sr., made the same discovery more than 50 years ago. He converted all factory workers at IBM from piece rate to salaries while expanding the scope and enriching the content of their jobs to the maximum. Many people expected productivity to fall after these changes were introduced, while actually output per worker continued to climb right through the depression and even during the war years, when productivity was declining in most other industries in spite of higher wages.

The major limitation of material incentives is that they relate only to people’s performance, not to the people themselves. Like the threat of punishment, which motivates only so long as there is a chance of getting caught, monetary incentives motivate primarily in areas where achievement is measurable and likely to be rewarded. They are also limited by a person’s ambition and expectations. Those strange stories we have heard about people in developing countries who work only as hard as is necessary to sustain their present economic level are not so strange or foreign as they may seem. Many people—executives included—are quite satisfied with their present standard of living and beyond that point cannot be easily motivated by financial rewards. In addition, monetary incentives are inherently limited by the economic costs involved in continuous salary increments.

Attention to people and recognition of achievement are also given through a variety of nonmaterial ways, ranging from a simple pat on the back for a job well done to promotion to a position with greater status, responsibilities, or decision-making authority. These forms of recognition are not limited either by economic constraints on the company or by the ambitions and expectations of the individual. Everyone responds positively to attention and recognition from his or her boss, peers, or subordinates. We all have an unquenchable thirst for social approval.

This is the reason for the success of all the unorthodox and non-traditional techniques now being used to motivate people, such as recognition for heroes and champions and collective rituals like beer busts, award ceremonies, and other forms of hoopla. These methods work because they are all ways of giving positive attention to people, releasing their pride, competitive spirit, sense of community feeling, and willingness to meet challenges. The forms and techniques may differ from company to company, but the principle remains the same.

However, these external forms of attention still belong to the lesser of the greater powers. There are inherent limits to their effectiveness. They tend to become routine, habitual, empty, and flat after a while, like the parting smile of a tired flight attendant who has already said good-bye to a hundred passengers who left the plane before you did.

These methods are successful only so long as and to the extent that they express a real interest, concern, and commitment on the part of management for its employees. When management genuinely feels this way, the form of attention given is less important, or rather, any form will do. It need not even be planned. In fact, the spontaneous expression of attention in the course of work has a greater significance, because it is unexpected and more natural. When management has the right motives and feelings in its relations with employees, employees change their attitude. Their submissiveness changes into loyalty, obedience turns into cooperation, and reluctant or resigned acceptance is converted into enthusiastic agreement. Employees come to identify with the company’s beliefs, values, and goals. Work becomes expansive.

Freedom and responsibility are greater incentives than money. When General Robert Wood moved Sears into retail stores in the 1920s, he built up a decentralized, loose-knit retail system that extended a great deal of freedom to store managers and demanded a large measure of self-reliance and personal capacity from them. As James Worthy described the system in Shaping an American Institution:

Wood’s system is still in force today. Entrepreneurship in Sears’ 798 retail stores is encouraged not only at the level of the general manager but all the way down. The Wayne, New Jersey, store is divided into 15 divisions, each headed by a separate manager. Each division maintains its own profit-and-loss accounts. The divisional managers are given greater freedom and responsibility than many store managers running other retail shops. The store manager, Bill Collett, explains:

The most powerful incentives for motivating people are neither the lure of material rewards for high performance nor recognition and approval for surpassing one’s peers. The greatest potentials of organization are revealed when the psychological energies of the individuals are released in pursuit of their own personal growth. When people grow through their work, they require no material incentives or social recognition. Their work becomes self-rewarding, self-motivating, and filled with joy. Employees at Delta derive a sense of personal satisfaction from making the customer happy. Delta flight attendant Chris Hendrix said: "We don’t smile at the passengers because we feel we have to do it for the company. We do it because the company is there for us. We want to do it for the company. I’m proud of this company. This company has done a lot for me, personally." When an organization provides individuals with opportunities of this type, it becomes a living organization.

What makes an organization come alive? Let us start with the individual. When does an individual become interested, vivacious, overflowing with energy? Recollect the most exciting moments in your own life, and the answer will be clear. When the outer circumstances or activities of our life appeal to our own inner seeking, we become actively involved and enthusiastic. When our work becomes an avenue or occasion for personal growth, we feel energetic and take joy in what we do.

People have two ways of existence—surviving and growing. When they are just surviving, life is routine, habitual, dull, flat, boring. The only satisfaction comes from physical pleasures and comfort. When they are growing, life becomes fresh, exciting, challenging, thrilling, and enjoyable. The child grows physically for 18 years or so, but people can continue to grow in knowledge, maturity, life experience, emotions, and skills throughout their whole life. Surviving requires a minimum of energy; growth requires a maximum. During times of growth our physical, nervous, and mental energies are at their peak, flowing and overflowing on all sides. When our inner motives or outer circumstances release our maximum energies, we grow psychologically.

When an organization genuinely commits itself to the personal growth of its people, it can help create the right inner motives and external conditions for their development. When the company grows, the people grow with it. When the people grow, the company grows, too. Each can stimulate the other. The individuals come to identify their personal seeking more and more with the company’s progress and find personal fulfillment by giving themselves to it through service. When this happens, the psychological energies of the individual are constantly being released in work and flowing out to animate the life of the organization. The organization becomes alive and charged with a vivifying energy.

A natural, progressive development of authority takes place in organizations: personal enforcement of discipline by the proprietor or founder; impersonal discipline enforced through rules and systems; self-discipline by employees and peer pressure based on an attitude of loyalty and commitment to the success of the organization; and finally, self-motivating and self-rewarding dedication by each individual worker in an atmosphere of freedom.

The stages of this progression can be reduced to ten basic steps: