Corporative IQ

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Library of Congress Cataloging-in-Publication Data
Underwood, Jim, 1941-

What’s your corporate IQ? : how the smartest companies learn, transform, and
lead / Jim Underwood.
p. cm.
Includes index.
ISBN 0-7931-8573-4
1. Strategic planning. 2. Organizational learning. 3. Organizational change.
4. Leadership. I. Title: Corporate IQ. II. Title.
HD30.28.U53 2004
658—dc22
2004009569
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To Harvey the Golden Retriever
More valuable than gold is a faithful companion.
October 1990–March 2004
C o n t e n t s
Foreword vii
Introduction ix
WHY COMPLEX DYNAMIC SYSTEMS

SHOULD BE YOUR BEST FRIEND
1. Why Companies Win 1
2. Why Companies Fail 19
3. The Three Rules of Leadership and Strategy 35
4. Context, Context, Context 49
CORPORATE IQ AND THE TEN

SMARTEST COMPANIES IN AMERICA
5. Custom-Built Companies 63
6. Corporate IQ Strategies for Success 79
7. Organization Entrepreneurial Support Systems 93
8. Character The Sustainability Factor 107
SMART LEADERS, SMART COMPANIES

9. The Ultimate Motivator 119
10. RAVE! Inspired Excellence 131
11. Creating the Ultimate Customer Experience 147
12. Strategic Focus Finding Your Way in a Chaotic World 165
13. Measuring Success 183
14. What’s Your Corporate IQ? 201
Appendix: Corporate IQ™ Stage I Research Results 221

Notes 225
Index 229
v
F o r e w o r d
J im Underwood in this book has ex-

panded the reaches of the practical, traditional methods of strategic analy-
sis. His concepts were developed from proven research methodologies,
practical business experiences, and, perhaps of most importance, from Un-
derwood’s leading hundreds of students through applications of strategic,
analytical methodologies to real world situations. I recently had the good
fortune to experience the application of Underwood’s method as one of his
graduate students. Moreover, having spent my career as an attorney, busi-
ness executive (including chief executive officer of a large publicly traded
company and a director of other publicly traded companies), and investor, I
have the experience to evaluate the usefulness of this book outside of the
academic environment. Needless to say, I find that it works well in all of
these arenas.
First, the book offers a great tool to use in an academic environment.
Students can easily follow and learn from the methodical step-by-step analy-
sis. And the application of these steps can be visualized easily through the
vivid, illustrative case examples. Different from many other books filling the
idle space for this genre, this book simultaneously connects the student with
the firm and with the environment within which the firm competes. As stu-
dents have been accustomed to being graded, evaluated, and critiqued, the
book serves as a transition for them (applying the same “how did I do?”
thinking) to scoring, critiquing, and comparing firms within an industry.
Second, the book extends and improves upon traditional strategic think-
ing, providing a concrete, quantifiable method to rank companies within in-
dustries. Underwood has coined the phrase Corporate IQ to measure the
degree to which a firm is prepared to operate within and meet the chal-
lenges emanating from its external environment. If the firm is prepared, it
is generally in strategic balance and has a high IQ; if not, it will have a low
IQ, indicating that remedial action must be taken for the firm to maximize
its profit opportunities.
By focusing on profit opportunities, this book also becomes a book for
investors. Smart investing for the long run involves betting on the best horse
vii
viii Foreword
in a particular race. While I am sure that Underwood did not intend this
book as an investment tool, one of my personal experiences convinces me
that it should be so regarded.
Having served as a board member in Energy Service Company, an off-
shore drilling contractor, for almost 20 years, I thought I had considered, or
had at least been exposed, to most of the issues facing this firm, and I had
my own, somewhat biased evaluation of the firm. Then came a study of the
Underwood methodologies. It was revealing. Leading an Underwood stu-
dent team through his methodical analysis provided me with new insights.
Actually these insights pleasantly surprised me by showing me that the firm
is in strategic balance and, as such, prepared to meet its competition and
maximize profits in its industry. After giving these insights much thought, I
decided to make a million dollar investment in Energy Service, which I
hardly expected to make when I first began the Underwood course of study.
While, as I said, I do not believe Underwood intended this result, my expe-
rience highlights why this book should be included in libraries for business
academics, business executives, and investors looking to glean keen insights
for their long-term investment decisions.
This book will set the industry standard for strategic thinking, and,
hopefully, will give me an opportunity to report on the success of my par-
ticular investment in future editions. In any event, it has certainly provided
me with the tools and methodologies for making business decisions and for
analyzing corporate enterprises by keeping the focus on matching the inter-
nal capabilities of the firm with the external environment within which it
operates.
Gerald W. Haddock,
Former CEO, president, and COO of Crescent Real Estate Equities
Director of Energy Service Company
Former general counsel of the Texas Rangers baseball club
I n t r o d u c t i o n
WHERE’S THE BEEF?
M any people still remember that

now famous line from the Wendy’s television commercial: “Where’s the
beef ?” When I heard about the ad, I was in a queue for a ski lift and the guy
behind me blurted out, “Where’s the beef ?”
When I finally saw the commercial, I realized why they were laughing.
The scene opened with a short, elderly woman holding an open hamburger
on her hand. In the center of the open bun was a scrawny little beef patty
about the size of a silver dollar. The large-sized bun made it appear even
smaller. All of a sudden, in a raspy, horribly irritating voice, the little old
lady looks down at the beef patty and asks, “Where’s the beef ?”
Where’s the beef ? has become a powerful communication phrase. When
someone uses it, you immediately know what the speaker means. It has taken
on a broad meaning from an applications standpoint and refers to the defi-
ciencies of an idea or a product. It is a question that business managers need
to learn to ask.
If you are the manager of an organization, it just makes sense that your
primary business objective is to maximize profit. That is why Where’s the beef ?
may be so important to you. You will discover, if you are insightful enough
to ask that famous question, something important about many of your man-
agement practices.
Let me put it this way. A lot of business theories and practices do not
hold up well when it comes to Where’s the beef ? In fact, a lot of those prac-
ix
x Introduction
tices contribute more to organizational losses than to profits. That’s why,

“Where’s the beef ?” is such an important question for you to ask.
PERFORMANCE ISSUES AT
MAINLINE MANUFACTURING
As a university professor, I expect a lot from my graduate students. At

the completion of their MBA program, the students must go through a “cap-
stone” class that synthesizes all of their learning into one experience. In the
case of my students, they are required to consult for the senior executives of
the some of the world’s largest companies.
Recently, as one of those graduate teams was visiting with the senior di-
vision president of a global company, the executive asked what I thought of
the hoshin strategic planning process. The executive seemed to glow with en-
thusiasm as we discussed the process, and he explained how they used it as
their primary planning model.
I’m going to call the company “Mainline Manufacturing” to protect the
guilty. Let me tell you a little about Mainline. Mainline is one of those com-
panies that have been around for about 100 years. Their tenure and size
gives them immediate worldwide name recognition. Like almost all 100-year
companies, Mainline has been through its ups and downs. The executive ex-
plained how the firm had been through one of those periods of sustained
losses but had gotten back on the right track and was again profitable.
With that in mind, let me paint a more detailed picture of the circum-
stances of this meeting. The graduate students had just completed a presen-
tation of their analysis of the company. They had carefully detailed the
statistical validity of their recommendations. They went to great lengths to
explain the existing corporate deficiencies and why each one, if not cor-
rected, would significantly impact future profit. They even cited the 1,000
studies that had been done over a 30-year period that supported the validity
of their recommendations. Here is what they found.
• The firm’s marketing lacked the aggressiveness required for success

in the emerging environment.
• The firm’s innovation and creation of new products was insufficient
for the emerging environment.
• The firm’s employees felt that management placed little value on
them (a real performance killer).
Introduction xi
• The leadership of the firm was controlling and risk averse, a real profit
killer for this organization, considering the nature of the emerging
environment.
• The firm’s strategic planning process was not designed effectively for
the emerging environment. It required extremely high levels of pre-
dictability for success, and the firm’s emerging environment would
clearly be highly unpredictable.
Keep in mind, my graduate students have been accurately predicting the

performance of their Fortune 500 clients for the past 12 years. In the case of
a number of privately held companies, they accurately predicted bank-
ruptcy.
There is a reason why my students are successful in predicting the per-
formance of companies. There is real beef behind their analyses and recom-
mendations. Extremely reliable statistical relationships underlie everything
that the students do. What would be surprising would be if they were wrong.
Assuming that the input data gathered by my students is correct, the statis-
tical correlation should hold true. There’s the beef!
Let me explain what I am talking about. I visited with the executive for
some time about the firm’s strategy process. To be honest, I was not that fa-
miliar with hoshin. What I have learned in my research in the field of corpo-
rate strategy is that there are probably 500 different strategy approaches.
What I have also discovered is that they are all similar, if not almost identical.
I discovered that hoshin is no different. It’s a combination of BHAG’s
(Big Hairy Audacious Goals), an interim strategy adjustment process, and
the traditional strategic planning approach (plus a total quality management
component). It’s a nice idea but not really much different from many other
approaches.
The executive went on to explain that a nationally known author and
consultant had worked with Mainline over the past few years and had led
them to the hoshin model. Let’s ask the question: where’s the beef ? In this
situation, we have two strategic approaches. On one hand, no statistical data
supports the use of the hoshin strategic planning and profit—none. On the
other hand, the students’ recommendations were based on decades of qual-
ity research. Statistical data backed up the relationship between their recom-
mendations and future profit. There’s the beef!
My point is that it makes little sense to be tied to a strategic approach with
no relationship with organizational profitability when you have an option of
using one that does. That is why it is so important for senior executives to be
xii Introduction
willing to ask, “Where’s the beef?” In the case of Mainline Manufacturing,

the “beef” wasn’t there with hoshin. In the case of my students’ work, it was
there. The research validated the power of their recommendations.
THE RESEARCH STUDY

The study behind this book is founded on a much larger body of re-
search. For the past 30 years, H. Igor Ansoff and his associates have been
conducting studies on the topic of organizational performance. Over those
30 years, over 1,200 studies have been completed in countries around the
world, in almost every major industry group. The outcomes of those studies
have been phenomenally consistent. Across the board, companies that
“match” their environment significantly outperform those that do not.
In designing the research study for What’s Your Corporate IQ?, I was im-
mediately faced with a major problem. To compute a company’s IQ, I had to
get internal access. Rather than being able to select a target group of com-
panies and study them from the outside, I had to go with the companies that
would give me access. In each case, I had to be sure that the internal source
of information was dependable.
The research instrument measured two things. First, it measured what I
call the competitor index, which describes the nature of a company’s com-
petitive segment on a scale of one to five. Second, it measured 17 different
aspects of the company on a scale of one to five. Then, each of the 17 as-
pects was scored based on how close to the competitive index it was. The
company could earn up to 10 points for each of the 17 aspects. Therefore,
the highest Corporate IQ a company could have is 170.
Here is the raw data that I gathered.
Each organization completed the Corporate IQ assessment question-
naire. In most cases, I tried to get at least ten respondents to fill out the ques-
tionnaires. The target respondent was a midmanagement employee (versus
a senior executive). Some might question the limiting the survey distribu-
tion to those in middle management roles. Our experience has been that the
senior executives generally have limitations when it comes to understanding
how their own organizations function. Accuracy is important, and we gener-
ally get the most accurate input from middle managers. Most of the compa-
nies were publicly traded, international organizations. A few were privately
held.
Once the Corporate IQ of each company was determined, each was
ranked based on its profit ranking (decile ranking) within its competitive
Introduction xiii
CIQ Rank
Mortgage 157 12
Entertainment 140 13
Retail Electrics 146 11
Telecommunications 140 10
Transportation 155 11
Consumer 167 11
Training 158 10
Investments 152 11
Technology-Medical 120 12
Bank 154 11
Bank 119 12
Mortgage 145 12
Industrial Products 134 12
Telecom-Corporate 160 12
Tech Manufactoring 195 16
segment. For example, you will note that the first mortgage company listed
ranked in the top 20 percent of its segment. The company listed last, a tech-
nology manufacturer, ranked in the bottom 40 percent of its segment. A 1
ranking indicates a company in the top 10 percent; a 10 ranking indicates
the company was in the bottom 10 percent of all companies.
The statistics were extremely encouraging. (See Appendix A.) The re-
search revealed that the higher the Corporate IQ, the higher the ranking in
its industry segment. The lower the Corporate IQ, the lower the ranking.
This confirmed something that I have personally observed in hundreds of
studies over the past 12 years: the original Ansoff model is highly predictive
of organizational performance.
As I did additional research over the years, I discovered that a number
of key issues needed to be added to Ansoff’s original work. One of the most
important, value of subordinates, is becoming even more important in to-
day’s highly competitive world. I have been fortunate to get an inside look at
some of the world’s most profitable and dynamic companies. Without fail,
the exceptional companies place an extremely high value on subordinates.
In addition to the statistical backing, an additional bit of information is
extremely encouraging. There has only been one instance of a high-scoring
company that had problems, or failed. That company, Enron, was one I fea-
tured in a previous book. Fraud is a difficult issue to uncover. One of the
real ironies of the Enron situation was that the executives who perpetrated
xiv Introduction
the fraud did not need to involve the company in such acts to be successful.
Regardless of any after-the-fact analysis, the company was well positioned to
have a long, profitable life.
Another reality of the studies I’ve been involved in relates to low IQ
companies. I’ve never seen a low Corporate IQ company that was doing
well. From a research standpoint, the inferences we can make based on the
Corporate IQ approach are quite encouraging. It is becoming apparent that
it simply works.
One of the reasons that business research has gotten a bad name in
some cases is an overreliance on researcher analysis, especially the use of
simple averages from which conclusions are drawn and books are written.
Even in academia, we seem to be enamored with the process of making deep
statements about performance based only on observation and a few simple
averages. As a number of people have pointed out, most great companies
have a building, bathrooms, and a copy machine. That does not, however,
correlate to profitability. Yet most of us in the business as well as the aca-
demic world seem blindly tied to the concepts of focus (mission, core com-
petencies), best practices, benchmarking, and numerous other approaches.
Yet, no facts support relating such practices to profitability.
That is why I am excited about the output of the research that surrounds
What’s Your Corporate IQ? It might be said that what is happening is the “map-
ping of corporate DNA.” It is exciting to think about the possibility that the
underlying drivers of corporate sustainability and profit are in the process
of being identified. That’s what the statistics are pointing toward. If that is
true, and I hope it is, we are embarking on a new and powerful way of cor-
porate governance, one in which fads are discounted and where we focus on
the basics of sustainability and performance. There’s the beef!
THE TEN SMARTEST COMPANIES IN AMERICA
As you will discover in the following chapters, Corporate IQ measures

17 areas of the firm. Basically, the Corporate IQ assessment provides a
somewhat in-depth look at how the company does business, from its strategy
and leadership to its corporate character and ethical standards. The key to
Corporate IQ is that it provides an insider’s view of the firm. That is why it
is such a powerful diagnostic.
In conducting the early research about the smartest companies, I spent
a number of months looking at different companies. My objective was to
Introduction xv
evaluate externally as many companies as possible to determine which ones

had a chance of making the list. Then I began contacting different compa-
nies and asking for internally generated information. The first thing I asked
was that a team of people go through the Corporate IQ assessment exercise.
Once that was done, I selected the top ten companies for the list.
It should be pointed out that a few companies were not willing to give
me access. Yahoo!, Inc., for example, was unwilling to participate. The same
is true for Whole Foods, FedEx, and a number of others that passed my pre-
liminary analysis. As an author, I am keenly aware that smart companies are
also really busy companies, so I understand when a firm chooses not to par-
ticipate. I did attempt to get access to all of those companies that passed the
external assessment phase of my research.
Once the list of ten companies was determined, I then asked for access
to the internal workings of the firm. Each firm’s history was important as
well. All of the research was organized around the 17 areas of the assess-
ment. I looked for stories that illustrated what “smart companies” are all
about. Finally, I asked for interviews with the senior executives of the firm.
I usually find that smart companies are led by smart leaders. You will ob-
serve that I place a lot of value on leaders who manage both today and to-
morrow well. With that in mind, I wanted to get some powerful quotes that
illustrated the philosophies that those smart leaders held.
In the end, I think you will be convinced, as I am, that smart companies
are different from their counterparts. They are managed with the future in
mind. They do not mind taking a quarterly hit to their financial perfor-
mance if it involves the long-term success of the firm. You will also note that
all of the smart companies value their people. It’s not just lip service; they
live it. That may be why so many people seem to want to work for these smart
companies.
I will also confess in advance that I have little sympathy for people and
companies who blindly follow fads. A bestselling management book is a best-
selling management book, but no more. Police officers stay alive on the
streets because they quickly learn that they cannot trust anyone. The same
is true of many management approaches. Don’t trust anyone or any philos-
ophy of management without testing it. Make sure it is worthy of your trust.
If it doesn’t work, reject it. In the end, you are betting your career and pos-
sibly your company on such a philosophy. Invest wisely and you will win.
Wisdom is the ability to see afar,
the distant result of this day’s deeds.
SOCRATES
C h a p t e r
1
WHY COMPANIES WIN
Y our Corporate IQ is extremely im-

portant if you happen to be a senior manager with an organization—or as-
pire to be one. I would like to start this book by answering the most obvious
question of all: what is Corporate IQ?
Corporate IQ is a computation that involves three broad areas of the
firm: strategy, organization, and character. Strategy deals with the firm’s
aggressiveness, organization deals with the firm’s ability to adapt, and char-
acter deals with the firm’s ability to sustain the first two. All three areas
combined reveal just how capable the firm is of competing in the specific
competitive segment it faces. That is why there is such a strong correlation
between a firm’s Corporate IQ and its industry ranking.
Let me begin by explaining that the firm’s character, which involves eth-
ics, value of subordinates, etc., is the only area where best practices and
benchmark comparisons can be utilized. When it comes to the firm’s strat-
egy (marketing and innovation), there are no “best practices.” The best strat-
egy is one that fits its particular context well. The same is true for the firm’s
organization. There is no such thing as a “best in class” culture or structure.
There is, however, an appropriate culture and structure (plus a lot of other
corporate attributes) for each competitive context.
I would like to repeat what I just said, because it is radically different
from what you probably have seen in the last 100 business books you have
1
2 What’ s Your Corporate IQ?
read. In fact, it is radically different from anything you might have read in
the last 100 years. Organizations must have high standards of character, but
the ability of the firm to match its strategies and organization with its com-
petitive context determines whether or not it survives, thrives, or dies. It’s
that simple. Regrettably, there is no simple formula for success.
I once pursued a graduate degree in theology. One of the first courses
I took was one called prolegomena. The word prolegomena literally means
“that which goes before.” The course dealt with the assumptions we make.
In philosophy and theology, the assumptions you start with determine the
outcome of your study. In philosophy, for example, the relativist, of neces-
sity, concludes that there is no truth.
In the case of corporate management and strategy, prolegomena is criti-
cally important. Suppositions have an important impact on how you manage.
More importantly, they directly impact the Corporate IQ of an organization.
With that in mind, I will spend the first few chapters talking about the prole-
gomena of management philosophy. If you start out your management day as-
suming that the future will be a simple repetition of the past, you as well as
your organization are destined to fail.
The assumptions that underlie corporate mission, core competencies,
total quality management, excellence, and numerous other ideas have such
built-in problems. That is why your ability to manage your organization’s
Corporate IQ is so important. It’s all about being smart—aggressive, adap-
tive, with high levels of corporate character. Unlike a lot of the theories in
the last 100 books you have read, Corporate IQ has facts to support it. Now
I would like to begin introducing you to the idea of “smart companies.”
The interest in so-called 100-year companies has tweaked the imagina-
tion of business leaders over the past few years, and rightly so. Most of the
books on the topic seem to take what I call an “excellence” approach. In
other words, the author tries to identify what “excellent” companies do.
There is one thing you must understand as you begin your reading of
this book. There are three types of companies.
1. Companies that have lasted for 100 years

2. Companies that are designed to last for 100 years
3. Companies that will not survive for 100 years
One more thing is important to understand as you look at that list. The
companies that meet criteria #2 (designed to last for 100 years) will generally
have ROIs (return on investment) of 20 percent higher on a consistent basis
Why Companies Win 3
than #1 and #3. That may be the most important aspect of this book. Fur-
ther, understanding #2 and how to create a company designed to last for
over 100 years is what this book is all about. Now let’s take another look at
the different types of companies.
You may think that there is little difference between the first two (we
have little interest in the third for obvious reasons), but there is a world of
difference between them. In some cases, it is clear that companies have
somewhat “accidentally” lasted 100 years. In still others, there are companies
that haven’t yet been around for 100 years but will someday. While there is
a lot of interest in companies that have lasted for 100 years and a number of
books have been written on the subject, what is more important is the un-
derlying truth that relates to why companies last 100 years.
Let me explain. The pharmaceutical called aspirin has been around for
over 100 years. The benefits of aspirin continue to emerge. Aspirin is a prod-
uct that has a sustainable demand of over 100 years. It would stand to reason
that the first company to produce aspirin should still be on the world scene
after 100 years. That’s why I say that some companies last 100 years.
At the same time, if you were to find one of those 100-year companies
that did not have a product like aspirin, with a long-term, sustainable de-
mand, it would be an entirely different matter. What you would have in that
case is a company that understood the difference between surviving with a
sustainable product and a company that understood how to survive by con-
tinually reinventing itself and its products. See the difference? That’s why
some of the recent books on sustainability or so-called “100-year companies”
may be misleading.
In many cases, the authors of such works will tell you that, if you do what
these “excellent” companies do, your organization can be successful as well.
As business managers, we tend to like such prescriptive ideas, because they
are usually somewhat simplistic and understandable. After all, if I just had
to do six things to be successful, that idea would be appealing.
One of the challenges of making such claims has to do with variables.
Every researcher understands the problem of variables. We may discover, for
example, that if we double the number of salespeople, our sales will go up.
At the same time, that apparent correlation may lose credibility if we dis-
cover that we lowered the price of our product over the same time period.
Research has to take into account all the variables that can impact your study.
When it comes to our 100-year companies, the same is true. Let’s pre-
tend that you could look at a company from two perspectives. On the sur-
face, you might see that successful companies have tended to have dull,
uninspiring leaders who place little value on innovation. However, if you

looked behind the scenes, you might discover a company that had been
founded 100 years earlier on a product that would be in demand for over 100
years. It is easy to see that if the demand for the product was over 100 years,
corporate leadership would be somewhat irrelevant. What I just described
is called a “demand cycle.”
OIL WELLS: A GREAT ANALOGY
Did you know that oil wells come in numerous varieties with regard to
how long they will be productive and how much oil they’ll produce? In Rus-
sia, some of the old fields that were developed over 100 years ago are still
producing a consistent amount of oil, as they have for all 100 years of their
existence. They are still profitable due to the volume of oil the well can pro-
duce.
At the other end of the scale is an area called the Austin Chalk. Talk
about heartbreak city, can you imagine drilling a well that f lows 2,500 bar-
rels of oil per day, only to drop to 1 to 3 barrels per day after a week or so?
The fact is, when it comes to oil wells, some will bloom and quickly drop to
almost nothing, while others will last for 100 years or more.
Companies are a bit like oil wells. Some tie into a “stream” that lasts for
a century or so. Others tie into a stream that will last only a year or a few
years. The stream or demand cycle, of course, is a critical issue in all of the
research out there on the supposedly excellent companies.
WHEN THE WELL RUNS DRY
IBM was an innovator in mainframe computers. As long as the demand

for mainframes was growing, IBM Corporation grew. When the demand for
mainframes went into the tank, IBM almost ceased to exist.
Xerox was granted a patent on its xerography process in the 1960s. Xe-
rox was one of those “excellent” companies, until the patent ran out around
1980. Xerox has never been able to return to its former level of greatness.
Joseph A. Schumpeter is the individual who best described the reality
of such situations.1 He coined the term creative destruction early in the last
century. According to Schumpeter, companies and products are driven out
Why Companies Win 5
of business by the creative efforts of entrepreneurs. Creative destruction has

a number of variations.
“Capitalism, then, is by nature a form or method of economic change and not only never is
but never can be stationary.”
“[The history of American business is a] history of revolutions.”

—Joseph A. Schumpeter, from Capitalism, Socialism, and Democracy2
Consider the sterile strip or Band-Aid that we put on a wound. It was a

wonderful invention. The sterile strip still exists, although over the years it
has undergone numerous modifications. Additionally, there have been at-
tempts to develop substitutes for the sterile strip (thus illustrating the idea
of creative destruction). Rather than replacing the sterile strip, substitutes,
such as liquids that can be applied to wounds, have not replaced the strips.
They are simply competitive products.
Another illustration of creative destruction is the current family of com-
puter processors. We are moving toward a time in which opto-electronic
applications will totally replace the current processor technologies. The cre-
ative destruction of that technology will be rapid and broad.
Some products (and consequently companies) are just like oil wells that
last for 100 years. In others, creative destruction of the firm’s products oc-
curs every 50 years. In still others, creative destruction events may occur
every 24 months. The issues are twofold.
1. How frequently do events of creative destruction impact a company’s

products?
2. Is the company prepared to anticipate and replace products cre-
atively as they are driven to obsolescence?
Our exploration so far reveals the inadequacy of focusing upon historic

“core competencies” as a basis for corporate strategy. Further, because en-
vironments are dynamic and not static, there is no such thing as “sustainable
competitive advantage.” Any advantage that a firm might have is momentary
at best. The exceptional firm is dynamic. It is constantly becoming some-
thing different as opposed to focusing upon what it used to do well.
When creative destruction occurs, companies enter a time of decline.
Of course, they hire consultants that tell them to “get back to basics” and
FIGURE 1.1 Companies with 100-Year Product Demand Cycles
Companies tied
to long demand
cycles are
extremely rare
“focus on core businesses.” However, the problem is that the basics have
changed, as have the supposed core businesses.
What this means is that the key drivers of organizational sustainability
or so-called “100-year companies” may be radically different than the litera-
ture currently indicates. Rather than being driven by six or so simplistic
characteristics, the real truth regarding sustainability may have much more
to do with the length of the demand curve of the company’s products or,
alternatively, the ability of the firm to anticipate and deal with events of cre-
ative destruction.
It is important to remember that creative destruction and complexity
are one and the same. If two people are describing a pencil that occupies the
same physical space and is identical in every way, we conclude that it is one
pencil, not two (the “identity of the indiscernible” for philosophy fans). Cre-
ative destruction, in the eyes of the economist, is the process of one product
being substituted by another due to competitor creativity. The complex sys-
tems management theorist would describe that as the outworking of com-
plexity, or environmental change. Either way, they’re basically talking about
the same thing. The operating world has changed. Companies with the lux-
ury of effectively emulating some of those “100-year companies” are few and
far between. As Figure 1.1 shows, only a few are tied to product families with
such sustainability.
The graphic illustrates just how few companies have products that can
last for 100 years. Studying such companies is of little value if your company
is engaged with competition that creatively destroys its product offerings
Why Companies Win 7
and re-creates them periodically. The real area of interest should be in those
companies that are continually re-creating themselves and their products to
thrive in an environment of change and uncertainty.
If we set aside the companies that are tied to long demand cycles and
look only at them, we will find that they are generally characterized by the
term stability. Stability-based strategy can only survive in a market sector
that is, in fact, stable. Richard Foster and Sarah Kaplan, in their book Cre-
ative Destruction, explain that, with rare exceptions, companies are operat-
ing in environments of change. The driving forces of creative destruction
are continually changing the rules of the game. The subtitle of Foster and
Kaplan’s book makes the point quite well:
“Why Companies That Are Built to Last Underperform the Market”

—Taken from the subtitle of Creative Destruction, by Richard Foster and Sarah Kaplan
As a consultant, I have conducted research on a number of the compa-

nies that have been cited as 100-year companies. In one case, I conducted an
extensive diagnosis of the firm. I concluded that the firm was operating at
60 to 80 percent of its profit potential and would continue to do so unless it
dropped some of it’s “founding practices.” The issues are often hidden to
the casual observer. With that in mind, I would like to introduce you to Cor-
porate IQ.
CORPORATE IQ
Foster and Kaplan got a lot of things right in their book. The process of
creative destruction, or environmental change and complexity, has every-
thing to do with the profit-effectiveness of a company. It is important to re-
member that the commonly understood idea of “100-year companies” is
built around the few that happen to be competing in a product family sector
characterized by stability.
It is important to note, however, that a few companies are not tied to
such a long demand cycle yet continue to thrive. GE, for example, continues
to thrive but is not tied to product families with 100-year demand cycles.
GE’s success is tied to the ability of the firm to adjust proactively to contin-
ued cycles of complexity or creative destruction over long periods of time.
FIGURE 1.2 Companies with 100-Year Product Demand Cycles
Context-Driven Strategy
Organization
Excellence- Character
Driven
Companies that will last 100 years are a unique blend of context-driven at-
tributes as well as having areas with only one standard: excellence. Strategy
and organization must align with context, while corporate character must
be unmovable and constant in all circumstances. Figure 1.2 illustrates those
realities.
In developing the Corporate IQ scale for companies, I decided to use a
scale of 1 to 170. My hypothesis was that low IQ companies would not per-
form well and high IQ companies would. The real breakthrough in the re-
search was simply that I got it right. I studied 15 major companies, some top
performers and some low performers, and across the board, the higher the
IQ, the higher the ROI.
I based my work on that of H. Igor Ansoff, who first developed the idea
of the role of management in equipping an organization with the complex-
ity (and speed of change) to suit its competitive environment. Ansoff’s work
measured only 8 areas of the firm (I expanded his work to include 17 areas),
but the results of the 1,000-plus studies conducted under his supervision
were phenomenal. Companies that matched their context tended to have
ROIs of 100 to 300 percent higher than their unmatched counterparts.
It is important to note that strategy and organization must match con-
text. Context can and does change. At the same time, organizational char-
acter is measured against an unchangeable standard of excellence. The
research conducted by Ansoff and his associates was monumental to say
the least. They conducted over 1,000 studies in almost every country in the
world, in almost every industry. No other strategic theory has such a body
of material to support it.
In 1992, after studying under Dr. Ansoff during my doctoral program,
I decided to continue the research around his model. The next decade pro-
vided additional insights into the validity of his concepts, especially when
the model was expanded into the Corporate IQ model. During that time, I
Why Companies Win 9
FIGURE 1.3 The Seventeen Broad Areas of Corporate IQ
STRATEGY ORGANIZATION CHARACTER

Marketing CEO attributes Values
Innovation Managers Ethics
Product-technology Culture Value of people
Product portfolio Formal structure Excellence rating
Quality and process
Corporate strategy
Attitude toward change
Internal technology applications
was able to study numerous global competitors, most of them Fortune 500
firms. Additionally, I worked with hundreds of CEOs at smaller companies.
The results were overwhelming. I have never found a low IQ firm that was
performing in the upper 50th percentile of its industry segment. The con-
verse is true. I have never found a high IQ firm that was performing in the
lower 50th percentile of its segment.
Not only have I found that the model accurately predicts future organi-
zational profits, it further predicts corporate crisis, including bankruptcy.
In the case of some of those 100-year companies that have been featured in
the books, I have also found that many are operating well below their opti-
mum level of performance. The reason is simply that the firm’s leadership
has chosen to stick with a strategy of stability instead of being open to adapt-
ing to environmental opportunity.
Corporate IQ focuses on three broad areas of the company: strategy, or-
ganization, and character. The failure to match any aspect of the first two
with the organization’s competitive context will result in diminished profit.
The failure to match the character standard will also result in decreased
profit versus what the firm could have achieved.
EDS
To better understand Corporate IQ, it might be beneficial to take a look

at a number of different companies. The first we will consider is EDS. EDS
is a company that has been through a number of drastic changes in its com-
petitive environment.
Under the leadership of Les Abersol, the company built a massive, un-
responsive bureaucracy. The company’s strategy suffered due to the com-
pany’s lack of focus on being a strategic first mover, and the culture of the
firm became a risk-averse profile. When Abersol left the firm, the external
environment had become highly competitive and was characterized by high
rates of change and complexity. His leadership had created a bureaucratic
organization that was unable to deal with the level of continual creative de-
struction that was occurring in the firm’s various competitive segments. At
the time of Abersol’s departure, the firm’s strategies were problematic at
best, the firm’s organization was equally f lawed, but the firm’s character re-
mained intact. Enter Richard Brown.
Brown brought in an era of executive intimidation. In many ways, his era
destroyed what was left: the firm’s character. No longer were individuals val-
ued or appreciated. The only thing that mattered was “making the quarterly
numbers.” The intimidation factor that Brown brought to the company did
enhance the level of strategic aggressiveness for a time, but the ability of the
organization to support high levels of creativity and risk taking was sum-
marily destroyed. Additionally, the character of the firm was destroyed. Peo-
ple no longer viewed their jobs as important and began to act accordingly.
When we look at the decline of EDS, what we see is a systematic destruc-
tion of the ability of the firm to deal with environmental uncertainty. The
firm’s strategy lacked appropriate aggressiveness, the organization was no
longer able to support entrepreneurial efforts, and the character of the or-
ganization was destroyed.
AMERICAN AIRLINES
One of the things that Bob Crandall brought to the airline industry was
his ability to manage the numbers. As American left the regulated environ-
ment to enter the unregulated environment, Crandall supervised the devel-
opment of systems that would allow him to manage the entire airline “by the
numbers.” The result was what might be called “acceptable neglect.” Cus-
tomer service standards, previously exceptionally high, were modified in
the interest of profit in the new competitive environment. The old AA cul-
ture of maximizing the customer experience was replaced by a numbers-
driven approach of acceptable neglect. Analysts were able to compute the
millions of dollars in savings that resulted from allowing customers to expe-
rience longer wait times on the phone. It all became a numbers game.
While the airline’s strategies remained well suited for the environment
or competitive context, the organization steadily became unable to support
Why Companies Win 11
entrepreneurial behavior (a critical behavior for times of uncertainty). More

importantly, the organization’s character went from one that valued its peo-
ple to one that had little regard for people. It was all about numbers.
Problem was, American had competitors that placed extremely high
value on their customers and employees. More importantly, those competi-
tors understood the critical competitive differences provided by such ac-
tions. As American’s organization and character declined, its competitors
got the message and began aggressive campaigns to create highly adaptive
organizations and character that placed a high value on people and ethical
behavior.
In April of 2003, American’s unions were given an ultimatum that in-
volved significant pay decreases if the company was to have a chance of
avoiding bankruptcy. Just one day after the pilots, ground workers, and
f light attendants narrowly approved the new contract agreement, the press
revealed that the board of American had voted to spend millions to guaran-
tee the retirement income plus future bonuses of the senior managers of
American in the event of bankruptcy.
Unquestionably, the character of the organization was damaged. One of
the key components of organizational character is trust. Intentional or not,
what the board of American did was to confirm the lack of trust that existed
among American’s various labor groups.
Strategy, organization, and character: strategy and organization must fit
the competitive environment, and character must be unquestionable if an
organization is to succeed on a long-term basis. In environments of low lev-
els of competitiveness, deficiencies (lower Corporate IQ) are less destructive
than when competition and complexity is extremely high.
THE OTHER (AND A MOST

IMPORTANT) VARIABLE: CONTEXT
I have alluded to the idea of context in a number of ways in this chapter.

Creative destruction is all about context. Context has to do with the variables
that are outside of the company. The creative, aggressive intervention of
competitors into a firm’s business segments usually changes the context in
with the firm is operating. Again, when we talk about complexity and cre-
ative destruction, they are basically the same things. When it comes to man-
aging a company, the forces of complexity and competition can be extremely
difficult to comprehend, because companies are subject to both global
FIGURE 1.4 Understanding the Global Competitive Context or Environment
The Ten Forces: Market, Technology, Economic, Governmental, Legal, Media, Climate,
Moral, Psychological/Sociological, and Ideological
Competitive Segment: Competitor marketing and innovation
Competitive Forces
Specific competitive forces
that can cause creative
The Ten Forces destruction events in a
Global forces that competitive segment.
affect the overall
operating environment
of the firm.
The Company
A complex system
operating within two
major complex systems.
forces as well as competitive forces. Consider Figure 1.4, which reveals those
challenges.
John W. Sutherland suggested that companies are generally operating
in one of four environments. In his exceptional book, Strategic Renaissance,
Evan Dudik did a great job of summarizing Sutherland’s idea.
1. Deterministic (highly predictable)

2. Moderately variable (mostly predictable)
3. Severely variable (generally unpredictable)
4. Indeterminate (totally unpredictable)
Dudik argues that strategy must be contingent, or based on, the predict-
ability of the firm’s context. We can see that Sutherland provides us a way of
understanding context by framing it in terms of predictability. Notice that
we can apply Sutherland’s ideas in relation to both the global forces (the ten
forces) as well as the competitive segment forces (marketing and innovation
forces that specifically relate to our product portfolio). In that context, we
can immediately see the impact of the 9/11 tragedy (ideological forces) on
the airline business. At the same time, we can see that competitors’ activities
in the airline segment will have a direct impact on an airline company as well.
Strategy and Organization Must Fit Context
STRATEGY, ORGANIZATION, AND

CHARACTER AT SOUTHWEST AIRLINES
In looking at Sutherland’s view of context, it is clear that global forces
as well as competitive forces have drastically affected the airline segment. As
some carriers go through bankruptcy, the reduced debt load and revised la-
bor agreements significantly enhance their competitive abilities. That brings
us back to the question: why do some companies last 100 years while others
do not? Southwest Airlines helps us to understand the answer.
In the highly turbulent environment of the early 2000s, Southwest’s strat-
egy has consistently challenged the competitive environment with creativity,
innovation, and a first-mover marketing mentality. To put it bluntly, their
strategies have been ideally matched with the “indeterminate” nature of their
competitive environment. Let’s look at the second broad aspect of the firm,
the organization, to see how it has functioned during the same time period.
Southwest’s leadership has maintained a high level of empowerment in
their relationships with their people. Their culture continues to be highly
adaptive. An analysis of the Corporate IQ of Southwest will reveal that the
firm’s overall Corporate IQ is above 160. That puts them in an elite club
with a few exceptional companies.
There is an important point that must be understood. Notice that South-
west’s strategies must be fast, creative, and aggressive. Notice as well that the
organization itself is a carefully designed “entrepreneurial support system.”
Without the organization in place to support highly creative marketing and
innovation, the strategies would fail. I hope your alarms are going off at this
point, because this example reveals one of the most important aspects of or-
ganizational leadership: the firm is a complex system operating in a com-
plex environment.
Complex Aggressive Poor Poor

Environment
➪ Strategy
➪ Organization ➪ Performance
Notice that Southwest Airlines can maintain a highly aggressive strategy

because of the speed at which the organization can execute. Without the cul-
ture, leadership, structure, etc. in place, the company would enter a stage of
decline.
If the organizational capabilities are the support system for corporate
strategy, the character of the firm is the foundation that supports both. Or-
ganizational character provides a firm with two critical competitive ingredi-
ents: the best people available and stability. Some have criticized firms like
Southwest because of the high level of devotion that their employees have
for the firm. Such criticism is ill founded.
In writing my 2002 book, More Than a Pink Cadillac, the leadership story
of Mary Kay, Inc., I was provided extensive access within the firm. One of
the leadership keys that came out of that research was, “Seek the best for oth-
ers.” Mary Kay Ash used to call that precept “golden rule management.”
Corporate character deals with the firm’s values, ethics, value of peo-
ple, and commitment to excellence (leadership, product, and customer rela-
tionships). One of the values that exceptional companies hold is integrity.
They also realize that managing to the quarter often results in treating em-
ployees as “disposable assets.” Let’s be honest: who wants to work at a com-
pany where you can’t trust management, there are no ethical standards, and
people are demeaned or, at best, unappreciated. The answer to that ques-
tion is simple: no one.
I keep a personal list of companies with high levels of character. I give
that list to my students who are considering job changes or to my traditional
students who are considering their options after graduation. One of my
graduate students recently called me after getting a job at one of those ex-
ceptional companies. “Unbelievable,” he said. “I’ve never been appreciated
so much. They do not tolerate dishonesty at any level in this company. I hope
I retire here.” During his 20-year career, the student had worked at a lot of
different companies. It was clear that he had never been treated with the re-
spect, value, and integrity that he had found at this company. Is it any wonder
that these exceptional companies, the ones with great strategy, great organi-
zation, and great character, will be those that will last 100 years? Is it any won-
der that most of these companies have over 300 applicants for every job?
At companies where strategy, organization, and character are appropriate,

I expect to find 300 applicants for every job opening.
In using Corporate IQ, it’s easy to pick winners and losers in a compet-
itive segment. For example, even if United Airlines were able to make some
of the basic changes in routes, airports, and aircraft to match those of South-
west, the firm would still not be competitive with their counterpart. They
lack the organization and the character to execute any strategy that requires
high levels of f lexibility and aggressiveness.
One of the ironies in the United situation is the relationships between
the unions and the corporation. The unions have been unable to give up
their traditional adversarial approach in dealing with the corporation, even
though the company is owned by the union membership. I would like to in-
troduce you brief ly to one of the smartest companies in America. Such
smart companies will be discussed in depth in the second half of the book.
THE TOP TEN SMARTEST COMPANIES IN AMERICA
The screening of companies for my research initially included a fairly

extensive list. It should be remembered that the Corporate IQ assessment
requires internal access to the organization, not just to its senior manage-
ment. In some cases, companies were eliminated due to low Corporate IQs.
In others, a number of exceptional companies chose not to be considered.
The final list of ten companies was compiled from those that scored quite
high on the Corporate IQ assessment.
It is important to remember that Corporate IQ is a measure of a broad
spectrum of corporate attributes. Rather than being based on a “best in
class” approach, Corporate IQ assesses how well a company’s strategies and
organization are equipped for their emerging competitive context. That
said, there is no such thing as “best practices,” only a best practice for each
different competitive context.
As I said, we begin by comparing a company’s strategies and organiza-
tion with its context. There is a third broad area that is assessed called “cor-
porate character.” In that area, it might be fair to say that there is only one
acceptable standard. Because factors like corporate ethics are included in
character, it makes sense that only one standard is acceptable.
The simple reality of Corporate IQ is that it measures the ability of a
firm to behave competitively and stay in the “profit zone” in every aspect
of its being. It includes marketing, innovation, CEO, leadership, culture,
technology, and other areas that are critical to long-term success. In the
area of character, the Corporate IQ assessment measures the various char-
acteristics of the firm that have to do with sustainability. Companies with a

high Corporate IQ will have appropriately aggressive strategies, highly
adaptive organizations, and an internal character of the highest standard.
They are winners simply because they are smarter than their counterparts.
In the next eight chapters, a short snippet of each company will be fea-
tured. The snippets are overviews of the companies and are designed to
bring out a few of the things these companies do well. As you will see, the
second half of the book is devoted to more extensive coverage of just why
these smart companies are so exceptional.
DELL COMPUTER: ONE OF THE TEN

When it comes to crazy competitive environments, Dell lives there. Al-

though Dell avoids the high cost research and development projects that
some competitors seem to enjoy, Dell is still able to be a first-to-market com-
petitor. The reason for their success is the company’s ability to deal with
both complexity and speed in their competitive environment.
It is fair to say that employees are the key to managing knowledge, which
is the basis of competitive success. Like other smart companies, Dell is clearly
both customercentric and employeecentric. The result of those approaches
is an organization that is highly aggressive when anticipating customer needs
and is also highly adaptive when responding to competitive thrusts.
If you were to boil it all down to one simple principle, Dell’s people and
systems allow it to find the sweet spot in the customer adoption process.
Sweet spot is a tennis term that describes the area of the racquet that pro-
duces the most power and speed. The sweet spot in the product diffusion
curve is the point at which a technology becomes a certainty. With a lot of
competing computer technologies hitting the market, Dell’s ability to pick
winners quickly makes them a really smart company.
CREATING A COMPANY THAT WILL LAST 100 YEARS
When it comes to creating a company that will last 100 years, there are
two options. You can get really lucky and choose a segment in which your
product will still be in demand in 100 years, or you can create a company
that is capable of continually matching its competitive context with its strat-
egy, organization, and character.
Keep in mind, I have never seen a company with a high corporate IQ
that was threatened with extinction. Certainly a number of the exceptional
companies have been in situations (like the airline industry) in which the en-
tire industry has been impacted with unexpected, frame-breaking change.
At the same time, what I continually see is that the high IQ companies will
continue to out perform the low IQ companies and emerge from periods of
extreme change as even better competitors. Usually, when such events occur,
the low IQ competitors go out of business.
I have never found a high IQ company that was in trouble.
When it comes to understanding leadership and why companies last 100

years, looking at some of the 100-year companies is not necessarily helpful.
Once we segment out the ones that were tied to products with long demand
cycles, we gain important insights. We should be studying the company that
is not tied to a product family with a 100-year demand cycle. It is important
to understand that the reason Southwest Airlines is doing well during the
post–9/11 airline industry meltdown is related more to its strategy-organiza-
tion-character profile than anything else.
Why are some companies a lot like the famous “Energizer bunny” in the
television commercials? Why do some companies just keep on going, while
others fade into oblivion? The answer to those questions is revealed in the
research on Corporate IQ. Regrettably, long-term sustainability is all about
strategy, organization, and character. I said “regrettably,” because manag-
ing a complex system (a company) in a highly complex environment is not
simple. Copying six best practices of excellence will not get you to first base,
if your organization is deluged with the uncertainty of a highly complex
environment.
But there is good news. If you are willing to challenge your current par-
adigm of strategy and management, it is possible to understand how to cre-
ate one those high IQ organizations that will last 100 years. By the way, if you
are willing to do that, not only will your company make a lot of money, but
you’ll also love working there. More importantly, so will your employees.
Happiness is a choice, and so is success.
I started this chapter with a somewhat startling claim about “companies

that are designed to last over 100 years.” What I said was that those compa-
nies will consistently have ROIs that are 20 percent higher than the two
other types of companies, the so-called 100-year companies with 100-year
products and those that will clearly not survive for 100 years. As you con-
clude this chapter, it is important for you to understand that I am making
that claim based on hard research. Simply put, companies with high Corpo-
rate IQs will consistently outperform their lower IQ counterparts to the
tune of at least 20 percent.
C h a p t e r
2
WHY COMPANIES FAIL
C ompanies fail because they have a

low Corporate IQ. That’s a proven fact. Underlying Corporate IQ is the idea
that the competitive environment is complex and may operate at varying lev-
els of complexity as well as rate of change. Simply put, not-so-smart compa-
nies operate without regard to their competitive context. As you will discover,
that is a death sentence for an organization.
If you look back in history, you will find that change has often been slow,
and except for a few interruptions, it has also been quite steady. The reason
for so much recent interest in Joseph Sumpeter’s concept of “creative de-
struction” is that those interruptions have increased in frequency. In fact, we
have moved from an environment in which disruptive events, or frame-
breaking changes in the “rules of the game,” would occur every few decades
to a world in which they occur every few months.
Cre a t i v e De s t r u c t i o n
Creative destruction is the result of scientific discovery, competitor innovation, or

both. The end result is that products and processes that formerly satisfied
purchasers’ needs are no longer viewed as relevant by the most important player
in the economic process: The Customer.
19
When it comes to customers, there is one company that has been able
to establish a new standard in its industry. Barely 20 years old, Luxottica Re-
tail (Lens Crafters, Watch Station, and Sunglass Hut) has become one of the
top ten smartest companies in America.
LUXOTTICA RETAIL: ONE OF THE

TEN SMARTEST COMPANIES IN AMERICA
When you took your last job, were you told that you could earn the op-
portunity to go on a “mission trip”? Chances are, you were not, unless you
were applying at one of Luxottica Retail’s companies: Sunglass Hut, Watch
Station, or LensCrafters. Associates have the opportunity to compete to be
one of the few people selected to go around the world each year as part of
the company’s “Gift of Sight” program.
As of 2004, over 3 million people around the world have received eye
exams and/or glasses from one of Luxottica Retail’s volunteer associates and
doctors. In some cases, the recipients were able to see for the first time in
their lives.
Luxottica Group Retail is an NYSE listed company (NYSE: LUX). The
retail division began in the United States just 20 years ago. A group of exec-
utives wanted to create a company that valued its people and was focused on
excellence. They chose the brand LensCrafters. One of the things that the
Luxottica leadership has realized is that their worldwide charity projects
change their people. By helping the less fortunate, their people become
even more customer focused.
The result is a group of companies with the lowest employee turnover
rate in their industries. It has also enjoyed a stellar 20 years of earnings and
revenue growth.
In many ways, Luxottica Retail is driven by its employees. In one series
of meetings, the Luxottica Retail leadership team was challenged to change
the company’s values to include “uncompromising integrity.” It was not a
case that the company did not already hold that value; it was a ref lection of
the employees’ existing beliefs about the company. They felt it was impor-
tant to emphasize the importance of uncompromising integrity in every as-
sociate’s dealings with vendors, customers, and, of course, the recipients of
the Gift of Sight program.
A philosophy within Luxottica Retail drives the idea of challenging ev-
ery standard with a better one. It is prevalent at the top as well as the bottom
Why Companies Fail 21
FIGURE 2.1 In the 1800s and Early 1900s
Creative Creative
Destructive 50 Years Destructive
Event Event
In the early 2000s
Creative Creative
Destructive 12-18 Months Destructive
Event Event
of the organization. Luxottica Retail is one of those smart companies that

realizes that great strategy can only turn into profit when it is supported by
a great organization that lives the highest ideals of corporate character.
Companies like Luxottica Retail will do extremely well regardless of the
business they are in. They are people-focused organizations that deliver con-
sistently high customer service. Some, unlike Luxottica Retail, lack the ability
to deal with the chaotic changes that periodically hit almost every industry.
Think about it. In the 1930s, if you were in the radio manufacturing busi-
ness, you didn’t have a lot to worry about. Only in the 1940s did an event of
potential creative destruction—television—begin to impact the business. If
we look back at history, what we discover is that creative destruction events,
or so-called “frame breaking change,” used to occur rarely.
Between early 2001 and late 2002, the following events rocked the world:
• Terrorists reached a new low in the events of 9/11, which precipitated

a worldwide recession.
• The Enron scandal and other ethics scandals rocked global stock
markets.
• The Internet and technology bubble of the 1990s collapsed and inves-
tors had a hard landing.
As Figure 2.1 illustrates, in past centuries, companies often had a long

time to adjust to change. A number of things happen when the creative ef-
forts of competitors (or other forces, such as terrorists) precipitate a creative
destruction event.
• The rules of the game change.

• The company’s rules of engagement (must) change.
This leads us to the underlying issues related to why companies fail.

Management philosophy over the past century has been, and continues to
be, consumed with linear thinking or “sameness.”
Here’s what I mean. When was the last time you heard a new CEO take
over a company and say, “We’re going to divest ourselves of slow-growth, low-
profit products and move to high-growth, high-profit segments regardless of
where we have to go.” Of course you haven’t heard a new CEO say that. What
you have heard is this: “We’re going to refocus on our core business.”
Allow me to translate this: “We’re going back to what we used to do.”
Does that make any sense? It might, in some cases, but if the rules of the
game have changed and the rules of engagement have changed, getting back
to your “historic competencies” will only accelerate your losses. That simply
makes no sense, yet we hear such comments almost weekly from new CEOs
who are in exactly that situation.
Management, I often say, is all about philosophy. How you think is what
you do. Whatever your management philosophy, that will drive your behav-
ior. It’s the philosophies behind most management theories that really
explain business problems. When you get down to it, six ideas underlie
management thinking as it has progressed to its current state. They are the
following:
1. Equilibrium theory
2. Complex adaptive systems
3. Emergence
4. Excellence
5. Creative destruction
6. Complex dynamic systems
To understand how managers think and why companies fail, it is impor-

tant to understand each of these approaches. I will confess in advance, some
will seem a bit silly. At the same time, it is important to remember that best-
selling books have been written about most of these ideas. Following is a
brief explanation of each of these approaches to management and corpo-
rate strategy.
Equilibrium Theory
Equilibrium theory is a great economic theory. It’s been around for a

couple of centuries, and the entire idea of supply and demand came from it.
Included in equilibrium theory is economist David Ricardo’s idea of the
“theory of comparative advantage.” Ricardo concluded from his studies that
each country had a unique set of attributes that meant that they were well
suited for a specific group of industries. For example, some of the countries
in the areas around Thailand and Laos were especially suited to grow rice.
The climate was right, and cheap labor was available. Others would be at a
disadvantage in competing with those countries. Thus, Thailand has a “com-
parative advantage” over its competitors when it comes to producing rice.
When the management theorists of the 20th century studied Ricardo’s
theory of competitive advantage, many jumped to the conclusion that
Ricardo’s ideas could be applied metaphorically to management theory.
They advanced the idea that each company had a unique set of assets and
attributes that gave them an advantage over others in a specific industry seg-
ment. The key, they hypothesized, was to keep the company “in the box.”
This is sometimes called a “focus” strategy. The idea is to operate where you
have a competitive advantage and to avoid competing in segments where you
are at a competitive disadvantage. To make sure that everyone in the com-
pany stayed in the box, the theorists developed the idea of the mission. The
purpose of the mission was to make sure that the company focused on its
unique area of competitive advantage. In other words, the company had to
stay in the box to be successful.
The purpose of the Mission Statement is to keep the company “in the box,” so that it will
not succumb to temptation to compete where others have competitive advantage.
Over the years, it became obvious to many in the management field that
adapting the idea of the “theory of comparative advantage” made little
sense. Further, there really do not appear to be things like “core competen-
cies” and sustainable advantage. The competitive world is much too complex
and changes much too frequently for that approach to managing a company
to be logical. The reality of creative destruction renders any supposed ad-
vantage unsustainable.
In the 1990s, a number of those who rejected the idea of a linear world,
as espoused by the equilibrium theory crowd, concluded that the world was
much more complex than previously thought. So they decided to focus on
the idea of nonlinear, or complex, systems thinking. There were two differ-
ent thoughts (at that time) on complexity. One held to a “biological” view of
the world, and the other took on what I call an “emergence” view of com-
plexity.
Biological or Ecological Management
This group of people decided that the business world is metaphorically

identical to nature (as they saw it). They decided that Charles Darwin’s con-
cept of evolution was an appropriate metaphor for the complex system
called business. Behind the idea of biological management is the assump-
tion that an invisible “force” of reality causes systems to behave in a certain
way. Those who hold this idea of the invisible force suggest that, just as in
nature, organizations mimic organisms by upward evolution. The “survival
of the fittest” results in an upward spiral of increasing complexity and intel-
ligence.
In the scientific world, Darwinism is difficult to support. Mutations, for
example, never result in an increase in complexity. In fact, mutations always
decrease the complexity of an organism. Charles Darwin himself recognized
that there is no fossil record evidence to support the hypothesis that one
species can become another.1 (So much for the idea of kissing a frog that
promises to become a prince.) Tragically, instead of adapting to changes in
the environment, over 100 species cease to exist every year.2
At the same time, the idea of biological management makes little sense
for the business manager. There is no empirical evidence to support the idea
of “self organization” as hypothesized by those who support the concept.
Emergence
In 1957, Herbert Simon suggested that the human mind’s ability to

comprehend the complexity of a system was significantly limited when
compared to the actual complexity of a system. Thus was the term bounded
rationality was coined, meaning that the human mind cannot comprehend
the numerous levels of complexity that exist in a system.
Two theorists in particular adapted Simon’s idea and applied it to the

business arena: Henry Minztberg3 and Ralph Stacey.4 Mintzberg and Stacey
avoided the trap of biological management and chose to focus only on the
idea of complexity and bounded rationality. Rather than assume a biologi-
cal metaphor, Mintzberg and Stacey suggested that issues can only be man-
aged after they have occurred. In other words, due to the mental overload
caused by bounded rationality, any attempt to plan for the future is insuffi-
cient. The result of their thinking is that “emergence” is the proper philo-
sophical paradigm. That is, “wait until something happens” is the best way
to manage an organization.
Obviously, emergence is just one aspect of organizational governance
and one way to make sure that the firm is prepared to deal with the surprises
that come from complexity. In fact, the best companies are those that man-
age both the present emergent system as well as the future. It’s simply a
“both” situation. Smart companies and smart leaders understand that they
must manage the future as well as the emergent discontinuities of the
present.
Often, managers become uncomfortable with the idea of constant
change. Research on change reveals that human beings generally do not
like it. Many seek to accomplish only superficial change, while at the same
time sticking with the firm’s historic competencies. I call this approach the
“excellence” approach.
Jim Collins and Jerry Porras make an excellent point about this ap-
proach.5 It is possible to conclude that all excellent companies have at least
one thing in common: a building. They have a lot more things in common:
restrooms, doors, copy machines, etc. Their point is that descriptive statis-
tics like the above may appear to shed light on why companies achieve sus-
tainable performance, but in reality, they are not valid relationships. The
problem is, people like them.
In fact, book publishers will tell you that if you can write a simple book
about “best practices” or “excellence” with a list of five to seven keys, you
may have a bestseller. You see, “excellence” infers that we can keep on focus-
ing upon our historic competencies—that we can correct our corporate de-
ficiencies without having to think about change.
I want you to think back a few pages. Remember the chart I drew that
showed how often creative destruction events occurred in past centuries? Do
you also remember the difference I pointed out in just the years 2001 and
2002? That’s the problem with excellence. Not only does it allow the firm to
stay in its old historic competencies rut, but it makes sure that you avoid
meaningful change. Simply by looking at the realities of the frame-breaking

changes of 2001 and 2002, it immediately becomes apparent that most com-
panies have to think about being something entirely different on a more fre-
quent basis.
That leads us to a new idea called “next practices.” The concept that a
firm needs to involve itself continually in creating the next practices for its
industry segment makes a lot more sense than trying to copy something that
someone else has done. After all, we usually have no basis in fact to support
the copying of a practice.
This leads us to the fifth concept of business thinking. That concept,
which I have previously introduced in this chapter, is called creative destruc-
tion.
Creative Destruction
In the first half of the 20th century, as the management field was in its
infancy, an economist named Joseph A. Schumpeter made some astounding
comments about equilibrium theory. He said that the idea had some merit,
except that the periodic creativity of entrepreneurs brought about the de-
struction of the existing equilibrium and established an entirely new system
of competition.6 What he hypothesized is that the creative destruction of
competitors changes the rules of the game. Again, when the rules of the
game change, competitors must change their rules of engagement.
To recognize the reality of Schumpeter’s ideas as they apply to business,
we need only to look at the years 1900 to 2000. We can observe two things
about that century. First, it was characterized by a number of frame-breaking
shifts. Second, the frequency of frame breaking or creative destruction
events accelerated each decade. By the end of the century, such events were
rapid and filled with surprises.
If you doubt this, consider medicine, banking, pharmaceuticals, office
products, retailing, learning, or almost any other product or activity at the
beginning of the century. After 100 years, nothing was even remotely the
same.
One of the reasons that we should pay a great deal of attention to the
idea of creative destruction is simply that it is true. When we look at the his-
tory of businesses and industries, we see creative destruction events. Cre-
ative destruction destroys the existing system in favor of a new system of
competition. The fact is, creative destruction is reality. The problem is, now
FIGURE 2.2 The Ten Forces Model
Fast
Speed of Change
(Market and
Technology Forces)
Slow
Low High
Complexity
(Economic, Sociological, Psychological, Media,
Ideological, Climate, Governmental, Legal Forces)
that we understand that it is reality, what can we do about it? How do we un-
derstand the new rules of the game, and how do we know what new rules of
engagement our company should deploy?
Interesting isn’t it? Of the first five ideas of how the world works, only
one of those I’ve discussed has any validity when we look at the world in gen-
eral. Global business enterprises have spent a great deal of time and money
on management approaches that simply do not work. I’m going to address
this issue at the end of the chapter, but first I’d like to discuss the last of the
six ideas regarding how the business system works.
Complex Dynamic Systems
Earlier, I mentioned the work of H. Igor Ansoff. I was fortunate in my

business studies to have the opportunity to study under Ansoff, the recog-
nized “father of strategic management” and, in my opinion, the top strategist
of the 20th century. It was Ansoff who introduced me to W.R. Ashby’s req-
uisite variety theorem. Ashby suggested that business systems involve two im-
portant dynamics: speed of change and complexity.7 In subsequent research,
I discovered a lot of support for his ideas. From that, I developed what I call
the ten forces model and the concept of complex dynamic systems.
The ten forces are those that affect the global environment. They affect
every aspect of the business community. In the case of a company, additional
issues must be considered: I call these areas the “competitive segment.” In
addition to the general effects of the ten forces, each competitive segment
FIGURE 2.3 The Company, Its Competitive Segment, and the Global Environment
Global
The Company
Environment
(Ten Forces)
Competitive Segment
in which a firm operates is subject to the specific creative or competitive acts

of other firms in that segment. As a result, the firm is a lot like a ship in a
storm. Not only does the ship’s captain have to deal with the effects of the
storm, but the changing currents also impact the ship’s path. To remain safe,
a skipper must account for both factors. The same is true for a company. The
CEO must ensure that the firm deals with the speed/complexity issues that
relate to the general business environment and, at the same time, deal with
the speed/complexity issues of the competitive segment.
Corporate leaders who fail to account for either the global environment
or the creative competitive action of opponents will usually end up failing.
The greater the degree of mismatch, or lack of strategic fit, the faster the
company will fail or the more money it will lose.
My research into both the ten forces and the idea of competitive seg-
ments supports the idea of complex dynamic systems. Complex dynamic
systems are an observable reality. That is not true of complex adaptive sys-
tems (Darwinism), emergence, or excellence. Equilibrium theory, when com-
bined with creative destruction, makes a lot of sense. At the same time, when
you combine equilibrium theory with creative destruction, you are really de-
scribing . . . you guessed it: complex dynamic systems.
Companies fail because their leaders fail to recognize the external real-
ity of complex dynamic systems. As a result, they don’t design an organiza-
tion that can operate at the speed or level of complexity that the firm will
face in both the global environment and the competitive segment. Let’s state
this in a more positive way: firms that are in strategic fit with their global
environment and their competitive segment will deliver creative destruction
to their competitors. Simply put, smart companies, those in strategic fit, are
consistent winners. Companies lose because they fail to fit the global envi-
ronment or segment into which they are moving.
Ram Charan and Jerry Useem’s 2002 article in Fortune concluded that
there are ten reasons that lead companies to fail.8
1. Slave to Wall Street

2. See no evil
3. Overdosing on risk
4. Dysfunctional board
5. Softened by success
6. Strategy du jour
7. Acquisition lust
8. Fearing the boss
9. Dangerous culture
10. Death spiral
Generally speaking, Charan and Useem got it right. At the same time,
rather than calling these the “ten big mistakes” that leaders and companies
make, it might be better to classify them as “ten symptoms.” All of these mis-
takes are rooted in leaders’ failure to understand the demands of the com-
petitive environment and what it will take to succeed in that environment.
Take a look at some of these issues and the problem becomes clear.
“Fearing the boss” is one example. The research shows that high-complexity
environments (those with high levels of uncertainty) require high levels of
trust, integrity, and empowerment. My research has shown that highly con-
trolling management severely impacts corporate profit in such uncertainty.
Chasing the “fad du jour” is another example that the firm’s leaders have
absolutely no idea what they should be doing. Take a look at what the aver-
age firm has endured in just the last ten years.
• A total quality management initiative

• A process reengineering initiative
• Downsizing
• Seven Habits training
• Open book management
• Change seminars
• Built-to-Last/Good-to-Great training (Collins and Porras/Collins)
• Six Sigma
• Execution seminars and/or training
Like the little old lady in the now famous Wendy’s commercial of years
ago, I have a question: Where’s the beef ? In other words, where are the sta-
tistical links between some of these teachings and profit?
I’ll let you answer that question for yourself. Keep in mind, each of these
ideas has a lot of merit. I routinely prescribe process reengineering to clients
that need shorter cycle times to serve their customers more effectively. Note
what I am saying.
• Understand the problem.

• Use the appropriate tool to correct the problem.
I would like to suggest that Dr. Seuss got it right. If you have no idea what
the real problem is, you probably have no idea of how to correct an organi-
zation’s profit situation.
When you know where things are out of whack . . .

then you know how to get things back in whack.
—Dr. Seuss
Most people never stop to figure out what is out of whack. In fact, the
very idea of figuring out what’s out of whack is foreign to most business
managers. Let’s take an honest look at how most companies’ CEOs deal with
bad quarterly profits. You are correct: they eliminate people. Did those peo-
ple cause the problem? No! Did they fail to take appropriate action when
they recognized that something was not right? No! In fact, the very people
who got downsized are often the same people who were screaming at the top
of their lungs, trying to get senior management’s attention about the very
problem that caused the decreased earnings.
Sydney Finkelstein, in his book Why Smart Executives Fail, lists “Seven
Habits of Spectacularly Unsuccessful Executives.”9
1. They see themselves and their companies as dominating the environ-

ment.
2. They identify so completely with the company that no clear bound-
ary exists between their personal interests and their corporation’s in-
terests.
3. They think they have all the answers.
4. They ruthlessly eliminate anyone who isn’t 100 percent behind them.
5. They are consummate spokespersons, obsessed with the company
image.
6. They underestimate obstacles.
7. They stubbornly rely on what has worked for them in the past.
Sydney Finkelstein has pretty well nailed it. Notice that he describes
leaders who fail their organizations as egotistical (versus humble), internally
focused (versus externally focused), and symptom obsessed (versus problem
driven). Obviously, such behaviors turn companies off instead of on. That’s
exactly why those who try to focus on their historic competencies do not do
well in the long run. One of the ten smartest companies in America is South-
west Airlines. It does not take long to realize that they do business by an en-
tirely different set of rules.
SOUTHWEST AIRLINES: ONE OF THE

One of the anomalies in the airlines industry is Southwest Airlines. As

the only company in the industry to make a profit every year, for the last 30
years, Southwest stands alone. Some might say that the company has an ad-
vantage over its heavily unionized competitors. Actually, Southwest Airlines
is one of the most unionized companies in the industry. So what is South-
west’s advantage?
If there is one truism about Southwest, it is that from one day to the
next, things are never the same. At least, that is true about some things.
From the standpoint of corporate strategy and the organization’s ability to
adapt, things really are in a constant state of f lux. The ability to deal contin-
ually with the competitive need to change makes Southwest one of the
smartest companies in America. However, some really important things do
not change.
Corporate character at Southwest is extremely important. There is little
tolerance among the employee group as well as management when it comes
to changing corporate character. As a company that openly values the very
highest levels of ethics, that has a culture that thrives on a “challenge every
assumption” mentality, and that holds a commitment to valuing every em-
ployee of the firm, Southwest Airlines as a team does not want to change. In
fact, from the new employee all the way up to the chairman and CEO, they
like things the way they are.
Southwest Airlines thrives on strategies that set new standards of perfor-
mance and creativity. The organization fosters rapid responses to the turbu-
lence of the industry. Finally, their character is the foundation of their
ability to sustain admirable performance. Truly, they are one of the smartest
companies in America . . . and their profits show it.
WHY COMPANIES FAIL
It would really be nice for managers if we could tell them that the reason
companies fail is that they lose sight of their historic competencies or that
they get out of their mission box. It would be nice if we could take the five
or six keys from one of those excellence books and create a checklist that
would keep a company from failing. All of that would be great, but it would
not be real or true.
Companies fail because the firm’s management fails to match environ-
mental change with the organizational attributes. In short, the firm’s strate-
gies are no longer capable of meeting competitors’ challenges. Further, the
organization is unable to adapt to the creative surprises that competitors
thrust upon them. Finally, the firm’s managers allow the corporate charac-
ter to deteriorate. They simply no longer have the ethics or other character
components to foster trust and risk taking—critical factors for thriving in a
highly uncertain competitive environment.
By now, you have figured out that I am attempting to lead you systemat-
ically and logically toward an understanding of Corporate IQ. Research on
change tells us two things. First, most of us struggle a great deal to give up
an idea in favor of something different. Complex systems thinking is ex-
tremely different from what most of us are used to. Second, the research also
demonstrates that change is best achieved by taking small bites instead of
trying to tackle the entire concept at one sitting.
Corporate IQ is all about understanding root causes. On the one hand,
it involves the ability of an organization to anticipate the future competitive
environment. On the other, it involves the ability of a firm to respond to the
discontinuities that result from creative destruction events. On a basic level,
it deals with whether or not a company has the character, the ethics, and phi-
losophy of leadership that will sustain the organization. Although not sim-
plistic, it is the key to performance as well as sustainability.
One of the joys of my life is when I see someone grasp something that
can really benefit them. As I lead you to an in-depth look at Corporate IQ
in a few chapters, I hope that you will be patient as I attempt to build the
foundations of the concept. The outcome is a radical way of looking at the
role of the manager and how they can truly make a long-term difference in
an organization. If you want to know how to maximize profit and create one
of those 100-year companies, your patience will pay off. The journey to that
understanding begins with the three rules of strategy in the next chapter.
C h a p t e r
3
THE THREE RULES OF
LEADERSHIP AND STRATEGY
S mart companies create sustainable

success, and stupid companies do not. That’s what Corporate IQ is all about.
When you boil it down, smart companies are simply servants. They serve
their customers, shareholders, and employees. Smart companies differ from
their not-so-smart competitors in a number of ways.
• Smart companies are living, growing organizations. It’s important

that you do not mistake this statement as support for a “biological”
model.
• High IQ companies (leaders) understand that corporate ego trips end
in disaster. They have corporate humility and, as a result, understand
just how critical the customer, the people who serve the customer (em-
ployees), and those who risk their money (the shareholders) really are.
• High IQ companies last a long time. Their less than smart counter-
parts do not.
• Corporate IQ is sustained by corporate culture and by CEOs who un-
derstand their roles as enablers.
Research is revealing that underneath the success of every organization

is a complex set of attributes that either drive or destroy success. I have com-
bined all of that research into a composite whole, called Corporate IQ.
35
What I have discovered is simply that companies with high Corporate IQ

will consistently outperform those with low Corporate IQ.1
Some corporate founders were wise enough to ingrain a high Corporate
IQ into their firms. Over the years, those companies’ boards and their CEOs
have been successful in maintaining the firms’ Corporate IQ. Generally,
those who create high IQ companies have a very deep understanding of the
drivers of corporate performance and sustainability. It takes only one gener-
ation of board or CEO to destroy a firm’s Corporate IQ.
What does a high Corporate IQ firm look like? They usually have hun-
dreds of applicants for every job. They often earn “best to work for” recog-
nition. They often have an unusual ability to anticipate customer needs
(versus staying close to the customer). They also have a preoccupation with
excellence that permeates every aspect of their company. They are usually
the first to discover the future and the first to adapt to where the future will
take them. They care little about historic core competencies or competitive
advantage, instead focusing on what the firm needs to become to sustain
success. Rather than falling into the trap of focusing on any “core business,”
they allocate assets according to future attractiveness. They are not married
to any business or any product. They are committed to maximizing the
future prospects of their company, its employees, its shareholders, and its
customers.
Simply put, companies with a high Corporate IQ are committed to max-
imizing both today and tomorrow. And they make sure they never get off
track. One of the companies that maximizes today as well as tomorrow is
Costco Wholesale, one of the top ten smartest companies in America.
COSTCO WHOLESALE: ONE OF THE TEN

Can you imagine a company whose legal and real estate staffs diligently
review local construction laws, then makes sure that the firm exceeds all the
local requirements? Can you imagine an organization that argues with some
of the Wall Street analysts when they call for lower employee benefits and
salaries, trying to explain to them that taking care of their employees is the
right thing to do for the long-term benefit of its stock price? You do not have
to imagine such a scenario. All you have to do is take a look at Costco.
One would expect this much smaller competitor of Sam’s Wholesale
(Wal-Mart’s warehouse club) to struggle against its much larger competitor.
The Three Rules of Leadership and Strategy 37
Actually, the reverse is true. Costco consistently gets better results than its
larger competitor.
“It’s all about our people,” said executive vice president Richard Galanti.
He explained that Costco utilizes an aggressive strategic approach that in-
volves a consistent (and, I might add, fairly low) profit margin on products
and combines that with seamless processes. Galanti believes that Wall Street
often places too much emphasis on short-term profits, thereby failing to ap-
preciate that having higher wages and benefits leads to higher quality em-
ployees; lower employee turnover; greater productivity; and, ultimately,
higher long-term profitability. He believes that Costco is a rapid response
machine that is totally dependent upon its people. “That’s why we try to
make sure we hire and keep the best,” he said.
While competitors focus on making sure that employees do not qualify
for costly benefits, Costco goes to great lengths to make sure they get them.
For example, they pay for over 90 percent of each employee’s health, vision,
and dental programs. Most employees, with a few exceptions, qualify for
benefits. Unlike their counterparts in the retail industry, the average checker
makes over $40,000 per year, plus all those benefits, after 60 months with
the company.
Costco is truly one of the smartest companies in America. Their profits
and their growth show it. Strategy, organization, and character: that’s what
high Corporate IQ is all about. Costco’s got it all.
Corporate IQ is neither magic nor unfounded fad. Corporate IQ is
based on an extensive body of research that links corporate behavior and
performance. It’s all about maximizing organizational performance . . . and
existence. Most importantly, any leader can understand and apply it.
WHAT CREATES SUSTAINABLE SUCCESS?
On any given day, thousands of business people go to a bookstore or to

an online site and buy a business book. In almost every case, the motive
behind the purchase is to learn about profitability. In some cases, the book
may be about total quality or Six Sigma. Others might be about sustainabil-
ity or some type of scorecard or rating system. At the end of the day, the
objective is the same in all cases: creating organizations that enjoy sustain-
able performance.
One of the challenges that faces business theorists and managers alike
is bias or assumptions. As human beings, we intrinsically hate change. In
fact, we hate change so much that we will often deny that there’s a gorilla in
the boardroom in favor of not having to deal with the issue. When it comes
to management theory, and corporate strategy as well, we have the same
problem. We have grown quite comfortable with the gorilla in the board-
room. So much so, in fact, that we would feel lost without it.
The “gorilla” is management theory as it has existed over the past 100
or so years. When we get down to it, not much has changed. In fact, if you
pick up 100 books written about corporate strategy, they will all read and
look about the same. The problem? That gorilla—the idea that firms need to
focus on, amplify, and improve existing competencies.
This idea has taken many forms over the years, but it is always founded
on linear thinking. The concept is that each company has a set of sustainable
competencies that can be taken from history into the future. The result of
such thinking is comfort. We don’t have to think about changing or becom-
ing something different. We just have to become better at what we’ve always
done, regardless of the external environment.
Our basic human desire to avoid change has led us to stay on a path of
thinking that allows us to avoid change. That is why the idea of “total quality
management” was embraced in the 1980s. Rather than being radical and re-
quiring change, the goal became that of doing what we were already doing,
just better than we used to do it. Of course, the excellence movement also
appealed to that idea. Out of both came ideas like “best in class” and bench-
marking. Again, these ideas created a continuum of process and avoided
frame-breaking change.
The problems that companies faced in the late 1980s and early 1990s
created a great deal of cognitive dissonance for managers and theorists
alike. The idea of sustainable competencies did not seem to fit with reality.
In an effort to preserve the status quo of sustainable competencies, a num-
ber of people promoted the idea that the problem had to do with change.
The result was an avalanche of books, seminars, and speeches about change.
All the while, in most cases, these new ideas held on to the concept of sus-
tainable competencies. A few radicals even proposed that occasionally a
company might need to adapt its competencies. Business went through a de-
cade or so of change management seminars, and consulting firms estab-
lished change management practices.
In the 1990s, a few people began to challenge the gorilla in the board-
room idea. It seems that a few radicals thought that the problem involved a
thing called “complexity” in the environment. The term frame-breaking
change was coined. At that time, the management theory camp split and be-
came two camps. One clutching the old theory and its numerous adapta-
tions, and the other suggesting that even the economic theory that founded
management thinking needed to be abandoned in favor of one based on
complex systems theory.
CHARLES DARWIN EVOLVES AGAIN
This new group of theorists reasoned that the business environment

must be a lot like nature. So they borrowed from biology and physics and
adopted the ideas of complexity theory and chaos theory. Among the devo-
tees to the concept is Peter Senge, author of The Fifth Discipline. Accord to
the proponents of this view, organizations must be allowed to self-organize.
The result, they hypothesize, is an organization that will upwardly evolve.
Others have rejected the sustainable advantage view and come up with
different results. Henry Mintzberg and Ralph Stacey would agree that the
business environment is complex and as a result, uncertain. Rather than sug-
gesting a Darwinian approach, both believe that complexity renders the fu-
ture environment uncertain. As a result of that perspective, they believe in
“emergence.” As the environment dynamically changes due to complexity is-
sues, the firm must also continually adapt. This incremental adapting is
called emergence.
Complexity Yes: Darwinism No
I believe that the evidence is clear when it comes to complexity. The

business environment is complex and is continually changing. As a result of
that complexity, the organization must also be continually changing. At the
same time, there is no evidence that Darwinism or self-organization has any
merit. In fact, as you will see later in this book, it will become clear that it
has no validity. Similarly, emergence has troubles as well. Success belongs to
leaders and organizations that capture the future instead of wait for it to oc-
cur. After-the-fact behavior does little more than create a company that is a
great follower.
The manager or theorist in search of a way to create maximum sustain-
able performance may find a dead end. Yet, there are companies, and lead-
ers, who appear to reject the idea of sustainable competencies, Darwinism,
and emergence. In most cases, these are successful companies that appear
to create long-term sustainable performance. What is it that these compa-

nies and their leaders seem to do? Why are they able to adapt to frame-
breaking shifts and still keep on going? The answer is found in a term: mental
models.
HOW YOU THINK IS HOW YOU ACT
Thomas Kuhn, author of The Structure of Scientific Revolutions, offered

some important observations in his seminal work on mental models. Kuhn
concluded that people tend to be locked into their history of training and
experience. In fact, he concluded, scientists will often reject evidence they
discover that disagrees with their mental model, which is the result of their
training.
If the business environment is complex, and it is, then managers must
be constantly thinking about differences. The problem is, our minds tend to
work on the assumptions of sameness. Kuhn discovered that when a scientist
is confronted with hard evidence of difference, they will almost always reject
that evidence in favor of a view that supported their view of sameness. The
point is that we as human beings tend to reject information about our world
if it means we have to work hard to understand it. We embrace sameness.
There is, however, another reality with which we must deal. That is the
reality of the external world. Success in business management and strategy
has everything to do with a manager’s ability to discover the external truth
or reality of the business environment. Managers must learn to think in
terms of difference instead of sameness. Such thinking is not easy to accom-
plish, but it is critical to sustainable performance.
THE THREE RULES OF LEADERSHIP AND STRATEGY
Jack Welch established some stringent product portfolio requirements

as chairman of GE. One of those was the requirement that GE would divest
any business sector in which it was not one of the top three competitors. In
late 2002, when the appliances segment became unattractive, the word went
out that GE was going to sell its historic cash cow, the appliances division.
Most successful CEOs did not learn how to keep a company on top at a
business school. Rather, the cumulative effect of experience, intellect, and
intuition allows them to sustain success. In reality, the combination of expe-
rience and intellect creates very high levels of intuitive understanding in

some individuals. In a lot of cases, these select leaders tend to be natural
“systems thinkers.” That is, they possess the ability to observe complexity in
the business environment and make reliable inferences.
If you read interviews or books by this select group, you will find that
they share a distinct pattern of operating and thinking. After studying suc-
cessful leaders and organizations over a period of years, I have concluded
that this pattern of behavior can be summarized into three rules, or the
three rules of leadership and strategy. They are as follows:
1. Maximize what’s in the box.

2. Think and act out of the box.
3. Stay ahead of the curve.
As you will discover later in this book, the expression of these three rules
is somewhat complex. At the same time, the rules are critical for sustainable
success. In fact, they might be better identified as the CEO’s (or manager’s)
mission statement. With that in mind, consider the role each of the three
rules plays in leadership and corporate strategy.
Maximize What’s in the Box
It should surprise no one that most managers and executives have a

very simple focus in doing their job. In most cases, they focus on opera-
tional issues. They do so for a number of reasons. First, as already pointed
out, operational issues are comfortable and familiar. Managers like what’s
comfortable. Operational issues do not involve change, so that makes them
even more appealing. It is probably safe to say that most executives spend
over 90 percent of their time on operational issues.
What you will discover about well-run companies is that their leaders
do not do that. In fact, you will find that they spend their time balancing
their activities equally around the three rule areas. So what does rule #1
really mean?
First of all, in my opinion, great leaders tend to be great philosophers.
They are thinkers. In reality, management theory is nothing more than phi-
losophy anyway. It makes sense that the best leaders are the best thinkers.
The first rule is played out in an ability to create an organizational focus
on today. This is not a preoccupation with only today, but an ability to focus
on maximizing whatever the firm’s past innovation efforts have created for
you to market. Let’s be honest. You can’t change today. Today is all you have
today, so as a leader you have to find some way to create an organizational
focus on maximizing today.
That is most effectively accomplished with excellence. Be careful when
you think about this. Certainly excellence has to do with a “commitment to
excellence.” But it’s a lot more.
An organizational focus on maximizing today means that we as an orga-
nization must commit to excellence. If your job is sales, you must focus in
such a manner that you achieve excellence. If your job is managing others,
you must commit to leading others with excellence. Oops! What in the world
does that mean? That’s a new wrinkle, isn’t it?
Commitment to excellence also means commitment to organization.
Only people can be committed to an organization. No matter how commit-
ted the senior executive team is, without commitment of the rest of the or-
ganization, a company will not do well. That means that senior leaders must
focus on recognizing the value of every person in the firm, which brings us
to a couple of things that need to be understood.
First, the old definition of management, “planning, organizing, leading,
and controlling,” needs to be replaced. The reality of the complexity of com-
petitive environments requires a new way of thinking about the manager’s
job. As a result, I have proposed the following definition: “Management is the
leading of organizational learning, transformation, and performance.” That
definition harmonizes with the three rules of leadership and strategy. The re-
sult of that mental model is an organization that is capable of maximizing to-
day (rule 1), transforming (rule 2), and maximizing tomorrow (rule 3).
Notice as well that managing is now defined in terms of leadership.
Leading infers that there are followers. There is a truism about management
and leading. People have little commitment to those who manage them with
abrasive power. Organizational commitment to excellence can only occur
when people are valued, respected, and recognized by their leaders. That
may be why so many of the “best to work for” companies tend to be among
the highest performing companies.
In our 1998 book, The Significance Principle, Dr. Les Carter and I re-
vealed that an individual’s primary motivator is the need to be valued and
recognized. We also reveal that most of us build our personal significance
at the expense of others. Our conclusion is that senior executives must begin
by setting the example of valuing, respecting, and recognizing subordinates.
Then they must create a culture of excellence in which every person in the
organization is valued, respected, and recognized by their superior or peer.

The results of such practices can be phenomenal.
An organizational commitment to excellence in both corporate objec-
tives and in how people are treated creates an organizational focus that pro-
duces exceptional results. It gives the organization the ability to maximize
today without sacrificing tomorrow.
Think and Act out of the Box
We have all seen it happen. A speaker gets off on a tangent—an idea that
they really like—and then forgets their next point. That is what happens if
companies are obsessed with the gorilla in the boardroom. Because most of
us like feeling comfortable, we have grown comfortable with the gorilla in
the boardroom. We really like the idea of a corporate strategy that focuses
on what we used to do well, or our “core competencies” and our supposed
“competitive advantage.”
If the environment is complex and dynamic (notice I added dynamism,
or “speed of environmental change” to the formula), and it is, then success-
ful companies are never static. They are constantly changing. As I noted ear-
lier, some hypothesize that leaders cannot anticipate events in complex,
dynamic environments, so they propose that we “wait until something hap-
pens.” Obviously, such an after-the-fact strategy commits the firm to being a
consistent follower.
As a researcher for some high-tech international firms, I have found that
I often think a lot about the future of computing and telecommunications.
A few years ago, I concluded that the future in telecommunications and
computers would be in a device I called a FID or “fully integrated device.”
The FID is a device that combines cell phone, handheld computer, PDA or
personal digital assistant, and the World Wide Web. In a number of articles
that I wrote, I predicted that soft-switches (a new device manager for all
other technologies) would bring paging, office and home voice mail, office
and home faxes, cellular communications, and e-mail into one device.
By 2003, it was obvious that I was going to be right. My point is not that
I am any different from anyone else. I use what is called “systems thinking”
in my research to develop reliable inferences about the future. That means
that managers do not have to wait until something happens to formulate a
strategy for the future. Just like my understanding of the future of telecom-
munications, a manager can, and must, be engaged in thinking about the fu-
ture and how it will be different, not the same.
I was watching the new world champion bull rider being interviewed on
a local news network a few years ago. He had been on the rodeo circuit for
a number of years and had always been a consistent third or fourth in the
rankings. When asked why all of a sudden he became number one, he had
a simple but powerful reply: “I realized I had never made the commitment
to be number one. I made that commitment, and here I am.”
If we as human beings are obsessed with sameness and hate difference,
how in the world can we learn to think and act out of the box? The answer
is commitment. We have to learn to break a habit—and a comfortable one at
that. We have to make a personal commitment to excellence in that area, and
further, we have to expect those around us in the organization to make a sim-
ilar commitment.
Unless we lead and encourage others to think and act out of the box, we
are failing as managers. In studying some of the best leaders of the past cen-
tury, I have found that ability is one thing they almost all have in common.
They expected their subordinates to act and think out of the box.
Do you realize that the failure to think and act out of the box leads to
corporate failure? When we look at some of the great companies that have
gone from the top to the bottom over the past 100 years, what one thing did
they all have in common? The answer: the environment changed, but they
didn’t. That was especially true when the total quality movement pounded
U.S. companies in the 1980s. It was again true in the 1990s and continues to
be true in the 21st century. Companies that fail to adapt in harmony with
the external environment cease to exist. Companies that fail to adapt and
anticipate environmental shifts are all lacking when it comes to thinking and
acting out of the box. It’s just that simple.
Dick Bartlett, vice chairman of Mary Kay, Inc., tells the story of how his
company dealt with the Internet in the late 1990s. “We knew it had the po-
tential for changing the business landscape,” he says. “At the same time, we
also recognized that our company’s business model had to make sense if we
were going to effectively utilize this new marketing medium.”
Bartlett calls that time period the “dot-con” era. He believes that a lot of
fortunes were made at the expense of investors who thought that the Inter-
net alone would make an idea successful. The outcome reveals the wisdom
of Bartlett’s position and the necessity of having a good business model be-
hind any marketing medium. Few people realize that today, Mary Kay, Inc.
is in the top five worldwide among e-business providers.
By thinking and acting out of the box, the Mary Kay organization was
able to take a great business model and make it better. They had to rethink
their entire recordkeeping, communications, and distribution system. By ap-
proaching the opportunity with an out of the box attitude, the firm was able
to capitalize on the opportunity. Incidentally, a number of Mary Kay Inc.’s
competitors were not so fortunate.
Stay Ahead of the Curve

Ask any executive at an exceptional company what they fear, and you
will discover it’s the future. Bill Gates, chairman of Microsoft, said he feared
the next guy coming down the road with the replacement for his software.
Andy Grove, former chairman of Intel, put it simply: “I’m just paranoid.”
Great leaders have an ability to continually live in three worlds at the
same time: maximizing today, thinking and acting out of the box, and staying
ahead of the curve. In the context of my definition of management, great
firms and great leaders are always committed to excellence in maximizing
today, changing the firm for tomorrow, and anticipating the future. In con-
trast to their peers at companies going into stagnation, these people are bal-
anced in their focus. They are always obsessed about all three areas, not just
about present operations.
Remember my point about the significance principle and how people
are valued, respected, and recognized? Great leaders rarely discover the fu-
ture. Their people do. That is why operationally oriented control freaks do
not last very long at most companies. They kill off the creativity and desire
to discover the future in their organization. Inside every organization is a
group of “sticky note” people. Remember the 3M guy who discovered the
sticky note that has now sold in the billions? That product was not invented
by a CEO; it was enabled by a CEO.
Let’s deal with an issue that has been brought up in some circles about
CEOs. Some suggest that great organizations are not necessarily led by char-
ismatic, inspirational executives. To put it another way, it doesn’t take a char-
ismatic leader to be great. In the strictest sense, that is true. At the same
time, those same people tend to diminish the importance of the CEO in
achieving success. Nothing could be further from the truth.
Sustainable success is never the result of one component. However, suc-
cess can be killed by one component, such as the CEO. Among companies
that have been recognized for their sustainability, there is a common thread.
The founder of the firm established a strong culture that focused on three
things.
1. Maximizing today
2. Thinking and acting out of the box
3. Staying ahead of the curve
In almost every case, those companies have had a succession of CEOs

who understood that their job was one of enabling the company to focus on
those three areas. In almost every case, the succession of CEOs maintained
the founder’s commitment to valuing, respecting, and recognizing the peo-
ple in the firm.
What about the firms that have lasted 100 years or more that don’t pos-
ses those qualities? They do exist, you know. Those organizations must be
recognized and understood to comprehend sustainable success. There are
three types of firms that tend to last a long time.
1. Companies with single products that are tied to a 100-year plus de-
mand curve
2. Companies that established and maintained leadership in a product
family with a 100-year plus demand curve
3. Companies that were created with a high Corporate IQ and have
stayed at that level
In the first instance, some companies are simply lucky enough to be tied
to a product that will be in demand for 100 years or more. The firm’s
founder, due to personal interests and circumstances, decided to enter a
business that had a demand cycle in excess of 100 years. End of story. In a
number of such cases, the firm does not have a high Corporate IQ. In fact,
the market or channel control that the current management of the firm has
allows them to break a lot of the Corporate IQ rules and still exist. At the
same time, if a frame-breaking shift occurs in the firm’s market, one should
not expect the firm to do well in the new environment. The firm might not
even survive.
It is important to avoid thinking in terms of exception. These are rare
companies, not necessarily good ones that enjoy an inherited position. At a
number of these companies, people are devalued, and there is little focus on
future excellence. They do exist, but their practices do not create sustain-
able success for companies without their unique position of market control.
The second type of firm is almost identical to the first, except that they
are tied to a product family that has a 100-year or more demand cycle. These
firms can use channel or distribution control and massive assets to remain
competitive in their market segment.
In both cases, it is important to understand that the practices of these
companies are not necessary good or profitable for companies in complex,
highly competitive environments. Generally, these “old line” companies en-
joy a branding advantage as well. It is possible to create brand power, but it
costs a lot of money. It takes a lot of money to replace a brand that has been
around for 100 years.
That brings us to the third type of firm. High Corporate IQ organiza-
tions thrive regardless of product demand cycle. These firms have the ability
to become continually something different. Don’t get me wrong: if you have
the opportunity to attach your firm to a 100-year demand cycle, you would
be terminally stupid not to take advantage of an opportunity like that. The
reality is, however, those opportunities come along only every 50 years or
so. That leaves the average manager with the task of being good. That’s the
only option for most of us.
The point is, don’t fall for the exception. Sure, some companies have
been around for a long time, and they are not run according to the three
rules of strategy. However, if you look carefully, those companies “happen”
to be tied to products or product families that enjoy long demand cycles. It’s
a little bit like looking at Xerox in the 1960s. They got a 20-year patent that
gave them a virtual market monopoly. When the patent expired in 1979, the
company entered a less than stellar period that continues through today. It
would have been unwise to copy Xerox or some of their supposed “best prac-
tices” just because they got lucky on one product.
CORPORATE IQ AND THE THREE RULES
The dean of a prestigious business school once made the following state-
ment: “We get the best and brightest people in the world in our program.
My job is to make sure we don’t damage them while they’re here.” That is
analogous to Corporate IQ. When we take charge of an organization, it’s our
job to sustain the organization, not just coercively force out a few quarters
or years of profit. Even Attila the Hun can beat a few profitable quarters out
of his people. The challenge is sustainability. Further, most of us don’t have
the luxury of inheriting a company that is tied to products or product fam-

ilies that have 100-year plus demand cycles.
That leaves us with just one thing to do: create or sustain a smart com-
pany. Logically, the leader who makes sure that the firm maximizes today,
thinks and acts out of the box, and stays ahead of the curve will do just that.
Therefore, success is a choice. If you will bear with me, that’s exactly what I
think you can learn to do. You can learn how to create a high-IQ, smart com-
pany that will be even better when you leave. What could be better for you,
your employees, your stockholders, or your customers?
C h a p t e r
4
CONTEXT, CONTEXT,
CONTEXT
T his chapter may be the most impor-

tant of this book. The reason is simply that context and profits are inex-
tricably linked. I want to ask you to stop for a moment and think about some-
thing. What one assumption seems to underlie most management theories?
The answer: “The context will not change.”
Take a quick look at one of the most recent bestselling books. What does
the author want you to do? The answer: Clone your company to look exactly
like a proposed “ideal” company. What is missing from that concept as well
as so many others is the reality that a company must fit its context. Here is
another reality. Every company’s context is different. “Uh oh!” you might
say, “Does that mean that if the context for each company is different, that
each company must be equally different?”
You already know the answer. That is why ideas like benchmarking so of-
ten fail companies. More often than not, the proposed “benchmark” prac-
tices of another company are simply not suitable for the benchmarking
company. It makes no sense to copy someone else’s practice, when you really
do not know why you are copying them or, worse yet, whether or not their
approach is suitable for your specific corporate challenges.
Earlier, I explained that companies fail because of the phenomena
called creative destruction. That is, the creativity of the competition de-
stroys the value of what you currently do as a company. I also suggested that
49
organizations must be adept at dealing with two kinds of forces. First, they
must deal with the global environment, or the Ten Forces. Second, they
must deal with the segment-specific forces they encounter, generally defined
by competitor behavior.
If you think about it, creative destruction is exactly what competitor be-
havior is all about. One of the greatest delusions that some managers hold
is, “I control the market.” Not only is that thinking egotistical and a poten-
tially fatal mistake, it is simply not true. Competition is made up of moments.
Moments are extremely short episodes or events. They are almost like pho-
tographs, capturing a scene as part of a changing landscape.
Sustainable success involves an infinite succession of momentary victories.
The whole problem with thinking that involves competitive advantage

or supposed core competencies is the “I control the market” fallacy. It may
be true for a moment in time that you have some type of an advantage. The
problem is, the creative activity of competitors is changing the scenario on
a moment-by-moment basis.
SUCCESS VERSUS FAILURE
During one week of reading the business section of my local newspaper,

I discovered three compelling examples that illustrate the power that con-
text has over success or failure. In the first example, Fleming Companies was
featured. The author of the article examined Fleming, which had almost
made the Fortune 100 in 2002 only to end up in bankruptcy.
Some might say that their dependence upon K-Mart caused their de-
mise. But insiders suggest that the problem was much bigger than that.
Here’s what the former CEO said about the demise of the firm:
Fleming is the victim of a f lawed business strategy that failed to

produce the intended results in a very difficult business environ-
ment.1
Notice that the problem was the difference between the firm and its
context. Simply put, the firm was not suited for its competitive context.
Context, Context, Context 51
That very same publication featured an article about Kodak just a few
days earlier. The article explains that, “Kodak is slashing between 4,500 and
6,000 jobs this year—shrinking its global payroll to about 62,000 from a peak
of 136,500 in 1983.” That very same article also commented on the root of
the problem: “The switch by consumers to digital photography is coming on
faster than expected, cutting deeply into the film, paper, and photo finishing
businesses that anchor Kodak’s profit and image.”2
A couple of stories need to go along with this. In the early 1990s, Texas
Instruments’s senior executive team began studying a phenomenon we now
call the digital revolution. What the TI executives concluded, almost ten
years before the revolution was in full swing, was that this new thing called
“digitization” would have a profound effect upon the world as well as on
their business. That is why, even though their strategy made little sense to
the outsider, the company began selling off profitable businesses to possess
the critical mass required for the future business arena of digitization. As is
often said, the rest is history. TI is now a global leader in digital signal pro-
cessor (DSP) technology, a critical component of many telecommunications
technologies.
Also in the early 1990s, a man named Michael Sekora was trying to con-
vince Kodak that they had a problem. Some may not be familiar with Sekora.
He was the head of Project Socrates for the Reagan administration. It was
his job to study global competition and understand what types of strategies
American business would face in the future.
After leaving the Reagan administration, Sekora took his skills to the
consulting arena. In the early 1990s, he discovered that a competitor of
Kodak had created a massive complex of shell companies in America. He be-
gan tracing the ownership of each company, and his journey took him to ev-
ery major technology partner and supplier of Kodak. Sekora discovered that
Kodak’s Japanese competitor was obtaining all of Kodak’s proprietary prod-
uct information years before the products were to come to market. Here’s
the unbelievable part of Sekora’s story. He could not convince the Kodak ex-
ecutives that the scheme was really happening.
Notice the commonality between Fleming and Kodak. In each case,
management had a categorical misunderstanding of the reality that the com-
pany faced. That misunderstanding led to totally inappropriate strategy.
Context is critical—this is an unavoidable reality for business. Smart compa-
nies are impacted by extreme shifts in the competitive context just like other
companies. One company that was severely hit by the technology meltdown
of 2001 and 2002 was Agilent Technologies, one of the top ten smartest com-
panies in America.
AGILENT TECHNOLOGIES: ONE OF THE

Agilent, like other technology companies, suffered in the aftermath of

the combined impact of the post–9/11 economy and the technology melt-
down of the same period. It would be an understatement to suggest that
Agilent’s industry segment went through a frame-breaking shift in its envi-
ronment. The difference between smart companies and their counterparts
is how they come out of such frame-breaking shifts.
In late 2003, while discussing the top ten smartest companies list, my ed-
itor questioned just how wise it was to put a company that was (at that time)
losing a lot of money on such a list. I confidently explained to him that Cor-
porate IQ was a great predictor of a company’s future performance. In the
first quarter of 2004, Agilient proved me right, as they turned the corner
and again entered a time of sustained profitability.
Agilent was a spin-off from Hewlett-Packard in 1999. Its leadership spent
a great deal of time making sure that the founding principles of the com-
pany were kept intact. The company’s management makes sure that every
member of the Agilent team understands just how critical his or her role is
for the overall success of the firm. The company’s CEO has spent the
months since the spin-off visiting with Agilent’s people around the world. To
date, he’s managed to meet with over 80 percent of the company’s almost
30,000 people.
Agilent focuses on highly aggressive innovation activities as well as
equally aggressive marketing strategies. The organization features an em-
ployee-focused culture that ensures a customercentric focus. Like all smart
companies, it is founded upon an exceptional commitment to the highest
standards of corporate character.
Context is the issue. Competitive life is not a succession of repetitive
events. It is a succession of different events. The companies that succeed
over long periods are those that continually anticipate the uncertainty of
change by constantly changing how and where they compete.
Hopefully, the reality of context is inf luencing your thinking. The rea-
son that most management theories fall f lat is that they are based on what I
call “simple stability.” In other words, the theorist assumes that the compet-
There is no such thing as competitive advantage. Winning is a succession of winning

and losing moments, in which the top company simply had more winning moments
than their competitors.
itive world will be simple, not complex, and constant instead of varying in
speed (of change). Let me ask you to stop and think about this for just a mo-
ment. I will assume that you support the ideas of core competencies, com-
petitive advantage, and mission (in the box) thinking. Let me ask you a
question: can you name any competitors who compete using a simple, stable
mental model in developing their strategy? Of course, the question reveals
the problem. It is simply not reality. Competitors stay awake at night trying
to create better products, decrease cycle times, and beat you in the market-
ing arena. That is simply fact—and it’s what creative destruction is all about.
Either you choose to win, or your competitor will win.
“I guess the environment changed and we didn’t.”
The former CEO of an internationally recognized company made this

statement. The company no longer exists. The reason: They failed to ac-
count for global changes as well as the changes in the ways that their com-
petitors were going to market. Companies fail because they fail to match
changes in competitor behavior.
CONTEXT: A NEW WAY OF THINKING
Thomas Kuhn crystallized much of the reality of paradigms. In many

ways, his 1970 work, The Structure of Scientific Revolutions, runs parallel to
Schumpeter’s work on creative destruction. On one hand, Schumpeter sug-
gests that competitive reality involves a succession of destructive events
driven by the creativity of competitors. On the other hand, Kuhn reveals
that the human mind tends to reject such change, even though it is reality.
It should surprise no one that top-performing organizations tend to be led
by managers who correctly perceive the complexity and speed of their com-
petitive environments.
In Chapter 1, I discussed the work of John W. Sutherland. He proposed

four types of environments.

4. Indeterminate (totally unpredictable)3
Let’s use Sutherland’s four types of environments to take a brief look

forward at Corporate IQ. They will help us understand how context relates
to the company and how it can have a critical impact on a nonadaptive or-
ganization.
It is somewhat obvious, even to the casual observer, that a firm with a
linear mentality (focusing upon historic competencies) will have numerous
problems in what Sutherland calls an indeterminate environment. In that
worst-case context, the firm’s competitors will be continually altering the
rules of the game. While the competitors are creating numerous new prod-
ucts every year and introducing them with a take no prisoners marketing
strategy, our nonadaptive company will compete much as though they are
going for a walk in the park. They will be mugged numerous times before
they manage to get through the park. The company simply lacks the ability
to compete like its competitors. That is the problem.
WHAT IS AMBIGUITY?
It’s difficult to define. I’m not being funny, but that’s what the word gen-
erally means. Ambiguity, historically conveying the fact that a word may have
multiple meanings, has become increasingly used in business. Another word
that defines ambiguity is cloudiness. A pilot friend once described instru-
ment f lying as an experience similar to “f lying in a bowl of milk.” In other
words, you are f lying without a lot of visual clues to attitude, altitude, or
speed.
When you get down to it, ambiguity is the reason behind so many books
on management and strategy. It’s also why there are so many different ideas
about how to manage an organization. The environment has become in-
creasingly ambiguous, spawning a lot of ideas about how to deal with it.
Here are just a few.
• Scenarios
• Contingency planning
• Game theory
• War gaming
• Emergence
• Complex adaptive systems
• Systems thinking
• Hybrids (combinations of two or more of the above)
A lot of people have studied the relationships between how people think
and how effectively they manage and lead an organization. The reality is, the
better or more accurately you perceive competitive reality, the better you
manage. The end result of matching the right mental model with reality is
high corporate performance.
DISCOVERING REALITY IN AMBIGUITY
A number of theorists suggest that the level of ambiguity in today’s com-

plex environments, or systems, is just too much for the human mind to com-
prehend. Ralph Stacey and Henry Mintzberg are two such theorists. They
base their ideas on a concept called “bounded rationality.” The result of
such thinking is an idea that I call “emergence.” That is, rather than thinking
about the future, wait until events occur and then respond. In other words,
it is impossible to plan for complexity, so just wait until something happens.
Lofti Zadeh developed the term fuzzy logic. Rather than interpreting an
idea in terms of absolute rights or wrongs, he suggested that propositions
may have degrees of truth or falsity.4 There are absolutes, but at the same
time I believe Zadeh may be on the right track in a number of ways, espe-
cially as it relates to the ideas of Mintzberg and Stacey.
It is possible to make inferences about complex situations. We do that
all the time. Can we predict exact events? No, but we can predict the nature
of events. In a number of speeches prior to 9/11, I suggested that it was not
a question of whether we would experience a terrorist attack in the United
States, it was only a question of when. I made those predictions in 2000.
My graduate students have been extremely accurate in predicting the

future environment for over 100 Fortune 500 companies. Generally, they
have not predicted specific events, but at the same time they have quite
accurately predicted the nature of the future competitive environment for
those companies.
COMPETITOR INDEX
In studying under H. Igor Ansoff, one of the first things I had to learn
about was what he called “environmental turbulence.” While Ansoff has
been recognized as the “father of strategic management,” I’d footnote that
title to recognize his work in the area of complexity as well as change in the
competitive environment. That is what his work on environmental turbu-
lence was all about.5
The Ansoff scale of environmental turbulence is comprised of two
subsets: marketing turbulence and innovation turbulence. The absolute
brilliance of Ansoff’s work is apparent for a couple of reasons. First, he
understood clearly that all of a firm’s success strategy had to be driven by
competitor’s behavior. Second, almost as if he had read Schumpeter’s mind
when it came to creative destruction, Ansoff accounted for it by measuring
the innovation behavior or turbulence in a competitive segment.
John Sutherland’s “four states of the environment” is very insightful. At
the same time, it is probably fair to say that Sutherland is describing the re-
sult of competitor activity as opposed to the basic drivers of environmental
conditions. That’s where Ansoff’s work is so beneficial. Over the past few
years, I’ve adapted Ansoff’s approach to ref lect a few changes that I discov-
ered in my research. At any rate, here is the end result of that work.6 The first
of two components of environmental turbulence is marketing turbulence.
When we look at any competitive segment, we are most interested in
competitor behavior. It’s also important to remember that, when we mea-
sure this in the external environment, we will never have any area that mea-
sures as a round number. It’s usually something like 3.7 or 4.2. That is why
an analysis of this type involves a lot of study and intuitive ref lection. It’s not
a simple process.
In trying to determine marketing turbulence, we might find that sales
aggressiveness (of competitors) is 4.1, marketing aggressiveness (sales and
PR) is 3.6, marketing strategy is 4.4, and the demand/capacity ratio is 4.5.
FIGURE 4.1 Marketing Turbulence
MARKETING TURBULENCE
Competitor Index 1 2 3 4 5
Sales aggressiveness Low Competitive Highly aggressive
Marketing Low Competitive Very high
aggressiveness
Marketing strategy Serve customers Grow market Expand share
Industry capacity Excess demand Equilibrium Excess capacity
versus demand
To determine marketing turbulence, we would then average the values to

come up with one number.
A Technical Word of Caution
To avoid confusing the reader, I’ve purposely avoided discussing a num-

ber of issues about turbulence. First, turbulence is always measured in the
future if we are developing future strategy. Without going into the multiple
measurement approaches used for estimating future turbulence, I will sim-
ply say it is fairly complex, extremely comprehensive, and, as a result, quite
accurate. On a number of occasions, clients have retained me for the sole
purpose of predicting future turbulence for a segment, so that they would
better understand what to expect from their competitors. That said, I will
continue to speak of turbulence in the present instead of the future, just so
you won’t be confused.
The second determinate of environmental turbulence is innovation tur-
bulence. I’ve mentioned “creative destruction” a number of times in the first
few chapters of this book. It should come as no surprise that Ansoff bril-
liantly included competitor innovation in his approach. The following table
shows my adapted version of innovation turbulence.
Innovation turbulence reveals the level and aggressiveness of competi-
tor innovation. As the level of turbulence increases, the frequency of events
of creative destruction increases. Again, we will generally discover that each
measurement is different.
Once we have both environmental turbulence and innovation turbu-
lence, we average them to obtain what I call the competitor index. In other
words, we now have a number that conveys a wealth of information. I would
FIGURE 4.2 Innovation Turbulence
INNOVATION TURBULENCE7
Competitor Index 1 2 3 4 5
Innovation Low Competitive Highly
aggressiveness innovative
Technological Slow Fast Extremely fast
change
Innovation Product Product Product
strategy duplication improvement innovation
Customer Meet needs Stay close to Anticipate
strategy the customer unrealized needs
Product Long Moderate Very short
life cycles
like to discuss the important contribution that an accurately measured com-

petitor index can play in the strategy of a company.
SYSTEMS THINKING
Although he never mentioned it when developing his system, Ansoff

was really creating a highly sophisticated systems thinking model. The idea
behind systems thinking, as I mentioned earlier, is that one can make reli-
able inferences about complex environments. What the Ansoff model ac-
complished was a highly accurate systems thinking approach in which each
critical slice of the future environment is measured.
Most management theorists know that there is a problem called para-
digm blindness. It is a recognized fact that most people will reject changes
in the competitive environment, no matter how well supported by evidence,
in favor of how things “used to work.” Most people prefer sameness in lieu
of difference when it comes to thinking about the competitive environment.
One company that is exceptionally good at understanding its context is
Mary Kay, Inc. Mary Kay, Inc. is one of the top ten smartest companies in
America.
MARY KAY INC.: ONE OF THE TEN

I must confess, when I was first granted access to this company in 2002,
I really did not expect to find one that was so creative and aggressive and,
at the same time, had such exceptional levels of corporate character. One of
the first things I found was that the company is constantly challenging the
limits of innovation.
Mary Kay’s people spend a great deal of time in trying to anticipate
changing customer needs. They do that by not only doing a lot of research
but also by spending a great deal of time listening to the independent sales
force and their customers. The result is an organization known for its ability
to anticipate trends.
Like the other smart companies, Mary Kay Inc. insists that leadership
practices should create a place where people want to work. At the heart of
the philosophy of the company’s founder, Mary Kay Ash, was the Golden
Rule. By maintaining Mary Kay’s philosophy, the company has continued to
thrive.
A lot of people have no idea of just how leading edge this company is.
Over the years, the company has pioneered new approaches to manufactur-
ing and inventory management. In the early 2000s, Mary Kay Inc. became
one of the top e-businesses in the world. Since that time, the organization
has continued to devote resources to achieve technological leadership in the
direct selling industry.
In 2001, the company lost its founder, Mary Kay Ash. Some suggested
that her death would set the company back. As with other smart leaders,
Mary Kay had planned to make sure that the character and the traditions of
her company would continue long after her passing. By 2004, the company
was nearing $2 billion in retail sales, had passed the 1 million mark in num-
ber of independent beauty consultants, was experiencing rapid revenue
growth in the international market, and was breaking every sales record the
company had ever set. Truly, Mary Kay Inc. deserves the title of “one of the
ten smartest companies in America.”
Clearly events of creative destruction radically change the rules of the
game. The products the firm used to make, the business the firm was in, and
sometimes even the entire family of products that are the foundation of the
firm’s business no longer are the object of consumer demand. In other
words, you may make the best buggy whip in the business, but there are sim-
ply no buyers for the fruit of your “core competencies.”
The result of Ansoff’s work is a highly accurate and practical approach
to applying systems thinking to corporate strategy. Because the approach
measures numerous slices of the competitive environment, the synthesized
result of the approach is a highly accurate tool for managers.
OOPS . . . WHY DID WE FIRE HIM?
One of the first thing a consultant has to recognize is that they will often
be fired for doing some of their best work. If a consultant walks in the door
of a new client and discovers a major problem, chances are it’s not news to
the company. In most cases, a number of people have been trying to tell the
leadership about the problem for some time. The problem most consultants
have to face is that they will usually get fired for pointing out the problem.
One of the things I have discovered in my work with companies in trou-
ble is that they almost always have a leadership problem. The symptoms are
often most evident in areas like sales, innovation, and the like, but the bot-
tom line is usually the problem in leadership. If you think about it, a problem
in sales or innovation can almost always be traced to the leadership of the
firm.
We have discovered the problem . . . and it is you!
At one client, I found out just how difficult it is to get an organization

to face reality. The firm was facing one of those creative destruction events.
Its entire industry was on the verge of a major overhaul. My study of the fu-
ture environment had made that problem quite clear, right down to the tech-
nology that would replace my client’s technology.
The real problem I faced, however, was not a dramatic shift in the com-
petitive environment. The real problem was an entire organization, from
top to bottom, that was committed to maintaining the status quo. They were
willing to lie and do just about anything else to make sure that nothing
changed.
After I was shown the door, I did try to get this critical information back
into the company through some personal contacts. The level of arrogance I
encountered was unbelievable. No one in the organization was willing to try

to get the critical information to the right people. They all feared for their
jobs. Ironically, almost all of those jobs went away as a result of the failure
to address this specific issue.
This is one case in which I really would have preferred to be wrong. The
sad truth is, however, that the company was devastated less than four years
later, when the technological revolution that I’d predicted hit.
Although not always successful in overcoming resistance to change, the
analysis that leads to a competitor index can often be eye opening for a lead-
ership team. In one futuristic study I did in 1996, I predicted major changes
in an area called SOHO (small office home office). Not only did the re-
search reveal that the trend toward SOHOs was substantial, but further that
the demand for broadband technologies at home was going to explode. In
this case, the client company listened and used the competitor index as a ba-
sis for their future technology focus.
CONTEXT, CONTEXT, CONTEXT
The October 6, 2003, Newsweek carried a short but important article. Ti-
tled “A New ‘Wind Tunnel’ for Companies,” its thrust was how major global
companies are trying to find ways to predict the future environment. The
major point was simply that if companies could predict the future (context),
they could be more profitable.
I have good news for you. It is possible to predict the future context, and
yes, the research makes it clear that those who most accurately understand
future context lead more profitable companies. Einstein once suggested that
if you have one week to solve a problem, spend the first six days understand-
ing it.
Strategy, contrary to the thinking in some circles, must follow context.
That is the missing link in management thinking today. Context also deter-
mines what type of organization we need to deploy to maximize profit. When
you get right down to it, this is the only logical conclusion. If context defines
competitor behavior, your firm will succeed or fail based on whether or not
you profile your firm for that competitive index. Most importantly, compet-
itor index gives the manager a valid systems thinking approach from which
to consider the firm’s strategic future.
Often, at the end of an hour’s television program, the announcer will
come on and tell you why you should stay tuned. They will explain that the
program coming up next is really interesting. I would like to suggest that

about the next few chapters. You will find that it is possible to custom-design
your company to fit the competitive context. It’s all about performance. It
can change the way you look at your job as a leader and, more importantly,
can change the future of your firm.
C h a p t e r
5
CUSTOM-BUILT COMPANIES
O ne of the most eye-opening and

powerful moments in most managers’ lives is when they discover the reality
of business competition. It is eye opening, because it is the antithesis of what
they have been taught about corporate profitability. It is powerful, because
from that point forward, they will have a much better grasp of how to max-
imize profit.
Think back for a moment about what I have been discussing in this
book. Business environments undergo constant changes in speed and com-
plexity. That’s important to remember. In the previous chapter, I developed
the idea of the competitive environment extensively, but for communication
purposes, I’d like to simplify it. Let’s assume for a moment that the business
environment can only exist in three states.
1. Slow, simple
2. Fast, moderately complex
3. Overwhelming speed and complexity
In your opinion, would the firm designed to maximize profit in the slow-
simple environment maximize profit in the fast-complex environment?
Would the firm designed to excel in the overwhelming environment do well
in the slow-simple environment?
63
I want you to think about this seriously. It’s really important. Neither
firm would do well in the other environment. The firm designed for the
slow-simple environment would lack the speed, aggressiveness, and adaptive
abilities to compete in the overwhelming, rapidly changing environment. At
the same time, the firm designed for the overwhelming environment would
be much too aggressive for the slow-simple environment. It would signifi-
cantly overspend in strategic areas such as marketing and product develop-
ment (R&D).
What you discovered in the previous chapter is that a company may
compete in almost infinite types of environments. That means that the busi-
ness leader’s role in managing a company is to understand two things.
1. What types of environment will the firm face?

2. What must the company look like to maximize profit?
I want to give you a little sneak preview of exactly what Corporate IQ

can do for you. First, it gives you a powerful, intuitive tool for understanding
the competitive environment. Second, it provides you a detailed plan from
which you can custom design your company for that environment. If you
were not yet convinced, I would like to offer you just one statistic from the
research that Igor Ansoff and his associates conducted over the past 30
years.1
Companies that match their competitive context, versus those that do not,
have a return on investment that is 100 to 300 percent higher.
Corporate IQ is built upon the research begun by Ansoff and his associ-
ates. What Ansoff hypothesized (and was later confirmed by research) was
that companies may be broken down into two broad areas, strategy (two at-
tributes) and organization (six attributes), and if those areas were well
matched with the competitive environment, the firm would be more profit-
able. In my studies over the past ten years, I concluded that three broad areas
needed to be used: strategy, organization, and character. I also increased the
number of attributes measured from 8 to 17.
Custom-Built Companies 65
Here is where it gets really interesting. Earlier, I noted Jim Collins and
Jerry Porras’s comments in Built to Last. As they said, in a lot of the “excel-
lence” books, the authors made observations at excellent companies and
computed mathematical averages around different attributes that they
hoped would reveal the secret to performance or sustainability. The idea
was to measure attributes of the excellent companies to discover the reasons
for their success. This was often done by using massive studies that resulted
in a comparison of statistical averages. Collins and Porras had pointed out
that all of the successful companies have a building. By using simple statis-
tical averages, the researchers were suggesting that they had discovered the
keys to performance. Collins and Porras were pointing out that the use of
such averages would also lead one to conclude that all excellent companies
have a building, for example. Obviously, that is simply not a good research
strategy for understanding corporate performance.
In the research conducted by Ansoff and his associates, as well as my
Corporate IQ research, a significant emphasis was placed on statistical rela-
tionships. For those who do not spend a great deal of time with statistics, let
me explain this a little further.
If you were conducting research on the causes of cancer and found that
all of those who got cancer had a specific gene, and all of those who did not
lacked that gene, you might have discovered important information. The
problem in research is to try to distill the cause-and-effect relationship of
phenomena. In the case of corporate excellence studies, the average might
have some meaning, but certainly is not a clear indicator of a cause-and-ef-
fect relationship.
The Stage I research project for my Corporate IQ measurement in-
volved 15 companies. My hypothesis was simply that companies with a
higher Corporate IQ would have a higher decile ranking (top 10 percent,
second 10 percent, etc.) than those with a low Corporate IQ. Corporate IQ
is a comprehensive assessment that measures 17 broad areas of the firm.
The following are the results of that first study. Because I had to get internal
access to the companies, I agreed to keep the participants’ names anony-
mous. Many are publicly traded, so that stipulation made a lot of sense.
CIQ Rank
Financial Org 157 12
Entertainment Co. 140 13
Energy Co. 146 11
Transportation 155 11
Consumer Goods 167 11
Training Org. 158 10
Investments 152 11
Technology 120 12
Financial Org 154 11
Int’l Financial Org. 119 12
Mortgage Co. 145 12
Chemicals 134 12
Tech Mfg. 195 16
The statistical analysis of these companies’ rankings confirms what is

also clear to the casual observer. In regard to all of the companies that I have
had the opportunity to measure, I discovered that the higher the Corporate
IQ, the higher the decile ranking of the competitor.
Cause-and-effect relationships are nearly impossible to determine. Re-
searchers try to develop statistical relationships. For example, let’s assume
that you could compare the leadership style of managers at 20 high ROI (re-
turn on investment) companies and 20 low ROI companies. It would be pos-
sible to develop a statistical relationship that provides relationships between
ROI and leadership style. That is quite different from a simple average. Es-
tablishing a statistical relationship is important to you as a manager as well.
If the research is done well, it can be a powerful tool for understanding or-
ganizational performance. Averages, as Collins and Porras point out, may
shed some light on a subject but fall short of any type of definitive evidence
of profitability.
THE BEDROCK PRINCIPLE OF

PROFIT AND PERFORMANCE
If you were to ask yourself (or anyone for that matter) about the question
that is behind almost every management book written, what would that
question be? Simply put, it would have to be the following: how can a com-
pany maximize profit? Here are some of the proposed answers that have
come forward over the past 20 years.
• Focus on the firm’s historic competencies.

• Be a total quality management organization.
• Have an adaptive culture.
• Lead like Attila the Hun.
• Open your books to the employees.
• Maximize the company’s resources.
• Focus on the value chains in your industry.
• Adopt the best practices of other companies.
• Cut cycle times.
• Be excellent, whatever that is.
• Form teams.
• Downsize your way to success.
I won’t bore you with the technical details, but basically there is no hard
evidence that any of the above is a “single solution” that will create success.
That leaves us with an unanswered question: how can a company maximize
its profit?
THE MISSING LINK
In 1977, Alfred Chandler, in his landmark work The Visible Hand, pro-
posed that business success is rooted in a business structure.2 He suggested
that the foundation to a firm’s competitiveness related more to a firm’s
structure than to anything else and that strategy must follow structure.
In Chandler’s work, as well as with almost all other management theo-
rists’ thinking of the last 100 years, there is a missing link. The missing link
is not the dominance that an appropriate organizational structure can im-
pose on an industry or how some set of best practices can do the same. To
propose that is to miss the very essence of business competition. The es-
sence, the missing link, is simply that all business thinking must begin with
environment. Environment must drive strategy. In addition, environment
must drive organization, including structure.
Please allow me to reach into my background in logic and philosophy.
Environment is simply what is. One can describe the condition of the sur-
roundings or environment of the firm. In fact, they are generally described
in terms of competition. A firm succeeds or fails based, not on its structure,
but on whether or not the entire firm is well suited to “what is.” That is, to
its environment.
If that is true, and it is, quality and/or “Six Sigma” approaches will
generally change or improve what the firm used to do, without any consid-
eration of possible frame-breaking changes that might slam into the orga-
nization. Here’s a challenge: name a firm that has failed and ask why. The
answer: The firm failed because competitors changed the way they were
doing business and the firm did not.
Why has K-Mart continued to struggle? Because K-Mart has never been
able to raise its organization to the competitive capability of its competitors.
Yes, structure is involved, but so is marketing, innovation, strategy, culture,
management, technology, etc. Across the board, K-Mart has been unable to
correct those problems.
I have said this numerous times already, but I feel compelled to say it
once more. The business environment is complex, as is the organization. As
much as we would like to think that a simple solution will fix a complex en-
tity, it simply will not. Every part of that complex machine we call a company
has got to be in sync with the firm’s context or competitive environment. If
it is not, the firm will experience deteriorating performance and possibly
cease to exist. It all gets down to the environment.
In the previous chapter, I discussed the idea of the environment and
what I call the competitor index. Again, the idea is to use a five-point scale
to indicate the level of complexity and the rate of change in the environ-
ment. Please remember that the competitor index is a descriptive metaphor
of what the competitors in any given segment will be doing. Logically, the
competitor index, if accurately measured, tells the manager exactly what
the company must do to compete and maximize profit. An overwhelming
amount of research demonstrates the truth of that idea.
Once we understand the competitor index of our company’s segment,
we also begin to understand something else. All of the other answers to the
question about maximizing profit cannot be right. It becomes astoundingly
clear. To maximize profit, our company must match that competitive index,
or it will fail. To put it another way, if the company’s behavior is less aggres-
sive and less adaptive than its competitors’, it will not succeed. As I said ear-
lier, in contrast to Alfred Chandler’s proposal that “strategy must follow
structure,” solving problems is much more involved. I want you to consider
that the following three areas—corporate strategy, organization, and charac-
ter—are each made up of numerous components. With that in mind, here
are the three rules of competitive success.
T h e Rules of Compet i tive Suc ces s
1. Strategies must match competitor index.

2. Organization must match competitor index.
3. Organizational character must be maximized.
I would like to visit each of these areas individually. To maximize profit,

a manager must thoroughly understand them.
STRATEGIES MUST MATCH THE COMPETITOR INDEX
Let’s assume for the moment that the competitor index is 4.8. As you
may remember, that is a competitive environment of extremely rapid change
with high levels of uncertainty, overwhelming competition, and very short
product life cycles. Let’s take a look at the strategies your organization will
need to be successful.
• Extremely aggressive sales, public relations, and advertising.

• Extremely high levels of innovation (new products, etc.).
• A product portfolio with a preponderance of products focused on
phases I and II of the product life cycle.
• A significant focus on the inclusion and application of technology in
all products and services.
Let’s assume for a moment that you are tempted to focus more on the
firm’s core competencies. After all, that’s a lot easier way to run a company,
isn’t it? Easier, yes, but is it smarter? No.
Th e Compone nt s o f S trat egy
• Marketing aggressiveness
• Innovation aggressiveness
• Product portfolio balance
• Product technology applications
Regardless of your firm’s core competencies, if you fail to match the

competitor’s behaviors, you will not succeed in the emerging environment.
That is why companies fail. Their competitors out-innovate and out-market
them, as the firm simply fails to respond because its focus is on the past, not
the present or the future. It is a matter of straightforward fact: strategies
must match the competitor index.
ORGANIZATIONS MUST MATCH

THE COMPETITOR INDEX
The strategies allow the firm to create competitive discontinuities in the

lives of competitors. Strategy is the firm’s attempt to destroy creatively the
value of the competitors’ product portfolio and to replace it with the firm’s
own solution. That is the story of competition. The provider of one set of
products and services is continually trying to come up with new and differ-
ent ways to meet customer needs. At the same time, so are all of the compet-
itors in that segment. The result is a continual re-creation of the segment
through creative destruction events that come from competitor innovation.
The firm must not only continually thrust its creative efforts into the
marketplace, it must be able to adapt simultaneously to the creative thrusts
of competitors. So what we end up with is a company that is continually in-
novating and changing the rules of the game and, at the same time, adapting
to changes resulting from competitors’ thrusts. It’s a little bit like walking and
chewing gum at the same time. It’s not an either-or situation—it’s both. The
successful firm must have the proactive capabilities to attack competitors’
product offerings, while at the same time being highly adaptive in respond-
ing to competitors’ thrusts.
Now let’s look at how this plays out in the real world. What do Motorola,
Xerox, and Kodak all have in common? They all have cultures that focus on
maintaining the status quo. The problem is, all three are in competitive seg-
ments in which the competitive index is around level 4 and above. Their com-
petitors are continually changing the competitive landscape, while Motorola,
Kodak, and Xerox have a culture that enforces “no change.”
T h e Compone nt s of Organ iz ati on
• CEO attributes
• Management
• Culture
• Structure
• Decision systems (early warning systems; speed)
• Strategy
• Creative capacity
• Product technology applications
If a firm is not only to possess sustainability but also maximize profit, all
of the components of the organization must align with the competitor index.
T h e Compone nt s of Organ iz ati on al

Character
• Ethics
• Excellence rating
• Value of people
• Quality and process
• Values
DO WE NEED CUSTOM-BUILT COMPANIES?
Earlier, I mentioned John W. Sutherland’s proposal that there were four

distinct conditions of the competitive environment. I would like to use his
ideas as a basis for understanding the importance of Corporate IQ and de-
signing a company around an environment. Here are the four environmen-

tal conditions that Sutherland developed.

4. Indeterminate (totally unpredictable)3
Now let’s just think about what type of organization will be needed for
a firm to succeed in each type of environment. I will simply use the three
broad areas of the firm as my basis for comparison: strategy, organization,
and character.
1. Deterministic (Highly Predictable)
• Strategies. Because the firm’s context is totally predictable, my strate-

gies can be simple with no risk required. I can also keep my innova-
tion at fairly low levels and create new products on an as needed
basis. Certainly I do not need to be aggressive in any area of my strat-
egies, because I can accurately predict my competitors’ every move.
• Organization. The firm’s structure can be a strict and steep bureau-
cracy. Management can be highly controlling, and the firm’s culture
can focus on maintaining the status quo. The firm has little need for
adaptive capabilities, because the emerging environment is so pre-
dictable. Rewards can be objectives-based (MBOs), because such a
high level of predictability makes it possible to set quantitative goals
and expect success if the employee carries them out.
• Character. Character involves issues that control how the firm does
business. Questionable ethics may reap a few quarters or even years of
increased profits, but at the same time, such behavior can ultimately
destroy the firm. Integrity is the foundation of trust, and regardless of
the external environment, solid principles always underlie workforce
stability and interpersonal transactions.
Another aspect of character is “value of subordinates.” Not only
is it possible to measure the level of value of subordinates, but the
data suggests a direct link between such behavior and organizational
performance. Regardless of the level of external competitiveness,
companies that communicate that they value their employees—and
walk the talk—will be more profitable. Character, and its five compo-
nents, are the only aspect of the firm that is not context dependent.
2. Moderately Variable
In a moderately variable context, the firm’s strategies must be stepped up

a bit. Approaches like benchmarking and best practices can work quite well
at this level. In a moderately variable environment, creative destruction
events are few and far between. Notice also that the firm’s product portfolio
should be skewed toward product life cycle stages III and IV (maturity and
decline). At this level of competitive context, leading is not much needed be-
cause in a context of low rates of change and complexity, following is much
more profitable.
The organization itself can be designed for stability. A divisional struc-
ture will work nicely. The culture, including rewards systems, can focus on
stability issues. Corporate strategy (approaches) can also utilize linear types
of thinking, because environmental change is mostly predictable. Corporate
intelligence of the futuristic type is not much needed, but the firm may need
to get involved in some simplistic business intelligence activities.
It’s important to remember that a moderately variable environment will
provide few surprises. Competitors are mostly predictable, and to do other-
wise (overinnovate and overmarket) would do little more than lower profits
and shorten product life cycles.
Character, as previously mentioned, provides stability for the firm and
should not change as the firm’s context changes. An absence of the highest
levels of character can destroy a firm, regardless of the level of competition.
3. Severely Variable
Let’s stop and think for a minute. If an environment is severely variable,

obviously competitive forces are driving that particular context. The cre-
ative activities of competitors are producing somewhat frequent events of
creative destruction.
As we think further about this particular context, sustainability has ev-
erything to do with a firm’s ability to be something different continually,
rather than to focus upon sameness or historic competencies. That should
help explain why some of the thinking in the field of strategy, such as the
equilibrium-based view (historic competencies) or the resource view (lever-
age existing resources, still an historic mental model), tend to fail organiza-
tions. To put it another way, the long-term survival of the firm is totally
dependent upon its ability to deliver events of creative destruction, in the
form of new products or new business arenas, to its competitors.
As the competitive context becomes severely variable,

the firm must have strategies that fit the environment.
At the same time, the competitive thrusts characteristic of such an envi-

ronment inevitably drive numerous environmental surprises for the firm.
The adaptive capabilities of the organization minimize the financial impact
of such discontinuities. A nonadaptive culture, an inf lexible structure, and
a stability-focused senior executive are just some of the aspects that can kill
the firm in that context.
Severely variable environments require high levels of adaptive thinking.
A “maintain the status quo” culture must be replaced by a “challenge every-
thing” culture. Rewards must focus on the level of creativity instead of the
usual MBOs that worked in a more predictable environment. Corporate
strategy must be nonlinear, and early warning systems (corporate intelli-
gence) are a must. The objective is not only discontinuous thinking and be-
havior but speed of response as well.
4. Indeterminate
The best way to describe an indeterminate context is “your worst night-

mare.” At that level, competitor creativity and, thus, events of creative de-
struction are extremely high. Additionally, the speed of change can be
overwhelming. It’s not like you are fighting just one enemy who just keeps
throwing different weapons at you; they are adding more speed to their
thrusts as well.
Strategy at this level of competition must allow for mistakes. In fact, un-
less a firm is making some mistakes, it is probably not being creative or ag-
gressive enough. Earlier in the book, I talked about how managers should
think about their firm. I talked about managers viewing themselves as man-
agers of a stock portfolio instead of managing in a specific business sector.
This explains why concepts such as the “resource view” of the firm can
be so problematic in indeterminate environments. You will also remember
that the second rule of strategy and leadership is to “think and act out of the
box.” In an indeterminate environment, that type of thinking can create a
firm that achieves long-term performance.
The only resource a firm has, in reality, are its assets. The issue is not
what factories you have and how you can leverage them; it is how much are
those assets worth? Let’s be realistic about something. It is always costly to
move from one area of business to an entirely different area. But remember:
it can often be more costly to fail to move to an entirely new area of business.
In extreme circumstances, success often depends upon a firm’s ability

to move to radically different and more profitable areas.
From a dynamics standpoint, the organization must be poised to adapt

aggressively. At this level of competition, only companies that eat change for
breakfast will ultimately survive. Field managers often have little time to call
the home office and ask permission to implement a new strategy. As the old
saying goes, “It’s easier to ask for forgiveness than permission.”
Organizational character plays a critical role in this context. The people
in an organization of necessity must be continually trying new ideas that will
pique the customer’s interest. People must unquestionably trust their supe-
riors when it comes to supporting them when they make mistakes. Mistakes
are a given at this level of uncertainty.
Let me add a comment here about risk. There is smart risk and there is
stupid risk. Learning organizations are also teaching organizations, and the
people who have to do the teaching are the frontline managers. I have per-
sonally demonstrated that it is possible to teach subordinates to take risk as
well as the difference between smart and stupid risk. Regardless, there has
to be a safety net of trust, encouragement, and support to catch those con-
tributors who make mistakes. An exceptional company that seems to effec-
tively combine aggressiveness and responsiveness is Kingston Technology,
one of the top ten smartest companies in America.
KINGSTON TECHNOLOGY: ONE OF THE

Can you imagine working at a company where the CEO periodically

challenged you to be creative and take a risk? What if that same CEO took
the blame if the idea did not turn out too well? Would you believe it if some-
one told you there was a company that expected its people to take action be-
fore they asked for permission? On top of all that, could you ever believe that
such a company could be one of the top performers in its industry?
You might not believe any of these things could be true unless, that is,
you have spent time at Kingston Technology in Irvine, California. “The first
thing I had to do when I came to work at Kingston,” said one manager, “was
to forget everything I’d learned in my MBA.” The people at Kingston break
all the rules simply because that is the rule.
Kingston is an international leader in the area of computer memory.
The company combines leading edge customer service, speed-of-light pro-
cesses, and ahead-of-the-curve strategies to create one of the most loyal cus-
tomer bases on the globe. While competitors strive for a 30-day ship time,
Kingston often provides same-day service for customers located in their im-
mediate area.
At Kingston, you will find the employee and customer focus that is so
characteristic of high-performing, smart companies. In a highly diverse
workplace, Kingston’s leadership is able to take advantage of the broad cul-
tural differences of its people to consider all possible approaches for better
serving customers. Among leading edge companies, Kingston is just about
as leading edge as it gets.
CUSTOM-BUILT COMPANIES
I don’t like authors who set out to gain at the expense of others. I don’t
think anyone gains if one sets out to do that. At the same time, there is a
tension that exists between books on the same topic. As I said earlier, the
bottom line is how to maximize profit.
I know that some of the things that I am saying will appear to be (and
are) critical of others’ ideas. At the same time, it should be clear that what I
am suggesting is radically different from their ideas. As hard as I might try
to harmonize with others’ ideas, I must face the fact that my proposal for
how to maximize profit is different. In fact, it is radically different. I hope
you will keep in mind the fact that I believe those with whom I am differing
are generally very bright people. I truly respect them for their intellect.
The debate that surrounds the approaches to corporate management
and strategy involves numerous different ideas that are clearly in conf lict
with each other. From that standpoint, I am no different than the rest. That’s
why they write books. That’s also why I must engage in the debate about
profit maximization. In some ways, the course of nations and the lives of peo-
ple depend on how companies are managed. If you don’t think that is true,
just investigate the lives of those who lose their jobs when a company fails.
With that said, the rest of this book is about maximizing profit. It’s
about how you can learn to custom build a company for its competitive con-
text. If you want to understand how to create one of those 100-year compa-
nies, read on.
C h a p t e r
6
CORPORATE IQ
Strategies for Success
Author’s note. In the next three chapters, I will talk about the various
aspects of Corporate IQ. In each chapter, I will discuss the concepts related
to the seventeen areas of the company that comprise Corporate IQ. Toward
the end of the book, I will provide a step-by-step explanation of how to apply
each of the concepts practically. Once you’ve completed the book, you will
be able to use Corporate IQ to enhance the performance of your organiza-
tion and will have the practical tools to achieve that goal.
S mart companies are radical compa-

nies. I hope that message is coming through clearly. Smart companies rarely
waste their resources to invest in seminars on the latest fad. They understand
the basics that have made them successful, and one of those basics is their
unwillingness to follow the crowd. Smart companies would rather lead than
follow anyway. In many ways, the competitive roots of the smartest compa-
nies are iconoclastic in nature, and as long as that quality does not change,
they will usually stay at the top of their industry.
It is important that you understand the extreme difference between how
we have traditionally thought about corporate strategy and what I am pro-
posing. The basic, yet extreme, difference between this methodology and all
others is what I call “contextualization.” In other words, rather than making
our historic competencies, or our resources, the starting point for strategic
planning, we begin with the context that the firm will face. Unless you are
79
willing to begin with openness and an understanding of the firm’s context,

including the absolute requirement that the firm must match its competitive
context, there is little hope for maximizing the future of the firm.
This is the missing link at the heart of competitive success: strategy must
follow context. Motorola, Xerox, Kodak, and numerous others have proven
that clearly. Sadly, they continue today to demonstrate what happens when
the firm fails to fit context.
Context-driven strategy is the missing link.
In Wharton’s December 1, 2003, knowledge newsletter,1 we see a chill-

ing example of a company that has failed to maintain a fit with its context.
The subtitle tells it all: “Does Sun, Burned by Competition, Need a New
Business Model?” Notice the implicit issue that underlies the subtitle. Sun
no longer fits its context. It has become the victim of creative destruction as
competitors have changed their strategies for competing.
In my book Thriving in E-Chaos, I suggest that complexity impacts firms
in a predictable manner, especially those that become inwardly focused and
obsessed with their historic competencies. I call the process the “four-phase
cycle of organizations.” The less-than-smart companies generally start out
like other companies, in a phase that I call “explosion.” However, the firm’s
inability to fit its context soon leads to organizational stagnation. As the
firm continues over time to reject the signals of change from the competi-
tive environment, the firm goes into the crisis phase. Ultimately, the firm
will cease to exist or go into the renewal phase. You will note that creative
destruction as well as the impact of complexity are inextricably tied to each
phase. In the case of Sun, the organization has clearly entered the late stages
of stagnation (phase II) or the early stage of crisis (stage III).
BUILDING THE FOUNDATION: SMART COMPANIES
In the development of his original concept, H. Igor Ansoff hypothesized

that the firm is made up of two broad areas. The first area, which he called
strategic aggressiveness, involved the level of aggressiveness of the firm, both
in marketing and innovation. In my research, I concluded that two additional
areas of strategy needed to be considered: product portfolio balance and
Corporate IQ: Strategies for Success 81
product technology applications. The second area Ansoff developed is called

management responsiveness, or management capabilities, and has to do with
the organization—its structure, culture, and other aspects that enable it to re-
spond to environment-driven events.
When we think about it, Ansoff’s ideas are analogous to sports. As a sail-
boat racer, I have to think about two issues at all times. First, can I use ag-
gressive thrusts to put my competitor off balance? Second, my crew and I
need to be capable of responding to uncertain events, such as a gust of wind
or a competitor who tacks to try to put my boat in the wind shadow of his
boat. It’s all about the balancing of those two areas. I have to be thinking con-
stantly about ways that I can attack my competitor, while at the same time be
able to respond rapidly to attacks. Business is no different.
The company is able to engage in its own form of creative destruction
by aggressively thrusting new products, new ideas, and marketing initiatives
into the business environment. As I have said before, the marketplace of this
century is one of continual creative destruction events. That, of course, is
why a firm’s “historic competencies” are usually irrelevant to the future. It
is generally a waste of time to focus on what the firm used to do well instead
of creating the firm’s future. Again, it is important to remember that the
company may be able to consider or extend some historic product areas, but
it is suicidal for a manager to consider that strategy as the only possible fu-
ture of the firm. More often than not, strategy is all about understanding
what products we can commit to for the next year or so, what products we
need to eliminate, and what we need to do to create an attractive future, re-
gardless of whether or not we have supposed “competencies” in those areas.
Let me put it another way: strategy is not about continuing the past; it’s
about creating the future.
Strategy is not about continuing the past. It’s about creating the future.
If a manager ever fails to realize that the only resource available is assets
(not “resources”), the game may be over. By assets, I am referring to the dol-
lars represented by those assets, not the resource that they represent. The
only real competitive “resource” is cash. We have to think of assets in terms
of cash—how they can be converted to cash—so that we can move to new ar-
eas of opportunity without regard to what we have done in the past. Just like
the financial guru who gets rid of low-performing stocks in a portfolio, a
good manager knows when to get rid of a declining stock to reinvest their
funds in one with a future. This is what separates the good CEOs from the
bad ones. Thinking out of the box means that you have to be willing to sac-
rifice your “core business” and supposed “competitive advantage” in favor
of an opportunity to enhance radically the firm’s future profit potential. If
you are unwilling to do so, you don’t need to be a CEO, because you are do-
ing nothing less than putting your company at risk.
Again, it is important to revisit the idea of contextualization or, to put it
another way, to recognize the need to custom build a company for its spe-
cific competitive environment. By now, it should be clear that the manager
with the most accurate understanding of the external environment is usually
the one who is able to best lead the company to maximum profitability. Let’s
begin our discussion on strategies by looking at the external environment
from a systems thinking perspective. In Chapter 4, you learned that Ansoff
developed a way of looking at the external environment that fit the systems
thinking approach. Figure 6.1 shows the five levels of environmental turbu-
lence that Ansoff developed.2 It is important to remember that each level
represents the combined effects of marketing and innovation turbulence.
In using this approach, it is possible to describe turbulence anywhere
along the five-point scale. For example, turbulence of level 4.5 is a rapidly
changing, complex (uncertain), highly competitive environment. In fact, at
level 4.5, competition is nearly overwhelming. Here is the most important
thing to remember about turbulence. Turbulence is nothing more than a de-
scription of your competitors’ behavior or strategies. That is why I call tur-
bulence the competitive index. It is a systems thinking index that describes
the competitive environment with one number. Once you understand the
competitive index for a segment, you also understand what the competitors
in that segment will be doing as well as the effects of those strategies.
THE PROFIT ZONE

Now, I want to really ask you to think carefully about something. If the
competitive index for an area is 4.0, what type of strategies do you think you
need to deploy to be successful in that environment? The answer: level 4.0
strategies. Let me put it another way. If the firm’s competitors will be highly
innovative, aggressive, and extremely focused on increasing market share,
can you do anything other than match that strategy if you want to survive?
Of course the answer is no. You have no choice. The only problem you have
is to figure out what a “level 4.0 strategy” is.
FIGURE 6.1 The Effects of Turbulence
1 2 3 4 5
Almost no Negligible Competitive Highly Overwhelming
competition competition competitive competition
Little/no Moderate Fast Rapid Supersonic
change change change change change
Long product Extended Moderate Short Extremely
life cycles PLCs PLCs PLCs short PLCs
Low Moderate Complex but Highly Highly
complexity; complexity predictable complex unpredictable
predictable unpredictable and complex
Now that you know what a level 4.0 environment is, let’s try to figure out
how we might create a company that is custom designed for that environ-
ment. Consider Figure 6.2.
Now take a look at the company. Remember, the competitor index (level
4.0) reveals that the company’s competition will be highly aggressive and,
further, that the company will deal with a substantial amount of complexity
and uncertainty. The profit zone—between 3.5 and 4.5—defines the range of
profitable behavior for the firm. Notice that if the company’s strategy was
aggressive (level 3.0) and its competitors were operating at level 4.0, the
company would be a consistent loser. Marketing and innovation at that level
must consistently be ahead of the curve, and the firm must concentrate on
growing (versus maintaining) market share. Notice as well that, if the firm
decided to behave at level 5.0, it would be too aggressive for the competitive
environment, spending much too much money and profit on marketing and
innovation.
It’s important to remember that the area of strategy includes four broad
areas of the firm. This is a simple example but at the same time will hope-
fully help explain exactly how the profit zone works.
Notice as well that an organization profiled at level 1.0 would not do
well in this environment at all. A steep, inf lexible, internally focused organi-
zation will become extinct in such an environment. The organization will
simply be unable to adapt to the discontinuities that are characteristic of a
level 4.0 environment.
The final broad area of the firm is organizational character. Notice that
there is only one standard for organizational character, and that is what I
have called “unquestionable.” Character includes ethics and value of subor-
dinates. Organizational character must be of the highest level no matter
FIGURE 6.2 Level 4.0 Strategy
1 2 3 4 5
Strategy Slow Very Take no
Follower Aggressive
follower aggressive prisoners
Organization Non- Highly
Slow Responsive Adaptive
adaptive adaptive
Character Extremely Low Flexible High Unquestionable
what the competitive environment is doing. The years 2001 to 2003 have
confirmed that reality as we watched the horror of the demise of Arthur
Andersen, one of the world’s largest accounting firms.
WHAT IS CORPORATE IQ?

Now that I have introduced the basic concept that underlies Corporate
IQ, I would like to expand it. Figure 6.3 shows the 17 areas that make up Cor-
porate IQ. Notice that each of the broad areas of strategy, organization, and
character are further subdivided into distinct components.
I have no intention of continually picking on those who suggest that cor-
porate strategy is little more than a weekend exercise for the board of direc-
tors, in which the firm’s core competencies are determined from a SWOT
analysis (strengths, weaknesses, opportunities, and threats) and the mission
is then created to make sure the firm stays in the box. I do have a message
for those who think that is what strategy is all about: Beware!
Smart managers and smart companies understand that each of the 17
areas of the firm are critical to long-term success. Companies like Luxottica
(Lens Crafters and Sunglass Hut) and Southwest Airlines, to name just two
of America’s smartest companies, spend a great deal of time and effort man-
aging each of the 17 areas.
In computing a company’s Corporate IQ, I assess how a company is do-
ing in each of the 17 areas. The closer to the profit zone that the company
is operating in each area, the higher the firm’s Corporate IQ. Yes, the re-
search reveals that the higher the Corporate IQ, the higher the firm’s profit.
It’s important to remember that we do not use the competitive index when
it comes to organizational character: 5.0 is the only measure of character for
a smart company. Smart leaders understand that the components of charac-
ter, such as integrity or valuing subordinates, are the very foundation of any
organization’s success.
FIGURE 6.3 The 17 Areas of Corporate IQ
Strategy Organization Character

Intelligence systems Quality and process
Corporate strategy
You might be tempted to ask, “What if a firm is operating in its profit

zone in 16 out of the 17 areas? Will that damage its profitability?” Numerous
examples suggest that failing in even one area can substantially damage a
firm’s performance. In one case, I discovered a Fortune 100 company that
was clearly operating in its profit zone in every area but one: marketing. In
this case, the company was renowned for creating some of the most phe-
nomenal, best-in-class products in the world. The only problem was, they
were never able to reach their potential with their products because of their
marketing deficiencies.
Companies that operate out of their profit zone

consistently snatch defeat from the jaws of victory.
With the basics under our belt, it’s now time to look at the first major
area of Corporate IQ—the firm’s strategies. As I said before, strategy is the
aggressive side of the firm. It’s the engine that produces future profit poten-
tial. Absent great strategy work today, the firm has little hope for tomorrow.
ORGANIZATIONAL STRATEGY
In computing a firm’s Corporate IQ, four areas of strategy are consid-
ered: marketing, innovation, product-technology applications, and the
firm’s product portfolio. In this chapter, each of those areas will be dis-
cussed. Notice that each of the 17 components of Corporate IQ are subdi-
vided into a number of attributes.
This leads us to the area in which the Corporate IQ approach is radically
different from all other approaches to corporate strategy. It begins with a
systems thinking approach to determining competitor behavior called the

competitive index. It then leads the manager to understand how to profile
each area of the firm for that specific environment. Again, it’s all about de-
signing strategies and an organization for the specific competitive chal-
lenges that the firm will face. The bottom line: It’s all about understanding
how to keep the firm—every aspect of the firm—in the profit zone. The first
area of strategy that we will consider is marketing aggressiveness.
I would again like to credit Igor Ansoff for his phenomenal work in cre-
ating not only his original strategic approach but, further, the entire process
that allows a manager to look at a chart for each area of the firm and use
that to understand how to design strategies. I cannot overemphasize the im-
portance of what you are trying to achieve. On one hand, you have the com-
petitive index, which describes expected competitor strategies. On the
other, you can quickly assess your organization and identify deficiencies re-
lated to the profit zone in every area of the firm.
I would like to begin the discussion on strategy with a practical exercise.
Let’s assume that you are in the residential telecommunications business. It
does not take long to figure out that the competitive index in that segment
is around level 4.5. Now let’s develop strategy based on that index.
Observe that I have indicated the competitor index in Figure 6.5 with
the dotted vertical line at 4.5. Notice also, that I have drawn in the profit
zone at +/- 0.5, which means that the profit zone for the firm is between 4.0
and 5.0. That means that if the firm’s sales aggressiveness, PR/advertising
aggressiveness, and market strategy is in that range, the firm will maximize
its profitability. Remember also, the further away from the ideal (4.5), the
lower the profit. I use the distance from the competitor index to arrive at
the score, or IQ points, for each of the 17 areas of the firm.
Now I would like to add one more aspect to the chart. I would like to add
a typical organizational profile to the chart, using small circles to indicate
the firm’s level of marketing aggressiveness. See Figure 6.6.
You can take one look at this profile and understand why this company
will not be successful in the emerging market. While competitors will be
highly aggressive, our firm will be a follower in the area of sales aggressive-
ness, will have negligible PR and marketing, and pay little attention to in-
creasing market share. After seeing this exact situation in real companies
numerous times, I can tell you that this company is all but dead.
This also helps explain why one of the fads like Six Sigma will not fix a
problem-laden company. If you do not measure the right things, you cannot
fix them. The answer is truly that simple, even though the process is com-
FIGURE 6.4 Marketing (Aggressiveness)
Factor Level 1 2 3 4 5
Sales Low Moderately Competitive Moderately Highly
aggressiveness low high aggressive
PR/Advertising Negligible Moderate Competitive Aggressive Highly
aggressiveness aggressive
Market Maintain Maintain Grow with Expand Increase
strategy market market market market market share
plex. I am not opposed to Six Sigma, by the way, but I do recognize that,
while a Six Sigma program may be able to correct 10 percent of a company’s
problems, unless the other 90 percent are corrected, the firm will still fail.
Six Sigma is only a fad if you view it as an all-consuming single solution.
The next area of strategy to consider is innovation aggressiveness. No-
tice again that, as the competitive index goes up, the creative activities of
the firm must increase accordingly. In the area of customer focus, it is im-
portant to note that the long-accepted idea of “staying close to the customer”
is an acceptable practice as long as the competitor index is level 3.0 or below.
When the level of competitiveness exceeds 3.0, the firm must become pro-
actively engaged in anticipating customer needs. That is another way of say-
ing that the customer will often not know their own needs and will want to
do business with the organization that can best provide solutions.
It is important to realize that innovation aggressiveness is the area of the
firm that provides the fuel for the engine of profit. Without an appropriate
level of innovation, the firm is not producing enough new products at an ac-
ceptable rate. Under those circumstances, the best marketing program in
the world will not help.
Sales Moderately Moderately Highly
Low Competitive
PR/Advertising Highly
Negligible Moderate Competitive Aggressive
Sales Moderately Moderately Highly
Low Competitive
PR/Advertising Highly
Negligible Moderate Competitive Aggressive
As the level of competition or competitive index goes up, so must the

levels of innovation and marketing aggressiveness. One way of measuring
just how effectively a company is handling its innovation, or R&D program,
is to look at its product life cycle balance.
Most companies tend to compete within a family of products. Technol-
ogy companies tend to focus in a fairly narrow product area. I would like to
add: this practice is not desirable; it is simply reality. People love to focus on
the familiar and avoid the unfamiliar.
With that reality in mind, it is often also true that the competitive index
for the various product segments will often be within the same range. That
means that the product strategies across the company can be similar. One
way that we can measure the effectiveness of a firm’s innovation aggressive-
ness is to look at what I call the firm’s product life cycle balance.
As the competitive index increases, product life cycles decrease. Think
about it, as firms innovate more rapidly, events of creative destruction be-
come more frequent. In turn, the useful sales life of a product will decrease.
Here is what we normally expect to see at each different level of competition.
FIGURE 6.7 Innovation (Aggressiveness)
R&D Low Moderately Competitive Moderately Highly
spending low high aggressive
Product life Very long Long Moderate Short Very short
cycles-plan
Customer Respond Meet Stay close to Anticipate Anticipate
focus to demands demands customer needs unrealized needs
FIGURE 6.8 The Competitive Index and Product Life Cycles
Competitive Index 1 2 3 4 5
7 years 5-7 years 5 years 3-5 years 18-36 months
I have not spent a great deal of time explaining how we derive the com-
petitive index for a competitive segment. I also have not spent much time
explaining why we normally measure the competitive index at some point in
the future versus today. In a consulting situation, it takes about four to six
weeks to complete the research required to accurately predict the future
competitive index. The process is complex and somewhat sophisticated.
Most importantly, it is extremely accurate. That’s why some clients have cho-
sen to retain our team solely for the purpose of computing the future com-
petitor index for a segment. It helps them understand the most profitable
product portfolio balance for the segment.
The final area of strategy is called product-technology (applications). In
this area, many companies have learned some costly and important lessons
over the past few years. Product-technology applications involves the inclu-
sion of technology in products. One emerging technology that recently has
had a significant impact on products and product marketing is the Internet.
This particular aspect of the product can obviously take many forms, but
needless to say, it is critically important and must be considered as part of
any effective corporate strategic plan.
Technology clearly is the fuel that drives the future of a company. One
of the best known technology companies is Microsoft, which is one of the
ten smartest companies in America.
FIGURE 6.9 The Four Stages of Products (Life Cycle)
3 Maturity
2 Growth 4 Decline
1 Introduction
FIGURE 6.10 Product Portfolio
Diversification None Limited Moderate High Very high
(Product)
Product life Mostly 3-4 Mostly 3-4 Balance (1-4) Skewed Skewed
cycle balance toward 1-3 toward 1-2
MICROSOFT: ONE OF THE TOP TEN

When it comes to identifying great companies, Microsoft is on just

about every list. In the case of this book, it made the list because the internal
assessment of the firm indicated that they are a very smart company. At the
same time, a lot of people try to find something wrong with the company.
Regardless, the unavoidable truth is that Microsoft has exceptional strategy,
a highly adaptive organization, and exceptional corporate character. It’s
hard to be critical of such a well-run company.
Microsoft, it turns out, is run a lot like the other smart companies fea-
tured in this book. A few years ago, I had the opportunity to interview em-
ployee number 1,500 of Microsoft. It is clear that the company is run exactly
the same way today as it was in those early years. Bill Gates still seeks excel-
lence from himself and from everyone else associated with the company. He
is still the resident visionary and is obsessed with discovering the future first.
One of the ways that Microsoft has maintained its growth and profitabil-
ity is through its focus on intellectual capital and knowledge. The organiza-
tion begins with hiring the best, most talented people. They also make sure
that the people they hire will fit the Microsoft culture as well as the com-
pany’s attitude toward excellence. One of the mantras of Bill Gates is the
need to share knowledge within the company. In the early years, he made it
clear that a discovery such as a new trend or process in one part of the com-
pany had to be shared immediately across the organization. That is where
those smart, capable people come in. As superb as Microsoft is as a learning
organization, they are probably equally adept at applying organizational
learning in the form of implementation.
Great people, aggressive strategy, continual learning, and exceptional
corporate character: Microsoft is one of those exceptionally smart compa-
nies that should continue to do well over time.
FIGURE 6.11 Technology Applications (Product)
Technology None Limited Moderate High Very high
applications
(Product)
Technology None Last In Adapt with Seek early First mover
philosophy competition adaptation
STRATEGY FOLLOWS CONTEXT
Great companies are adept not only at creating great products on a con-
tinual basis but at marketing them. Smart leaders and smart companies have
the foresight to spend money on innovation, even in hard times, because
that is how they create the future. At the top ten smartest companies, each
clearly can continually create strategies that are appropriate for the firm’s
context. If you look out into the world of commerce, the same cannot be said
for a lot of companies. At those companies, it takes a crisis to convince the
firm’s management of a strategy problem. Often, that realization occurs
much too late.
Author comments. I have based my research on the original work of

H. Igor Ansoff. While I have extensively modified his original model, I
credit him for creating the first comprehensive model of the environment as
well as the organization. I will forever be indebted to Dr. Ansoff for his
insightful teaching and mentoring.
C h a p t e r
7
ORGANIZATION
Entrepreneurial Support Systems
E ver wonder why some great emerg-

ing companies did not last very long? Have you ever seen a company that had
a great product but was unable to operate at a level sufficient to get the re-
sults that it deserved? If you have seen companies like that, and most of us
have, this chapter will hopefully provide a lot of answers for you. I’ll begin
by telling you a true story. I have changed only the name to protect the guilty.
ZEUS ELECTRONICS
Zeus Electronics is not a small company. In fact, it ranks well toward the
top of one of the major top 100 lists. What makes Zeus unique is a business
combination that occurred just a few short years ago. One of the firms in-
volved in the consolidation has its roots in the early 1900s. The other was
over a half a century old at the time of the consolidation. One company had
reached the point of being a high Corporate IQ firm. The other had a Cor-
porate IQ of around 50—one of the lowest scores that I have ever seen. Sadly,
the low-IQ company ended up on top after the consolidation.
What followed was a systematic destruction of the acquired firm’s lead-
ership structure as well as its culture. Within a few short years, empowering
managers had been replaced by highly controlling managers. The culture of
excellence became a culture of compliance. Soon, the exodus of talented,
93
creative members of the corporate team left the firm with a slow, bureau-
cratic group with little ability or desire to engage in creativity. The organi-
zation had lost its ability to be innovative or responsive.
Since the consolidation, the firm has laid off tens of thousands of work-
ers. Finally, they were able to lay off enough workers to squeeze out a profit.
The promotional policies at the firm clearly favored those from the firm
that came out on top. One employee, in talking about the firm’s new promo-
tional policies, put it this way: “If you fail the IQ test, you get promoted.”
At first, I really could not believe some of the stories that I was hearing
about this company. However, after confirming them with about ten differ-
ent sources, I concluded that they must be true.
UNDERSTANDING CORE INTELLIGENCE
While some worry about a firm’s core competencies, I worry a lot more
about a firm’s core intelligence. A few years ago, I did an external study of
Apple Computer, just before Steve Jobs returned to run the company. Years
of bureaucratic management and repressive dealings had led to a massive ex-
odus from the company. Repressive bureaucracies do not cause the slugs to
leave the company—the slugs don’t have anyplace to go. Repressive bureau-
cracies cause the people who can leave—the bright, talented ones—to leave.
The situation is a classic brain drain.
Some have claimed recently that their research shows that a firm’s CEO
is somewhat irrelevant to its sustainability. I would have to say that I disagree
with that conclusion for a number of reasons. First, the anecdotal evidence
is that the CEO does matter. Problem companies change for the better when
a strong, knowledgeable CEO comes in. In the same way, we can observe nu-
merous instances in which a high-performing company starts a downward
trend when a new CEO arrives. Second, the research underlying Corporate
IQ simply does not support their hypothesis. With that in mind, let’s begin
looking at the various aspects of the organization.
Before looking at specific areas, it is probably a good idea to revisit the
Corporate IQ model. The approach measures three broad areas of the or-
ganization.
1. Strategy (the aggressiveness factors)

2. Organization (the adaptive factors)
3. Character (the sustainability factors)
Organization: Entrepreneurial Support Systems 95
FIGURE 7.1 CEO Attributes
Attitude Reject Resist Slow Drive Aggressively
toward change adaption change drive change
Attitude toward No value Devalue Necessary Drive Aggressively
creativity and risk evil creativity Promote
Attitude toward Expect Expect Meet Respect Encourage as
subordinates performance efficiency objectives and value team member
Also, it is important to remember that the profit zone for character

never varies; it is always at level 5.0. In the case of strategy and organization,
those areas are context dependent. In other words, the profit zone can move
along the scale from 1.0 to 5.0. Success is all about contextualization and
matching the company with its context.
CEO ATTRIBUTES
CEO attributes really involves all the other 16 broad areas of the firm. I
put it in the organization area because it seems to fit best there. That said,
let us take a look at the attributes of the CEO that are important to organi-
zational success (see Figure 7.1).
In many areas that are measured using the Corporate IQ approach, po-
sitioning an aspect of the organization such as “advertising and public rela-
tions aggressiveness” out of the profit zone on the high side will cost the
company money. In a few areas, such as “attitude toward subordinates,” that
is not true. Even if the competitive index is in the 2.0 to 3.0 range (uncompet-
itive), valuing subordinates will increase profitability. Therefore, the profit
zone minimums obviously are more important than the maximums in some
areas.
Let us assume for a moment that you were on the board of a company
like Motorola. (In 2003, Motorola’s chairman Chris Galvin indicated his in-
tention to leave the post.) Let us also assume that Motorola’s environment
or competitive index (its context) is generally in the level 4.3 range. What
type of CEO does Motorola need? (See Figure 7.2)
It is fairly common knowledge that, when Galvin announced his inten-
tions, Motorola had become a restrictive bureaucracy. There were still
pockets of innovation within the firm, but getting a good idea to market is
still a problem.
FIGURE 7.2 Desired CEO/Chairman Attributes: Motorola
Attitude Reject Resist Slow Drive Aggressively
toward change adaption change drive change
Attitude toward No value Devalue Necessary Drive Aggressively
creativity and risk evil creativity Promote
Attitude toward Expect Expect Meet Respect Encourage as
subordinates performance efficiency objectives and value team member
Finding the CEO/chairman that Motorola needs may prove a difficult

task. In a lot of cases, CEOs like to build control structures and establish
their own little bureaucracy. That would obviously be a major mistake for
Motorola. What the company needs is someone to shake its foundations. In
some ways, it needs to get back to its entrepreneurial roots. Rather than es-
tablishing a new bureaucracy, the new CEO will need to come in with a
“challenge everything” attitude. Obviously, the existing management team
could prove to be the biggest challenge for the new head.
While I disagreed with a few things that Carly Fiorina did when she be-
came Hewlitt-Packard’s new CEO, I really admire her for creating a few sim-
ple rules to establish a new way of doing business. Here are the three rules
that she instituted when she came in the door.
Carly Fior i na’ s Th re e Rules
1. Preserve the best, reinvent the rest.

2. No politics, no bureaucracy.
3. Radical ideas are not bad ideas.1
The enormous task that Motorola’s new CEO will face is immediately
obvious. Not only is there an immediate need to reinvent much of the firm,
but there is strong internal resistance. The wisdom of the board of directors
will have an enormous impact on the future of the firm. Yes, CEOs really do
matter.
ORGANIZATIONAL MANAGEMENT
When you walk into a company, a bit of attention to detail can tell you
an awful lot. Regardless of what they tell you, most companies have a very
clear philosophy of management. That philosophy usually plays out in two
areas: leadership style and risk propensity. One area that I will discuss in
depth in a later chapter is control and controlling managers. At many 100-
year companies that have been featured by the likes of Jim Collins, it is not
surprising to find a highly controlling leadership style as a common philos-
ophy in the firm. Because most of those companies are competing in seg-
ments where the competitive index is over level 4.0, a control-oriented
philosophy clearly makes little sense.
“But these are those renowned, 100-year companies,” you might say. I
would respond and recognize the accomplishment of the company’s ability
to sustain itself for 100 years. As I have investigated such companies, what I
have discovered is that they do a lot of things well. In the case of GE, they
have a product portfolio approach that enables the firm to revitalize its
product mix continually and even make radically different investments (a
real no-no in some management circles) to sustain growth.
With all of that said, these companies are still operating with level 3.0
management practices in segments with competitive indexes in excess of
4.0. I would like to make two important points that relate to this issue. First,
most of these 100-year companies are tied to demand cycles of over 100
years. They did not start out life in the hula hoop segment. They started the
corporate life in a segment with a demand cycle in excess of 100 years. It was
not planned; it just happened. Second, and most importantly: sustainability
is not necessarily a measure of management excellence. I would fully expect
a 100-year-old sugar company to continue to be around for at least another
50 years. The reason is simply that the commodity called sugar will be in de-
mand for the next 50 years, at least. Sustainability in cases where the com-
pany is tied to a 100-year demand cycle does not indicate organizational
excellence.
I have had the opportunity to work with and study some of the compa-
nies I am talking about. Across the board, I have concluded that if the lead-
ership style of those firms were changed from a disciplined, goal-oriented
approach (level 3.0) to that of empowered excellence (level 4.0), the ROI of
those firms would go up substantially. In other words, they are doing well
because of their circumstances, but in every case they could do a lot better.
FIGURE 7.3 Management (Organizational)
Leadership Controlling Moderately Results Empowering Inspirational
style controlling oriented
Attitude Reject Discourage Tolerate Encourage Expect
toward risk
If the CEO is the cornerstone of an organization, then the leadership

philosophy is the foundation. As you will discover in Chapter 10, leadership
not only establishes the context for innovation but also fosters adaptive be-
havior. Both are critical for firms operating in segments with competitive in-
dexes above level 4.0, over 90 percent of the companies in the world.
CORPORATE CULTURE
I hope you are carefully reading each of the charts on the 17 areas. Most
of us have worked for a company with a level 1.0 culture at some point in our
lives. An organizational culture that focuses on “defending the status quo,
devaluing employees, and rewarding historic performance” is usually a re-
volving door. The literature talks about adaptive and nonadaptive cultures.
It should surprise no one to discover that most troubled companies have a
level 1.0 or 2.0 culture. That makes a lot of sense, because most of the time,
the complexity of the environment deals the organization numerous sur-
prises and challenges. By definition, a nonadaptive culture destroys a firm’s
ability to deal with such discontinuities.
A PAUSE FOR SOME MUSIC
A number of times in this book, I will revisit an analogy that I frequently

use to reinforce the concept of an organization as a complex system. A com-
pany is much like an orchestra. If one part of the orchestra is out of sync,
the music stinks. I can attest to that reality personally, because I spent much
of my youth playing in high school and college orchestras. All it takes is one
instrument or one section of an orchestra to be out of sync with the rest of
the group, and the music really does stink. The same is true for a company.
FIGURE 7.4 Culture
Values Defend the Support the Maintain the Challenge Create the
status quo status quo status quo status quo future
Value of Little Minimal Moderate High Very high
employees
Rewards and Historic Accuracy and Productivity Solutions Creativity
incentives performance efficiency development
Notice the interdependence between CEO attributes, organizational

management, and corporate culture. Each is dependent on the other. Bring
in a control freak CEO, for example, and you will destroy the firm’s culture
and diminish the level of organizational management.
Also, consider the impact of the CEO, management, and culture on the
company’s innovation efforts. A risk-averse, control-oriented philosophy can
quickly destroy the ability of the firm to use its core intelligence.
ORGANIZATIONAL STRUCTURE
In the same way that the literature talks about adaptive and nonadaptive
cultures, it talks about f lexible and inf lexible structures. Stop for a moment
and consider the logic that underlies Corporate IQ. It makes a lot of sense
to have an adaptive culture in a highly complex, uncertain environment. It
also makes a lot of sense to have a f lexible structure in that environment.
That is why most people who look at Corporate IQ ultimately say that it is
simply a matter of logic. That is true of an organization’s structure. Struc-
ture is simply a description of how the people and functions in an organiza-
tion are connected. It would be logical to assume that the more complex the
firm’s context, the more complex the firm’s structure should be.
It is also pretty obvious that a steep bureaucracy will kill a firm when the
competitive index exceeds level 3.5. The question is, what types of structures
are appropriate for each level? Figure 7.5 helps us understand that.
One of the concepts that Ansoff created is the bicentralized power
structure. A matrix structure (level 4.0) is one in which there is connectivity
not only to a functional area but also to a product area (or some variation of
that idea). Figure 7.6 shows a simplistic matrix structure.
FIGURE 7.5 Structure
Formal Hierarchy Functional Divisional Matrix Matrix
structure
Power Senior Bureaucracy Executive and Distributed Bicentralized*
focus executive bureaucracy CEO/team
*A bicentralized focus on power involves a high level of creative leadership at the top and highly
empowered teams at the competitive level.
You will note that in a matrix structure, each member of the team has
two reporting relationships. First, each has the normal function responsibil-
ity. Second, each also serves as part of a product team. One of the benefits
of the matrix structure is the fact that it cuts out a lot of the politics associ-
ated with decisions. Because each functional area has direct participation in
every product, the product gets good representation in the functional area.
That fact alone can help most organizations.
DECISION SYSTEMS
There has been a lot of talk over the past few years about intellectual
capital. What exactly is intellectual capital? Intellectual capital might best be
characterized as knowledge that reveals the optimal future path of the orga-
nization. The real issue involves both organizational learning as well as
speed of decisions.
I know I have suggested numerous times that management is all about
philosophy. That is especially clear when you think about organizational
learning. Most companies gather the same data. Why, then, does one com-
pany use that data to create a wonderful future, while its competitor ignores
the information and goes into a downward spiral? It is all founded on that
elusive concept called organizational learning.
Organizational learning has to do with the ability of organizational
members to convert data to knowledge, then to act upon that knowledge.
Knowledge contains intellectual capital. It is the intellectual capital, be it a
business process, a new customer preference, or a patent, that becomes the
future profit of a firm. Intellectual capital resides in a firm’s people. It is
not something you can put in a fireproof vault. That explains the inevitable
revenue tumble that firms with restrictive bureaucracies experience when
FIGURE 7.6 A Typical Matrix Structure
Senior Executive
Functional Functional Functional

Executive Executive Executive
Functional Functional Functional

Team Members Team Members Team Members
Product Team A Product Team B Product Team C
their intellectual capital walks out the door in protest of treatment by senior
executives.
When we look at decision systems, we are concerned first with how data
is collected. Obviously, the higher the expected competitive index, the more
futuristic the nature of the intelligence that must be gathered. Pair that with
a commitment to high-speed decision making, and you have an organization
that can compete at supersonic speeds.
I would like to point out that most organizations do not have an intel-
ligence unit. Most that do have an intelligence unit tend to be market intel-
ligence focused. Often, the intelligence unit operates under the sales depart-
ment. Intelligence units need to report directly to the CEO to be successful.
Further, intelligence personnel not only need to be equipped with the latest
data capabilities, but they further need access to the latest analysis tools. In
many cases, intelligence personnel are taught how to do a SWOT analysis
(strengths, weaknesses, opportunities, and threats) on a competitor, plus a
Porter’s Five Forces Industry Analysis, and little more. As intelligence tools,
these approaches are severely limited, because they lack the predictive
power required for complex, high-speed environments.
FIGURE 7.7 Decision Systems
Speed of Very slow Slow Moderate Fast Extremely
decisions fast
Early warning None Limited Competitive Strategic Multiple
systems intelligence intelligence systems
INTERNAL TECHNOLOGY APPLICATIONS
The ability to support high levels of strategic aggressiveness as well as

foster speed-of-light adaptive behavior depends upon the internal technol-
ogy of the firm. It is often easy to justify cutting the technology budget in
highly competitive times, because profit is so hard to achieve in those envi-
ronments. More often than not, however, the failure to invest in appropriate
technologies will haunt a company for years to come. The evidence, al-
though anecdotal, is everywhere.
STRATEGIC PLANNING
Strategic planning can help, or destroy, a company. By now, you realize

that I believe that strategic planning, as most companies practice it, keeps
them well below their profit potential. In some cases, I suspect that it can
destroy companies. If you question that reality, just look around and ask
yourself why certain companies fail. In most cases, it gets down to f lawed
strategy. Generally, the environment has changed, but the firm has not.
FIGURE 7.8 Technology Applications (Internal)
Technology Very slow Slow Stay with Leading edge, Consistent
strategy adaptation adaptation competition not bleeding first mover
edge
Redundancy* Unnecessary Unimportant Important Serious Critical
*Redundancy refers to the value placed upon the ability to take over for an operating system. It is
assumed that all systems are backed up, but the firm could not stay in operation if the system were
to go down. Obviously, some systems must be redundant regardless of the turbulence of the environ-
ment (health, safety, etc.)
FIGURE 7.9 Strategic Planning
Planning Budgeting Business Competency Nonlinear** Nonlinear
model Analysis based*
Planning Manual Computer Complex Artificial Artificial
technology projections budgeting intelligence intelligence
*The competency-based or traditional strategic model is based upon historic core competencies,
competitive advantage, and mission.
**Corporate IQ is a comprehensive, nonlinear strategic planning approach.
Notice that the competency-based approach appears to work up to a

level 3.0 competitive index. I said appears for a reason. When the competi-
tive index is below 3.0, we know that change is fast, but the environment is
still predictable. With that in mind, the approach will at least appear to work
in such environments.
STRATEGIC CAPACITY
As the level of complexity in a competitive segment increases, so does
the level of uncertainty. With that in mind, it becomes important for staff
and executives alike to be capable of doing creative strategic work. There is
little sense in creating a bicentralized power structure without giving the en-
tire team the tools with which to make decisions about complex situations.
Some of the tools that can be used are complex systems thinking (or sys-
tems thinking), scenarios, and war gaming. In the case of all three, they
clearly are designed to help the manager think through the multiple possi-
bilities of any situation. Earlier, I suggested that the whole idea behind sys-
tems thinking is to make reliable inferences. It is not only possible to make
reliable inferences about complex futures, but even in situations where it is
not, the very fact that you understand the level of uncertainty can help you
craft an appropriate strategy for the situation.
FIGURE 7.10 Strategic Capacity
Senior Very low Low Moderate High Very high
executive team
Staff/Managers Very low Low Moderate High Very high
The difficulty in getting senior staff to think in terms of difference can-

not be understated. It is a real challenge, because the power basis from
which most executives operate is tied up in the old paradigm. Moving to a
new paradigm of necessity involves leaving a personal power base behind
and learning to think in new terms. Research has demonstrated that it is an
extremely difficult change for an individual to make.
One company with a consistent record in creating a sustainable organi-
zation is Fidelity Investments. Fidelity is one of the top ten smartest compa-
nies in America.
FIDELITY INVESTMENTS: ONE OF THE TOP

Fidelity Investments is well known for its array of mutual funds and the
services it provides to its customers. At Fidelity, the real story is what you
don’t see. It’s a dynamic organization that is continually challenging every
assumption about the future.
As with the other top ten smartest companies, Fidelity is keenly aware of
how employees impact corporate performance. The firm’s leadership knows
well that “how you treat your people is how they treat your customers.”
While writing this book, I was interviewed by an author who was writing
a magazine article on productivity. One of the main questions she had was
about productivity departments. “Do any of your top companies have pro-
ductivity departments?” she asked. I explained that they did not but rather
that productivity was a result of what I call “empowered excellence.” I went
on to explain that, at the top ten smartest companies, productivity was built
into their culture in the form of excellence. That is excellence in how their
people were treated and excellence in everything that every member of the
team did. Excellence translates into productivity. That is exactly what and
how Fidelity leads its people.
Another little-known fact about Fidelity is extremely important. Behind
the scenes, Fidelity is a technology innovator. They have entire teams that
work on creating the next technology application to serve their massive cus-
tomer base. Their national networks are not only redundant but linked such
that every customer transaction is simultaneously mirrored at all of the
firm’s technology centers.
Obviously, technology plays an important role in the development of the
firm’s overall strategy. They also spend a great deal of time in recognizing,
appreciating, and valuing employees. The result is a highly adaptive organi-

zation that is founded on the highest standards of organizational character.
MAXIMIZING THE ADAPTIVE

BEHAVIORS OF THE ORGANIZATION
Research shows a direct correlation between the age of an organization

and the aggressive as well as the adaptive abilities of a firm. As organizations
age, they tend to become inf lexible and inwardly focused.
The ability to keep the firm’s strategies operating in the profit zone is
totally dependent upon the organization. Just like that orchestra, each
piece of the puzzle must fit the competitive context. As a manager, you have
the opportunity to make a significant difference in the future of your orga-
nization. Now, you have the foundation from which to launch just such an
initiative.

C h a p t e r
8
CHARACTER
The Sustainability Factor
T he corporate meltdowns of the early

2000s produced a new emphasis on corporate and individual ethics. Many
changes have resulted. There are new standards for corporate governance as
well as changes in accounting and reporting standards. While these changes
are welcome, the manager should remember that character is not the process
of complying with external laws and regulations. Character is in establishing
the very soul of the company. Further, character is much more than ethics or
compliance. Character involves the values of the organization—its ethics,
value of people, attitude toward excellence, and its attitude toward quality as
well as process.
One of the first observations you will make about transformational lead-
ers, those who take organizations to new highs, is that they often spend a
great deal of time in the areas that I have listed as organizational character.
One problem, according to many who comment on leadership issues, is the
link that exists between a transformational leader and the organization. In
a number of cases, when the transformational leader departs a company,
performance suffers because the foundation or link with the character at-
tributes is gone. I agree: transformational leaders are exceptional people,
but it is critically important for character attributes to be tied to the firm it-
self instead of to the personality of a charismatic leader. Smart leaders un-
107
derstand that and make every effort to ingrain organizational character into
the firm itself. Corporate character is comprised of five broad areas.
1. Values
2. Ethics
3. Value of people
4. Excellence
5. Quality and process
Every one of those areas drives the sustainability of the firm. In a world
where the rules of the game change constantly, some character issues should
never change.
Some organizations encourage storytelling to keep the emphasis on
character at the forefront. At Mary Kay Inc., Mary Kay herself oversaw the
creation of a “heritage department” that had the responsibility of recording
and communicating the rich stories that have characterized that company
over the years.
The literature on leadership talks about the role of leaders in providing
meaning to various aspects of an organization. Leaders often use ceremony
and recognition to emphasize and give meaning to important aspects of cor-
porate character. They also go out of their way to walk the talk in areas that
involve character. From her firm’s founding moment, Mary Kay Ash spent
much of her time building the foundation of the organization’s character. If
one of the hundreds of thousands of beauty consultants had a family trag-
edy, it was not unusual for Mary Kay to hear about it and call the individual,
even to continue to follow up with the individual for an extended period of
time. As a result of spending her time establishing the meanings behind the
corporate focus, the emphasis on character continued after she became dis-
abled in the late 1990s.
The events of 9/11 had an impact on the Mary Kay organization. A num-
ber of Mary Kay Inc. consultants lost their lives in that tragedy. A visit with
a Mary Kay executive will reveal that they are still keeping in touch today
with those impacted by 9/11. Living the principle of “the value of people”
takes precedence in the lives of those at the top of the organization. That is
how smart leaders at smart companies live their lives. They give meaning to
the character issues of the firm by giving them priority in their own lives.
They simply demonstrate by doing.
Character: The Sustainability Factor 109
CORPORATE CHARACTER IS THE

FOUNDATION OF PERFORMANCE
The top ten smartest companies all have a long waiting list. That is, hun-
dreds of applicants are lined up for every job opening. Not only does corpo-
rate character attract large numbers of people who want to work in an
environment of excellence, it also attracts the very best people. People want
to work in a company where ethics is more than just a piece of paper on the
bulletin board. People want to work at an organization where the slogan, Our
people are our most important asset, is not just a statement in the firm’s annual
report but describes how it actually treats its people.
It should be no surprise that some of the great corporate recoveries have
been based on the reestablishment of the firm’s corporate character. At Con-
tinental Airlines, for example, the company was able to become viable again
only after the firm’s character was revitalized. Years of managerial abuse and
poor employee relations had put the company into a position where its very
existence was in doubt.
When Gordon Bethune took over the airline, it had been through two
bankruptcies, and the relationships with customers as well as employees
were at an all-time low. He restored the trust relationships with the employ-
ees and, at the same time, established a standard of customer experience
that required excellence across the board.
Recently, Bethune was booked in a first-class seat on a Continental f light
out of Newark, New Jersey. The f light was completely full, and just before
departure, an announcement was made that the f light would be delayed be-
cause of a seat belt malfunction in a coach seat. Bethune immediately told
the agent to move the passenger from the malfunctioning coach seat to his
first-class seat. Bethune then took the jump seat in the cockpit. They don’t
serve jump seat passengers first-class meals, and the seats are not nearly as
comfortable. The f light left on time, and it should surprise no one that the
story of Bethune’s actions got to the Continental team at Houston long be-
fore the f light arrived. One of Bethune’s favorite questions to Continental
employees is, “Are you running a good airline?” Bethune’s actions gave real
meaning to that principle in the minds of his people.1
The creation of an excellence-based customer focus, trust, and the value
of people has allowed Gordon Bethune to lead this once troubled company
back to profitability. Rather than his years of airline experience, it is Be-
thune’s skill at creating high levels of corporate character that have enabled
FIGURE 8.1 Values
1 2 3 4 5
Importance of Non-existent Discounted Minimal Very Critically
stakeholders important important
Transparency Deceptive Clouded Minimal Open Completely
transparent
Practice None Little if any Minimal Consistent A minimum
expectation
him to be successful. I have often stated that great leaders can be successful
in any industry. I believe that is true of Gordon Bethune, as with most great
leaders. It is not their industry knowledge that makes them successful. I be-
lieve that they intuitively understand the basics of performance, strategy, or-
ganization, and character. With that said, I would like to discuss each of the
areas of corporate character.
VALUES
In many ways, the values of an organization are intricately linked with a

number of other areas of the firm. In most cases, the firm’s values center
around practices that involve customers, vendors, and employees. Figure 8.1
reveals the two basic areas that are measured in the computation of a firm’s
corporate IQ.
Importance of Stakeholders
In looking at the first value, importance of stakeholders, let’s first under-

stand the term stakeholders. In essence, the stakeholder view of ethics suggests
that corporate decision makers consider the interests of all stakeholders, in-
cluding the community, the employees, the stockholders, and the vendors,
when making ethical decisions. Profit is not a priority for those with a stake-
holder-oriented view. Ethically, however, a corporation has a duty to maxi-
mize profit. It makes little sense to spend money to save baby whales, unless
that activity directly impacts profitability. It is simply illogical for a manager
to try to consider all stakeholders and balance their desires with profit. At
the same time, there is a good ethical reason to invest in charitable work
from a bottom-line perspective.
In any situation that does not directly involve a customer, the leadership
of the firm must establish the nature of the relationship. Stakeholders, such
as the community at large, vendors, and charities, are part of a complex sys-
tem that helps drive profitability. For example, some companies squeeze ven-
dors to the maximum. In most cases, the vendor will endure the abuse just
to keep the business. In still other cases, companies create integrity-based re-
lationships with vendors. Over time, the dealings between the two become
characterized as relationships of trust and mutual benefit. When tough times
hit a company, often that trusted vendor helps the firm get through its diffi-
culties. Those firms without a good relationship will often suffer at the hand
of the vendor, who never cared much for the customer in the first place be-
cause of how it has treated it.
Charitable deeds operate similarly. One of the least appreciated aspects
of marketing is public relations. Few realize that one positive article about a
company’s charitable work can have the same value as a multimillion-dollar
ad campaign. The real challenge is to find the point of maximum profit. In
other words, there is a level at which the costs of charitable involvement are
maximized. Anything past that point has a diminishing return. I do not mean
to sound cold about this, because I have a number of charities that I person-
ally support, and that support has only to do with personal conviction.
The difference for a corporation with stockholders (as opposed to one
stockholder) is the implied promise of maximizing profit. Merck, widely her-
alded for its guaranteed-to-lose investment in a drug to cure river blindness,
came under intense stockholder criticism in 2003 for the firm’s lack of invest-
ment in new, high-growth, high-profit products. Investors are counting on
publicly held companies to maximize profit, because those same investors
have obligations and need profit maximization.
It makes no sense to create stakeholders mindlessly and then make
profit take a back seat to the supposed interests of those stakeholders. At the
same time, it makes a great deal of sense to manage proactively the relation-
ships with every entity that can ultimately enhance the firm’s profitability.
In that case, the interests of stakeholders become one with those of the com-
pany. That is the objective of any charitable deed on behalf of a for-profit
company. The alternative is to tell stockholders that you do not plan to max-
imize profit. We all know what they would do with their 401(k)s once they
found that out.
Transparency
A few exceptional companies make sure that their every action is above-
board and direct. Those companies go out of their way to make sure that their
actions are transparent. The results of such behavior are extremely positive.
In the last few years, an approach called open book management has
emerged. Open book management means that every employee of a company
has access to its financial dealings. That includes executive compensation,
incentives, etc. The company’s dealings are an open book.
Another concept that has received a lot of attention in the last few years
is called transformational leadership. As I mentioned earlier, the approach
involves inspiration, integrity, and high levels of trust. Generally, it also
seems to exist at companies that outperform their peers on a consistent ba-
sis. Transparency is one of the keys to effective transformational leadership.
That is why it is a key component of the firm’s character.
Practice
Practice deals with how strongly the organization’s culture enforces the
firm’s values. For example, at Southwest Airlines, every member of the team
is involved in making sure that the customer comes first. If a new employee
does not practice that value, their own peers often will make sure that they
do not remain with the company. The same is true at the management level.
There is little tolerance for those who do not practice the organization’s val-
ues. In many ways, it’s an environment in which everyone walks the talk.
ETHICS
Ethics involves two specific areas. The first, policies, deals with how the
firm’s ethical policies are written. Surprisingly, it is rare to find that a firm
lists lying, misrepresentation, fraud, or stealing in its ethical statement. Most
offer broad statements about being a good corporate citizen and the like.
Smart companies set clear, concise ethical standards.
I have mentioned my dislike for diversity programs. That does not mean
that I am opposed to diverse organizations. It just means that profit must
come first. I have never seen a company with the following in its ethics state-
ment: “Any manager who fails to promote the most qualified individual,
without regard to insignificant difference (race, gender, age, religion) will be
FIGURE 8.2 Ethics
1 2 3 4 5
Policies Non-existent Hazy Situational Clear Unquestionable
standards standards
Support None Marginal Moderate Strong Uncompromising
terminated.” Obviously, the company that consistently promotes the best

person for the job will be the most profitable, as well as a diverse, organiza-
tion. It just makes sense.
The second area of ethics has to do with what I call support. Support
deals with the level of compliance that exists within the company in the eth-
ics area. A lot of people talk about ethics; a few take action. The issue is sim-
ply how strongly the firm’s ethical standards are supported within the firm,
top to bottom.
I know it may seem a bit ridiculous to measure something like this, but
my experience has been that numerous problems with ethical standards and
support exist within organizations. I am sure that Enron and Arthur Ander-
sen had great-sounding ethical statements. The problem is, the standards
must be exact and the support must be uncompromising at all levels of the
firm. Otherwise, the firm has no ethical standards.
VALUE OF PEOPLE
Chapter 9 is devoted entirely to this topic. In some ways, value of people

could be considered a part of the firm’s culture. Most importantly, it is a crit-
ical part of the firm’s profit strategy. Value of people refers to how the or-
ganization does business. It refers to the very core of every interpersonal
transaction that occurs within an organization.
It should surprise no one that the turnover for a level 1 firm (abuse em-
ployees) is exponentially higher than a level 5 firm (exceptional). That also
explains why many of the “best to work for” companies have the most tal-
ented people and also often enjoy higher earnings.
We also know that how employees are treated has a significant impact
in other areas. For example, at one company, where supervisors were told
they would be accountable for how they treated their subordinates, customer
satisfaction, employee satisfaction, and unit performance all went up. W. Ed-
wards Deming once said, “What gets measured gets done.” It turns out that
FIGURE 8.3 Value of People
1 2 3 4 5
Value of People Abuse Discount Tolerate Appreciate Exceptional
if we make managers accountable for how people are valued, it happens. The
results can be exceptional.
EXCELLENCE RATING
Excellence is an attitude. Although the idea has been criticized, there is

a place for an appropriate standard of excellence. In many of the popular
business books of the last 20 years, the theme has been excellence. The only
problem with those writings is the vague nature of their definition of excel-
lence. Most of the books tried to look at companies that happened to be do-
ing well at the time. In almost every case, the authors tried to identify the
keys of excellence that related to the firm’s performance.
In most cases, the excellence books are mostly about practices. Some-
times, they involve what might be called best practices, as does the scorecard
approach. The common problem of those books is context. They do not re-
veal the relationship between practice and context.
Excellence in its purest form is simply a definition or standard. Excel-
lence has nothing to do with best practices or anything else that someone is
doing. Excellence has to do with establishing an outrageous performance
goal. Excellence can deal with how employees are treated, how customers
are treated, or the new products that the company will create. Excellence
simply has to do with setting the highest of all possible goals.
When applying the excellence rating to product innovation, the rating
begins to make sense. What do the smartest and greatest companies do dif-
ferently from their counterparts? The answer: They break the mold. While
their competitors are busily benchmarking the work of others, the smart
companies are trying to figure out how to establish a new standard. Profit-
ability is all about changing the rules of the game, and every member of the
corporate team must be committed to excellence.
FIGURE 8.4 Excellence Rating
1 2 3 4 5
Excellence rating Non-existent Very low Low High Exceptional
QUALITY AND PROCESS
You might wonder why I would include the ideas of quality and process
after I just slammed things like benchmarking and best practices. I want to
tell you two things. One, smart companies understand that quality is the
competitive minimum. Second, smart companies continually question and
revise their processes.
Smart companies understand that quality is a minimum. It’s not a ques-
tion, and it’s also not a program. Quality is simply a way of life as well as an
organizational commitment at smart companies.
The issue of process is equally important. A lot of consulting firms
passed themselves off as process reengineering specialists, when in actuality
they were little more than downsizing experts. Process has to do with cycle
times, such as how long it takes from when an order is placed until it is
shipped. At smart companies, every member of the team is a consultant. Ev-
eryone can question the process, and if there is a way to get a product to a
customer faster, the entire organization will support the change. An open-
ness to process change is a way of life at smart companies. One of the com-
panies that is known for its corporate character is A.G. Edwards, one of the
ten smartest companies in America.
A.G. EDWARDS: ONE OF THE TEN

Want to know the name of the securities firm that did not go in the tank
during the crash of 1929? Are you interested in finding out about the com-
pany that has made the “best to work for” list nine times? If you are, I need
to tell you about A.G. Edwards.
A.G. Edwards is over 100 years old. Even after all of that time, the com-
pany is one of those rare organizations that thinks and acts out of the box.
Headquartered in St. Louis, Missouri, A.G. Edwards has avoided some of the
herd mentality pitfalls that others in the securities business have encoun-
FIGURE 8.5 Quality and Process
1 2 3 4 5
Quality No standard Little focus TQM A way A total
programs of life Commitment
Process Unchangeable Inflexible Resist change Change as Continual
necessary revision
tered. “We think being out of New York is a positive for us,” said one execu-
tive. “It helps us keep our focus on the customer instead of all the ‘hot tips’
that are so tempting for a lot of people.” The executive went on to say that
the company has a unique organization. Everything focuses on the customer
and the financial consultant. All products and offerings relate to them.
This approach would be considered unusual for many in the industry.
At some firms, the brokers are given quotas of specific securities that they
must sell. “We don’t allow that,” said the executive. She continued, “Our fi-
nancial consultants are expected to avoid such deals and do only what is in
the best interest of their customers. We are here to provide support for them
in achieving those goals. We view anything else as a conf lict of interest,”
Old firm or not, A.G. Edwards has the aggressive strategies and the
highly responsive organization that is easily capable of succeeding on a long-
term basis. The firm also spends a great deal of time making sure that the
character standards, like ethics, are exceptionally high.
One way that the company maintains its ability to remain above re-
proach in dealing with employees and customers is through its monthly call-
in broadcast over the corporate network. Bob Bagby, CEO, conducts the ses-
sions, and any employee of the firm can call and ask a question or complain.
The employees may remain anonymous. Bagby welcomes any and all calls,
because he believes that way the company can maintain the highest stan-
dards of customer service.
At smart companies, walking the talk is critically important. Integrity
and valuing employees create an environment of trust that carries over to
the customer. That’s how business is done at A.G. Edwards, truly one of the
smartest companies in America.
SMART COMPANIES AND CHARACTER
We have witnessed the demise of some companies that had great strat-
egy and even a few that had a highly adaptive organization. The bottom line
of sustainability is that it takes all three: aggressive strategy, an adaptive or-
ganization, and unquestionable character.
Companies really are analogous to an orchestra. The weakest performer
can cause a disastrous performance. In some ways, it is difficult for a smart
company to fail. Their strategy keeps them ahead of competitors, their adap-
tive abilities allow them to respond effectively to uncertainty and surprises,
and their character allows them to sustain the first two.

C h a p t e r
9
THE ULTIMATE MOTIVATOR
A s a manager, you have a choice. You

can pay someone exactly the same money for the same job as your competi-
tor and get half as much productivity. Or you can pay them exactly the same
money and get twice the productivity. It is your choice. Contrary to popular
opinion, money is not a motivator. If you think that it is the ultimate motiva-
tor, it is time to rethink. If what I am saying is true, you might get only 50
percent of the effort from an employee that your competitor gets from an
equally qualified individual who is paid the same. So, what is the difference?
The answer is “significance.” In the field of psychology, the idea of sig-
nificance has begun to emerge as a major theory of motivation. The idea of
significance is somewhat simple. If you find a way to communicate that you
believe another is significant, chances are that they will be motivated by your
view. Let me put it another way: if you recognize your employees as signifi-
cant, chances are that your company will be much more profitable than a
competitor who does not recognize the significance of their employees.
In our book, The Significance Principle, Dr. Les Carter and I devote a lot
of time to that concept. Les believes that the human desire to be recognized
by others is one of the most powerful motivators in the makeup of the hu-
man being. I agree. When we look at people who want to run for political
office or become a senior executive of a company, more often than not their
119
drive is all about significance. The bottom line is that we spend a great deal
of time and effort with the sole objective of being significant.
What if you worked at a company where one of the base values was to
recognize the value of people? What do you think the bottom line of that
company would be versus that of its nonsignificance-focused competitor?
Undoubtedly, the company that focused on the value of its people would be
much more profitable than its counterpart.
Let me stop for a moment. I have seen companies that forgot about the
customer, the future, and excellence that have ended up in the dumps, even
though they spent a great deal of effort on communicating the significance
of their employees. There is a saying: beauty may be skin deep, but ugly goes
clean to the bone. The same is true of ego and stupidity. When a company
fails to manage all of the factors that drive profit (the 17 areas that comprise
Corporate IQ), then I would expect the firm to enter the stagnation or crisis
phase. That said, if a company is doing everything else well but its managers
fail to recognize the significance of the entire team, the firm will not be a
top performer in its segment.
One might ask: “What about GE? They are not known for valuing their
people, yet they have been featured as one of those top companies in a lot
of business books.” My response is simple: GE is probably underperforming.
In spite of their results, they are leaving a lot of money on the table. I’ll ex-
plain further.
An acquaintance was recently offered a job with GE. The contract in-
volved a very high salary, but one of the conditions of the job concerned her
a lot. They wanted her to leave home on Sunday and not return until Satur-
day morning, just to make sure she maximized her customer contact time
Monday through Friday. She is a bright individual, so it should not surprise
you that she quickly figured out that she would not be appreciated as an in-
dividual. It was one of those impersonal, “perform or else” situations. She
accepted a position at another major firm and immediately became one of
their top performers. Her bottom line was simply that she wanted to work at
a company where she was appreciated as an individual, not just for her per-
formance. In that case, GE missed hiring an individual who could have made
a serious contribution to their bottom line.
At a lot of companies, compliance is much more important than perfor-
mance. Yes, companies with an “Attila the Hun” attitude about making the
numbers can do fairly well, but at the same time, they leave a substantial
amount of profit on the table. People live to be appreciated and valued. It is
why they get up in the morning. Extremely bright and capable people will
The Ultimate Motivator 121
work for lower wages if their employer communicates their significance. It’s
important!
I must tell you that all of the top ten smartest companies in America fo-
cus on the issue of significance. It was difficult to choose which of those
companies might be the most representative of that attitude. In the end, I
had to focus on Mary Kay Inc., and the company’s founder, Mary Kay Ash.
Of all of the executives who have ever led a company, Mary Kay understood
the value of significance. I had the opportunity to interview David Holl,
CEO of the company. As you read his comments, I think you will understand
just how important significance is at that company and why they have en-
joyed double-digit growth every year since their founding in 1963.
MARY KAY INC.: ONE OF THE TOP

“Integrity, intelligence, energy: it all starts at the top,” says Mary Kay
Inc.’s president and COO, David Holl, who emphasizes that he considers
himself accountable to the ideals of company founder, the late Mary Kay
Ash. I had asked David for an interview during which we could talk about
philosophy—specifically how Mary Kay’s philosophy translates into the com-
pany’s strategy. I was not disappointed.
I suspect that if you were to ask some of the now-unemployed people of
recently failed companies about the reasons behind their firms’ demise, they
might list those same words: a lack of integrity, intelligence, and energy.
They might also agree on how important it is to maximize today, think and
act out of the box, and stay ahead of the curve. Further, if I were to list my
own three rules of good corporate strategy, these same words would appear.
Without integrity, intelligence, and energy, there is no support for the exe-
cution of good strategy.
“It all starts at the top,” says Holl. While he believes that a company can
find success without a charismatic CEO, Holl concedes that it certainly helps
to have a charismatic leader like a Sam Walton or a Mary Kay Ash to lay the
foundation. When speaking with Holl, it becomes very clear that he expects
his senior leadership team to establish and uphold the level of integrity, in-
telligence, and energy that shaped Mary Kay’s founding philosophies.
It has been my own experience as a business strategist that, unless the
senior executive proactively supports iconoclastic behavior and thinking
(think and act out of the box, stay ahead of the curve), those ideals simply
cannot occur. In fact, without the proactive involvement of the senior lead-
ership in fostering such behavior, the culture will revert to a staid, inf lexible
bureaucracy.
When I listened to David Holl, his personal accountability for leading
those behaviors was evident—both to the legacy of Mary Kay and to the en-
tire organization. “Mary Kay herself lived that way,” he says. “Rather than
just running the company centered around those principles, it’s what she
lived every day. Her ideals were ingrained in her character, and she made
sure we understood that the firm’s leadership had to live those ideals. Oth-
erwise, she believed we would be much less likely to succeed.”
Holl understands that companies can’t just talk a good line; they have to
earn the loyalty of their employees. As a corporate employer, Mary Kay Inc.
is known for its careful selection of personnel. “Don’t get me wrong,” he ob-
serves. “We still make mistakes. But we try to be quick to react and correct
them when we do.” As a rule, Mary Kay studiously avoids large layoffs or
downsizing. Holl says this has been possible because, “We stay as lean as pos-
sible and avoid spending ahead of our growth.”
Within the company’s one million-plus independent sales force, Mary
Kay Inc. also seeks the goodwill that the founder engendered from the
beginning in the consistency of her programs and practices. There are still
grand and glorious prizes, generous commissions, and a teaching emphasis
on developing leaders and instilling the Mary Kay values. “It is up to us to
keep this opportunity as great as Mary Kay always wanted it to be,” Holl
observes.
“We compete for our employees’ hearts.”
One of the ideals that Mary Kay always subscribed to—and today’s man-
agement team wholeheartedly endorses—is that employees treat their cus-
tomers in much the same way they are treated by the company. It is important
to note that Mary Kay views its independent sales force as its primary cus-
tomers. That is why they place so much importance on valuing and recogniz-
ing them.
Building trust and loyalty with its independent sales force is very impor-
tant at Mary Kay Inc.
“We also compete for our employee’s hearts,” says Holl. “One of the
most important things about leading is how you treat people. We learned
from Mary Kay’s example. We strive to treat our employees so well that they
won’t even think about leaving us to work somewhere else. And we are keenly
aware that good people will always have other options.”
That may be one reason why the corporate staff enjoys low turnover and
remains so committed and empowered to solve customer—independent sales
force—issues. “A very high percentage of inquiries are solved by the first con-
tact with the company,” says Holl, who adds that independent sales force
customer service systems are designed to do just that. The balance of excel-
lence and caring seems to drive every member of the team at every employee
level to strive to provide the best service for every person with whom they
come in contact.
Smart Risk Is a Necessity
The Mary Kay organization has always demonstrated a commitment to

taking calculated risk. The founder herself demonstrated that commitment
when she invested her life savings of $5,000 to launch the company, which
opened just a month after she had lost her husband to a heart attack. Al-
though thriving on creativity and risk, today’s company leaders are also cau-
tious about making sure to avoid the mistakes often associated with those
same entrepreneurial attributes.
That competitive reality was clearly demonstrated by the company’s
technology philosophy upon entering the e-business arena. Though early to
embrace the possibilities, Mary Kay Inc. was not the first to jump on the e-
business bandwagon. “Of course, we saw the potential, but we also knew the
exceptionally high risks. We knew we had to get it right and get it that way
right out of the box,” observes Holl, who thinks that spending time up front
made a positive difference.
One of the corporate philosophies that the Mary Kay organization lives
by is a “seek the best for others” approach, which is focused on its worldwide
independent sales force as well as on its customer base. In the mid-1990s,
Mary Kay executives clearly saw that the Internet held a great deal of poten-
tial for the company. For a company that thrives on staying on the leading
edge of change, getting it right the first time around was their major concern.
The organization grappled with issues like what group was going to lead
the online charge and how to handle the high traffic that would come to a
Mary Kay Web site with its success throughout the independent sales force.
One other issue was particularly relevant to Mary Kay Inc. as a direct selling
company. The firm had always gone out of its way to make sure that the in-
dependent sales force was secure when it came to their customer relation-
ships. “Simply put, we had to make sure that our independent sales force
knew and trusted that our strategy was never to go around them to get to
their customer. At the same time, we knew we needed their acceptance; we
also needed that acceptance right away and in large numbers,” said Holl,
who can look back after seven years and be proud that Mary Kay’s strategy
was not only an instant and overwhelming success, but it was true to its com-
mitment never to cut out its independent sales force. Holl and his leadership
team were keenly aware that such behavior would have been a violation of
Mary Kay Inc.’s bedrock principles and certainly no way to follow the “dance
with who brung you” philosophy that prevails with regard to its relationship
with the independent sales force.
Mary Kay’s cautious creativity toward tailoring its Internet strategy has
paid off.
By early 2004, some 90 percent of product orders from the independent
sales force came via the Internet. Approximately 80,000 orders are pro-
cessed any given week. Considered among the e-commerce giants, the com-
pany has continued to write programs that have proven of great value to its
independent sales force, a huge percentage of whom also take advantage of
Mary Kay’s state-of-the-art educational and motivational online programs
that have continually evolved since 1997.
The company’s independent sales organization can now obtain all of
their sales data online—this activity once involved massive printed reports
that arrived after month-end. The company’s technology strategy has been
centered on convenience for its end-use customers and sales force. This has
not only paid massive dividends in reduced costs and heightened customer
service, it has also helped hundreds of thousands of individual business
owners streamline the way they manage their own business systems and thus
provide good service to their customers. All these innovations, plus the en-
hanced ability for a cosmetics empire to disseminate the latest beauty trends
in a timely manner, may be why the firm has quietly become one of the larg-
est e-businesses in the world in such a short time.
A Culture-Supported Strategy
When you mention “walk the talk” to an executive like David Holl, you
get some idea of how the company defines excellence. Mary Kay founded
the company on the Golden Rule: Do unto others as you would have them
do unto you. Mary Kay believed that actions, not words, were the key to liv-
ing out that principle. As with so many of her teachings, it became the stan-
dard for how the company operates. She believed that principle applied
equally to the people who work for the company and those who comprise
the independent sales force.
Culture might be defined as the internal environment of the company.
It’s often referred to as the unwritten rules by which the company does busi-
ness. At Mary Kay Inc., the rules are clear. If it’s difficult for you to work by
these rules, you may not be a good fit for the company. The Mary Kay way
instructs that leading is the opposite of controlling or demanding. A high
premium is put on managers who can achieve goals at the same time as they
inspire and lead. The model that developed first from Mary Kay’s own
brand of leadership has been refined over the years, and other companies
continue to look to it even today—two decades after Mary Kay’s philosophy
was spelled out in her book, Mary Kay On People Management. It would be
highly unlikely that a manager who is willing to sacrifice the well being of
employees for the sake of personal gain would survive long in this culture.
That ethos goes all the way to the top of the firm.
The company culture can be seen particularly in discussions about rela-
tionships among top executives. They are a diverse team with vastly different
backgrounds, but Holl defines them more as a close-knit family than as busi-
ness associates. There is little tolerance for those who only want to defend
their territory. The focus is much more on how senior managers can work
together to accomplish the firm’s objectives. As Holl put it, “We truly care
about one another.”
When we look at the realities of today’s competitive environment, it is
my opinion that success depends upon speed, appropriate risk-taking, and
trust. That explains why companies like Mary Kay do so well in challenging
business environments as well as in good ones. Every manager and every
employee has the freedom and the support that encourage them to strive for
excellence. Rather than battling egos, maintaining the status quo mentali-
ties, and cultural norms, the joint commitment to excellence among all
members of the team allows the firm to avoid many of the bureaucratic and
political traps that burden other organizations.
David Holl recognizes the critical role that the firm’s culture plays in its
ability tso sustain long-term profitability. “I think it’s fair to say that a key fo-
cus of our job as members of the senior executive team—in addition, of
course, to growing the company—is to sustain the Mary Kay culture,” he says.
One of the ways that the culture plays out in Mary Kay Inc.’s corporate strat-
egy is the continual high level of innovation within the firm.
The remarkable track record that the company has achieved for more
than 40 years in the hotly competitive beauty industry speaks for itself. Mary
Kay brands enjoy great customer loyalty. But there is more. Based on the
most recent industry sales data and actual Mary Kay sales, in the United
States, Mary Kay has ranked as the best-selling brand in the combined cate-
gories of facial skin care and color cosmetics for most of the last decade.
Part of the reason for that success has been the company’s ability to tap
into emerging markets like the elusive Gen-Xers and Gen-Yers, as well as the
widely divergent international arena, while maintaining its loyal following
among Baby Boomers and cultivating the youngest Echo Boomers.
Realizing that the company’s domestic U.S. market was approaching the
mature status (even though this market continues to show consistent growth),
the company’s leadership realized that it had to reinvent itself in the interna-
tional arena to sustain its historical growth rates. The result has been success
in a number of exploding international markets, including Mexico, Russia,
and China. For a company like Mary Kay Inc., that also means that teams like
technology and marketing and even research scientists have to think globally.
Unlike many firms that keep their researchers in laboratories, Mary Kay’s sci-
entists travel the globe to understand the unique needs of each of its markets.
“We listen to our customers,” says David Holl. “That means that the people
who create our products must have an intimate understanding of the inde-
pendent sales force ‘customers’ as well as the end-use customers. You don’t
get that by living full-time in the lab; you’ve got to go to the source, and that’s
what our team does.”
Transformational Management
David Holl likes to stress the tension between maintaining the firm’s
core culture and principles, while at the same time competing in a world
that is different every day. The firm’s competitors are some of the most re-
spected companies in the world. They are known for their marketing and in-
novation savvy. In addition to that, Mary Kay—which advertises minimally—
thrives in an industry where ad budgets are typically extremely large.
Admittedly, the company dances to the beat of a different drummer,
preferring to spend what others might spend on ad dollars on the commis-
sions, prizes, and recognition that are hallmarks of the firm. “As Mary Kay
said, sometimes we fail forward to success,” says Holl. “Yes, we face strong
and smart competitors who continually create competitive challenges for us.
It’s the combination of our stable culture and our wonderfully creative en-
trepreneurial spirit that allows us to effectively compete.” The combination
apparently works, because the company has continued to excel even through
some tough times.
On Thanksgiving Day 2001, company founder Mary Kay Ash passed
away. The firm’s leadership had been actively working on a transformational
plan at the insistence of Mary Kay, who assumed the chairman emeritus title
in 1987. However, when she had a stroke in 1996, the need for such action
became even more evident. In many ways, the Founder herself put the plan
in place.
It has been said that, “Sales is the heart of a company.” What Mary Kay
and a number of the firm’s senior executives realized was that the leadership
in the company’s independent sales organization held the key to this firm’s
heart. With that in mind, Mary Kay Ash began working as far back as 1971
to pass her mantle of caring leadership to those who’ve reached the pinnacle
of success in the independent sales force—more than 325 independent na-
tional sales directors worldwide. Mary Kay told them, “This company carries
my name, but it has a life of its own.” It became their role to sustain the prin-
ciples and the culture of the founder. “That made a lot of sense,” says Holl.
“The independent national sales directors have embraced the challenge and
executed it with brilliance.”
In spite of the loss of its founder in 2001, the company has achieved
record-breaking results in the three years since her passing. The worldwide
independent sales force has grown from 800,000 to nearly 1.3 million. It’s al-
most as if they were offering a personal salute to their departed leader, while
contradicting skeptics who wondered what might happen to the company
once its founder was gone.
In 2001, when I inquired about writing the leadership story of this com-
pany, I knew that it was an exceptional organization. What I saw was great
strategy, a highly adaptive organization, and a corporate character founded
on extremely high ethical standards. It should be no surprise that, when I
assessed the company using my Corporate IQ measurement; the score was
among the highest of any company that I had ever measured. That is a trib-
ute not only to the firm’s founder, Mary Kay Ash, but to the leadership team
that has the wisdom and insight to lead the company forward into the 21st
century.
Another one of those smart companies is Fidelity Investments. While

the firm is well known for their mutual fund products, very little is known
about how the firm is run. My investigation revealed that Fidelity is a leading
edge company and warranted my attention.
FIDELITY INVESTMENTS: ONE OF THE

When you think about managers who communicate significance, I al-

ways think about Fidelity Investments. About four years ago a friend of mine
was hired by Fidelity. It wasn’t long before I got a phone call from him. He
absolutely could not believe how the company treated its employees.
It seems that my friend was involved in one of those projects that re-
quires working all night to get the job done. He had only been with the com-
pany for one day, when that need arose. Working through the night is not a
normal expectation at Fidelity, unless you end up working in the informa-
tion technology area where my friend worked. In that case, you often have
to work on systems when they are not being used. That means the occasional
evening or weekend.
In this particular case, the team was responding to an emergency that
required the relocation of employees to a contingency site because of a bro-
ken water main. The team had to get everything in place by market opening
the next day. In true Fidelity tradition, they worked long hours to ensure
that employees reporting to the contingency site in the morning would have
all the computer services they needed. They got the job done because they
pulled together and set high standards for their own performance.
The following morning, my friend and his associates were called into a
meeting with a company vice president. Executives at Fidelity’s home office
on the East Coast had heard about their exceptional commitment to com-
plete their project the preceding evening and had instructed the local vice
president to pass on their congratulations and a spot award check. Of
course, a lot of praise went along with the money. When my friend called
me and told me the story, all he could say is, “I’ve never been treated this
well in my life.” A few months later, the team was recognized a second time
when the division president, along with a team of senior executives, f lew to
Dallas and presented each person with an outstanding service award plus an-
other check, lunch at the Cattleman’s Club, an inscribed crystal desk clock,
and a framed picture of the team.
That is why Fidelity is one of the smartest companies in America. Every-

thing they do focuses on the value that they place on their employees and
their customers.
Strategy, Organization, and Character at Fidelity
Obviously, companies that score extremely high on the Corporate IQ as-

sessment will have extremely good scores in the three major areas of strat-
egy, organization, and character. Fidelity does so well for a number of
reasons.
When it comes to strategy, a few areas are obvious. Fidelity Investments
is fairly aggressive in the areas of advertising and promotion, key compo-
nents of the assessment. There is another area in which the company’s ag-
gressiveness is not quite so obvious, the area of innovation.
One of the behind the scenes activities that characterizes Fidelity is a
team that works on technology. The team is continually looking at new and
emerging technologies that can impact the way Fidelity serves its clients.
Imagine that you have the ability to receive constant updates on the status
of your investment accounts on a device similar to a PDA. Add to that the
ability to receive information no matter where you are in the world.
The emergence of the Internet as a global communications highway,
plus the new technologies that will allow global access to the World Wide
Web and personal e-mail, will change the way that we communicate. At Fi-
delity, a creative team is responsible for applying those technologies and
constantly seeking new innovations that will enhance the firm’s services.
Another important area of Fidelity is technology philosophy. Fidelity’s
national technology system is a marvel. With a number of somewhat identi-
cal technology centers around the country, Fidelity spends a great deal of
money and time to ensure that multiple levels of redundancy exist.
Let us assume for a moment that a Fidelity customer is online, working
on their account, and a massive power failure occurs in the region where the
computing center is located. Due to the way that Fidelity’s system is de-
signed, the system will automatically move the client’s connection to another
regional computing center, and the client will never know what happened.
Fidelity Investments takes the same aggressive approach when it comes
to corporate character. As I have already pointed out, they focus on the value
of subordinates. Likewise, ethical standards are a focus in every aspect of the
firm’s business, and there is no tolerance for those who would violate Fidel-
ity’s standards. When it comes to quality and processes, a high level of open-
ness exists around any opportunity to change processes that impact the
customer.
Aggressive strategy, an adaptive organization, and unquestionable char-
acter—those are the prerequisites for success in a highly competitive uncer-
tain environment. In the case of Fidelity, as with the other smart companies,
a lot of attention is paid to these areas. Rather than resting on past successes,
these smart companies are continually engaged in creating the future.
I started this chapter with a discussion of the significance principle. The

most powerful aspect of the human personality is the desire to be recog-
nized, appreciated, and valued. In the case of the two companies featured
in this chapter, Mary Kay Inc. and Fidelity Investments, both are committed
to making the significance principle a key aspect of their business. The suc-
cess of these companies will hopefully provide valuable lessons for others
that desire to be equally successful.
C h a p t e r
10
RAVE!
Inspired Excellence
A lot of people wonder how some

of the great companies operate. The management literature talks a lot about
“transformational leadership” and charismatic leaders, but limited informa-
tion is available about how to create a great company. Without exception,
the great companies operate on a principle that I call inspired excellence.
I believe that the acronym RAVE, Recognize-Appreciate-Value-Excel-
lence, is a great way to understand how transformational leaders, and smart
companies, lead their people. The idea of RAVE is simple. Recognize, ap-
preciate, and value your people in everything you do. Add to that the stan-
dard of excellence in everything that the organization does, and you have a
highly motivated organization. I’ll brief ly explain each of the four ideas.
First, recognize is what you do in public. It is one thing to tell someone
that they did a great job on something. It’s another entirely to call all their
peers together and tell them what a great job someone did. Recognition as
a public ceremony is the ultimate application of the significance principle.
It conveys the idea of significance to the individual but, further, provides a
ceremony in which to communicate it.
Appreciate deals with what might be called the little things that people
do. It might simply be thanks for a project or a job well done. Appreciation
is transactional in nature. That is, it occurs as a matter of course in conver-
sations between a leader and one of their people. Appreciation is personal
131
and reinforces the validity of what a leader does by recognizing others in a

public setting.
Value has to do with the very foundation that underlies any relationship
between people. It deals with the communication of just how important and
capable a leader considers another person. I recently watched a new man-
ager struggle in his job. As he began making decisions, he soon managed to
make just about everyone mad. The problem is, the new manager had no
idea what was going on.
The young manager was violating what I call the first rule of leadership.
Th e First R u l e o f Lead e rshi p
Before making any decision, get the counsel of those who will be affected by the
decision, those who are passionate about the issue, and those who will have to carry
out the decision.
The first rule of leadership addresses the issue of significance. If people

feel discounted, you have just hit them right in the center of their being. As
I have mentioned a number of times before, our need for significance is at
the root of almost everything we think and do. The ability to communicate
the fact that you truly value someone is one of the most important leader-
ship skills that exist.
Excellence is the final factor that must be considered. Smart managers
understand that excellence is the foundation of everything that a top orga-
nization does. Excellence has little to do with best practices or other com-
parison approaches. Excellence has to do with continually striving for the
very best without regard to whether or not something has ever been done,
or whether or not a competitor does it. Excellence also means that leaders
must practice that principle in all their dealings with subordinates. Power
trips, discounting, or control behaviors are not allowed in companies in
which excellence is the standard. That means that managers who lack per-
sonal humility have no place in a company that practices RAVE.
One of the ten smartest companies in America is Southwest Airlines. Al-
though branded by some as being a little corny, they proudly say that one of
their most important corporate values is “love.” Whether love is corny or
not, hundreds of thousands of people apply to join this company every year.
You have probably heard the song that goes, “looking for love in all the
RAVE!: Inspired Excellence 133
wrong places.” When it comes to Southwest Airlines, you might call it, “look-
ing for love in all the right places.”
SOUTHWEST AIRLINES: ONE OF

AMERICA’S TEN SMARTEST COMPANIES
On June 18, 1971, the airline business was changed forever. On that date,
a little maverick start-up called Southwest Airlines took to the air for the first
time. The fact that the company ever got into the air at all is a testimony to
the tenacity of the company, its founders, and its employees. Only after
many years of legal battles was the first f light cleared for take off.
The concept for the company was taken from an airline in California.
That company focused on short haul, regional service along with a no-frills
approach. The original founders of Southwest thought that the same ap-
proach would have a great deal of appeal in the southwestern United States.
Little did they know that the company would grow to have a national pres-
ence. They did know that they wanted to break all of the traditional rules
when it came to setting up a company. Even in those cash-starved early years,
Southwest Airlines was an iconoclast. They started life as a really smart com-
pany and have not allowed bureaucracy or fads to take over.
In the case of Southwest, one of the founding values that has guided the
company throughout its life is “love.” If you had the opportunity to spend a
few hours inside the company, you would discover that love is not just some-
thing that the people of Southwest talk about, it is how they live their corpo-
rate lives.
I would like to spend just a moment in defining love. Early in the devel-
opment of their language, the ancient Greeks had three words for love. One
word conveyed the idea of brotherly love (the source of the name, Philadel-
phia). Another word for love communicated the idea of romantic love. Yet
another meant sacrificial love or putting another first. The third word often
characterizes the way that smart companies operate. Also, that third con-
cept of putting others first characterizes the really smart companies.
At a company that is 85 percent union, it might surprise you to discover
that love is a company value. After all, most of us would expect a company
with such a high percentage of union representation to be an, “I work for the
union, not the company,” type of environment. Not so at Southwest. In fact,
even during times of intense contract negotiations, both sides go to great
lengths to make sure that the corporate value of love is the foundation of
the firm’s business. They value each other, their vendors, and their custom-
ers, and they make sure that the corporate value of love permeates all of
those relationships. Perhaps the following quote from CEO Jim Parker best
summarizes the company’s approach:
Our objective is to keep the best interests of all in mind. We

want the very best for our people and our stockholders. We make
that happen by maintaining that bond of trust . . . and a lot of love.”
Love, Money, and the Ten-Minute Turnaround
During its early existence, Southwest Airlines encountered its share of

turbulence. One of those bouts with turbulence was a defining moment in
the development of the bond between Southwest and its people. The com-
pany’s management realized that they were facing the ultimate cash crunch.
As with any start-up company, the lag between when you have to pay vendors
and when you collect the money from customers often creates a cash f low
crisis. That is exactly what happened to Southwest.
The problem was, the company could not borrow any more money, and
all it had was three airplanes that were operating a three-airplane schedule.
Its only option to make payroll was to sell one of the airplanes. However, if
it sold the aircraft, the firm would have to cut back its schedule, which could
be a real negative in the eyes of the traveling public.
In the true tradition of Southwest Airlines’s love, the employees came
to senior management and told them to go ahead and sell the airplane. They
believed that they had figured out how to operate a three aircraft schedule
with two airplanes. The employees then created the “ten-minute turn.”
While most carriers struggled to turn an inbound f light and get it out in 30
minutes, the Southwest people developed new processes for getting a f light
in and out in 10 minutes. The time saved allowed the company to operate a
three aircraft schedule with only two planes. When you hear someone from
the company talk about “the Southwest spirit,” that is what they are talking
about—the bond of love between a company and its people.
Corporate Humility and Winning
When Herb Kelleher says, “We don’t take ourselves too seriously,” he
means it. While the company loves to have the best people, it has little toler-
ance for managers who fail to practice corporate humility. In fact, ego trips
are usually short ones when it comes to managers at Southwest. The reason
is, the company believes that its people are important, not the managers.
The outworking of love and corporate humility can be observed daily at
the company. If a problem comes up, an impromptu virtual team will form.
Who is included on the team, unlike at most organizations, has nothing to
do with title or position. It has to do with knowledge. As an employee, you
might be walking down the hall and be pulled into an office with five other
people of varied responsibility levels, from senior vice president to an ad-
ministrative staff member, and be asked to help make an important decision.
It’s not about position; it is all about knowledge and corporate humility. The
result is that the company is knowledge-driven, organized around knowl-
edge instead of political, ego, or power issues. At a knowledge-based organi-
zation, everyone is important, and titles mean little if anything. Smart
leaders and smart companies make that practice a way of life.
No Community Relations Department
As you look at the ten smartest companies, you will probably figure out
that they are all quite similar. For instance, they all encourage their people
to engage in helping the community at large. I believe that this idea of en-
gaging all of the firm’s people in charitable activities ends up impacting the
customer. In some ways, it teaches everyone how to put others first, and in
the end, they learn how to put the customer first as well. This attitude or phi-
losophy can create exceptional relationships with the population at large.
At Southwest, this idea plays out in the form of local initiatives. The com-
pany has no rigid policy on what causes it will support. They have no corpo-
rate committee or community relations office that controls such things.
Southwest likes for their people, from New York to Los Angeles, those in ev-
ery area, to recognize local needs and take responsibility to help meet them.
From a corporate standpoint, that policy results in a lot of surprises. Each
local area develops its own focus on charities that the team recognizes.
Innovate to Win
Smart companies are innovative companies. They have little interest in

sitting on their past successes, because they realize that tomorrow, they must
be exceptional if the firm is to sustain itself. When you combine high levels
of excellence, empowerment, recognition, and inspiration, you end up with

a lot of innovation. Innovation is the engine of sustainability. That is, inno-
vation is the key to dealing with a dynamic, constantly changing complex en-
vironment. It’s how companies go to battle. It’s also how they continue to
grow and to thrive.
Southwest Airlines as a company, according to its managers, is not very
smart. But they are quick to point out that their people are really smart. Se-
nior executives rely on the people of the company to maintain a high level
of creative activity. According to one senior manager, 99 percent of all new
ideas generated at the company come from their people, not their senior ex-
ecutives. “The last time I checked, 50,000 minds are a lot smarter than one
or two,” said one executive.
Clearly, innovation is the lifeblood of Southwest. They operate off of
two basic principles when it comes to innovation.
1. Keep it simple.
2. Keep it low cost.
“In the end, that’s what knocks the customer’s socks off,” said one exec-
utive. The company has applied that concept to its Internet strategy. From
almost nowhere, Southwest now books over a majority of its reservations on-
line.
What’s a Few Pennies, Anyway?
What in the world is a winglet? A winglet is a modification to the end of

the wing of a Boeing 737. Southwest operates 133 such aircraft and has op-
tions for 373 additional aircraft through the year 2012. The winglets will be
retrofitted to the existing f leet and will be ordered as standard equipment
in the future. Sounds like a lot of technical stuff, doesn’t it? Let me put it in
perspective. Each aircraft fitted with the winglets will climb faster and oper-
ate more efficiently. The net result is 92,000 less gallons of fuel burned by
every aircraft each year, translating into a cost savings of over $12 million
per year, even if the cost of jet fuel is only $1 per gallon. That’s innovation!
The Heart of Innovation: People
Beverly Carmichael has a simple title: vice president of people. Car-

michael, however, is not a simple person. She has a rich academic back-
ground, and just prior to joining Southwest Airlines, she was a corporate
attorney specializing in labor relations. A visit with Carmichael will quickly
reveal that she did not get the job because of her academic or professional
credentials. It takes little time to figure out that Carmichael is a people per-
son. Carmichael loves people and believes that she has found her calling in
working with a group of people that she cares about and respects: the people
of Southwest.
“We have a hierarchy of priorities,” says Carmichael. “First, we make
sure we do absolutely everything we can to take care of our people. Our be-
lief is simply that, if we do a good job of caring for our people, they will do
the same for our customers. That, of course, leads to the best for our stock-
holders.” That said, it should surprise no one that Southwest Airlines is the
prospective employer of choice for a lot of job seekers. In fact, in 2003, the
company had over 400,000 applicants vying for just 1,000 jobs.
In a number of my visits with the top ten companies, I have made it a
point to talk about the firm’s diversity programs, and Carmichael and I had
an opportunity to talk about that issue. Like most of the other top ten smart-
est companies, at Southwest, diversity is not about ratios or affirmative ac-
tion. It’s all about unlimited opportunity.
“You know,” said Carmichael, “Those kinds of things (ratios) never
cross our minds.” She went on to explain that Southwest has a zero-toler-
ance approach to behaviors like sexual harassment or discrimination. She
explained that Southwest can hire a lot of very bright and capable people.
The result is a very diverse pool of candidates for every job. “You’ve got to
understand,” she says, “everything we do is about keeping costs low and
keeping our processes simple. That means we have to hire the brightest peo-
ple, and we have to always promote the brightest people. As you and I know,
bright people come in both genders and many races. Sure, we’re a really
diverse organization, but we’re diverse because we keep it simple: we hire
and promote the best.”
One of the reasons that Beverly Carmichael is so confident has to do
with those in the management ranks of Southwest. “We are a mentoring or-
ganization,” she said. About that time, Melanie Jones, also in management,
spoke up. “I started out at the bottom when I came to Southwest. I’ve been
mentored by a number of different people in every job I’ve had.” Carmichael
went on to tell the story of Donna Conover. It seems that she started at
Southwest in June of 1977 as a reservations agent and had since worked her
way up to executive vice president. “Mentoring is the lifeblood of our com-
pany,” said Carmichael. “If you care for people, you want the best for them.
Mentoring is our way of saying that we care.”
“Our definition of good leadership involves how many of your people you’ve mentored to
promotions.”
—Beverly Carmichael, VP of people
Carmichael pointed out that no formal mentoring program exists at

Southwest Airlines. It is simply understood that managers at all levels con-
tinually look for bright people and mentor them.
Carmichael went on to explain the reason that mentoring is so prevalent
at Southwest. “Everyone we touch is our customer.” She explained that the
idea of internal customers was another ingrained value at Southwest. “It’s
never taught to new people, but it is so obvious in how we do business that
it doesn’t take them long to figure out what is going on.” Let’s be honest:
wouldn’t you like to be treated like that where you work? Like a lot of the
other top ten companies, Southwest Airlines talks a lot about the Golden
Rule: treat others as you would like to be treated.
We Don’t Take Ourselves Too Seriously
Beverly Carmichael was brought to Southwest by Jim Parker, now the

CEO of the company. Jim Parker exemplifies what some would call a “ser-
vant leader.” Upon meeting him, you quickly realize that he is a humble man.
As the CEO of Southwest Airlines, he is responsible for leading the firm’s
strategic planning along with chairman Herb Kelleher and president/COO
Colleen Barrett.
I began our time together by asking Parker: “How can you sustain your
current success in the future?” He explained that, as the company grows, it
becomes more difficult to keep the culture the same. He believes that the
Southwest culture is the foundation of everything that they do. “The bottom
line is that the executives cannot sustain the culture. Only our people can
make sure we don’t change.” Parker went on to say that the company needs
to make sure that their philosophy of business stays the same to sustain their
success. “The first thing that has to happen is we need great leaders at every
level in the company. They are the key to sustaining the culture. If they treat
our people like we want them treated, they will ensure that all our people
continue to work toward what’s best for our customers, our team members,
and our stockholders. We hire tomorrow’s leaders every day. We believe that
we start that cycle of sustained success by hiring exceptional people.”
Jim Parker went on to talk about how they look for people to hire, as well
as people to promote, who have extremely high ethical standards. He be-
lieves that the bond of trust that exists among the Southwest team is founded
on a commitment to integrity.
I asked him how that translated to the bargaining table. Southwest Air-
lines is one of the most organized (meaning it has high levels of union mem-
bership) in the transportation industry. With a number of contracts at or
near maturity at the time of our interview, I suspected that my question
could be sensitive. “There are two things that characterize our negotiations
with our people. When we are at the bargaining table, both sides can be
pretty tough. The second and most important thing is the foundation of our
relationship—when I look across the table and I know that the person I’m
talking to wants the best for our customer and for Southwest Airlines. Yes,
we can be tough with one another, but we never forget that no one wins un-
less the outcome is one that is best for all parties involved.”
Southwest’s strategy has always focused on two specific issues. First, they
always want to be the low cost/low fare airline. Second, they want to keep it
simple. Everything they do is focused on those two issues. The result has
been 31 consecutive years of profitability.
Jim Parker foresees the future of the airline business as one of high tur-
bulence. He talked about how the industry had not only the old legacy car-
riers, focused on the hub-and-spoke system, but also has new start-up
Southwest “look-alikes.” Ironically, Parker believes that there is room for
both types of airlines. He believes that the legacy carriers are necessary for
the connecting passenger, while the point-to-point carriers will generally
never want to go into that business. He believes that both can be successful.
To the casual observer, Southwest Airlines must look a lot like a busy ant
colony. People are conducting impromptu meetings. Executives willingly in-
teract with those at the lowest level of the firm. Yet, order seems to rise out
of apparent chaos. “We’re the epitome of simplicity,” says Parker. “Yes, we
seem to be busy doing a lot of different things, but at the same time, the an-
chor of our strategy is simplicity. That is how we can continually meet our
objectives of low cost and low fare leadership.”
AGILENT TECHNOLOGIES: ONE OF THE TEN

Ned is an interesting man. Ned is different from a lot of people. He

spends a great deal of his time with people. He also drinks a lot of coffee.
You see, Ned believes that a major aspect of his job is having coffee with
28,000 people. On any given day, he might be somewhere in the world infor-
mally discussing various issues—and having coffee with some of those 28,000
people.
As I said, Ned is different. At Agilent, Ned holds a one-of-a-kind posi-
tion: chairman and CEO. Ned Barnholt is a rare leader who believes that
spending time with his people is one of his most important duties. He also
thinks that the 28,000 people of Agilent Technologies are the key to the
company’s future. With that in mind, it makes a lot of sense for him to spend
as much time as possible with his associates.
Sustaining the HP Way
Agilent Technologies was spun off from Hewlett Packard in 1999. Ned
Barnholt was chosen to lead that activity. By 2004, there had been quite a
bit of talk about the changes in HP since Carly Fiorina had taken over as
chairman and CEO. There had been stories circulated about how Fiorina
had brought in a new, much more rigid approach to managing HP. Some
suggested that she was turning her back on the “HP way.”1
Not so when Barnholt took the reins of Agilent. A quick look at Agilent’s
Web site confirms that fact:
While physically we have outgrown HP’s garage [the company

was started in a garage by Bill Hewlett and Dave Packard], we con-
tinue to live the values handed down from Bill and Dave: uncom-
promising integrity, trust, respect and teamwork, and innovation
that makes a difference.
Truly, Agilent is committed to the HP way.

Most theorists as well as practitioners in the field of management differ
on the issue of control of people. Some suggest that you have to control the
people of a company. You do that by setting very high expectations and then
rewarding or disciplining based on whether or not the individual reaches
those goals. In some ways, that approach leans toward the Theory X view of
Douglas McGregor. The opposite view, Theory Y, focuses on empowerment
and involves little if any control.
As I pointed out earlier, some well-known companies have taken a The-
ory X approach to managing their people, and they have been able to sustain
long-term profitability. I also mentioned that most of those companies were
not dependent upon their peoples’ ability to reinvent the firm continually.
Those companies generally have products or product families with demand
cycles of 50 to 100 years. I’m suggesting that few companies have the benefit
of being in an industry segment in which their products are not continually
changing. I agree that Theory X management will work for those compa-
nies. Even then, they will not maximize their profitability.
My research reveals that long-term success in a dynamic environment is
clearly linked to management’s ability to involve the firm’s people in the cre-
ative process. What I have found in the smartest companies is what I like to
call “inspired excellence.” That is how Agilent operates as well.
Open Doors—Open Attitudes
I have previously discussed how the actions of a firm’s leaders give

meaning to the business philosophy of the firm. Ned Barnholt’s commit-
ment to spend a lot of informal time listening to associates as well as taking
action on their ideas gives meaning to Agilent Technologies’s entire busi-
ness approach. The offices at a company provide the same kind of meaning.
Agilent has an open-door policy that is different from that of many
other companies: a lot of the offices at Agilent have no doors. The absence
of doors communicates openness and accessibility. Researchers will typically
leave their projects out for all to see. Everyone who wanders by is encour-
aged not only to look at the project but to write the researcher notes that in-
clude ideas about the project. This “open doors—open attitude” policy
creates an entire culture of innovation. The result is a string of new products
on a continual basis. Isn’t it interesting what happens when an entire orga-
nization is more concerned about team accomplishment rather than per-
sonal recognition? I suspect there is a lesson for aspiring senior executives
in here somewhere.
To sustain the high level of innovation at Agilent, a system of account-

ability is utilized. It involves four areas.
1. Goals
2. Metrics
3. Expectations
4. Empowerment
There is also a consistent focus on maintaining the unique culture of the

company. First, they relish the idea of diversity. For starters, they hire and
promote the brightest and best people. The result in that case is a diverse
culture. They also promote diverse thinking. Pride of ownership is not really
allowed. Everyone is encouraged to contribute their view on products, pro-
cesses, or research. The result is an iconoclastic, out-of-the-box way of think-
ing and behaving that permeates everything the company does.
That interconnectedness carries over to the entire research and develop-
ment structure of the firm. It would probably be an understatement to sug-
gest that the firm’s R&D is highly matrixed. There are four distinct research
labs at Agilent: measurement research, molecular technology, photonics and
electronics research, and precision instrumentation. In every case, proactive
approaches link the three labs. I need to make an important point here. A
lot of companies foster a competitive environment within the organization.
At those companies, the last thing one lab would do is share a discovery with
another lab. Some call that “siloing.” The lack of interconnectivity or matrix
links creates serious barriers to the exchange of internal information.
Earlier, I had talked about how everyone at Agilent is encouraged to be
innovative. In addition to the three major labs, each business sector has
product-specific labs to enable the firm further to stay at the leading edge
of creating customer solutions. The creation of a high-trust, innovative cul-
ture plus the multiple-matrix structure results in extremely high levels of in-
novation. The result is a lot of profit potential in the form of new products.
This is not a one-time event; it is a continual process of innovation.
An Ethics Anomaly
The past five years in corporate America have not been stellar when it
comes to ethics. However, some companies stand out because of their excep-
tionally strong ethical standards. Agilent is one. As we have seen with some
of the problem companies, the problems start at the top. The same is true
for those who set unquestionable integrity as their ethical standard.
Ned Barnholt believes that high ethical standards are the prerequisite
for sustainable success. Periodically, Barnholt puts out personal musings
that he calls “On My Mind.” Those are sent to Agilent’s team worldwide. In
a number of cases, Barnholt has talked about corporate ethics. As you read
his comments, it becomes clear that he views the position of chairman and
CEO as what I call a “stewardship.”
A lot of people are supposed to act as stewards. The word conveys the
idea of acting in behalf of another. Attorneys, for example, are often re-
quired to hold money in the interest of their clients. In Texas, an attorney
who fails to perform their responsibilities according to that principle may
be disbarred. Stewardship also conveys the idea of possessing something in
the interest of others. It might also be defined in terms of fiduciary duty. Re-
gardless, the point is that the CEO of a company is a steward over all of the
assets of the company. The CEO is holding and managing them in the inter-
est of the stockholders.
In looking at the ethical standards of a company, we can see that unques-
tionable integrity and behavior that is above reproach must be the minimum
standard. That describes Barnholt’s attitude as well. Although Barnholt
serves as the chairman of the board of directors of Agilent, he insists that
the board meet independently of any members of management in situations
where there might be a conf lict of interest. The board makes sure that its
membership always includes significant representation from outsiders.
They operate under the principle of maximizing shareholder value in every-
thing they do. If anything could give even the appearance of impropriety, it
is avoided. In many ways, this process might be called “ethical accountabil-
ity.” Whatever it is, it provides us with an ethics blueprint for corporate
America.
People Make the Profit

One common element at all of the top ten smartest companies in Amer-
ica is their attitude toward profit. At their less successful counterparts, man-
agers tend to think that they make the profit. The top ten companies, like
Agilent Technologies, clearly understand that managers do not make
profit—the people do. They also realize that, generally, the quality of treat-
ment that employees receive is how they treat the company’s customers. I
truly believe that a correlation exists between the two.
Agilent offers the best benefits possible to the 28,000 members of their
team. They frequently survey every employee of the company, and they re-
spond to the input. “In some ways,” said one manager, “our people get to
design their own workplace.” She went on to explain, “Our culture and how
we care for our people goes straight to our customers. If we treat our employ-
ees exceptionally well, that goes right on through to our customers. It’s that
simple.”
The January 22, 2002, edition of Fortune carried a story illustrating the
tremendous impact that an employee-focused approach can have. They told
the story of Cheryl Ways. On October 15 at around 9:00 PM, 30-year-old
Cheryl got a phone call from her husband, asking when she was going to
leave the office. She told him that she just had a little more to get done and
then she would be home. What makes this story unique is that three weeks
earlier, Ways had been laid off, and October 15 was her last day at work for
Agilent. A victim of the global downturn in its markets, Agilent was forced
to downsize after doing everything possible to avoid such actions.
Leaving her job in the best of condition was Cheryl’s way of saying
thank you to Agilent and her fellow employees. It was a ref lection of the care
that she had received over her five-year career at Agilent. That commitment
to excellence differentiates the smart companies from the others, and it all
starts with the company’s leaders’ ability to inspire such excellence. As you
know, I do not buy into the idea of competitive advantage, but I will say this:
companies that create environments of inspired excellence have a distinct
advantage over those that do not.
INSPIRED EXCELLENCE
Whether it’s Ned Barnholt at Agilent or Jim Parker at Southwest Air-

lines, they both spend a lot of time doing exactly the same thing. The leaders
at both companies understand that inspired excellence is at the heart of
their company’s success. Inspired excellence is why an employee at Agilent
will take extra care to ensure that a product is delivered as promised or why
a Southwest Airlines f light attendant will make sure a child traveling alone
is put safely into the arms of a waiting parent.
It has been said that the little things matter. The truth is, both the little
and the big things matter, but most importantly, it’s how you do the little as
well as the big things that really matters. You cannot buy inspired excellence.
By definition, it can only be derived from how one person treats another.
When that occurs, that spark of excellence is passed on to another, then an-
other. Ultimately, that spark of excellence finds its way into the life of a very
important person: a customer. That spark of excellence creates a company
that becomes a consistent first choice in the hearts of those who deal with it.
It is this simple: inspired excellence is a choice. It is hard work, but for
those exceptionally smart companies, it is not an option. It is the only way
they want to do business. It’s spelled RAVE.
C h a p t e r
11
CREATING THE ULTIMATE
CUSTOMER EXPERIENCE
T ed Brown is one of those unmistak-

able people called a “native Texan.” He looks the part. His usual uniform is
jeans, boots, a checkered shirt, and one of those gigantic belt buckles that
looks like it weighs at least 15 pounds. Ted is also known for his unusual
sense of humor and his willingness to engage just about anyone who walks
in the door with his unique form of personal harassment. Of course, Ted
drives a pickup truck and is an avid outdoorsman, but that’s not the end of
the story.
Ted grew up in the car repair business. A number of years ago, he de-
cided that the industry needed someone they could go to who would seek
the best for them. Ted started his own business, and his reputation for hon-
esty and expertise soon spread. Ted did so well that he was able to build his
own repair facility, complete with a customer waiting area well furnished
with couches and recliners, all facing a wood-burning fireplace. It would not
be exaggerating to say that Ted created a real first-class facility.
Over the years, the faces don’t change much at Brown’s Automotive. Ev-
ery few years, there is a retirement, but aside from that, there is no such
thing as a revolving door when it comes to the staff at the firm. One of the
things Ted just won’t tolerate is dishonesty. If someone comes in with a loose
battery cable, he won’t accept a mechanic or service writer who tries to turn
147
that into a $300 repair bill. In fact, if it’s a loose battery cable, Ted and his
people fix the problem and won’t consider charging for it.
The other thing one quickly discovers about Ted’s organization has to
do with their knowledge. In this day of technological change, one may go to
a nondealer repair facility and be told that they do not have either the equip-
ment or the knowledge to correct the technical problem your automobile
has. That just doesn’t happen at Brown’s.
Ted Brown has created what I call the “ultimate customer experience”
for those who are fortunate enough to take their car to him. It’s all about
what’s best for the customer. Underneath all that Texas bravado is a man
committed to integrity. More than that, he runs his business exactly as if it
was where he would take his own car.
A visit to the waiting room in Brown’s Automotive tells the story an-
other way. “I drove in from Sherman,” one man said to me. Sherman, it turns
out, is well over an hour’s drive from Ted’s shop. In one case, a customer had
a transmission problem over 200 miles away. Rather than trust anyone other
than Ted Brown to fix it, the customer had her car towed 200 miles to Ted’s
shop.
That is what happens when a company establishes the ultimate customer
experience for those it serves. Of course, every company has its financial
and service limits, but the smart companies will consistently challenge those
limits. Their leaders understand that when a company provides customers
with an experience of that nature, they become customers for life.
A lot has been written about the “voice of the customer” and about un-
derstanding customer needs. In the case of smart companies, they generally
take a proactive approach to customers. Rather than simply responding to
customer pressures or conducting the obligatory customer survey, smart
companies proactively search for new ways to create the ultimate customer
experience. They understand that service and customer relationships change
and, in many cases, the customer is not aware of their needs. Smart compa-
nies understand how to stay ahead of the curve in considering customer
needs. As technologies change, they try to anticipate the new customer chal-
lenges those developments will create. Kingston Technology anticipates ex-
tremely well. I was fortunate to have the opportunity to spend a day at
Kingston’s home office in California and visit with a number of their people,
including the founders of the company.
Creating the Ultimate Customer Experience 149
KINGSTON TECHNOLOGY: ONE OF THE

Kingston Technology was founded in 1987 by John Tu and David Sun.

Over the past 16 years, Kingston has grown from humble beginnings to be-
come a global leader in the computer memory area. They have also become
a leader in logistics. Their customer list includes global technology giants as
well as smaller firms.
They are especially well known for their exceptional commitment to em-
ployees, vendors, and customers. They have a reputation of being a wonder-
ful place to work, and their vendors hold them in the highest esteem. As a
result of their employee and vendor relationships, their customer loyalty is
among the highest in the United States. So strong is their commitment to
their customers, Kingston has been known to pay for a customer to ship their
computer to them (and back), even though the customer has purchased only
a $30 piece of Kingston memory. Not surprisingly, in most cases, the problem
is not with the Kingston product. Even then, the company is pleased to return
the customer’s repaired computer for no charge. I am sure you will agree,
Kingston Technology is a unique company.
Corporate Humility
You don’t hear a lot of people talk today about corporate humility. A lot
of people think that humility has to do with the way you act, but it really has
to do with the way you think. That is important, because how you think ulti-
mately determines how you act. Humility is a way of life for some people as
well as for some companies. Kingston Technology is one of those companies.
One of the things that smart leaders focus on is what I call “meaning.”
Smart leaders use action to give meaning to the practices and principles by
which they want their organization to run. As you enter Building A at the
Kingston Technology headquarters in Fountain Valley, California, it looks a
lot like any other successful company. When you get to the second f loor of
the building, however, your impression will change quickly. Except for a few
people who have a job-related need for an office, there aren’t many offices.
There are no partitions. In fact, as you look out over any large room in the
building, all you see is desks and people.
Around one corner, sitting out in the middle of the room, is a desk with
a nameplate reading “David Sun.” A hundred feet or so away is another desk
with a nametag reading “John Tu.” On every side of those desks are more
FIGURE 11.1 A Philosophy of Leadership
VENDORS
CUSTOMERS
EMPLOYEES
John Tu
David Sun
desks. The people at those desks do myriad jobs. Some are new hires who
are just learning the ropes. Others are seasoned veterans working with ma-
jor customers. What makes this setup unique is that David Sun and John Tu
are the founders and senior executives of this almost $2 billion company.
John and David conduct their business in an open setting alongside their
people. “That is one of the most important ways we communicate with our
people,” said David Sun. “We, as the founders and senior executives, are to-
tally dependent on our people. They make the profit, not us. We can’t exe-
cute—they can!”
David went on to explain how he and John work together to coach and
inspire their team toward excellence. John, the eldest of the two, is the exact
opposite of David. While David is always moving and extroverted, John
tends to think about something for a long time before he says anything. They
confess that the first few years of their relationship were a bit challenging at
times, but they eventually realized that they are a powerful combination.
After talking about the company for a while, David asked if he could
draw a picture on the board. He wanted to give me a clear picture of their
philosophy of leadership. (See Figure 11.1.)
As he spoke, David became very animated. Basically, he views the dia-
gram as the secret to their business. “I am a simple man,” said David. “John
and I believe that if we take care of and reward the people who make the
profits, and we also take extremely good care of our vendors, that the out-
come will be exceptional care for our customers. If we do that (and he
pointed at the downward arrow with the dollar sign next to it), we will make
more money. We always make sure that we share our financial success with
our people. After all, they are the ones that make the profit.”
John and David believe that the location of their offices gives meaning
to their philosophy of business. They are open about everything. They con-
duct their business in the open for all to hear. It is a way of establishing high
levels of trust within the organization. They also believe that it really helps
them understand how the company is working, because they can listen to
their team as they deal with various issues.
A Run on the Bank
A little after noon on a sunny California afternoon, the staff at a local

Wells Fargo branch in Fountain Valley became suspicious. In a little over 30
minutes, the lobby of the bank had filled up. It became so crowded that
there was almost no more room for anyone to get into the building. It was
not a robbery; it was people putting money in the bank.
It seems that on that particular day in 1996, John Tu and David Sun had
sold an 80 percent stake in their company for $1.5 billion. As each employee
returned from lunch that day, they found an envelope and a check on their
desk. There was also a personal thank-you note from David and John. In
some cases, the checks were well over $100,000. It was David and John’s way
of sharing the profit that the team had produced.
When all of the Kingston people got their checks, many headed for the
local Wells Fargo branch located nearby. That is why the lobby filled up. All
those Kingston people wanted to deposit their checks. At one point, a Wells
Fargo employee stood up and yelled, “Congratulations, Kingston people!”
The crowd, still waiting in line to make their deposits, roared and applauded.
When it comes to corporate humility, David Sun and John Tu went to
great lengths to make sure that the story of the bonuses stayed inside the
Kingston family. Much to their dismay, the story was picked up by the na-
tional media and made most of the prime-time news broadcasts. Even today,
they are hesitant to talk about the story, preferring instead to focus on the
wonderful accomplishments of their people.
You Are Empowered to Be Excellent

From a formal standpoint, Kingston has a program that is designed to
foster high levels of innovation. It is simply called a continuous program im-
provement, and it is administered through the company’s Lotus Notes pro-

gram on their network. People are encouraged to submit ideas, and every
idea is carefully considered by a Kingston team. But it is not quite that simple.
David Sun refers to himself as a jumpy individual. He says that he is al-
ways concerned that a competitor will get to a new customer idea first. David
has a lot of ideas. He likes to go and test his ideas on different people in the
firm. If he gets buy-in, he encourages the employee to go forward and try
the idea. If he doesn’t get buy-in, he may try a couple more times. If he still
does not have success, he may ask if the employee will go ahead and try the
idea just to see if it works. If the idea works, David recognizes the employee.
“If it doesn’t work, I make sure to go to the employee and say ‘Boy was I stu-
pid,’” says David with a smile.
Kingston, like other smart companies, does not punish people for mis-
takes. In fact, they recognize people who step out and take risks, even if
sometimes they fail. From top to bottom, the firm’s leadership realizes that
the creativity needed to stay at the forefront of their industry necessarily in-
volves some failures.
Trust drives innovation in the company. In one case, Richard Kanadjian,
technology manager, concluded that the company needed to invest in some
expensive test equipment to stay ahead in a new product area. Richard went
to visit with John Tu and explained that he needed to spend $1.5 million on
the equipment. David immediately told him to make the investment. Rich-
ard recalled the meeting in our conversation. “I was a bit shocked at how
quickly he backed me. I decided to go ahead and tell him that I really needed
two sets of testing equipment if I was to be able to do the best job for our
customers. He didn’t even blink when I told him it would be over $3 million
for all of the equipment.” Richard went on to explain how much it meant to
him for someone to put such trust in him.
Another team member, Mark Leathem, told a similar story. It seems that
he had figured out that they were paying $15 per hit for advertising their
product on a major Internet search engine site. After some investigation, he
realized that the product they were advertising only cost about $15. “I
thought that it would be a lot more powerful if we gave away the product
than just paying for someone to visit our site,” he said. “I decided to strike a
deal with one of our technology partners to offer free product through their
Web site. That was great for them, and we got to put our products into the
hands of some brand new customers.”
After a while, he realized that he had not told anyone about what he was
doing. He decided to visit with David and explain what he had done. David’s
response: “What a great idea. We’re going to sell a lot more products by get-
ting a few samples into the hands of customers than we ever could by paying
someone for hits on their Web site.”
While at the company, I ran into a new hire who had only been at the
firm for a little over six months. It seems that his desk was next to David
Sun’s. He confessed that he was a little overcome with the way that Kingston
did business. At first, he really could not believe it. One day, he had occasion
to visit with David Sun in the hallway. During the conversation, he men-
tioned how much he appreciated how the people at Kingston, including
himself, were treated. Much to his surprise, David explained to him that he
is one of the people at the company who can “execute.” David went on to
explain that he and John cannot execute. He explained that the people make
things happen, and they want employees to understand that they are the
ones who are really important because, “They make the profit, not the
founders.” It had taken six months, but Bill Kuo finally understood that it all
was for real. He really was valued and appreciated. That knowledge had an
enormous impact on him.
Strategy at Kingston
During my visit with the founders, John made a point of talking about
the firm’s strategy. Unlike a lot of companies, Kingston does not have a five-
year plan. They usually operate with strategies that focus on fairly short ho-
rizons. But that does not tell the entire story.
During my tour, I was shown a new testing facility for a product that is
not yet available to the public. The company started working on testing the
product, buying related equipment, and working with the new technology in
2003. Due to the high-trust relationship that exists between Kingston and
some of its major vendors, the vendors are willing to provide prototypes of
new products to Kingston long before the products are commercially avail-
able. Because of this ahead-of-the-curve approach, Kingston has a decided
edge when the product finally comes on line.
Richard Kanadjian made an interesting comment when I was visiting
with him. “I had to forget a lot of what I’d learned during my MBA course-
work when I came to Kingston.” He went on to explain that Kingston never
tries to utilize all of its production capacity. In fact, when they reach 50 per-
cent capacity, they usually begin to think about expanding their manufactur-
ing capacity. “We know that our customers depend on us if they get into a
bind. If a customer calls and says they need 10,000 units in a week, we make
it happen. We have the capacity, and all of our team is more than willing to
go the extra mile to make sure we meet the customer’s needs.”
In one case, an assembly line employee advanced an idea regarding a riv-
eting process. The employee believed that it could be done in a much shorter
period of time. As a result of a lot of empowerment and some creative think-
ing on the part of the employee, the process was shortened from six to eight
weeks to one week.
Kanadjian also said that Kingston breaks down processes to a bare min-
imum. He talked about how the finance department does not get involved
in approving expenditures. As most people know, getting finance’s approval
can be a real bottleneck when it comes to meeting customer needs. David
Sun mentioned that during our visit. “The finance department is there to
keep records of our successes. We make customer decisions really quickly, so
we can’t afford to run decisions through some bureaucratic process. We are
all about speed of execution.”
Another unique aspect of Kingston is its quality program. Unlike some
companies, Kingston does not use statistical process control to test product
quality. Kingston has designed robotic testing equipment that enables them
to test 100 percent of their products before shipping. “We believe that our
customers have the right to expect the very best from us,” said Kanadjian,
“and that means that we do not ship any product until we have tested it and
know that it works.”
Another strategy of Kingston is its approach to cycle time. A lot of com-
panies are willing to live with a one month cycle time. That is, they feel
pretty good about themselves if they can ship an order within one month of
when they receive it. At Kingston, they like to see just how fast they can turn
an order. Frequently, a customer will call with a large order and need it
within a week. Kingston consistently meets their deadline.
“In a lot of cases, we turn an order in 24 hours,” said Kanadjian. “In fact,
for many customers who place orders in the morning, we manufacture their
products as well as deliver them before the end of the day.” David Sun be-
lieves that those short cycle times are one of the key differentiators between
Kingston and the competition. He believes that the f lat structure of the or-
ganization, the can-do spirit of the team, and the empowered nature of the
environment allow them to do things that their competitors just cannot do.
During our visit, David Sun did confess one fear that he had that was related
to his competitors. “If I see our competitors treating their employees like we
treat ours, I’ll be scared. Until then, I think we have an advantage because of
our team. We are capable of doing things that other companies simply can-
not do, and John and I owe it all to our people.”
The Kingston People
One of the foundations of the company’s approach is its hiring process.

When asked about their philosophy in this area, David Sun said: “We hire
good people; we want humble, modest people who get along well with oth-
ers.” David and John Tu went on to explain that they are willing to take a lot
of risk on people as well. Once someone is on board, the entire team has the
task of helping each person to maximize their potential. David and John also
explained that the company’s turnover is probably about one-fourth that of
their competitors. They also credited their people with the company’s abil-
ity to be so f lexible and responsive. “We can move fast because our people
are so experienced,” said David. “Our advantage is that we can take a chal-
lenging task and assign it to a team that is 90 percent veterans and only 10
percent rookies. We know how to work together, cut out all the bull, and get
the job done. That’s our advantage.”
Another one of those exceptionally smart companies is Luxottica Re-
tail. You may know them best by the name LensCrafters, which is one of
their subsidiaries. What you will discover is that, like the other smart com-
panies, they understand how to create the ultimate customer experience.
One of the ways they do that is to “create the ultimate associate experience.”
By focusing their efforts on their people and their customers, Luxottica Re-
tail’s brands continue to grow and to thrive.
LUXOTTICA RETAIL: ONE OF

AMERICA’S TEN SMARTEST COMPANIES
Ask any tennis player what their most burning question about tennis
might be, and you might be surprised. Around the clubhouse and in other
tennis venues, you will often hear players compare the shots they make in
the warm-up with the shots they make during a match.
The reason this is such a topic of interest is simply that most players
would love to be able to make some of the shots they make in the warm-up
during the match. On more than one occasion, I have seen people hit high-
speed f lat shots in their warm-up session, only to follow up with a high per-
centage of shots out of bounds during the match.
Experienced players will tell you that the explanation is simple. It’s all
about having the ability to relax. In a match, the average player will get tense
when a difficult shot comes along. That same player, in a relaxed pregame
session, is usually able to make some pretty impressive shots, all because
they are relaxed.
In analyzing the smartest companies in America, I have found that they
go to great lengths to make sure that their employees are relaxed. That does
not mean that there is no incentive to be excellent. It does mean that em-
ployees feel that they are surrounded by people who care about them and
the job that they do. It means that they work for a company that is extremely
hesitant to terminate someone and will do everything possible to help that
employee learn to be exceptional. There’s a reason for that. You see, when
people are relaxed, they can make some “incredible shots.” That is also why
the companies that made the “top ten smartest companies in America” list
focus a lot of their efforts on fun. It seems that companies that excel not only
work hard, but they play hard as well.
One such company is Luxottica Retail. Although it’s listed on the New
York Stock Exchange, chances are you are not too familiar with the com-
pany—not, that is, until you hear the names of their companies: LensCraft-
ers, Sunglass Hut, Watch Station, and EyeMed Vision Care. In most cases,
people are familiar with at least one if not all of those companies.
Strategy: A Culture of Excellence

At the heart of this somewhat young (a little over 20 years of existence)
company is a focus on excellence in all three major areas: strategy, organiza-
tion, and character. Again, when I use the word excellence, I am not referring
simply to a company that tries to be the best; I am talking about a company
that is committed to creating the exceptional. Keep in mind that, at smart
companies like Luxottica Retail, excellence applies to all three areas of the
firm: strategy, organization, and character.
As I previously noted, attributes like excellence create sustainability.
Smart leaders understand that any erosion in the character of the firm leads
to deteriorated profit and performance. At Luxottica Retail, the culture of
excellence is the shared responsibility of the entire executive and leadership
team.
One aspect of transformational leadership is the setting of somewhat
outrageous goals. The aspirations of Luxottica Retail reveal a lot about how
such an approach can create a firm that is continually striving to achieve
FIGURE 11.2 Luxottica Retail’s Mission and Vision
Luxottica Retail’s Mission: “To Serve and Inspire with Excellence”

Luxottica Retail’s Vision: “To be the retailer of the Century”
• The Best Place to Work
• Best Place to Shop
• Best Place to Invest
• The Best at Helping the World See
higher levels of excellence. Take a look at Luxottica Retail’s mission and

vision in Figure 11.2.
One of the things that the organization has is the “world’s best work-
place committee.” The work of the organization revolves around the firm’s
values and its desire to ensure that their values are carried out continually
in practice. Here are those values.
• Uncompromising integrity
• Respect
• Teamwork
• Fun
• Trust
• Quality
• Innovation
Those values came out of LensCrafter’s original value statement of do-

ing “the right thing for the customer.” Interestingly, those values are re-
f lected in the company pins, called “vision pins,” that are given to all 25,000
employees. Each pin comes in a package with the words Mission-Vision-Val-
ues, and the pin is a triangular shape with the words that summarize the
firm’s mission—Serve, Inspire, and Excel—around the border.
In visiting with Scott Stoelting (senior director of corporate culture),
Carol Spicer (senior director of human resources), and Kathy Clark (director
of communications), I discovered that the organization had added another
value of “uncompromising integrity.” This came about as the result of asso-
ciate feedback. While integrity was implied under the value of trust, associ-
ates indicated that in the current business atmosphere of many corporate
fiascos, they wanted the entire organization to stand proudly for uncompro-
mising integrity. The decision was made to put uncompromising integrity at
the top of the list. The team believed that every aspect of the organization,
from how individuals were treated to how customers were handled, had used
that value as a foundation. That attitude is not uncommon at the smartest
companies.
Integrity, Trust, Turnover, and Satisfied Customers
One thing that separates smart companies from others is their rejection
of a concept that I call “acceptable neglect.” We all know that it’s possible to
intimidate an employee group into a few quarters’ or, in some cases, a num-
ber of years’ acceptable performance. At the same time, if you utilize such
tactics, you should not expect to have high levels of trust within your organi-
zation. Yes, it is possible to achieve a minimal level of customer satisfaction
with that approach, but that approach will never achieve exceptional cus-
tomer relationships. At this point, I would expect the more insightful reader
to understand why some of America’s old-line companies did not make the
“ten smartest companies in America” list.
As I have said a number of times before, it is possible to intimidate peo-
ple to a point where they achieve acceptable customer service. Those same
employees have little interest in achieving excellence. I recently saw a sign at
a company I was visiting. It was posted on an employee’s cubical wall.
Smart companies understand that you never achieve long-term success
on the backs of your people. While some companies burn out their people,
badgering and intimidating them while simultaneously sustaining profitabil-
ity, they do not maximize profit.
Luxottica Retail and other exceptional smart companies understand the
basic rule of maximum performance: excellence produces excellence! If you
are committed to treating your people with excellence, they will treat your
customers with excellence. It is not rocket science. If you want to create the
ultimate customer experience, you must start the process by creating the ul-
timate employee experience. As I have visited with the Luxottica Retail
team, that principle oozes out of every conversation. Not only do they pass
it on to the customers, they pass it on to the world.
Luxottica Retail’s approach pays off in the hiring area as well. While oth-
ers in the retail business try to find ways to deal with turnover rates in the
50 percent to 100 percent area, LensCrafters full-time positions maintain an
industry low of 19 percent rate. (Total Luxottica Retail turnover for all
brands, full-time and part-time, is at 45 percent.) I guess people want to work
where they are recognized, appreciated, and valued.
The Best at Helping the World to See!
Every year, a significant percentage of Luxottica Retail’s 25,000 people

apply to go on a “mission trip.” Working in conjunction with Lions Club In-
ternational to gather discarded prescription eyeglasses, the Luxottica Retail
team sends groups of 25 to 30 member teams of doctors and volunteers
worldwide to provide the gift of sight to others. This team provides free eye
exams and recycled glasses to those who cannot afford them around the
globe.
But it takes more than just the collection of eyeglasses to pull this off.
Throughout the year, Luxottica Retail’s people sponsor fund-raising events
for their charitable arm, the LensCrafters Foundation. Rather than being a
one-time event, a mission trip is the culmination of the efforts of the people
of Luxottica Retail from around the United States and Canada. The pro-
gram now conducts one international mission every month. Participating in
such events is a way of life throughout the entire organization, from home
office to stores.
The stories of the people they have helped are inspiring. In one case, an
old woman had never been able to see her two baby granddaughters. In an-
other, a young boy had never been able to see well enough to write at school.
In story after story, we see that the efforts of the people of LensCrafters,
Sunglass Hut, and Watch Station—the Luxottica Retail team—are experienc-
ing the exhilaration of helping others in a unique way.
Sometimes . . . Things Go Wrong
I have been focusing on a lot of the great things about this company. In
my investigation, I also asked questions about how the firm handles prob-
lems. I want to introduce a word that Luxottica Retail does not use but that
really describes their approach in dealing with problems: reconciliation. The
word conveys a difference between parties in which the resolution is two-
sided, not just one-sided as we see in many organizations. In living out their
value of uncompromising integrity, the firm’s leadership has set up some
unique approaches.
It all starts with a “we’re slow to let someone go” attitude at the top, ac-
cording to Carol Spicer, senior director of human resources. In listening to
Spicer talk about their process, it became clear that the process is all about
nurturing associates. At a lot of companies, the process is more about “build-
ing a case” so you do not get sued. “The first thing we do is look at ourselves
as well as the employee,” says Spicer. “We try to discover deficiencies in our
training of the employee; we give them personal attention to make sure that
they clearly understand the job we are asking them to do. Then we develop
an action plan that includes training as well as goal setting.” There are some
offenses for which there is immediate termination.
Step two is initiated only after the employee has failed to correct defi-
ciencies. That occurs in the form of a written warning. After every effort to
save the employee has been made, the third and final step is termination.
The company tries everything to make sure that the employee understands
that the power to stay with the company rests solely in their own hands. “We
focus on making our people successful,” says Spicer. “When we get to that
final step of termination, we like to believe that we have done everything
possible to help the individual have a rewarding career. But it does take
commitment from both sides, and regrettably in this world, that does not
always happen.”
Finding and Keeping the Best of the Best
Luxottica Retail, according to Carol Spicer, is extremely aggressive in its

recruiting approach. The objective is not just to fill slots but to find and hire
the very best. They utilize numerous sources to accomplish that objective.
“We spend a lot of time networking,” she says. The end result is one of the
lowest turnover rates in the retail industry.
Another tool that the firm uses to keep its best is to recognize excep-
tional performance. During the year, the company features inspiring stories
of associates in the VIP (Very Inspired People) newsletter. In addition, nu-
merous award and recognition programs are designed to honor exceptional
service in more than 13 different categories. Luxottica even has an award to
honor vendors who go above and beyond to deliver great service called The
Extra Mile Pin.
Luxottica Retail practices what I call “RAVE Leadership.” That means
that you recognize, appreciate, and value your people who are excellent and do
excellent things. I consistently find these practices when looking at excep-
tional companies. After all, great companies are not about bricks and mor-
tar—they’re about the people who engage in greatness.
A Commitment to Innovative Excellence
“That’s my personal mission,” said Mildred Curtis, senior vice president

of human resources, as she talked about Luxottica Retail’s approach to peo-
ple and excellence. “I believe that the foundation of everything I do must
focus on making sure we are a culture of excellence. It all starts with our peo-
ple, and getting and keeping great people is my job.”
It does not take long to figure out that Mildred Curtis absolutely loves
her job. “I knew from the moment I walked in the front door that this was a
special company. I don’t know how to say it, but you can feel the difference
when you enter the premises of the company,” said Curtis. A special bond
clearly exists between the members of the Luxottica team. “We are a fun
group,” said Curtis. “We are all about excellence, but fun is at the top of the
list as well.” There are no examples to support “fun.”
It is clear that an almost invisible force propels this group of people.
“We focus on creating tenure,” she continued. She went on to explain that
the senior executives had studied their most productive people, and that the
more tenured people clearly are the most productive. “The invisible differ-
ence,” said Curtis, “is the power of doing things for others. I am convinced
that, as our people go out into the community or go out of their way to help
a customer, that it touches our peoples’ hearts. Doing good things for others
changes you.”
I had heard that comment before as I visited with others at the company.
Some used the word different, and others used the word special, but they were
really saying the same thing. When people step out and go beyond them-
selves to help someone else, they create a pride in serving that changes ev-
eryone involved. Regardless of how it is conveyed, the invisible difference is
what drives every individual in the company to focus on taking the personal
responsibility to discover new opportunities for achieving excellence.
The result is a senior vice president of human resources who sees her
job as different from the way most in similar positions at other firms view
theirs. Mildred Curtis has a singular focus as being the “champion for the
Luxottica Retail culture.” “In everything I do,” said Curtis, “I continually ask
myself if our actions will ensure that we maintain a culture of excellence.” As
with the other smart companies, excellence begins with how the firm’s peo-
ple are treated. “Excellence also means that we stretch people beyond what
they think they can do,” said Curtis.
According to Mildred Curtis, the focus on excellence within the firm
makes her job of external recruiting much easier. She explained that excep-
tional people are attracted to the company. “It’s like there was a magnet here
or something, we are continually amazed that really exceptional people find
us and ask for the opportunity to join us.”
Collaboration Drives Innovation

Mildred Curtis spent a lot of time talking about collaboration. She ex-
plained how it begins with the hiring process. Although the human re-
sources team begins the process with an in-depth assessment, from that
point forward, it’s all collaboration. “There is an emphasis on gathering in-
put and support for everyone that a new employee would work with, from
the hiring manager to the entire team.”
The idea of collaboration is prevalent in the area of corporate strategy
as well. Iconoclastic behavior is not just talked about, it is expected. Manag-
ers are empowered to challenge executives. “Strategy is not just a top-down
process,” said Curtis. “The managers that are working with customers have
a lot of insight. We encourage every member of our team to help us find
better ways to serve our customers. There is no pride of ownership here; we
really cherish the input of everyone on our team. We always keep our cus-
tomers and our people at the top of the priority list. That means we value
their input.”
The Luxottica executive team goes to great lengths to reinforce what I
will call “servant leadership.” Servant leadership is founded on corporate
humility. The Luxottica leadership team is proactive about communicating
that idea. There is no tolerance for ego trips. Office doors are always open,
and every executive welcomes a member of the company who wants to visit
about a concern or an opportunity.
The executive team goes out of their way to send that message. They en-
joy walking into the company lunchroom at their headquarters location and
having lunch with a group of their people. It’s all about the healthy exchange
of ideas, never about top-down communication.
When asked about the foundation that underlies Luxottica’s success,
there is no hesitation. Curtis believes that the involvement in helping others
through the Gift of Sight program has enormous impact on the entire orga-
nization. “Our people go out into their communities or to the far reaches of
the world in order to provide vision for those who cannot afford it. When
they return, they are changed because of what they did for someone else,”
says Curtis. “It establishes a foundation of care that touches everything we
do as a company.”
Curtis went on to talk about changes she saw in the company. She talked
about how their focus on a culture of excellence was being blended with a
culture of innovation. That message is supported by an expectation of em-
powerment, according to Curtis. “We are trying to build a company in which
every member of the team sees himself or herself as a leader,” she said. “Let’s
be honest. Only our people and not our senior executives have the ability to
live the ideas of excellence and innovation in the lives of our customers.”
A View from the Top
Kerry Bradley, chief operating officer for Luxottica Retail, is a 16-year

veteran of the company. Prior to joining Luxottica Retail, he spent his early
years in advertising and brand management with one of the top consumer
brands companies in the world. He was approached by a team of former as-
sociates who asked him to join this new company called LensCrafters. What
sold him on making the change was their desire to build an exceptional com-
pany with a big “heart.”
“A lot of people think you cannot be a caring organization and also be
a large company,” said Bradley. “The team that acquired LensCrafters 20
years ago believed that it was possible to grow and become a large organiza-
tion while at the same time having a lot of heart. It turns out they were right.
When you give to others, you always get more in return than you gave.”
When you get down to it, Luxottica Retail is not obsessed with profit.
“We are obsessed with helping others,” said Bradley. “We believe if you do
your very best to help your customers, both paying and nonpaying [their
charity work], plus have the same obsession about caring for your people,
the profits are inevitable. It’s just that simple.”
The result, according to Kerry Bradley, is a Luxottica team that has an
unbelievable passion for all that they do, including caring for the company’s
12 million customers. As I listened to Kerry Bradley talk, I realized that the
passion he was talking about was clearly not some gimmick to get people to
perform well; it was a passion that he felt as well.
Speaking of profit, the company, along with the rest of the retailers in
the United States and Canada, was hit pretty hard. “We were a bit disap-
pointed with our performance,” said Bradley. I was almost amused at the
reason. Luxottica Retail did not have the disastrous year that some had in
2003. In fact, they achieved a really nice profit result. “Actually, we were hop-
ing to achieve our growth goals as well as our profit goals,” he said. “I know
a lot of people would have liked to have made level profits in 2003, and we
are thankful that our profits held. It’s just that when you are part of a com-
pany that stretches, you feel like you’ve failed if you aren’t able to hit those
lofty goals.”
In spite of their relative disappointment, the company continues to pro-
duce pretax profits (as a percentage of revenues) that are 100 to 400 percent
higher than their competitors. It is clear that yesterday is not what consumes
this company’s leadership. In fact, they are so consumed with tomorrow that
their latest initiative is all about creating the future.
For starters, the executive level leadership program, historically offered
only to senior executives, was rolled out to the company’s managers through-
out the United States and Canada. “We realized that we needed a great lead-
ership program at all levels if we wanted all our people to take charge of their
future,” said Kerry Bradley. They paired that initiative with another effort
that targets creating an even more creative, innovative, and explosive orga-
nization. “There’s nothing wrong with what we are today,” he said. “At the
same time, we believe we can be significantly better in the future. That’s the
charter for our entire organization. We want to create an even better future
for our people, our customers, our stockholders, and those we serve around
the world.”
At the time of the interview with Kerry Bradley, Luxottica Group had
entered into an agreement to acquire one of its largest competitors. This
smart company clearly has little interest in resting on its laurels. They are in-
tent on creating a company that will make sure that they fulfill one of their
prime objectives: “To be the retailer of the century.” It should surprise no
one that they are already on track to fulfill that dream.
SMART COMPANIES AND THE

ULTIMATE CUSTOMER EXPERIENCE
While I was working on this chapter, I needed to shop at one of the old-
est retail companies in America. I could not help but compare the extreme
differences between that company and the smart companies I have studied.
It should surprise no one that the smart retailers are growing and maximiz-
ing profit. That, of course, is what separates the smart companies from the
not-so-smart companies. The smart companies understand that customers
really are important and how you care for them goes straight to the bottom
line.
C h a p t e r
12
STRATEGIC FOCUS
Finding Your Way in a Chaotic World
B y now, you have figured out that a

lot of the debate in the academic world has to do with how organizational
leaders should think about chaos. On one side of the argument are the tra-
ditionalists, who suggest that there is no need to account for complexity and
random events in the competitive environment. For the traditionalists,
there is no need for a company to question the industry or products in which
it competes.
This discussion would not be complete unless I mentioned the fad du
jour crowd. In reality, a lot of companies’ strategies are driven by the latest
fad. In those cases, the employees of such companies must deal with another
new fad every 12 to 24 months. Most of these fads can be effective tools only
if the firm’s leadership understands that a complex mental model is re-
quired if the firm is in a complex environment. That’s another way of affirm-
ing Dr. Seuss’s statement: “When you know where things are out of whack,
then you know how to get them back in whack.”
Another school of thinking revolves around complexity. One group
takes a Darwinian approach, which assumes that organizations will self-or-
ganize. Another group focuses on the inability of the human mind to deal
with complexity, suggesting that such “bounded rationality” prohibits the
development of effective strategy for the future. They believe that all good
strategies emerge after the fact.
165
Complex dynamic systems is the mental model that I propose in this

book. The system has two general characteristics and both must be ac-
counted for in the development of corporate strategy: complexity and speed
of change. Fads don’t do that, emergence does not do that, nor does either
the complex adaptive or the traditional approach. Research reveals many
possible levels of complexity as well as speed of environmental change which
with firms must deal. Complex dynamic systems are simply reality.
STRATEGIC FOCUS
Leaders who create strategies, organization, and character that are ap-
propriate for their company’s competitive context can keep the company op-
erating in the profit zone. To put that another way, if the competitive
context is level 4 (rapidly changing, highly complex, moderately high levels
of uncertainty), the smart leader will focus on creating aggressive strategies,
a highly adaptive organization, and the highest level of corporate character.
Smart companies not only deliver creative destruction into the lives of their
competitors, they rapidly adapt to those same destructive efforts of their
competitors. That is how a company can proactively anticipate as well as re-
actively adapt to stay in the profit zone.
COSTCO WHOLESALE CORPORATION: ONE OF

THE TEN SMARTEST COMPANIES IN AMERICA
The November 24, 2003, edition of Fortune had an interesting article

title: “The Only Company Wal-Mart Fears.” The article is about the member-
ship warehouse club, Costco. Consider some of the statistics cited in the ar-
ticle.
• Sam’s Club has 71 percent more locations than Costco, yet as of

August 31, 2003, Costco had 5 percent more sales.
• The average Costco warehouse generates almost double the revenue
of a Sam’s warehouse.1
“We take what some might think is a pretty radical approach,” said Ri-
chard Galanti, chief financial officer of Costco Wholesale Corporation.
“Corporate America has really developed a downsized, efficiency, and cost-
Strategic Focus: Finding Your Way in a Chaotic World 167
cutting mindset, particularly when it comes to controlling labor and benefits

expenses. Some companies control these expenses by figuring out how ’lit-
tle’ they must pay their employees and how much of the health care costs
they can pass on to their employees. While we agree with the idea of cost
efficiency, we believe the rest of that stuff is mostly about sacrificing the
well-being of your employees in order to increase profits; we don’t buy that.
We believe you can do both.”
I would agree: Costco’s attitude does run contradictory to the general
thinking at most companies. The same could be said for all of our top ten
smartest companies. They have little interest in sacrificing the well being of
their employees for the sake of profit. In fact, they all believe that profits will
be increased if a company goes out of its way to treat every member of the
team with the ultimate in respect and care, including compensation.
“Why in the world would a company not understand that having well-
paid employees with great benefits, management that cares, and unques-
tionable ethics would not lead to higher profits?” said Galanti. “Our turn-
over is one-third that of the retail industry as a whole; that automatically
reduces our costs. I think it’s a no-brainer.” It is fair to say that Costco’s lead-
ership is willing to take a lot of heat to make sure their people are well cared
for. “We get a lot of pressure from the Wall Street analysts,” said Galanti.
“They seem to think we pay our people too well and that our profits would
go up if we didn’t. In the short-term . . . maybe, but longer term, we believe
our strategy for hiring and retaining the best employees will help us to max-
imize earnings. To be honest, I don’t mind taking that kind of heat, and nei-
ther does Jim Sinegal, our CEO.”
One of the unquestionable inf luences at Costco is Sol Price. The philos-
ophy that underlies Costco’s success has a lot to do with Sol Price and the
time that Jim Sinegal spent working for Price at Fed-Mart early in his career.
Costco’s values are a direct ref lection of Sol Price’s five-point philosophy of
business.
It might be appropriate to add another of Sol Price’s philosophies. He
calls it the “intelligent loss of sales.” Let’s take a look at each of these prin-
ciples.
When it comes to obey the law, Costco has a philosophy of avoiding the
minimums. They tend to go beyond what is required by the law. “If we’re
building a new store and the code requires that we plant a specific number
of trees, we go beyond that number. We want to make sure that the commu-
nity understands up front that we respect their needs and desires,” said Gal-
FIGURE 12.1 Sol Price’s Five-Point Philosophy of Business
1. Obey the law.

2. Take care of our customers.
3. Take care of our employees.
4. Respect our suppliers, and, if we can accomplish 1 to 4, then . . .
5. Our shareholders will be rewarded.
anti. “We like to make sure that we go above and beyond just about every
requirement our community values.”
Take care of our customers is also a serious commitment at Costco. Not
only is Costco committed to providing its members the lowest possible
prices on the best quality items, the company offers its members what it
terms an “unconditional, double guarantee.” First, the company will fully re-
fund a member’s annual membership fee—100 percent—any time, no ques-
tions asked. Second, the company has an unquestioning return program for
just about everything. Every product is 100 percent guaranteed. If you’re not
satisfied, simply return the item for a full refund. Neither a receipt nor the
original packaging is required, and there’s no time limit. The only exception
to Costco’s personal computer return policy was implemented in late 2003.
“We had to look at that,” said Galanti. “It seems that most computer systems
are out of date within several months, so we can’t justify taking a computer
back after it’s clearly obsolete. Historically, over one-half of the computers
being returned were one to four years old. We changed the return policy to
be “within six months;” that is still the most customer- friendly return policy
in retail today—by at least five extra months. We’ve had good customer sup-
port on this. It’s clear that they understood our dilemma.”
Costco does control its profit margin on products. If a vendor ap-
proaches Costco with a special discount on an item, Costco passes the cost
savings on to the customer. The company’s leadership believes that such
practices, although somewhat hidden from the customer, are best for all in-
volved in the long run. “They may not know what we’ve done, but we do,”
said Galanti. “At some point, we believe that the customer begins to develop
a high level of trust in us and in our integrity. A one-time profit opportunity,
when compared with a lifelong customer relationship, is not a decision for
us. We always choose our customers first; and we believe they appreciate
that. And in the long run, our shareholders will benefit from that.”
I have already alluded to the pressures that Costco’s leadership experi-
ences related to employee salaries and benefits. Costco believes that their
value of reward our shareholders is best served by taking a long-term instead

of a short-term view of success. “We try to maximize profit every day of the
year,” said Galanti, “but we believe that ‘managing to the quarter’ just to suit
Wall Street is not in the long-term interest of our shareholders. We want to
be providing attractive growth and profits for our shareholders, not only to-
day, but also 25 years from now. We can’t do that by sacrificing the well-be-
ing of our customers, our employees, or our vendors.”
A Model of Efficiency
One of the principles that Sol Price lived by was the “intelligent loss of
sales.” When applied to the Costco model, that means that less is better for
the firm as well as the customer. At the heart of Costco’s philosophy is low
price. They realize that they cannot offer every variety of each product. So
they offer the highest volume product varieties, knowing full well that they
cannot keep costs low and at the same time stock large inventories of a single
product that involves 12 or more different can sizes or types. Costco oper-
ates to serve the customer who is willing to buy in larger quantities than the
average customer. Where the average retailer might offer 12 or more variet-
ies of a single canned good, Costco will offer only two. For example, they
may sell a six-pack of peaches and a large, commercial can of peaches.
Rather than offering 12 or more varieties of can size, etc., Costco offers just
two. The result is greater purchasing power with its suppliers, more rapid
inventory turn, and, ultimately, lower prices. That approach results in even
lower prices, because a lot of inventory is not sitting on the shelf for long pe-
riods of time.
As a result, while Costco’s competitors often stock over 60,000 items,
Costco averages around 4,000. That alone results in substantial cost savings
to company and customer alike. This is where the story gets better. When
you consider all that happens between manufacturer and customer, there is
a lot of expense. Costco is exceptional when it comes to slicing costs in this
area.
“We use what is called a ‘cross-dock’ approach,” says Galanti. To begin
with, Costco buys in very large quantities. Additionally, they ask their sup-
pliers to shrink-wrap and palletize every shipment, with the pallet stocked
completely with ready-to-sell items (e.g., no boxes to cut open and no items
that need to be placed neatly on a shelf. The average order is then shipped
from the manufacturer to a cross-dock depot facility. Rather than a tradi-
tional facility where merchandise sits and waits to be ordered for each retail
location, the inventory is at the Costco cross-dock facility for an average of
only 9 hours. Basically, the inventory comes in on one side of the facility and
is shipped out on the other side to maximize freight and volume efficiencies.
Here is where it gets interesting.
Each Costco warehouse has very little space for inventory. When the pal-
letized inventory is received, the pallets are immediately moved to the sales
f loor. Then the protective plastic wrapping is removed and the product is
immediately ready for purchase.
When you look at that process, how Costco keeps its costs down be-
comes immediately clear. The product is only handled three times by a
Costco employee: at initial receiving, unloading/stocking in the warehouse,
and final checkout when the product is sold to the customer. Then at final
checkout, the cashier can ring up six cans of peaches once as a six-pack in-
stead of six separate rings.
To take care of our employees, a lot of what the company does has already
been discussed. The average full-time clerk or checker at Costco will make
over $41,000 per year after four years with the company. Not only that, they
get health, dental, and vision insurance, and the company pays over 90 per-
cent of the cost, a significantly higher proportion than do their direct com-
petitors.
Costco’s values translate to the employees’ lives in a meaningful way.
Obviously, integrity is critical in the retail business. Like most companies,
employees at Costco are expected to practice unquestionable integrity in all
their dealings. “That goes for our managers in their dealings with subordi-
nates as well,” says Galanti. “We believe you have to treat all employees just
like you want them to treat customers. We make sure our managers do ex-
actly that.”
Costco’s value of respect our suppliers is equally important. Costco, unlike
some businesses, goes to great lengths to ensure that their supplier relation-
ships are based on mutual benefit and integrity. Galanti believes that Costco’s
suppliers understand the competitive challenges they face, so there is no
room for coercion or manipulation. At the same time, Costco’s approach to
its product mix is extremely simple and cost efficient for both Costco as well
as its suppliers. “That enables our suppliers to cut their costs to a minimum
and, as a result, give us a great price as well.”
This in no way indicates a lack of interest in the customers’ needs. It sim-
ply recognizes the reality that they cannot serve all customers all items,
while still keeping prices low. At Costco, the mantra is high quality and low
price. No exceptions.
Creating the Ultimate Customer Experience
You might think that Costco would get a lot of complaints from custom-
ers wanting larger product selections. That does not occur. The Costco cus-
tomer apparently appreciates the value they can get and the integrity of the
firm that stands behind each purchase. It might be said that the end result
is a special relationship between the customer and this extremely smart
company.
By now, it should be clear that Costco works hard to create the ultimate
customer experience. It starts with low prices and high quality; it continues
with motivated, caring employees; and it’s driven home by a company that
stands behind its products. Here’s a story that illustrates the lengths that this
exceptional company will go to make sure that every customer has the ulti-
mate customer experience.
Early in its 20-year existence, Costco had warehouses on the West Coast
plus two in Minneapolis/St. Paul, Minnesota, and one in Milwaukee, Wis-
consin. In mid-1985, the firm’s leadership determined that the three stores
located in Minnesota and Wisconsin were losing more money than the com-
pany was making at their 19 West Coast locations. They concluded that their
expansion to Minnesota and Wisconsin had been premature and concluded
that they had to close the Midwest locations.
As a young, growing company, Costco had some decisions to make.
They had nearly 100,000 members who had paid $25 each for shopping priv-
ileges at Costco. In some cases, the memberships had only a month of buy-
ing privileges left on them. In others, the members had just joined. Costco’s
response was to provide a full refund to all 100,000 people. It was not a pro-
rated refund; each member got their $25 back in full.
As a side note, the company offered every employee a job at one of the
company’s other warehouse locations. Despite the difficulty of moving from
Minnesota and Wisconsin to the Pacific Northwest, over 30 percent of the
company’s employees chose to transfer, and many are still with the company
today.
Unsurprisingly, when the company was able to reenter the Minneapolis/
St. Paul market more than 15 years later, they were greeted with open arms
and excited customers. That usually happens when a company provides the
ultimate customer experience.
A Different Kind of Company

Like the other smart companies I studied, Costco executives have little
time for self-importance or egos. Parking slots at corporate headquarters are
allocated according to seniority, not position or title. That means that many
of the 300 or so sheltered parking spaces go to the most tenured employees,
irrespective of position or title, while less-tenured employees have to park
uncovered and further away.
Corporate humility is also practiced at the company. Jim Sinegal, for ex-
ample, had a wall knocked out of his office so that associates who were pass-
ing in the hallway would have open access to visit. The human resources
group conducts what are called “caucus groups” with employees. The objec-
tive is to allow the employees, as much as is feasible, to design their own
rules and workplace procedures.
If you call one of the senior executives of the firm, as I did in working
on this story, you do not usually get an administrative person. The executive
answers his or her own phone. That includes Jim Sinegal as well. The mes-
sage to the Costco team is that there is always an open door and that input
is always welcome, even at the highest levels of the firm.
Costco now has over 430 locations worldwide. Outside of the United
States, the company has operations in Canada, the United Kingdom, Mex-
ico, Korea, Taiwan, and Japan. Across the board, managers are expected to
spend a great deal of their time in developing their employees. Although the
company requires that at least 85 percent of all promotions come from in-
ternal candidates, the actual number is closer to 99 percent.
If you consider my three rules of strategy and leadership (maximize to-
day, think and act out of the box, stay ahead of the curve), you will agree that
Costco is one of those really smart companies. As such, it is reasonable to
expect that this company will continue to grow and thrive. Costco’s Corpo-
rate IQ assessment revealed that the company was extremely well matched
in all 17 measured areas. It is designed to operate in the profit zone today
and into the future.
DELL, INC.: ONE OF THE TEN

Imagine for a moment that you are the coach of a Super Bowl football
team. Like other coaches, you take your team through all of the drills, and
you prepare for anything that you could possibly face . . . almost. Imagine
standing on the sideline, watching your team in the first quarter of the
game, and suddenly realizing that something is seriously wrong.
You had noticed during the first few minutes of the game that the other
team seemed to be executing slightly better than your team. But, ten minutes
into the first quarter, after they were ahead by a touchdown, a realization
hits you like rock in the pit of your stomach—the other team is significantly
faster than your team. Not only is every player faster, but the team as a whole
seems to adapt more quickly. As you watch, you realize that everything they
are doing is simply much faster than what your team is doing. You quickly
figure out that your team has little chance of beating a team that is so much
faster.
Welcome to Dell, Inc. It is simply one of the fastest, most adaptive com-
panies around. It is also a very complex organization. The abilities to be fast
and complex combine to make the company a formidable competitor.
Dell, Inc.: A Customer’s Perspective
I had written about Dell long before I had a personal experience with
them. I think you will agree, after I finish telling you my story, that Dell’s cus-
tomers really like to do business with it. My customer experience began
when I was given the task of finding a computer system for my church.
I had searched all the discount stores and other outlets and finally got
around to looking at Dell. I was a little wary of having a computer shipped to
me, because I usually like to pick out something at a store and take it home.
But I’d found an ad by Dell that seemed to offer exactly what I wanted. I con-
sulted with a couple of computer people whom I knew, and made the deci-
sion to call Dell, Inc.
I got through to a customer service person pretty quickly. I noticed that
she had an ever so slight accent, so I asked her where she was. “India,” she
replied. I went ahead and told her what I wanted to order. The words were
barely out of my mouth when she informed me that I was ordering the wrong
system. She had been careful to make sure she understood exactly how we
were going to use the system. She went on to explain a lot of technical things
that I obviously did not understand but that she was kind enough to translate
into simple language. “The system you are ordering is not suited for the ap-
plication,” she said. I braced myself for what I expected to be a bait-and-
switch move to a much higher system.
Instead, she suggested that another model was much more suited to our
application, and she explained all the differences. Then she suggested that
I go ahead and order a network switch. Not counting the switch, the upgrade
to the appropriate equipment was less than $75 per computer. I was a bit
shocked at the amount because I was expecting it to be a lot more.
I ordered the system from Dell, only to find when it arrived that the
switch was defective. Our administrative leader called Dell and explained the
problem. They told us to expect a replacement part no later than the next
day. It seems that there were some problems in getting the item from the
warehouse to our location in Dallas. Imagine our surprise when a Dell em-
ployee arrived at the church that day. She had driven almost 200 miles to get
the replacement part to us. Needless to say, I was impressed. That is why I
decided I wanted to know more about this company.
Challenge Everything Processes
Some companies are not interested in challenging the status quo. In

fact, at many companies, you can lose your job if you challenge the existing
structure. Not so at Dell. In fact, the idea is to challenge everything to con-
tinually discover new and more efficient ways of doing things.
A few years ago, process reengineering was a hot topic. Some companies
specialized in reengineering processes for clients. The only problem was
that these companies were more about downsizing initiatives than they were
about process cycle time reduction. For those who are not that familiar with
process reengineering, it is a way of analyzing a process and cutting out un-
necessary delays and activities. The average order-to-ship process that takes
60 days can usually be cut by 80 percent if the process is cleaned up. In the
case of Dell, not only is every customer’s order a custom-made system, but
they can often ship on the same day they get the order and almost always
within five business days. Compare that turnaround with that of the average
competitor, who not only cannot ship an order in less than a couple of
weeks, but lacks the ability to design the system precisely to the customer’s
needs—most can only ship off-the-shelf inventory. But there is more that
makes this phenomenal company really different.
Customer Intelligence
Most companies spend a great deal of money researching what the cus-
tomer thinks they need. Often, that research happens once a year. Not so at
Dell. Dell utilizes its customer ordering system to detect minute changes in
customer preferences. Once a change is identified, the company takes less
than 48 hours to change its offerings to its client base. That ability to change
at the speed of light makes Dell a formidable competitor.
A Lesson in Diffusion
The idea of diffusion is paid little attention in corporate America, al-

though it has a great deal to do with business success. Diffusion has to do
with how fast a new idea or change penetrates a societal structure. It involves
anything from how fast a new fashion idea diffuses from Europe to America
to how fast a new idea is adopted into a company. Everett M. Rogers is per-
haps best known for his work in this area. In his book, The Diffusion of Inno-
vations, he synthesized over 40 years of research into one coherent treatise
on diffusion, change, and the people aspects of change.2
One of the most important conclusions of Rogers’s work, in my opinion,
was his recognition of what I call “the point of no defeat.” Rogers observed
that every change, including the diffusion of a new product or technology
into a market, reaches a point at which the success or adoption of that prod-
uct is a fait accompli. What Rogers discovered was that somewhere between
the 10 and 25 percent acceptance levels, a product or technological change
becomes unstoppable. Obviously, the marketer who understands this reality
will have a substantial advantage over their uninformed counterparts. That
is where Dell comes in.
Competitors in technology-driven markets understand that there are
trade-offs between focusing on the leading edge and being a fast follower.
Dell leaves the high-dollar technology research to their vendors. At the same
time, Dell avoids investing its research and development money in new tech-
nologies before they have passed the point of no defeat.
“We call that the ‘standardization curve,’” says Lynn Tyson, VP of inves-
tor relations. “We figured out that products go through three stages: the
proprietary or introductory stage, the standardization stage or when the

customers are in the process of settling on one technology, and the full stan-
dardization stage or when the technology becomes the global standard.”
She went on to explain that Dell is a profit-focused company and that it
makes little sense for them to invest in the proprietary/introductory stage
if the diffusion (or mass acceptance) of the product is yet unknown.
“It’s a little bit like tennis,” I responded. “You’re always looking for the
‘sweet spot’ in the tennis racket. In diffusion, you are looking for the point
at which a new technology enters the standardization process.”
“I agree,” she said, “but it takes a lot of concentration to do this well. We
not only listen to the customer, we spend a lot of our efforts in trying to un-
derstand where the customer is going. We are sensitive to industry trends
and focus on how they’ll affect our customers. Once those technology trends
start to standardize, we look at how the business opportunity will contribute
to our growth and balance this with products and services that will meet our
customers’ needs.”
Tyson went on to talk about how Dell is a true learning organization.
She explained that, starting at the top with Michael Dell, the entire organi-
zation emphasizes the dynamics of learning that drive organizational trans-
formation. During the interview, it became abundantly clear that Dell is a
company, like its competitive environment, that is never the same from one
day to another.
One way that Dell carries out that objective is through technology part-
nerships. As I mentioned, one of the firm’s key areas of focus is its desire to
recognize products that are capable of, or about to enter, the “sweet spot” of
standardization. Dell does that by focusing on and partnering with a number
of highly innovative companies. “Sometimes the status quo technology is re-
ally in decline, and people don’t recognize that reality,” says Lynn Tyson.
She went on to explain that a lot of companies in their business seem to place
all their confidence in the technology or supplier who has market share at
the moment. “Today’s technology leader may be tomorrow’s history,” says
Tyson. “Dell is a fast follower. We look for companies that are right on the
edge of developing new technologies, then become partners with them
when we know that we can ultimately leverage those technologies to deliver
solutions to our customers for the best value.”
I would be remiss if I did not mention Dell’s attitude about thinking and
acting out of the box. It became apparent to me that Dell is an organization
in which the leadership pays little attention to historic competencies and
ideas like “competitive advantage.” Rather, it is much more consumed with
where the future will be. Tyson summed it up nicely: “We will go anywhere
and create any product that makes sense, as long as it’s adjacent and comple-
mentary to our current portfolio and represents profitable growth for our
business. Right now, we want to maximize our existing portfolio of offerings,
and at the same time, if we need to be different in the future, we want to be
the first company that gets there.”
Do You Really Care?
The Corporate IQ assessment involves 17 broad areas of the firm. Dur-

ing my visit with Lynn Tyson, I asked a pointed question: “Your Corporate
IQ assessment indicated a small deficiency in an area called value of peo-
ple.” I went on to say that the smartest companies seemed to be obsessed
with making sure that their people were recognized, valued, and appreci-
ated. I was curious about this particular area, even though it was a slight blip
on the assessment.
When I mentioned the issue to Lynn Tyson, she immediately agreed.
She went on to explain what had happened. It seems that the technology
meltdown of 2000 to 2001 had a significant impact on Dell. At first, the se-
nior executive team seemed to be asking themselves, “What did we do
wrong?” “That is when we realized that the industry had gone through a
frame-breaking shift,” said Tyson. “We immediately acknowledged the real-
ity of the situation and, instead of being paralyzed by the downturn, we took
swift action to refocus on our company’s ability to aggressively recognize
market opportunities and move toward them as rapidly as possible.”
One of the benefits of working at Dell since its founding was the mete-
oric increases in the company’s stock price. The disastrous events of the tech-
nology meltdown, paired with the impact of 9/11, hit every company in the
United States if not the world. Dell was faced with what might be called its
“last resort” approach for dealing with those changes. Dell had to downsize
to match the new business reality. At the same time, the company continued
its commitment to inspired excellence. A 2002 employee survey revealed
that the downsizing and other pressures had pretty much def lated the level
of inspiration in the organization. People were wondering if they really mat-
tered anymore.
In the same way that the Dell organization attacks competitive chal-
lenges, they immediately launched a “winning culture” initiative to renew
the company’s spirit and communicate just how much each member of the
Dell team is valued and appreciated. By 2004, Dell had matched its external
strategy changes with a coordinated program for communicating the impor-
tance of each individual in the firm. In a company with little tolerance for
corporate egos, the message was loud and clear: “Our people make the
profit, and we want them to understand how much we appreciate them,
their hard work, and their focus on excellence.” Smart companies view their
people as being equally as important as their customers. Without the enthu-
siastic support of both, inspired excellence is little more than words on a page.
When the meltdown occurred, the immediate response of Dell’s leader-
ship was fast and meaningful. Dell was the first of the competitors in its seg-
ment to turn the corner. Dell’s keen focus on balanced profitability in a low-
growth environment was able to lead the company into a new and brighter
future.
Perhaps Lynn Tyson explained it best. “We were the first movers when
it came to changing our cost structure and reinvigorating our culture so we
could continue to deliver the best value to our customers and employees. We
learn fast. Once we implemented our product and people strategies, we were
back on track.”
Breaking the Mold Ethically
When looking at Dell, I asked for the opportunity to get a couple of dif-
ferent perspectives of the firm. Lynn Tyson provided wonderful perspec-
tives on strategy. I was fortunate also to have the opportunity to visit with
Thurmond Woodard, Dell’s chief ethics officer and vice president of global
diversity, who provided an inside perspective.
Smart companies understand that they can’t be good in a few areas and
be successful; they have to be good across the board. That is why the time
with Thurmond Woodard was so valuable in providing a much broader look
at the company.
I was pretty blunt in starting our interview: “How do you describe diver-
sity?” Let me explain why I was so interested in his answer. We have all seen
the word diversity used to justify a lot of things. When it comes to companies,
I have observed that ill-conceived programs of preference can cause exten-
sive damage. I’m all for diversity, but I believe we have to pair it with excel-
lence to do the best for everyone involved.
“We believe that diversity is what drives our success,” said Woodard, as
he began to explain Dell’s approach. “Diversity describes who we are as peo-
ple. If we are to be an innovative company that challenges the future, we

have to be able to not only tolerate people who are different, but we need to
be able to encourage them. Diversity is not about race or gender; it’s about
attitudes and abilities.”
I purposely pressed him a bit further on this issue. He began talking
about the “Soul of Dell” and how those values and principles drive every-
thing the company does. The word soul is often used to describe the inner
being of a person. In this case, it is used to describe the stuff of which Dell
is composed. The “Soul of Dell” is more than a simple phrase; it is a well-
conceived document that covers every aspect of what the company does.
From unquestionable integrity, to people relationships, the community, and
customers, Dell uses its “Soul of Dell” as a strategic compass to guide every-
thing it does.
Two statements in the “Soul of Dell” document captured my attention.
Here is the first.
At Dell, we value and are committed to: Customers, the Dell

Team, Direct Relationships, Global Citizenship, and Winning.
It is important to note that the company philosophy recognizes the

value of balance between the organization, its team members, the commu-
nity, and, of course, the firm’s raison d’etre—winning! In our discussion, Woo-
dard talked a lot about excellence. Woodard took that idea of winning to his
view of diversity. He explained that the company’s objective was to create a
workplace in which every member of the team believed that they had the
freedom to make a difference. I got a kick out of his comments on this topic.
“We want to access talent. We don’t care about the package.”

—Thurmond Woodard
History is filled with instances in which really bright people experienced

difficulty because they were different. Albert Einstein apparently did not do
well in math as a young child. Walt Disney was fired by a newspaper because
his boss felt he was not a good idea man. Enrico Caruso’s parents were urged
to send him to engineering school, because, according to his voice teacher,
he “has no voice at all.” Smart companies understand that really talented
people come wrapped in all kinds of packages. They also realize that great
companies find ways to discover the genius in everyone they hire. Wouldn’t
you love to work for a company that does that? Maybe that’s why so many of
the smart companies have a lot more “smart applicants” than their counter-
parts.
Take a Stand!
This word is loaded with meaning: Enron. Most remember the news
reports of financial misrepresentation and tragic losses by stockholders as
well as employees of this troubled company. One of the things I have found
in the smartest companies might appear on the surface as a dichotomy. On
one hand, there is a preoccupation with creativity and challenging every-
thing. On the other, there are unquestionable standards of practice and
ethical behavior.
When you think about it, that dual focus makes sense. If you as a man-
ager encourage your people to be risk takers who engage in creatively dis-
covering the future, they will make some mistakes. At the same time, if no
ethical standard supports the risk-taking employee, all creative activity will
cease. The highest of ethical standards creates the highest levels of trust.
That applies to employees, vendors, stockholders, and customers. That’s an-
other way of saying that high ethical standards go straight to the bottom line.
Uncompromised Integrity
Another thing that became clear during my discussion with Thurmond

Woodard relates to the corporate attitude regarding any breach of ethics. In-
tegrity is the standard in every aspect of an employee’s life at the company,
regardless of their position. Dealings with subordinates, peers, vendors, and
customers are expected to be of the highest ethical nature. “If all else fails,”
says Woodard, “do the right thing.”
Doing the right thing is in the very fiber of Dell. It’s part of their corpo-
rate DNA. The same is true of the “Soul of Dell” principles and practices.
From their first day on the job until they retire, every member of the team
is reminded of the standards by which the firm operates. The good news is,
good people want to work for a company with those standards as minimums.
SMART BUSINESS
It seems fashionable today to take pot shots at companies that take mo-
rality seriously. Some are tempted to criticize companies with high levels of
employee commitment. The leaders of companies that commit to taking a
moral, ethical approach in managing their company are willing to take the
heat because it is simply the right thing to do. Smart companies are aggres-
sive, they are adaptive, and they insist on high levels of corporate character.
That must be why some of the world’s most profitable companies are also
quite smart.
C h a p t e r
13
MEASURING SUCCESS
S mart companies are different from

their lesser counterparts. In every case, smart companies have a well-estab-
lished system of accountability. If I were to single out the one single f law in
management thinking that does the most to destroy companies, it is an all too
common misunderstanding of accountability. The old management ap-
proach makes managers accountable for results. The problem is, it fails to
make managers accountable for the behaviors that produce sustained success.
Let me put it another way: if high performance goals are the only stan-
dard you establish, you leave managers free to use “whatever means nec-
essary” to reach them. You may win a few battles with that approach, but
ultimately you will lose the war.
When you look at Corporate IQ, you discover that measuring, or ac-
countability, means focusing on the behaviors that produce high levels of
achievement, not looking only at the outcomes or goals. Let us look at just
one area that is a consistent problem at companies that I have studied: lead-
ership style. Leadership style is discussed in Chapter 7 on organization. You
probably remember that a level 1 leadership style is highly controlling, while
a level 5 leadership style is highly empowering and charismatic. Simply put,
the higher the competitive index, the competitive environment or context
becomes more competitive with a higher rate of speed (of change). Highly
controlling management can kill a company in a competitive context that in-
volves high rates of change and high levels of complexity.
183
Excellence or extremely high standards of performance are the norm in

smart companies. To make sure that the company is capable of achieving
those goals, the managers are accountable for how they treat subordinates.
Earlier, I talked a lot about the significance principle. When it comes to lead-
ership, the significance principle is involved on both sides of the transac-
tion. On one side, managers are often tempted to build their personal
significance by deriving it from those they supervise. Although such “self-
esteem” is false, some managers are so psychologically needy that they think
nothing of demanding that subordinates engage in rituals like calling them
“mister” or forcing them to endure public rages over a missed goal.
The other side of the significance transaction involves the subordinate.
I happen to believe that most people really have a desire to be involved in
excellence. At the same time, if they are discounted and publicly humiliated,
most people will give little more than their manager demands. The result is
significant underutilization of the company’s talent.
It makes a lot of sense to make managers accountable for how they treat
their subordinates. When combined with an expectation of excellence, a
commitment to recognize, appreciate, and value subordinates can drive an
organization to new levels of achievement. Yes, the idea is simple, but as I
said, a lot of managers are more interested in having their egos stroked than
in the long-term success of the firm.
When you compare the approaches of smart managers with those of
other managers, you begin to discover the real reasons behind corporate
success and failure. It should be abundantly clear by now that how managers
think has everything to do with how they behave. As a result, how managers
think and how they behave directly impacts the companies that they lead. I
have written a lot about success in this book, but now I will pay attention
brief ly to failures. Low-performing managers often do not stick around to
experience the results of their misdeeds. That does not change the reality of
their outcomes. Highly ineffective managers can and do obtain short-term
improvement. The only problem is, when they leave, nothing but devasta-
tion is left behind. Just to make sure you know how to spot one of these peo-
ple, I have prepared a list (see Figure 13.1).
We can all identify with the preceding list. The truth is there are a lot of
people who seem to think that such behaviors are necessary if one is to be a
successful manager. Reality reveals otherwise. As you consider the leaders of
each of the top ten smartest companies, it is clear that they are the exact op-
posite. I call those exceptional leaders “level five leaders.” I’ll brief ly explain
the concept.
Measuring Success 185
FIGURE 13.1 The Fifteen Stupid Habits of Highly Ineffective Managers
1. They believe that management is all about controlling others.

2. They think the latest fad will save their company.
3. They think that downsizing is a strategy.
4. They are obsessed with what the firm used to be (historic competencies).
5. They demand respect (instead of earning it).
6. They sacrifice anything or anyone to make their quarterly numbers.
7. They take credit for the work of others.
8. They hire and promote compliant people.
9. They are people of intrigue and avoid transparency at all costs.
10. They view integrity as less important than results.
11. They value political skill in people as more important than performance and
productivity.
12. They insist on being called “mister” or another, similar title.
13. Their door is never open.
14. They view humility as a sign of weakness.
15. They have contempt for subordinates.
LEVEL FIVE LEADERS
H. Igor Ansoff, the strategist who originated the idea of evaluating con-
text and organizations on a five-point scale, must be credited with laying the
foundation for what I call “level five leadership.”1 In his early work, he talked
a lot about the importance of leaders who are charismatic as well as empow-
ering. Ansoff believed that such leaders were critically important to firms
that were operating in environments with competitive indexes in the four to
five range (thus, “level five leaders”). As a result of his work as well as my
own, I would like to share what I believe are the characteristics and beliefs
of level five leaders.
• Having humility
• Having integrity
• Inspirational
• Empowering
• Defining success in terms of their people’s accomplishments
• Having excellence as their minimum standard
• Proactive listening
• Seeking first the best for others and believing that profits will come
as a result
It does not take long to figure out that level five leaders have little toler-
ance for self-absorption and egocentric behavior. They are unwilling to
build their own success at the expense of others. Let’s look at one of these
exceptional people.
BARBARA MEDLIN: LEVEL FIVE LEADERSHIP
Barbara Medlin is responsible for the national marketing effort of a

large financial institution. Over the past few years, I have had the opportu-
nity to observe her personally in a number of different circumstances. I be-
came so intrigued with just how gifted she is as a manager; I asked a number
of her subordinates and peers to send me e-mails that describe how she
leads.
My first exposure to Medlin was when her organization was undergoing
a major reorganization. Needless to say, she was surrounded by unhappy
people. I discovered that Medlin operates on a personal philosophy of “rec-
ognize the best and avoid the rest.” That principle involves focusing on the
positive aspects of a situation you cannot control and avoiding the negatives.
I am sure that Medlin, as did others in her organization, disagreed with at
least a few of the decisions that were made. Yet, she consistently chose to
avoid getting on the negative bandwagon. When negatives were brought up,
Medlin consistently focused on the best.
We have all met people who were unable or unwilling to recognize un-
productive situations. Medlin is not one of those people. Medlin is realistic
when it comes to recognizing what she can change and what she cannot. The
result is that she avoids the negative rut that some get into. Medlin chooses
to focus on being the best she can be in areas where she can affect the out-
come. Rather than perpetuating the unavoidable negativism of a situation,
she chooses to use “focus on the best” to keep her people focused and pro-
ductive.
Not surprisingly, the e-mails I got from Medlin’s subordinates were ex-
tremely positive. In fact, if you look at the eight characteristics of level five
leaders, they generally describe exactly how her associates and her subordi-
nates feel about her leadership style. One very bright subordinate made a
telling comment: “She encourages her people.”
Unsurprisingly, people enjoy being a part of Medlin’s organization. This
is characteristic of what happens to level five leaders. At most companies, it
is not unusual to find that there are waiting lists of internal applicants who
want to work for a level five leader. After all, who wouldn’t want to work for
someone like a Barbara Medlin?
Level five leaders hold themselves as well as others accountable for how
people are recognized, valued, and appreciated. One of the companies that
seems to maintain a nice balance between excellence and how it values em-
ployees is Microsoft. The company was established on the idea of “getting to
the future first,” so it should be no surprise that the company continues to
focus on that issue. Staying ahead of the curve is a Microsoft mantra. The
company’s leadership understands that its people and its leaders must work
together to accomplish that goal. That is why the company has continued to
do extremely well over the years.
MICROSOFT: ONE OF THE TEN

When you think about Microsoft, it’s natural to think about Bill Gates.
One of the things I wanted to do in this book was to get an internal view of
the firm. I asked people who were way down in the middle of the firm’s man-
agement structure to talk about things like . . . Bill Gates. More than that, I
wanted an insider’s perspective on how the firm does business.
Before I selected Microsoft for this book, I conducted a Corporate IQ as-
sessment on the firm. Through a few contacts who trusted my motives, I was
able to get the assessment completed. Let me begin by saying that Microsoft’s
Corporate IQ was extremely high. Obviously, that’s one of the reasons that
they were selected as one of the top ten smartest companies in America. They
measured out as having aggressive strategies, a highly adaptive organization,
and the corporate character to go with it. They are truly a well-balanced com-
pany. With a Corporate IQ in the top tier, I expect Microsoft to continue to
show sustained, high earnings.
You may remember that earlier, I suggested that my three rules of strat-
egy are, “Maximize today, think and act out of the box, and stay ahead of the
curve.” That is exactly what Microsoft does exceedingly well. I had the oppor-
tunity to spend some time with one of those who had completed the Corpo-
rate IQ assessment on Microsoft. I would like for him to remain anonymous,
so I will simply call him “John.”
One of the first things I asked him was what role Bill Gates now plays in
the company. “He’s the chairman and the chief technology architect,” said
John. “But his love and his skill are in the latter role of chief technology
architect.” John went on to say that, even from way down in the firm, it was
clear that Gates’s role as the creative engine of the firm had not changed
since its inception. He went on to say that Gates and Steve Ballmer (CEO)
are great at sticking to their respective roles. “Ballmer runs the company,”
said John.
I asked John to talk about the internal workings of the company. John
explained that the Microsoft culture is different from that of most other
companies. “If you come to work at Microsoft and you do extremely well in
every area of your job, that means you’ve met the minimums,” said John.
John expanded on the idea by explaining that every member of the Micro-
soft team was expected to look beyond the obvious and to try to discover the
exceptional. “It’s all about ‘empowered excellence.’” He went on to explain
that managers tend to avoid being controlling or directive. Instead, they
point you in a direction, and it’s your job to figure out how to get there.
The Secret Weapon
I asked John if he could identify the one real key to the company’s suc-
cess. Without even blinking, he said, “People.” If you are like me, you have
become jaded by that saying over the years. I quickly discovered, however,
that John was extremely serious about his idea. John wanted me to under-
stand just how the company is so radically different from most others. John,
incidentally, had worked at a number of well-known organizations prior to
joining Microsoft. He felt that I needed to understand what the average pro-
spective employee had to go through to get a job with the firm. Hiring pro-
cesses are different for various areas of the company; in John’s area, a lot of
emphasis was placed on the technical components of the job.
He explained that the first step for his area was a technical interview—a
little like running a gauntlet, according to John. The applicant would spend
30 minutes on the phone in a fast-paced discussion of the various technical
issues involved in the job. If you get through the short technical interview,
then you get to go through the long technical interview. That interview, one-
and-one-half hours on the phone, is a bit on the grueling side, according to
John. If the applicant is fortunate enough to get through the second inter-
view, then they get to visit with an interview panel. The interview panel is
composed of two managers and two others who work in the job area that the
applicant is pursuing. Incidentally, neither of the managers in that interview
is the hiring manager.
The third interview is a real switch from the first two. The applicant is
given a lot of scenarios and asked to comment on how they would solve a
problem. This exercise challenges the logic and thinking skills of the appli-
cant. “What we are looking for in the third interview,” said John, “is to see if
we can evaluate the critical thinking skills of the applicant. Critical thinking
is a core skill requirement in our culture.”
If the applicant does well enough on the third interview, there is a fourth
interview. That interview is with the actual hiring manager. If the applicant
is successful in that interview, then and only then can they be offered a job.
John went on to explain that the interviews are each carefully designed
to get an in-depth understanding of the applicant. “We spend a great deal of
time to make sure that we get the very best people,” said John. John ex-
plained that the purpose of the interviews, in addition to examining quali-
fications, was to find out if the applicant was someone with the desire and
ability to be special. He talked about how his particular division described
that special attribute with the word wow! “I don’t know how to define that
word, except to say that we are looking for something in an applicant that is
beyond the job and is really impressive,” he said. “It’s difficult to describe,
but when you find someone with ‘wow,’ you know it.” Like most exceptional
companies, Microsoft hires approximately 1 in 400 applicants.
The applicant interview process at Microsoft is complemented by the em-
ployee evaluation process. John explained that the company uses a technique
called “stacking” in their evaluation and rewards process. Those who rank to-
ward the bottom with respect to their peers receive little or no salary in-
creases or bonuses. Those who rank in the middle receive limited increases.
“We’re unashamedly a meritocracy,” said John. “The people who contribute
the most get the lion’s share of the incentives. It’s just that simple.”
Create Your Own Future
One interesting thing that John talked about was just how much empha-
sis was placed on creativity. “It’s easier to get $1 million than it is to add one
new person to your headcount,” said John. John went on to explain that
Microsoft encourages its people to have ideas. He explained that in its cul-
ture, everyone is viewed as important, and anyone who had a desire to create
a new product or cut costs is always given an opportunity to present their
case.
All of this may contribute to the fact that the turnover at Microsoft is
extremely low. People simply do not want to leave. John suggested that a high
percentage of those who do leave each year are probably retirees instead of
those who go to another company.
Why Does Microsoft Continue to Win?
I have written a lot about how companies must combine aggressive strat-
egy and a highly adaptive organization. As luck would have it, as I was start-
ing to write this paragraph, my phone rang. It was an individual for whom
I will be doing a strategy session later in the month. It turns out that he had
done some work within Microsoft a few years ago. Here’s what he said about
the firm: “They are the most proactive change organization I have ever seen.
If you point them a direction, they are already on the way before anything
else is said. They are a phenomenally aggressive, adaptive organization.”
That is why Microsoft continues to win. In addition to an aggressive stra-
tegic approach and a highly adaptive organization, the firm has strong orga-
nizational character. Without high levels of integrity to create exceptional
trust among all members of the Microsoft team, the firm would be unable
to sustain itself. Microsoft’s culture has that level of trust, and it probably will
continue to be one of the smartest companies in America.
Companies like Microsoft clearly must be involved in a continual pro-
cess of reinventing themselves. But what about those companies that are not
involved in technology and the rapid churn that goes along with competing
in those types of competitive segments? Does it make sense for them to re-
invent themselves continually? If you are one of the “top ten smartest com-
panies in America,” the answer is yes.
A.G. Edwards is an NYSE traded company. It also has been around for
over 100 years. Like other smart companies, A.G. Edwards is sustained by its
commitment to extremely high levels of corporate character. That may be
why the company also has an innovative and customercentric strategy.
A.G. EDWARDS: ONE OF THE TEN

Smart companies appear to do a lot of things that make little sense to

outsiders. In an industry known for its high turnover, A.G. Edwards spends
a lot of money on training and coaching its new financial consultants. While
some companies are content to live with a harsh, survival-of-the-fittest ap-
proach, smart companies spend a lot of effort on finding good people and
then keeping them.
A few years ago, I was asked to develop a benchmark for evaluating
training organizations. One tool that I discovered was a methodology for
computing the return on investment of the dollars spent on training. What
I discovered was astounding. Few, if any, companies had any meaningful way
of measuring the bottom-line value of their training programs. Not surpris-
ingly, companies often slash their training programs with little consider-
ation of the impact of such cuts. Often, the negative outcome of such cuts
shows up months or even years later.
Appropriate training impacts the bottom line. One of the first discover-
ies I made about A.G. Edwards is that they continually assess their “training
ROI” and have a real appreciation for great training’s contribution to corpo-
rate performance. In fact, the firm’s chairman and chief executive officer,
Robert L. Bagby, views training and ongoing professional development as
cornerstones of his corporate strategy. The company also stays in touch with
recent trainees with coaching and additional course offerings after they
complete the firm’s formal training program. Ironically, at most companies,
little attention is paid to the effectiveness of an employee’s training once
they get back to their jobs. Of course, on the job is the most important place
to measure training. By engaging in a proactive coaching program for their
financial consultants, A.G. Edwards has been able to keep its turnover sig-
nificantly lower than that of its industry counterparts, resulting in increased
profit.2
I had the opportunity to visit with Donnis L. Casey, executive vice pres-
ident of the firm, to discuss some of these issues. She suggested that one of
the core values that has historically contributed to the success of A.G. Ed-
wards is its customer commitment. “Our approach is to focus on our clients’
needs, believing that if we do what’s best for the client, the profits will fol-
low,” she said. She went on to explain that the company expects their con-
sultants to work for their clients, and that means there are never special
incentives to sell the latest stock or bond deal.
A Sustainable Difference
A.G. Edwards is one of the few companies that has been included in all
seven editions of Fortune’s list of “The 100 Best Companies to Work for in
America.” Having spent a number of years in financial institutions myself, I

found that a bit surprising. The highly regulated nature of most financial in-
stitutions usually creates management teams that focus on compliance and
control. That usually results in inf lexible cultures and controlling manage-
ment, and rarely is such a place one of the “best to work for” companies. But
A.G. Edwards is different.
Founded in 1887 by General Albert Gallatin Edwards, the company has
a rich history. Long before it was fashionable, the leadership at A.G. Ed-
wards made “the importance of the client” an integral part of its organiza-
tional strategy and culture. You may recognize a hint of the golden rule in a
statement made in 1967 by former chairman and CEO Ben Edwards III, the
great-grandson of the firm’s founder:
Our purpose is to furnish financial services of value to our cli-

ents. We should act as their agents, putting their interests before
our own.
We are confident that if we do our jobs well and give value for
what we charge, not only will mutual trust and respect develop, but
satisfaction and a fair reward will result.
This statement has become the foundation for the mission statement of
the firm, and current CEO Bob Bagby makes sure its ideals carry on. Inter-
views with executives from the “top ten smartest companies in America” re-
veal that the Golden Rule is a standard of behavior at almost every company.
Companies that act in that manner are capable of creating the ultimate cus-
tomer experience on a consistent basis.
I think it is important for you to understand how this plays out in the
operation of the company. A.G. Edwards comes by its client-first philosophy
honestly. Just prior to the Great Depression, a lot of brokerage houses began
allowing clients to have large margin accounts. That meant that a client
might be able to buy $1 million of stock but only put up a small percentage
in actual cash. The brokerage firm would loan the balance on what is called
“margin.”
A.G. Edwards’s leadership did not believe that such leveraging was in
the best interest of either its clients or the company. That is one of the rea-
sons why they came through the Depression so well. In fact, the largest loss
sustained by any A.G. Edwards client during the great depression was a
$5,000 loss on a $1 million portfolio.
The Inverted Pyramid . . . Again
I have to confess that I made an interesting discovery as I did the re-

search and interviews for this book. What I discovered was that the smartest
companies had a lot more in common than a high Corporate IQ. For exam-
ple, almost all founded their decisions on a version of the Golden Rule: “Do
unto others as you would have them do unto you.” Another almost universal
practice among the smart companies was their use of the inverted pyramid
to describe their organizational focus.
The idea of the inverted pyramid reverses the common view of an orga-
nization: having the customers at the bottom level of the pyramid, the
employees above them, managers above them, and the executives at the pyr-
amid’s peak. Smart companies invert that hierarchy of importance. That is,
the customers and the employees are at the top (now inverted, because
there are a lot more employees and customers than managers), the manag-
ers are in the middle, and the executives are at the bottom. Another thing
I have observed at the smart companies is that, when the pyramid is pre-
sented in its normal mode with the senior executives at the top, the mes-
sage is not power; rather, it is responsibility.
When you put all of this together, it means that the importance ranking
in smarter companies looks like this:
1. Customers and employees (shareholders)

2. Managers
3. Executives
Some choose to put the shareholders in that picture as well. They will
generally rank shareholders as more important than executives. The bottom
line is that smart companies believe that by ranking customers and employ-
ees as the most important aspects of their business model, the rest of the
parties will experience maximum return.
The other side of the coin is the responsibility ranking. That looks like
the traditional pyramid with the executives and shareholders at the top.
That pyramid describes where the responsibility lies for keeping the impor-
tance pyramid intact. In other words, the senior executives are responsible
for keeping the customers and the employees at the top of the “importance
list” so that organizational performance is maximized.
“That’s exactly where we are,” Bagby told me, when I had a chance to
visit with him. “Our starting point is client- and employee-centric.” He went
on to explain that the inverted pyramid and the Golden Rule are the driving
forces behind everything that the company does.
At some securities firms, every area of the firm is a profit center. That
means that the bond division must make a profit, then the broker must also
make a profit when the customer buys a bond. The result is that customers
can pay a lot of mark-ups based on the internal processes of the company.
Another practice at some securities firms is even more customer-averse. At
some companies, the decision is made to push a specific bond, stock, or ser-
vice. Each broker is then given a quota of those specific items to sell. The
conf lict between customer needs and corporate directives is clear.
In A.G. Edwards’s processes, such practices are not allowed. In fact, in
true inverted pyramid tradition, the financial consultants (the A.G. Edwards
title for all its brokers) can select products based on their perception of their
clients’ needs. There is a saying: “He who holds the gold makes the rules.” It
might be said that at this company, the “gold” is the clients, and they make
the rules.
That also translates into a long-term investment philosophy geared to-
ward client success rather than toward following hot leads and rumors, a
practice that can frequently work against clients. “We have a bit of an advan-
tage in some ways,” said Bagby. “Being in St. Louis (the corporate headquar-
ters for A.G. Edwards) allows us to avoid the herd mentality that sometimes
takes over brokerage firms in New York.” He went on to say that, in the same
way that the company expects their financial consultants to approach their
clients’ needs with a long term view, the same is true of the company’s phi-
losophy of doing business. “We take the approach that, if it’s not good for
our client, it’s not good for us,” Bagby said. “That keeps our focus on stable,
long-term opportunities. Sure, you might get lucky chasing a hot stock every
once in a while, but our observation has been that in the long run, you could
lose a lot of your clients’ money that way.”
It’s All About Philosophy
You will recall that I have spent a lot of time throughout this book talk-
ing about how management is a philosophy. In my interviews, the continual
reference to “our philosophy” caught my attention. I truly believe that how
managers think is how they act. Few would disagree with that. As I listened
to Bob Bagby and others, it became clear to me that A.G. Edwards, like the
other smart companies featured in this book, makes sure that everyone in-
volved with the firm understands the company’s philosophy of business.
One of the ways that plays out occurs during the first day a new em-
ployee is with the company. New hires are exposed to people from every area
of the firm. Not surprisingly, there is a lot of talk about the principles and
practices that drive business activity. By the end of their first day on the job,
every new employee understands that a common philosophy guides the peo-
ple of A.G. Edwards. To make sure that each new hire understands the broad
nature of this commitment, they are invited to Bob Bagby’s office and, if he
is in town, visit with him during their tour of the firm’s home office. Bagby
wants new employees to understand that putting clients first is not just talk;
it is the first rule of everything that they do.
The Grid
OCS (Officer’s Candidate School) is where prospective officers in the

U.S. Army have gone for years to obtain their initial training to become an
officer. For those who have been through such a program, it is an experi-
ence that they will never forget. Some may remember the grueling physical
demands of the course. But none will forget its mental demands. The OCS
staff purposely wears the candidates down physically, creates overwhelming
pressure as well as confusion, and then puts the candidates into a decision-
making situation.
The military has learned that candidates who fare well in such demand-
ing simulations will usually do well when they are confronted with real-world
situations on the battlefield. In some ways, that describes a training pro-
gram that A.G. Edwards uses called The Grid, a program created and up-
dated by Robert R. Blake.
A.G. Edwards likes for its management personnel to go through this
one-week leadership program. It’s not your typical “one week in a classroom
and fill out a smile sheet” type of class. The class features a full week of de-
cision-making activities covering a variety of scenarios. Managers are asked
to participate in group activities that simulate some of the challenges that
they encounter when they work collaboratively in their day-to-day activities.
It’s all about people, clients, ethics, and results philosophy. At the end of the
week, the managers apply the company’s philosophy of business as groups
present their thoughts and ideas on areas of improvement to the firm’s ex-
ecutive leadership team—including CEO Bob Bagby.
“It’s all about openness, teamwork, and communication,” says Donnis

Casey. “Each manager spends a great deal of time in understanding his or
her management style. It’s a personal growth experience that not only helps
each person understand himself or herself better, but also instills a sense of
integrity in communication. The Grid calls that ‘candor.’” Casey added that
outsiders often do not believe it when they hear stories of how free people
are to express their views within the company. “Candor is very important in
our business,” she said, “not only in our internal communications among
employees but also when we’re dealing with our clients.”
One of the most important things at A.G. Edwards is its overall leader-
ship philosophy. It is best summed up by the following list:
• Honesty
• The Golden Rule
• Open door
• Candor (teamwork)
As with the other smart companies, the A.G. Edwards philosophy is

founded on honesty. As a company that values innovation by every team
member, the company’s leadership recognizes the critical relationship be-
tween creative excellence, honesty, and trust. They also believe that their
commitment to integrity in dealing with associates will be passed along in
their relationships with clients.
You will note that having an open door is an important philosophy at
the company. That means if someone wants to visit with Bob Bagby, there
are several ways to do so. That same reality is played out every day in every
office in the company. At the same time, every one of the company’s 16,000
people understands that they are the key to sustaining the firm’s history of
high ethical standards and innovation. The open door policy is one avenue
that every member of that team has to accomplish those objectives.
A lot of people have the impression that empowerment is tantamount to
having managers sitting around a campfire together singing “Kumbaya” in
harmony. I love that song, but at the same time, I do not think that is an ac-
curate picture of empowerment at most companies. Smart companies will
generally practice “empowered excellence.” Empowered excellence conveys
the idea of a joint commitment to excellence in the context of personal re-
sponsibility.
At A.G. Edwards, it translates into a leadership philosophy that I would
call “candor coaching.” It’s the idea of using honesty and candor to help sub-
ordinates to be more successful. It goes without saying that honesty has to be

at the foundation of any leader’s relationship with subordinates. In using a
candor coaching approach, the team member is provided a clear understand-
ing of performance-related issues. At the same time, rather than taking a de-
meaning or demanding approach, the leader is expected to coach the team
member to excellence. As with other smart organizations, A.G. Edwards
does not like to be wrong when hiring people. Candor coaching is a proac-
tive, positive approach for making sure that the company keeps its people.
The Proof Is in the Pudding
A lot of companies talk about how they value their people. In a number
of cases, they do not practice what they preach. Often, the result is short ten-
ure and high turnover. That’s why “the proof’s in the pudding” is a great ap-
proach to discovering if companies walk the talk.
As mentioned previously, A.G. Edwards has one of the lowest turnover
rates among financial consultants among financial services companies. In
addition, the firm strives to ensure that its people are valued, appreciated,
and recognized in a variety of ways. A.G. Edwards takes a share-the-wealth
approach with all team members. All full-time and part-time employees get
5 percent of their salary as a company contribution to their 401(k). That oc-
curs whether the employee contributes or not. Additionally, full-time and
part-time employees also get annual profit sharing contributions based on
the company’s overall performance.
The company also has a philosophy of promoting from within. People
are encouraged to gain a greater understanding of all aspects of the firm’s
business, and in some cases, that attitude has allowed employees to take ad-
vantage of a broad range of opportunities.
Another factor that underlies the success of the company is RAVE lead-
ership. You will remember from Chapter 10 that RAVE means recognize, ap-
preciate, and value employees, while expecting excellence from yourself as
well as every member of your team. You will also remember that RAVE plays
a major role in company performance by confirming the significance or
value of an individual. Margaret Welch, the director of public relations, told
me a personal story about what happened to her one day at A.G. Edwards
that illustrates just how this company’s leadership feels about confirming
the value of its people.
“Actually there were two situations that really made an impact on me,”
Welch said. “The first came at the conclusion of our recent launch of a new
branding initiative. When we finished the project, our entire department
was treated to a pizza party that was attended by several members of our ex-
ecutive team.” She went on to tell about her tenth anniversary with the com-
pany. Her coworkers had created a video that detailed a lot of Welch’s time
at A.G. Edwards. There was a lot of good-natured fun in the comments from
her coworkers, but there was recognition for her contributions as well.
“Imagine my surprise,” Welch said, “when I heard a familiar voice behind
me laughing at all the funny videotaped barbs of my coworkers, and there
was Bob Bagby . . . there to show his appreciation as well. Money doesn’t pro-
duce the attitude I have for this company and our people. That kind of care
and recognition does.”
Transparent Leadership
I often find that outsiders have problems believing that any company
could run like A.G. Edwards and the other smart companies that I have cited
in this book. They are unable to believe simply because they have never been
treated that well. Bob Bagby often says, “Our brand is our people, and our
product is our knowledge.” For that statement to be true, the entire leader-
ship team of A.G. Edwards has to live that reality in everything that they do.
They have to lead with high standards of ethical conduct. The bottom line
of that type of leadership is simply, “What you see is what you get.”
You do not have to look very far to find people who want to take pot
shots at companies that are run by those types of leaders. Not only do they
not believe that what they see is true, they often have a bit of contempt for
such companies because of their ethical standards and how they treat their
people. Regardless, if you ask the people who work for companies like A.G.
Edwards, you will find that they want to work there simply because of the
transparency, the integrity, and the leadership of those who guide such or-
ganizations.
Bob Bagby: A Leader Who Serves
Bob Bagby views his job as that of serving others. The open door to his
office is just one way that he sends that important message. Another way is
his monthly broadcasts on A.G. Edwards’s internal radio network. The
16,000 plus people of A.G. Edwards who work around the country can tune
into the network, obtain a CD of the broadcast after it airs, or listen via the
firm’s intranet. Usually, the program starts out with a few remarks from
Bagby, but then the f loor is open for discussion. During the program, peo-
ple have the opportunity to ask pressing questions without being identified.
Although he cannot always be face-to-face with all of the people in the
company, Bagby uses this open exchange of ideas to make sure that the con-
cerns of the firm’s employees are heard and that action is taken when and
where appropriate. Rather than being a one-way broadcast, this exchange
between a CEO and his employees is just one way that Bob Bagby lives the
principle of leading through service. “I believe the bottom line is that the
profits of a company start with your people,” Bagby said. He went on to ex-
plain the basics that are the focus of the organization.
• Branding: the A.G. Edwards people

• The Product: knowledge
“We’re a relationship company,” Bagby said. “Our job is to focus on our

people, and their job is to focus on the client. That’s why we spend a lot of
time training our employees, so that they are able to provide knowledge.”
A.G. Edwards is serious about taking care of the client. For example, the
firm’s research analysts are compensated, in part, based on the performance
of their recommendations, which motivates them to keep the client’s best in-
terests in mind at all times. “They get their incentives for recommending se-
curities that perform well,” Bagby said, “and we believe that never puts them
in conf lict with the client.” He went on to explain that, unlike many in the
securities industry, A.G. Edwards is not in a lot of other businesses, such as
owning their own bank. That means that they have to pay the bills by doing
well in the securities industry.
Bob Bagby believes in communication. Each month, he has a special
luncheon with people from each division. He said that he often gets some
tremendous ideas from those luncheons. He went on to talk about how the
firm was involved in a long-term process to change its technology capabili-
ties radically. Bagby believes that the candor and communication that oc-
curs within the firm is one of the keys to the highly innovative nature of the
company.
During our conversation, Bagby spent a lot of time talking about ethics.
One of the basic rules that everyone is expected to operate on is always to
put the customer first. “We never put ourselves in a conf lict position,” Bagby
said. “That’s why our financial consultants are free to design a portfolio that
is clearly the best for their client. As long as they deal with integrity and put
the client first, we are happy.”
Bob Bagby’s final comment related to the company’s training and the
importance of maintaining a dynamic curriculum—better known as A.G. Ed-
wards University—that ref lects the growing needs of the firm’s clients. He
made it clear that they believe in continual training. “We train-train-train,”
Bagby said. He went on to discuss the company’s new 200,000-square-foot
learning center that houses A.G. Edwards University. Bagby believes that
success is a simple formula: “First you hire and train the best people. Second,
you make sure that your people have every tool they need to make money
for their clients. Third, you continue to keep your people at the top by con-
tinuing to educate them.”
At A.G. Edwards, the standard is excellence. Everyone is expected to

commit to excellence in everything that they do, but they are also account-
able for the work they do. Excellence begins with integrity in all dealings,
especially with clients. It’s the glue that creates that inseparable bond be-
tween client, company, and employees.
At companies where the significance principle is applied, the managers
as well as their subordinates are highly motivated. They want to go above
and beyond, because those who lead them continually go above and beyond
on their behalf. The result is openness, organizational f lexibility, and speed
that allow the company to take advantage of opportunities as they emerge.
That “people make the profit” is true, as one of our CEOs said during
an interview. That reality can propel a company to greatness and sustain it
at the highest levels. The philosophy drives those who are responsible for
leading at the ten smartest companies in America.
C h a p t e r
14
WHAT’S YOUR
CORPORATE IQ?
S mart leaders understand that the key

to sustainable performance is their ability to keep the organization firmly
planted in the profit zone. In my discussions of Corporate IQ to this point, I
have purposely tried to avoid involving the reader in technical information.
At the same time, I believe that you need to understand how Corporate IQ
is calculated and also how to use it to change your organization. It might be
appropriate to offer a refresher from Chapter 6: the organization is made up
of three distinct areas:
1. Strategy defines the aggressive capabilities of the firm.

2. Organization describes the adaptive capabilities of the firm.
3. Character describes the foundations upon which the company oper-
ates.
The idea is not simple, but once it grabs your mind, you really will not
be able to think in any other way. It is critically important to remember that
the first two areas, strategy and organization, are context-dependent. The
third, character is not. Character is critical regardless of the competitive con-
text. Let’s look at each area again to make sure that the concepts are clear.
201
Competitor Index
All strategy work must have, as its starting point, a clear profile of what
competitors will be doing in the future. I do not want to discuss in too great
detail how competitor behavior is predicted, except to say that by using the
charts in Chapter 4, it is possible to examine future competitive behavior sys-
tematically, then develop an understanding of the future competitive index in
your segment. Again, competitive index (or competitor index—I use them in-
terchangeably) is an application of systems thinking. In the consulting arena,
we use three different views of the future to arrive at our final index: internal
managers of the client company (almost always f lawed), the view obtained
from relevant literature and research, and the view of a panel of experts. Once
the three views are obtained, each is evaluated, and a final determination of
the future competitive index is calculated. The accuracy of this process has
been confirmed in over 100 major studies in the past 12 years.
Once you understand that the competitive index provides a clear descrip-
tion of how competitors will behave in the future, the entire process becomes
extremely clear. If I understand that my competitors will be operating at a
competitive index of 4.2, I immediately know that they will be highly aggres-
sive in the creation of new products and that they will be devoting substantial
assets to highly aggressive marketing activities. It also follows that, as the
leader of a firm that is competing in that specific context, my company has
little chance of doing well if I do not creatively match my organization to the
competitors’ strategies. If I fail to respond, the creative destruction efforts of
the competitors will eliminate my company. Again, strategy and organization
must match context. Let’s brief ly review how the entire process works.
Figure 14.1, “The Profit Zone,” presents the concept in a simplistic
manner, but at the same time, it reveals how we can paint mental pictures
of the firm. This is the same graphic that I presented in Chapter 6 to
explain Corporate IQ. Notice that, in the example, the firm’s competitors
will be operating at a competitive index of level 4.0. That’s a pretty compet-
itive environment, with very high levels of chaos (unpredictability), and the
competitors will be highly creative as well as highly aggressive marketers.
The chart indicates that the profit zone for our company is between 3.5 and
4.5. Anything outside of that area will impact future profit.
Again, observe what we are doing. First we measure the future compet-
itors’ behavior on a five-point scale. Then we measure our current company
on a five-point scale. Then, we compare the two to see if we are already in
the profit zone. The further away from the competitive index we are, the
What’s Your Corporate IQ? 203
FIGURE 14.1 The Profit Zone
1 2 3 4 5
Strategy Slow follower Follower Aggressive Very Take no
aggressive prisoners
Organization Non-adaptive Slow Responsive Adaptive Highly
adaptive
Character Extremely Low Flexible High Unquestionable
more urgent a fix becomes. Remember, it takes time to change an organiza-

tion. That is why we spend so much time and effort in developing a profile
of competitors’ future behaviors.
Strategy
Strategy is a measure of the firm’s creativeness and aggressiveness. As
the competitive index goes up, so must the creative activities of the firm
(known as research and development) as must its marketing aggressiveness.
Reviewing Schumpeter’s concept of creative destruction can help us under-
stand what is going on. According to Schumpeter, environmental change is
driven by the competitor’s creativity in a given segment. For example, the
computer processor manufacturer who is first able to deploy light process-
ing technology will creatively destroy the value of the manufacturer who spe-
cializes in the current technology.
When we look at the competitive index, we can immediately understand
the intensity of competitors’ future creative destruction efforts in our com-
petitive segment. If we do not match that level of effort, we will be elimi-
nated. The same is true of marketing.
Organization
The next context-dependent area is organization. Areas like the CEO, the
firm’s leadership, culture, strategic planning, and others affect the ability of
the firm to adapt. Clearly, certain types of CEO behaviors, leadership, and
culture are well suited for a competitive context that involves slow change and
low levels of competition (levels 1 and 2). It is equally clear that level 2 CEO
behaviors, leadership, and culture will kill an organization that has moved
into a level 4 or higher competitive index. For example, level 2 leadership
(highly controlling, goal focused) will simply not work at level 4, where em-
powerment and individual creativity are critically important. The organiza-

tional measurements of Corporate IQ show the ability of the firm to adapt at
appropriate levels. As the competitive context becomes more and more com-
plex, the ability of the company to adapt becomes more important to profit-
ability. Again, it all has to do with keeping the company in the profit zone.
Organizational Character
Organizational character is the driving force of sustainability. It is im-
portant to remember that character is the only area of the firm that is not
context dependent. Level 5 is the only standard of behavior for smart com-
panies. Smart companies value subordinates. I have talked a lot about cor-
porate humility. Needless to say, unless corporate humility is a value, a
company’s leaders will generally become egocentric control freaks.
Ethics is another area of character that must be of the highest level. Re-
gardless of the competitive index in which a firm is operating, any breach of
ethics has the potential to destroy the firm. To validate that statement, one
has only to look at the Enron fiasco.
In some ways, corporate character ref lects a company’s values, but in re-
ality, it is much more. Corporate character is the bedrock that underlies all
organizational activities. Corporate character not only fosters iconoclastic
behavior, it also creates an internal and external atmosphere of uncompro-
mising integrity that can impact every aspect of the company’s life.
I have graphically portrayed a high level view of all of this below. Notice
that the firm’s competitive context is at level 4.0 and that strategy and orga-
nization must be able to operate at those levels to remain in the profit zone.
Notice also that the standard for corporate character is 5.0.
THE 17 AREAS OF CORPORATE IQ

Figure 14.2 reveals the areas of the firm that fall under each of the three
broad areas. Each of the 3 areas is further subdivided into 17 components.
To more effectively explain how the process works, I’ll take one attribute
of each of the three broad areas and demonstrate how to use this approach.
Remember: the whole point is to keep the company in the profit zone, de-
fined as “0.5 points of the competitive index.” Let me show you how it
works.
FIGURE 14.2 The 17 Areas of Corporate IQ
STRATEGY ORGANIZATION CHARACTER

Intelligence systems Quality and process
Corporate strategy
Strategy: Sales Aggressiveness

Notice in Figure 14.3 that I have presented a subset of the firm’s mar-
keting aggressiveness called “sales aggressiveness.” Let us assume that the
competitor index is 4.5.
Notice that the competitive index is around 4.4, but the dark dot that
represents the current level of the firm’s sales aggressiveness is around 2.9.
Based on research, the difference between the company’s sales aggressive-
ness and that of the firm’s competitors (-1.5) will have a critical impact on
the future profit of the company if not corrected. A simple way to under-
stand the profit impact is as follows:
Difference = -0.5 or less Impact = None (in the profit zone)

Difference = -0.51 to -1.0 Impact = Marginal
Difference = -1.1 to -1.49 Impact = Serious
Difference = -1.5 or more Impact = Critical
The measurement of Corporate IQ is based on the differences cited

above. The scale was changed to ref lect more precise differences like -1.3 or
-2.3. Otherwise, the principle is exactly the same.
The analysis indicates that the company is currently designed to com-
pete with a sales strategy that is competitive but certainly not aggressive. A
competitive strategy suggests that the firm attempts to keep pace with com-
petitors. Notice that the appropriate sales aggressiveness at a competitive in-
dex of 4.4 is one of moderately high aggressiveness. Because the value is
between 4.4 and 5.0, it will be necessary to move sales aggressiveness even
closer to 5.0 or highly aggressive.
Some people look at the graphic and suggest that it might be difficult
for a manager to understand. My experience has been just the opposite. Be-
cause each industry segment is different, managers who are familiar with the
segment have little trouble explaining what an aggressive level of sales is, or
what a highly aggressive level of sales is. Defining each is rarely a problem.
For those who believe that this approach sacrifices some of the benefits
of the traditional strategic management approach, such as “goal setting,” I
suggest that you rethink that view. Figure 14.4 presents all of the area called
marketing aggressiveness. Notice that it clearly provides for goal setting in
the area called market share. If you look at that area carefully, you will ob-
serve that, as the competitive index goes up, the company must set market
share goals that ref lect the future profit for the company. The higher the
competitive index, the more aggressively the firm must seek to take market
share from others.
Organization: Leadership Style
In the case of leadership style (a subset of Management), it appears that

the firm’s managers are moderately controlling (level 2.1). Again, the com-
petitive index is 4.4, which leaves us with a difference of -2.3 (see Figure
14.5). That difference will have a critical impact on profit if not corrected.
I would like to point out the logic of this kind of thinking. In a compet-
itive environment of level 4.4, high levels of uncertainty should be expected.
Control-oriented managers (levels 1 or 2) will fail in this environment, be-
cause only moderate to high levels of empowerment will allow the firm to
deal effectively with the numerous surprises that characterize the level 4.4
environment. This is not rocket science, just logic.
Character: Ethics
As I said earlier, organizational character is not context dependent. Only
one level of character is acceptable: level 5. The character of the organization
provides the stability required for internal adaptive capabilities as well as the
behaviors that foster long-term customer relationships. In this particular ex-
ample, I have considered the ethical standards of our fictitious company.
PR/Advertising Negligible Moderate Competitive Aggressive Highly
Notice that the company has provided no clear-cut ethical policies. I am

often astonished when I discover a company with one of those somewhat
mystical ethical statements that contains a lot of words but very little content.
Smart companies make ethics clear and understandable. Things like fraud,
theft, discrimination, sexual harassment, and lying are simply not tolerated
at smart companies. They put it into writing, and they put it into action.
In my interviews with the top ten smartest companies, I would often ask
a question about what the company would do if a supervisor failed to pro-
mote a subordinate solely because of gender or racial prejudice. In every
case, such behavior is clearly not tolerated. Let me be very clear about this.
The difference between talking about an ethical standard and living that
standard is summed up in one word: consequences. At smart companies,
everyone knows that you walk the talk or you leave. That is how you define
excellence.
ON BECOMING A SMART COMPANY
One of my objectives in writing this book was to avoid the highly tech-
nical approach that I sometimes see in other books. If a manager wants to
apply the principles in this book, all they have to do is focus on Chapters 5
through 8, which deal with the various aspects of Corporate IQ.
FIGURE 14.5 Management (Organizational)
Leadership Controlling Moderately Results Empowering Inspirational
style controlling oriented
FIGURE 14.6 Ethics
1 2 3 4 5
Policies Non-existent Hazy Situational Clear Unquestionable
standards standards
A word of caution: Be sure to use an outside organization to help you

determine the future competitive context. In almost every study I have su-
pervised or completed, internal managers consistently underestimate the
level of the future competitive context by about 1.0 points. In fact, most of
the time, they estimate it at level 3.0. The reason is somewhat complex. Ba-
sically, because most people resist change, they will often predict the future
as highly predictable (level 3.0 or lower), simply because they do not want to
deal with a lot of change and uncertainty.
Another caution has to do with who you poll to get some of your values.
For example, I have seen a number of situations where senior executives
thought that they were perceived as being level 4 or 5 leaders. Rather than
being charismatic and highly empowering, their subordinates rated them as
level 2 leaders, or highly controlling and risk-averse. The point is simply that
you have to provide a way for the people being managed to answer some of
these questions anonymously. Now that you understand the approach, it is
time that you went ahead and conducted a Corporate IQ assessment of your
own company.
THE CORPORATE IQ QUESTIONNAIRE
Part I: Competitive Context
Important. Be sure to answer based on what you expect the competitive seg-
ment to be in three years. Check the answer that best indicates your personal
understanding.
1. Which of the following best describes the marketing segment in which

your organization is competing?
A. A monopoly; No competition; Very slow change; Extremely predict-

able.
B. Extremely low level of competition; Slow change; Few competitors.
C. Competitive but not too challenging; Fast change; Mostly predict-
able.
D. High levels of competition; Very fast change; Moderately unpredict-
able.
E. Overwhelming competition; Supersonic change; Almost totally un-
predictable.
2. Which of the following best describes the level of competitor innovation

you see in the segment?
A. No innovation; Few or no new products.

B. Little innovation; Occasional new products.
C. Moderate levels of innovation; A steady pace of new products.
D. A few breakthrough products; High levels of innovation; Frequent
new products.
E. Overwhelming innovation; Extremely high levels of new product in-
troductions.
Part II: Corporate IQ Factors (The Organization)
Each of the following questions refers to your organization. Specifically,

they refer to the part of your organization that competes in the segment
described in Part I above. Again, please be sure you answer every question.
1. Which of the following best describes your firm’s (organization’s) ap-

proach to marketing?
A. We are nonaggressive; We expect the customer to find us; No adver-

tising or public relations strategy.
B. We are slightly aggressive; We will respond to competitors if forced;
Little or no advertising or public relations activities.
C. We keep pace with competitors; We might be described as a “fast fol-
lower;” We match competitors sales, advertising, and public relations
activities.
D. We are aggressive; We like to be the first mover; Very proactive sales,
advertising, and public relations activities.
E. We get to the customer first; We are extremely aggressive first-mov-
ers; Highly aggressive sales, advertising, and public relations ap-
proach.
2. Which of the following best describes your firm’s approach to innova-

tion and the creation of new products and processes?
A. Noninnovative.
B. A follower approach; Benchmark others; Low level of innovation.
C. A competitive innovator; Keep pace; Benchmark others; Little cre-
ativity within the organization.
D. Very innovative; We seek new areas of product opportunity; A cre-
ative, innovative organization.
E. Extremely innovative; We are out-of-the-box thinkers; We create the
future.
3. Which of the following best describes your firm’s approach to the inte-
gration of technology into its products and services?
A. Little or no effort in this area.

B. Minimal focus on integrating technology into products and services.
C. We maintain balance with competitors; We keep pace with the com-
petition.
D. We stay ahead of the curve; We’re adept at anticipating customer
needs.
E. We are the industry leader; We continually maintain first-mover ad-
vantage.
4. Which of the following best describes your organization’s product portfo-

lio, that is the balance of old (declining sales), mature (level sales), and
new (high growth/high profit) products?
A. Most of our products are in the mature or declining stage.

B. Most of our products are in the mature stage; Level sales, but no high
growth products.
C. We maintain a balance of products; A few new products; Mostly ma-
ture products; A few declining products.
D. We have a nice balance of new, high-growth products and mature,
level-sales products.
E. We have a lot of new, high-growth products with the balance being
low-growth and mature products.
5. Which of the following best describes the CEO (or senior manager of
the competitive segment)?
A. Control oriented; A disciplinarian; Obsessed with the present and

with performance; Little or no ability to value subordinates.
B. Control oriented; Rewards those who maintain the status quo; Little
or no ability to value subordinates.
C. Objectives oriented; Moderately slow to change; Values performers
and those who meet personal objectives.
D. People oriented; Values subordinates; Sets a standard of excellence.
E. Expects subordinates to value people; Values subordinates; Expects
exceptional excellence and will help others achieve it; A great coach.
6. Which of the following best describes the managers in your organiza-

tion?
A. Strict disciplinarians; Results are all that matter; Highly controlling.

B. Results oriented; Control oriented; Little or no value of people or
subordinates.
C. Performance oriented; Focus on results; Little value of people or
subordinates.
D. Coach, appreciate, value, and recognize subordinates; Credit others
when a job is well done; Appreciate excellence in every area.
E. The ultimate empowering coach; Love to see others do well and get
recognized; Great at showing appreciation for others and recogniz-
ing their contributions.
7. Which of the following best describes your organizational culture?
A. Don’t rock the boat; Never share new ideas.

B. Maintain the status quo; Do your job; Thinking is not your job.
C. Maintain the status quo; Unquestioned obedience; Respond when
asked.
D. Challenge the status quo; Everyone has a part in our future.
E. We terminate managers who do not value and listen to their subordi-
nates; Everyone’s job is to be a part of creating the future.
8. Which of the following best describes the formal structure of your firm?
A. A steep hierarchy; Departmentalized bureaucracy.

B. A hierarchy organized around functions; Bureaucracy.
C. A divisional structure with separate product or geographical man-
agers.
D. A matrix or cross functional organization.
E. A matrix structure that rewards those who cross formal lines of au-
thority to get the job done.
9. Which of the following best describes how your organization gathers

information?
A. We get financial statements.

B. We use computer analysis of sales, customers, etc.
C. We get all of the above, plus have a business or competitive intelli-
gence function.
D. We have a global intelligence, information-gathering team with di-
rect access to the CEO.
E. All of the above plus; The intelligence function is highly valued by
our entire organization (they have clout).
10. Which of the following best describes how your organization does corpo-
rate strategy?
A. We do an annual budget.
B. We do an annual budget plus a mission statement.
C. We do a budget, a mission statement, and a SWOT analysis (strengths,
weaknesses, opportunities, and threats).
D. We create a strategic plan that is based on the future; Highly creative;
Assumes nothing.
E. We use multiple approaches that are highly creative; We assume noth-
ing about the future, including “what business we will be in;” We de-
sign our strategy from the future back.
11. Which of the following best describes the ability of staff and senior man-
agers to do creative strategic work (out-of-the-box thinking and creative
problem solving)?
A. Extremely low.
B. Moderately low.
C. A few.
D. A moderately high percentage.
E. A significant percentage.
12. Which of the following best describes your firm’s internal technology (the
internal technology systems that support operations) approach?
A. Extremely slow; Far behind the curve.

B. Slow; Add technologies and systems when forced to do it.
C. As required to keep pace; Avoid adapting any technology too early.
D. We constantly try to make sure we’re anticipating the future technol-
ogy needs of our organization and our customer.
E. We have a total commitment to anticipating future technology re-
quirements; We are a first-mover.
Part III: Corporate IQ (Organizational Character)
13. Which of the following describes your corporate attitude toward product
and process quality?
A. We don’t concern ourselves with quality or our processes.

B. Little concern for quality of processes.
C. We have a formal total quality program that focuses on product qual-
ity and the processes used to handle and deliver products.
D. Excellent quality and processes are the minimum at our organization.
We have a formal measurement program.
E. We expect excellence; quality is a way of life in our organization.
14. Which of the following best describes your corporate values (the stan-
dards and principles that guide decisions and actions)?
A. We have values, but they’re just not positive or people focused; It’s all
about doing what you have to do to get the job done . . . regardless.
B. We don’t have any focus on values; There are really no guidelines
about how we treat others, our standards, etc.
C. Our values are pretty standard; Do a good job and you’ll keep it; We
don’t make managers accountable for how they manage others or
how people relate to others.
D. We have a clear set of values; We expect everyone to value others; We
expect openness; We encourage people to stand up for doing the
right thing.
E. We are a principled, values-based organization; Everyone in our or-
ganization is accountable for how we treat customers, our peers, and
our subordinates.
15. Which of the following best describes the ethical standards and practices
at your firm?
A. Little attention is paid to ethics; It’s mostly an attitude of “avoid trou-

ble” or not getting caught.
B. We don’t have a formal ethics statement but try to be honest.
C. We have an ethics statement that says a lot of nice things; There are
no real hard and fast standards, however.
D. We have specific standards of ethical behavior; We provide employ-
ees with clear guidance when it comes to what we view as right or
wrong.
E. We have an ethical standard that clearly states what our organization
views as absolutely right and wrong; We train all employees on our
ethics; There is discipline, including termination in some cases, if
our ethical standards are violated.
16. Which of the following best describes how your organization values people?
A. People are discounted in our organization.

B. People are necessary but unappreciated.
C. Some people are valued, but it depends on who their manager is.
D. Our managers are expected to value their subordinates and to com-
municate that value.
E. Our managers are accountable for valuing their subordinates; They
spend a great deal of time and expense to make sure people are rec-
ognized and valued.
17. Please respond to the following statement: “The firm is absolutely com-
mitted to exceptional excellence in the areas of products, customer re-
lations, processes, and how every employee is valued, recognized, and
treated.”
A. Strongly disagree.
B. Disagree.
C. The company really does not focus on this area.
D. Agree.
E. Strongly agree.
ADMINISTERING THE CORPORATE IQ ASSESSMENT
The competitive context is derived from questions 1 and 2. This is one

of the most difficult aspects of computing Corporate IQ. The reason is that
most internal managers will underestimate the context by as much as 1.0.
This error can devastate a company. If the firm’s managers incorrectly esti-
mate the context at level 3.0 instead of 4.0, the impact on the firm’s bottom
line could be substantial. For that reason, it is acceptable to add at least 0.5
to whatever competitive context is derived from your computations. Here is
how you compute competitive context.
Begin by administering the questionnaire to at least ten people in the
organization. Obviously, for the context-related questions, knowledgeable
outsiders can be extremely valuable. Once you have the questionnaire re-
sponses, convert the letter answers to numbers (A = 1; B = 2; C = 3; D = 4; E
= 5). Use a spreadsheet to record the answers, then compute the mathemat-
ical average of each question. Average the results from questions 1 and 2.
You should get a number like 3.6 or 4.7. Be sure to calculate the average to
one decimal point, as shown.
Next, make the same calculations for each of the 17 questions about the
organization. Again, it is critically important that 80 percent of the answers
come from people down within the organization. For obvious reasons, every
respondent must be absolutely certain of anonymity. Otherwise, the re-
sponses will be biased. It’s a good idea to let a trusted outsider gather the
completed questionnaires.
COMPUTING THE INDEX
Let us assume that you have computed a competitive index of 4.1.

Assume that you have also averaged the responses from each of the 17 ques-
tions as shown in Figure 14.7.
FIGURE 14.7 Competitive Index Computation
The Competitive Segment: Competitive Index = 4.1

The Firm: Raw Score Difference CIQ Index
Marketing aggressiveness 3.0 -1.1 16
Innovation aggressiveness 2.7 -1.4 15
Product technology 3.4 -0.7 18
Product portfolio 3.1 -1.0 17
CEO attributes 3.4 -0.7 18
Managers 2.5 -1.6 14
Culture 2.9 -1.2 16
Structure 3.4 -0.7 18
Decision systems 3.0 -1.1 16
Strategy 2.2 -1.9 13
Strategic capacity 4.0 -0.1 10
Internal technology applications 3.8 -0.3 19
Product quality/process 2.8 -1.3 16
Values 2.5 -1.6 14
Ethics 2.0 -2.1 12
Value of people 1.9 -2.2 12
Excellence 2.8 -1.3 15
CIQ Index Computation (based on difference between competitive index and the
attribute):
-0 through -0.25 10 points (or 100%)
-0.26 through -0.50 19 points
More than -2.0 2 points
CIQ Index Computation for Corporate Character (always use an index of 5.0):
Product quality and process
Values
Ethics
Value of people
Excellence
In the case of our subject above, the firm’s Corporate IQ is 88. At best,
that is a marginally low score. Based on my research, I would expect this
company to have little success in the competitive environment. Go back and
look at the company’s scores in the area of Corporate Character. Those ex-
tremely low scores indicate that the company has little commitment to its
people or to ethical behavior. This company is on its way out of business.
Again, it is important to remember that the 12 factors related to Strategy
and Organization are always measured against the competitive context. At
the same time, Corporate Character is always measured against an index of
5.0. A company’s ethics, processes, quality, values, value of people, and com-
mitment to excellence must always be of the highest standards if the firm is
to achieve sustainable performance.
A FINAL COMMENT
You may remember the comment from the manager at Kingston Tech-
nology about when he came to work at the company: “I had to forget every-
thing I’d learned in my MBA.” I am sure by now that you have figured out
that the entire approach of Corporate IQ is radically different from what is
taught in most MBA programs.
The problem we have in business education today is a classic paradigm
problem, much like the ones that Joel Barker has spent much of his time
writing and talking about. The world has changed, but most in the academic
field have not. Let me explain why I am saying that.
A lot of people in the field, such as best selling author Richard D’Aveni,
are openly commenting on the outright inadequacy of the traditional, mis-
sion-vision approach to managing organizations. A lot of bestselling books
are focusing on complexity and the need for organizations to forget about
historic competencies and focus on what they need to become. “How has
that impacted what is taught in most university business schools?” you might
ask. The answer is simple: “Little or none.”
Little if any research links the traditional approach to managing and
corporate strategy to corporate performance. Let me say that again: there
is simply no evidence to support the validity of the system. Conversely, the
research that underlies the Corporate IQ approach is backed by over 30
years of research by H. Igor Ansoff and his associates. In many instances,
that research accurately indicated future problems for organizations. No
other approach can make claims of possessing the predictive power of this
system.
I think the most compelling argument for Corporate IQ is that it simply
makes sense. It makes sense to understand the competitive context that a
company will face. It also makes sense to custom-design a company for its
unique segment and context. Corporate IQ provides a road map that will al-
low a manager to design a company to match both the complexity as well as
the rate of speed of the firm’s emerging environment. That is why the ap-
proach works.
It makes sense to understand what a company’s competitors will do,
then to create or custom-build a company that is ideally suited for that spe-
cific competitive environment. Clearly, strategy and organization must fol-
low context.
It is my personal hope that you have found this book helpful in your
management endeavors. My calling is to teach, and I delight in seeing people
have those wonderful moments of discovery. If I have managed to teach just
a little in this book, I believe the effort will have been worthwhile.
A p p e n d i x
CORPORATE IQ™
Stage 1 Research Results
January 6, 2003
Jim Underwood, DBA
OVERVIEW
The research focused on the study of 15 companies, most of which were

publicly held, international organizations. The companies included a broad
spectrum of industries, including telecommunications, transportation, con-
sumer products, and technology. The objective of the research was to test
the validity of an organizational profiling technique developed by the re-
searcher called Corporate IQ. The results of the research are as follows:
• Companies with high IQs (above 140) will generally rank in the
upper 20 percent in ROI (return on investment) ranking in their
respective industry segment.
• Conversely, those with low IQs (90 or under) will tend to rank in the
lower 20 percent of their industry segment.
• In spite of the relatively small sample size, the correlation between
Corporate IQ and ROI ranking was extremely high.
• It is reasonable to conclude that Corporate IQ is an accurate predic-
tor of organizational performance in the target population. That is,
smart companies really do outperform their lower IQ industry coun-
terparts.
221
222 Appendix
THE RESULTS
The Stage I (15 companies) results indicate an extremely high correla-
tion between Corporate IQ and ROI (return on investment) ranking in the
firm’s industry segment. Firms with a high Corporate IQ (scale of 0 to 170)
consistently ranked in the top 20 percent of their segment, while low IQ
firms consistently ranked in the bottom 20 percent of their segment. Fur-
ther, the research calls into question both equilibrium theory-based ap-
proaches to corporate strategy1 (core competencies, competitive advantage),
as well as Darwinian-based (complex adaptive systems) approaches.2
n = 15; r = 0.945; r2 = 0.893; 95% Confidence Interval 0.987 – 0.839
THE INITIATIVE
The initiative is the result of over ten years of related research by the au-
thor that deals with complex environments and corporate profit. Approxi-
mately 40 percent of the proposed model or corporate aspects were based
on previous research conducted by H. Igor Ansoff and his associates. Ansoff
also based the concept of competitor profile on previous work.3
The Ansoff research measured eight organizational variables (now in-
cluded in the Corporate IQ research). Ansoff and his associates tested the
model (1,000 studies over a 20-year period) in almost every country in the
free world and in every major industry group and confirmed the power of
the concept. The Ansoff model confirmed that companies that match using
his model had ROIs of 100 percent to 300 percent higher than those that did not
match.
This research is a continuation and expansion of Ansoff’s work. The
past ten years have involved research surrounding other variables that may
impact organizational performance.4 The result is a 17-variable model that
measures organizational behavior in a number of areas, including market-
ing, innovation, leadership, ethics, etc.
The need for such research is evident due to numerous problems5 with
competency-based views of the organization6 as well as the questionable na-
ture of the foundations of complexity-based views7 such as complex adaptive
systems. In addition to the numerous studies conducted by Ansoff and his
associates, this researcher has supervised or conducted over 80 studies of
Fortune 500 firms, which revealed the consistent predictive power of the
model.
Appendix 223
THE IMPORTANCE
The research reveals that corporate performance and sustainability have

little to do with focusing on historic competencies or with self-organization.
Rather, the research reveals that organizations must be managed as complex
systems in which the organization and the firm’s competitive environment
must be balanced, or matched. Corporate IQ provides the complex model
and measurements that account for performance and sustainability.
THE TARGET COMPANIES
The target companies were generally publicly traded, international

companies. The Corporate IQ assessment was administered under agree-
ment of confidentiality to individuals within the study organizations who
would be expected to have a reasonable understanding of the firm’s prac-
tices. Due to the extremely sensitive nature of the output, all respondents,
with the exception of one, required confidentiality.
The research instrument was administered to a number of individuals
within each firm. In some cases, there were over 40 respondents. In others,
the number of respondents was small. In either case, the historic use of the
assessment instrument has demonstrated that the selection of a knowledge-
able respondent will consistently provide the same level of accuracy as would
multiple respondents.
Corporate IQ is the trademarked property of Jim Underwood.

N o t e s
Chapter 1
1. Joseph A. Schumpeter, Creative Destruction (New York: Harper, 1975).
First published in 1942.
2. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy (New York:
Harper, 1972).
3. Richard Foster and Sarah Kaplan, Creative Destruction: Why Companies
That Are Built to Last Underperform the Market—and How to Successfully Trans-
form Them (New York: Doubleday/Currency, 2001).
4. Evan M. Dudik, Strategic Renaissance (New York: Amacom, 2000).
5. John W. Sutherland, Systems Analysis: Administration and Architecture
(New York: Van Nostrand, 1981).
Chapter 2
1. Charles R. Darwin, Origin of Species, 6th ed. (London: John Murray,
1972), 42.
2. Jonathan D. Sarfati, Refuting Evolution (Green Forest, Arkansas: Mas-
ter Books, 1999).
3. Henry Mintzberg, The Rise and Fall of Strategic Planning (New York:
The Free Press, 1994).
4. Ralph D. Stacey, Managing the Unknowable (San Francisco: Jossey-Bass,
Inc., 1992).
5. James C. Collins and Jerry I. Porras, Built to Last (New York: Harper
Business, 1994).
6. Joseph A. Schumpeter, Capitalism, Socialism, and Democracy.
7. W.R. Ashby, Introduction to Cybernetics (New York: John Wiley and
Sons, 1956).
8. Ram Charan and Jerry Useem, “Why Companies Fail,” Fortune, 27
May 2002.
9. Sydney Finkelstein, “7 Habits of Spectacularly Unsuccessful Execu-
tives,” Smart Company, July 2003.
225
226 Notes
Chapter 3
1. Corporate IQ is the trademarked property of The Dallas Strategy
Group, Inc., and Dr. Jim Underwood.
Chapter 4
1. Maria Halkias, “A Wholesale Debacle,” Dallas Morning News, 26 Au-
gust 2003.
2. “Kodak Announces a Reorganization,” Dallas Morning News, 22 Au-
gust 2003.
3. John W. Sutherland, Systems Analysis: Administration and Architecture
(New York: Van Nostrand, 1981).
4. http://atheism.about.com/librar/glossary/general/bldef_fuzzylog
ic.htm
5. H.I. Ansoff and Edward Donalson, Implanting Strategic Management
(Hertfordshire, UK: Prentice Hall International, 1991).
6. Ansoff and Donalson, Ibid.
7. Igor Ansoff originated the two concepts of marketing turbulence and
innovation turbulence. Both concepts as presented in this book are adapta-
tions of his original work.
Chapter 5
1. H.I. Ansoff, et al., “Empirical Proof of a Paradigmic Theory of Stra-
tegic Success Behavior of Environment Serving Organizations,” in Interna-
tional Management Review, ed. D.E. Hussey (New York: John Wiley and Sons,
1993).
2. Alfred DuPont Chandler, The Visible Hand: The Managerial Revolution
in American Business (Cambridge, Massachusetts: Harvard University Press,
1977).
3. John W. Sutherland, Systems Analysis: Administration and Architecture.
Chapter 6
1. http://knowledge.wharton.upenn.edu/articles.fmf ?catid=14&article
id=867
2. H.I. Ansoff and Edward McDonnell, Implanting Strategic Management
(Hertfordshire, U.K.: Prentice Hall International, 1990).
Notes 227
Chapter 7
1. “Rebuilding the Garage,” The Economist 356 (8179): 59-60 (2000).
Chapter 8
1. “Continental CEO Won’t Rest on His Laurels,” Houston Chronicle, 28
December 2003.
Chapter 10
1. Peter Burrows, Backfire (New York: John Wiley and Sons, 2003).
Chapter 12
1. John Helyar, “The Only Company Wal-Mart Fears,” Fortune, 23 No-
vember 2003.
2. Everett M. Rogers, The Diffusion of Innovations (New York: The Free
Press, 1983).
Chapter 13
1. H.I. Ansoff. Lectures at Alliant International University, San Diego,
California, 1991.
2. Training Magazine, pub. VNU Business Media Company.
Appendix
1. As supported by the work of Michael Porter and many in the academic
community.
2. As supported by the work of Peter Senge, Meg Wheatley, and others.
3. H.I. Ansoff, et al., “Empirical Proof of a Paradigmic Theory of Stra-
tegic Success Behaviors of Environment Serving Organizations.” Interna-
tional Review of Strategic Management. New York: John Wiley and Sons.
4. James D. Underwood, Thriving in E-Chaos (Rosedale, California:
Prima Publishers, 2001).
5. Richard A. D’Aveni, Hypercompetition (New York: The Free Press,
1994).
6. M.D. Ryall, “When Competencies Are Not Core: Self-Confirming
Theories and the Destruction of Firm Values.” Bradley Policy Research Cen-
ter, University of Rochester, 1998.
7. Jonathan Sarfati, Refuting Evolution (Green Forest, AR: Master Books,
1999).
I n d e x
A B
Abersol, Les, 9–10 Bagby, Robert L., 116, 191–94, 196,
Acceptable neglect, 10, 158 198–200
Accountability, 183 Ballmer, Steve, 188
Adaptation. See Organization Barker, Joel, 218
(adaptation) Barnholt, Ned, 140–41, 143
A.G. Edwards, 115–16, 190–200 Barrett, Colleen, 138
customer commitment of, 191 Bartlett, Dick, 44
Grid, 195–97 Benchmarking, 38, 49, 73
leadership program, 195–97 Bethune, Gordon, 109–10
management philosophy, 194–95 Bias, 37–38
motivation and, 200 Bicentralized power structure, 99
philosophy and, 194–95 Biological management, 24
training and, 200 Blake, Robert R., 195
transparent leadership, 198 Bounded rationality, 24–25, 55, 165
Aggressiveness, 86–88, 105, 205–6. Bradley, Kerry, 163–64
See also Strategy/strategies Brain drain, 94
(aggressiveness) Brown, Richard, 10
Agilent Technologies, 52–53, 140–44 Brown, Ted, 147–48
accountability and, 142 Brown’s Automotive, 147–48
ethics and, 142–43 Built to Last (Collins and Porras), 65
profit and, 143–44 Bureaucracy, 99
Airline industry, 15
American Airlines, 10–11
Continental Airlines, 109–10 C
September 11 tragedy and, 12 Calculated risk, 123–24
Southwest Airlines, 13–15, 31–32, Candor, 196–97
112, 132–39 Capitalism, 5
Ambiguity, 54–56 Carmichael, Beverly, 137–38
American Airlines, 10–11 Carter, Les, 42, 119
Ansoff, H. Igor, 8, 27, 56, 58, 64, 65, Caruso, Enrico, 179
80–81, 86, 91, 99, 117, 185, 218 Casey, Donnis, 191, 196
Apple Computer, 94 Cause-and-effect relationships, 65–66
Appreciation, 131–32 CEO(s)
Arthur Andersen, 113 attributes of, 95–96
Ash, Mary Kay, 14, 59, 108, 121–28 describing, 211
Ashby, W.R., 27 enabler role of, 35
Assets, 81 failure and, 30–31
Assumptions, 37–38 stewardship and, 143
Austin Chalk, 4 sustainability and, 94
229
230 Index
Chandler, Alfred, 67, 69 complexity theory, 39

Change Computers, 43
environmental, speed of, 43 Apple Computer, 94
resistance to, 25, 37–38, 60–61 Dell. See Dell Computer Inc.
Chaos theory, 39 IBM, 4
Character, 1–2, 15, 83–84, 107–17, 201, Intel, 45
204 opto-electronic applications, 5
A.G. Edwards and, 115–16 Conover, Donna, 138
areas/components of, 71, 108 Consultants, 60–61
Corporate IQ questionnaire, Context, 8, 11–12, 49–62
214–15 Agilent Technologies and, 52–53
deterministic, 72–73 ambiguity and, 54–56
employee value and, 14, 113–14 best practices for each, 15
ethics, 112–13, 206–7, 208 competitor index, 56–58
excellence rating, 114–15 consultants and, 60–61
as foundation of performance, followed by strategy, 90
109–10 four types of environments, 54
moderately variable context, 73 Mary Kay Inc. and, 59–60
practice, 112 predictability and, 12
quality and process, 115 predicting future, 61
smart companies and, 117 success vs. failure, 50–52
Southwest Airlines and, 31–32 systems thinking, 58
standard of excellence, 8 ten forces, 11–12
transparency and, 112 Contextualization, 79–80, 82
values, 110–12 Continental Airlines, 109–10
Charan, Ram, 29 Core competencies, 5, 23. See also
Charitable activities, 110–11 Historic competencies
Luxottica Retail and, 20 Core intelligence, 94–95
Southwest Airlines and, 135 Corporate character. See Character
Chief executive officers. See CEO(s) Corporate culture. See Culture
Clark, Kathy, 157 Corporate IQ
Collaboration, 162–63 character. See Character
Collins, Jim, 25, 65, 66, 97 company areas and attributes, 64
Commitment, 44 competitor index, 202–3
Companies, types of, 2 defined, 1, 85–86
Comparative advantage, 23 determining, 201–19
Competitive advantage, 53 leadership/strategy rules and,
Competitive/competitor index, 56–58, 47–48
68, 82, 89, 202–3 organization, 203–4
computing, 216–18 profit zone, 15
organizations matching, 70–71 questionnaire, 209–15
and product life cycle, 88–89, 90 research project. See Research
strategies matching, 69–70 project (Corporate IQ™)
Competitive segment, 27–28 scale, development of, 8
Competitor behavior, 56 17 areas of, 9, 82, 85, 204–7
Complexity smart company, becoming, 207–8
change and, 39–40 stage 1 research results, 221–23
complex dynamic systems, 27–28, statistical relationships, 65
166 success strategies, 79–91, 203
Index 231
Corporate strategy, describing, 213 challenge everything processes,

Costco Wholesale, 36–37 174–75
cross-dock approach, 169–70 customers and, 173–74, 175
customer experience and, 171–72 diffusion lesson, 175–77
efficiency model, 169–71 diversity and, 178–79
integrity and, 170 ethics and, 178–80
strategic focus and, 166–72 integrity and, 180
supplier relationships, 170 “Soul of Dell,” 179
Crandall, Bob, 10 winning culture initiative, 177
Creative destruction, 4–7, 26–27, 203 Demand cycle, 4, 6–7, 8, 47
context and, 11–12 Deming, W. Edwards, 113
customers and, 19 Deterministic condition, 72–73
market control fallacy, 50 Diffusion, 175–77
profit-effectiveness and, 7 Diffusion of Innovations, The (Rogers),
Creative Destruction (Foster and Kaplan), 175
7 Digital revolution, 51
Creativity method, describing, 213 Digital signal processor (DSP)
Cross-dock approach, 169–70 technology, 51
Disney, Walt, 179
Culture, 98
Diversity, 112–13, 137, 178–79
Dell and, 177
Dudik, Evan, 12
describing, 212
Dynamism, 43
profitability and, 127–28
Southwest Airlines and, 138–39
Curtis, Mildred, 161–62 E
Custom-built companies, 63–77, 82
Ecological management, 24
competitor index and, 69–71 EDS, 9–10
deterministic, 72–73 Edwards, Albert Gallatin, 192
indeterminate, 74–75 Edwards, Ben III, 192
missing link, 67–69 Efficiency, 169–70
moderately variable, 73 Ego, 35, 120, 162, 172
profit and performance principle, Einstein, Albert, 61, 179
67 Emergence, 24–25, 39, 55
severely variable, 73–74 Employees, value of, 1, 35, 72–73, 95,
Customer experience, 35, 147–64 104, 113–14, 184, 204
A.G. Edwards and, 191–93 A.G. Edwards and, 197
CostCo and, 171–72 Agilent Technologies and, 140–44
integrity and, 147–48, 158–59 Costco and, 37
Kingston Technology and, 149–55 Fidelity investments and, 128
Luxottica Retail and, 155–64 Kingston Technology and, 149–55
Luxottica Retail and, 20–21
Mary Kay Inc. and, 108
D
mentoring and, 138
Darwin, Charles, 24 RAVE, 131–45
Darwinism, 39–40, 165 significance principle and, 119–21
D’Aveni, Richard, 218 top ten companies and, 109
Decision systems, 100–101 Employee turnover, 158–59, 167, 197
Dell, Michael, 176 Empowerment, 18, 151–53, 185, 196
Dell Computer, Inc., 16, 173–80 Enron, 21, 113, 180
232 Index
Environment(s), 11–12, 54, 56. See also G

Context
Galanti, Richard, 37, 166–69
environmental turbulence, 56–58
Galvin, Chris, 95–96
as missing link, 67–68
Gates, Bill, 45, 90, 187–88
speed/complexity of, 63–64 GE, 7, 40, 97, 120
Sutherland’s conditions, 72–75 “Gift of Sight” program, 20, 159, 162
Equilibrium theory, 23–24, 26, 28 Global competitive context, 11–12
Ethics, 1, 15, 72, 112–13, 180, 206–7, Global environment, 27–28
208 Goals
A.G. Edwards and, 199–200 excellence and, 114
consequences and, 207 setting, 206
Dell Inc. and, 178–80 Golden rule management, 14, 59,
level of compliance, 113 124–25, 193
trust and, 180 Gorilla in the boardroom, 38, 43
Excellence, 42, 132, 184, 185 Grove, Andy, 45
approach, 25
commitment to, 200
empowered excellence, 196
H
inspired excellence, 144–45 Hewlett, Bill, 140
productivity and, 104 Hewlett-Packard, 52, 96, 140
rating, 114–15 Historic competencies, 25, 36, 81. See
also Core competencies
Holl, David, 121–26
F Honesty, 196
Fads, 29, 88, 165, 166 Humility, 35, 134–35, 149–52, 162, 185
Failure, 19–33, 184
biological or ecological I
management, 24
complex dynamic systems and, IBM, 4
27–28 Indeterminate condition, 74–75
creative destruction and, 26–27 Industry ranking, 1
Information, gathering, 213
emergence and, 24–25
Innovation
equilibrium theory and, 23–24
excellence rating and, 114
linear thinking (sameness), 22, 38
innovation aggressiveness, 87
symptoms, 29
innovation turbulence, 56, 57–58
vs. success, 50–52
Luxottica Retail and, 161–63,
FID (fully integrated device), 43 162–63
Fidelity Investments, 104–5, 128–30 questionnaire, 210
Fifth Discipline, The (Senge), 39 Southwest Airlines and, 135–35
Finkelstein, Sydney, 30–31 Inspired excellence, 144–45
Fiorina, Carly, 96, 140 Integrity, 14, 20, 72, 185
Fleming Companies, 50 Costco and, 170
Focus strategy, 23 customers and, 147–48, 158–59
Formal structure, describing, 212 Dell, Inc. and, 180
Foster, Richard, 7 Luxottica Retail and, 157–58
Four-phase cycle of organizations, 80 Intel, 45
Frame breaking change, 21, 26, 38 Intellectual capital, 100–101
Fuzzy logic, 55 Internal technology applications, 102
Index 233
Internet, 21, 89, 123–24 M

Inventory, 169–70
McGregor, Douglas, 141
Inverted pyramid, 193–94
Management
defined, 42
J–K philosophy, 22, 41, 97–98, 194–95
responsiveness (management
Jobs, Steve, 94 capabilities), 81
Jones, Melanie, 137 theory, 37–39
Kanadjian, Richard, 152, 153–54 Managers
Kaplan, Sarah, 7 corporate success and, 184
Kelleher, Herb, 134, 138 describing, 212
Kingston Technology, 76, 218 Marketing aggressiveness, 82–83,
corporate humility, 149–51 85–86
empowerment and, 151–53 Marketing questionnaire, 210
strategy, 153–55 Marketing turbulence, 56–57
K-Mart, 50, 68 Market share, 206
Kodak, 51, 70–71, 80 Mary Kay Inc., 14, 44–45, 59–60, 108
Kuhn, Thomas, 40, 53 motivation and, 121–28
Kuo, Bill, 153 transformational management
and, 126–28
Mary Kay On People Management (Ash),
L 125
Leadership Matrix structure, 99–100
A.G. Edwards and, 195–97 Medlin, Barbara, 186–87
character and, 107–8 Mental models, 40, 166
decision making and, 132 Mentoring, 138
level five leaders, 185–87 Merck, 111
Medlin, Barbara, and, 186–87 Microsoft, 45, 90–91
strategy rules, 40–48 aggressiveness and adaptability of,
190
Corporate IQ and, 47–48
critical thinking and, 189
maximize what’s in box, 41–43
empowerment and, 188
stay ahead of curve, 45–47
measure of success in, 187–90
think/act out of box, 43–45
Mintzberg, Henry, 25, 39, 55
style, 183, 206
Mission statement, 23
transparent, 198
Moderately variable condition, 73
Leathem, Mark, 152 More Than a Pink Cadillac (Underwood),
LensCrafters, 20, 156–57, 159, 163. See 14
also Luxottica Retail Motivation, 119–30
Level five leaders, 185–87 A.G. Edwards and, 200
Listening, proactive, 185 Fidelity Investments and, 128–30
Luxottica Retail, 20–21, 84, 155–64 Mary Kay Inc. and, 121–28
culture of excellence strategy, Motorola, 70–71, 80, 95–96
156–58
innovation and, 162–63
integrity and, 157–59 N–O
mission trip, 159 “New ’Wind Tunnel’ for Companies,
reconciliation and, 159 A,” 61
234 Index
Next practices idea, 26 Porter’s Five Forces Industry Analysis,

Obsolescence. See Creative destruction 101
Oil well analogy, 4 Practice(s), 112, 114
100-year companies, 2–3, 6 Price, Sol, 167, 169
creating, 16–18 Process, 115
product demand cycles and, 8 Process reengineering, 174
stability and, 7 Product demand cycle, 47
Open book management, 112 Productivity, 104
Product life cycle, 88–89, 90
Operational issues, 41
Product portfolio, 81, 211
Opto-electronics, 5
Product-technology (applications), 81,
Orchestra analogy, 98
89–90
Organization (adaptation), 1–2, 70,
Profit, employee value and, 143–44
201, 203–4
Profit and performance principle, 67
CEO attributes and, 95–96 Profit zone, 82–84, 86, 202, 203, 204
components of, 71 Project Socrates, 51
context and, 8, 75 Prolegomena, 2
core intelligence and, 94–95 Public recognition, 131
corporate culture and, 98 Public relations, 111
decision systems, 100–101
deterministic, 72
internal technology applications, Q
102 Quality, 115
leadership style, 206 Questionnaire, Corporate IQ
maximizing adaptive behaviors, assessment, 177, 216
105 competitive context, 209
moderately variable context, 73 computing the index, 216–18
organizational management, factors (the organization), 210–14
97–98 organizational character, 214–15
organizational structure, 99–100
Southwest Airlines and, 13–15 R
strategic capacity, 103–4
RAVE, 131–45, 160
strategic planning, 102–3
Recognition, 160
Organizational character, 83–84. See
Redundancy, 103
also Character
Requisite variety theorem, 27
Organizational commitment, 42
Research project (Corporate IQ™),
Organizational strategy, 85–90
65–66, 221–23
Organizations importance of, 223
four-phase cycle of, 80 initiative, 222
matching competitor index, 70–71 overview, 221
results, 222
P target companies, 223
Responsibility ranking, 193
Packard, Dave, 140 Ricardo, David, 23
Parker, Jim, 134, 138–39 Risk, 75, 123–24
Point of no defeat, 175 Rogers, Everett M., 175
Porras, Jerry, 25, 65, 66 ROI (return on investment), 2–3, 8
Index 235
S Strategic capacity, 103–4

Strategic focus, 165–81
Sales aggressiveness, 205–6
Costco Wholesale and, 166–72
Sam’s Club, 166
Dell, Inc. and, 173–80
Sam’s Wholesale, 36
Strategic planning, 102–3
Schumpeter, Joseph A., 4–5, 26, 53, 203
Strategic Renaissance (Dudik), 12
Sekora, Michael, 51
Strategy/strategies (aggressiveness),
Senge, Peter, 39
1–2, 81, 201, 203
September 11 tragedy, 12, 21, 108
competitor index, 202–3
Servant leadership, 162
Severely variable condition, 73–74 context and, 8
Significance, 119–21 deterministic, 72
Significance principle, 45, 131, 184, 200 Fidelity Investments and, 129–30
Significance Principle, The (Carter and indeterminate context, 74–75
Underwood), 42, 119 matching competitor index, 69–70
Simon, Herbert, 24 moderately variable, 73
Simple stability, 52–53 rules. See under Leadership
Sinegal, Jim, 167, 172 sales aggressiveness, 205–6
Six Sigma, 88 severely variable context, 73–74
Smart companies, 2, 207–8 Structure of Scientific Revolutions,
character and, 117 The (Kuhn), 53
job applicants and, 36 Subordinates, value of. See Employees,
and not-so-smart compared, 35 value of
success strategies, 80–82 Success
sustainable success and, 45–47 Chandler theory, 67
top ten, 15–16, 109 creation of sustainable, 37–39
value of employees and, 204 vs. failure, 50–52
Soft-switches, 43 measurement of, 183–200
SOHO, 61 accountability and, 183
Southwest Airlines, 13–15, 17, 31–32, A.G. Edwards and, 190–200
84, 132–39 level five leaders, 185–87
community involvement, 135 Microsoft and, 187–90
cost innovations, 136 rules of competitive success, 69–71
culture of, 138–39 strategies
diversity programs, 137 Microsoft and, 90–91
employees and, 14 organizational strategy, 85–90
humility and, 134–35 profit zone, 82–84
innovation and, 135–38 Sumpeter, Joseph, 19
love and, 133–34 Sun, David, 149–55
ten-minute turnaround, 134 Sunglass Hut, 20, 159
values and, 112 Suppliers, 170
Speed/complexity issues, 28 Support (ethics), 113
Spicer, Carol, 157, 159–60 Suppositions, 2
Stability, 14, 73 Sustainable advantage, 5, 23
Stability-based strategy, 7, 9 Sustainable competencies, 38
Stacey, Ralph, 25, 39, 55 Sutherland, John W., 12–13, 54, 56,
Stagnation, 80 71–72
Stakeholders, 110–11 Sweet spot, 16, 176
Stewardship, 143 SWOT analysis, 101
Stoelting, Scott, 157 Systems thinking, 43, 58, 82, 85–86
236 Index
T United Airlines, 15
Useem, Jerry, 29
Technology, 21
Fidelity Investments and, 129
integration of, 211 V
internal technology applications,
Values, 110–12
102
product-technology applications, Variables, 3
89–90 Vendors, 111
Telecommunications, 43 Visible Hand, The (Chandler), 67
Ten forces model, 27–28
Texas Instruments, 51 W
Thriving in E-Chaos (Underwood), 80
Total quality management, 38 Wal-Mart, 36
Transformational leadership, 112, Walton, Sam, 121
156–57 Watch Station, 20, 159
Transformational management, 126–28 Ways, Cheryl, 144
Transparency, 112 Welch, Jack, 40
Trust, 11, 72, 116, 152 Welch, Margaret, 197–98
ethics and, 180 Wendy’s “Where’s the beef ?,” 30
Tu, John, 149–55 Why Smart Executives Fail (Finkelstein),
Turbulence, 56–58, 82 30
Turnover, 158–59, 167, 197 Woodard, Thurmond, 178–79, 180
Tyson, Lynn, 175–77, 176, 178
X–Z
U Xerox, 4, 47, 70–71, 80
Underwood, Jim, 14, 42, 80, 119 Zadeh, Lofti, 55
research project, 65–66, 221–23 Zeus Electronics, 93–94

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This publication is designed to provide accurate and authoritative information in

Vice President and Publisher: Cynthia A. Zigmund

© 2004 by Jim Underwood

Published by Dearborn Trade Publishing

Printed in the United States of America

Library of Congress Cataloging-in-Publication Data

Underwood, Jim, 1941-

WHY COMPLEX DYNAMIC SYSTEMS

CORPORATE IQ AND THE TEN

SMART LEADERS, SMART COMPANIES

Appendix: Corporate IQ™ Stage I Research Results 221

J im Underwood in this book has ex-

WHERE’S THE BEEF?

M any people still remember that

tices contribute more to organizational losses than to profits. That’s why,

As a university professor, I expect a lot from my graduate students. At

• The firm’s marketing lacked the aggressiveness required for success

Keep in mind, my graduate students have been accurately predicting the

willing to ask, “Where’s the beef?” In the case of Mainline Manufacturing,

THE RESEARCH STUDY

THE TEN SMARTEST COMPANIES IN AMERICA

As you will discover in the following chapters, Corporate IQ measures

evaluate externally as many companies as possible to determine which ones

Y our Corporate IQ is extremely im-

1. Companies that have lasted for 100 years

uninspiring leaders who place little value on innovation. However, if you

OIL WELLS: A GREAT ANALOGY

WHEN THE WELL RUNS DRY

IBM was an innovator in mainframe computers. As long as the demand

of business by the creative efforts of entrepreneurs. Creative destruction has

“[The history of American business is a] history of revolutions.”

Consider the sterile strip or Band-Aid that we put on a wound. It was a

1. How frequently do events of creative destruction impact a company’s

Our exploration so far reveals the inadequacy of focusing upon historic

FIGURE 1.1 Companies with 100-Year Product Demand Cycles

“Why Companies That Are Built to Last Underperform the Market”

As a consultant, I have conducted research on a number of the compa-

FIGURE 1.2 Companies with 100-Year Product Demand Cycles

FIGURE 1.3 The Seventeen Broad Areas of Corporate IQ

STRATEGY ORGANIZATION CHARACTER

To better understand Corporate IQ, it might be beneficial to take a look

entrepreneurial behavior (a critical behavior for times of uncertainty). More

THE OTHER (AND A MOST

I have alluded to the idea of context in a number of ways in this chapter.

FIGURE 1.4 Understanding the Global Competitive Context or Environment

1. Deterministic (highly predictable)

Strategy and Organization Must Fit Context

STRATEGY, ORGANIZATION, AND

Complex Aggressive Poor Poor

Notice that Southwest Airlines can maintain a highly aggressive strategy

At companies where strategy, organization, and character are appropriate,

THE TOP TEN SMARTEST COMPANIES IN AMERICA

The screening of companies for my research initially included a fairly

acteristics of the firm that have to do with sustainability. Companies with a

DELL COMPUTER: ONE OF THE TEN

When it comes to crazy competitive environments, Dell lives there. Al-

CREATING A COMPANY THAT WILL LAST 100 YEARS

I have never found a high IQ company that was in trouble.

When it comes to understanding leadership and why companies last 100

I started this chapter with a somewhat startling claim about “companies