“E-Myth \ ‘e-,’mith\ n 1: the entrepreneurial myth: the myth that most people who start small businesses are entrepreneurs 2: the fatal assumption that an individual who understands the technical work of a business can successfully run a business that does that technical work…Those mundane and tedious little things that, when done exactly right, with the right kind of attention and intention, form in their aggregate a distinctive essence, an evanescent quality that distinguishes every great business you’ve ever done business with from its more mediocre counterparts whose owners are satisfied to simply get through the day. Yes, the simple truth about the greatest businesspeople I have known is that they have a genuine fascination for the truly astonishing impact little things done exactly right can have on the world. It is to that fascination that this book is dedicated.”
Contrary to popular belief, my experience has shown me that the people who are exceptionally good in business aren’t so because of what they know but because of their insatiable need to know more. The problem with most failing businesses I’ve encountered is not that their owners don’t know enough about finance, marketing, management, and operations—they don’t, but those things are easy enough to learn—but that they spend their time and energy defending what they think they know. The greatest businesspeople I’ve met are determined to get it right no matter what the cost.
So if your business is to change—as it must continuously to thrive—you must change first. If you are unwilling to change, your business will never be capable of giving you what you want. The first change that needs to take place has to do with your idea of what a business really is and what it takes to make one work.
That myth, that misunderstanding, I call the E-Myth, the myth of the entrepreneur. And it finds its roots in this country in a romantic belief that small businesses are started by entrepreneurs, when, in fact, most are not. That Fatal Assumption is: if you understand the technical work of a business, you understand a business that does that technical work. And the reason it’s fatal is that it just isn’t true. In fact, it’s the root cause of most small business failures! The technical work of a business and a business that does that technical work are two totally different things! But the technician who starts a business fails to see this. To the technician suffering from an Entrepreneurial Seizure, a business is not a business but a place to go to work.
The Entrepreneur / Manager/ Technician
But it’s a three-way battle between The Entrepreneur, The Manager, and The Technician. The entrepreneurial personality turns the most trivial condition into an exceptional opportunity. The Entrepreneur is the visionary in us. The dreamer. The energy behind every human activity. The imagination that sparks the fire of the future. The catalyst for change. The managerial personality is pragmatic. Without The Manager there would be no planning, no order, no predictability. The Technician is the doer. “If you want it done right, do it yourself” is The Technician’s credo. The Technician loves to tinker. Things are to be taken apart and put back together again. Things aren’t supposed to be dreamed about, they’re supposed to be done. If The Entrepreneur lives in the future and The Manager lives in the past, The Technician lives in the present. Put another way, while The Entrepreneur dreams, The Manager frets, and The Technician ruminates.
It is self-evident that business, like people, are supposed to grow; and with growth, comes change. Unfortunately, most businesses are not run according to this principle. Instead most businesses are operated according to what the owner wants as opposed to what the business needs. And what The Technician who runs the company wants is not growth or change but exactly the opposite. He wants a place to go to work, free to do what he wants, when he wants, free from the constraints of work Unfortunately, what The Technician wants dooms his business before it even begins.
“If you want to work in a business, get a job in somebody else’s business! But don’t go to work in your own. Because while you’re working, while you’re answering the telephone, while you’re baking pies, while you’re cleaning the windows and the floors, while you’re doing it, doing it, doing it, there’s something much more important that isn’t getting done. And it’s the work you’re not doing, the strategic work, the entrepreneurial work, that will lead your business forward, that will give you the life you’ve not yet known…“Don’t you see? If your business depends on you, you don’t own a business—you have a job. And it’s the worst job in the world because you’re working for a lunatic! “And, besides, that’s not the purpose of going into business. “The purpose of going into business is to get free of a job so you can create jobs for other people.
The Technician’s boundary is determined by how much he can do himself. The Manager’s is defined by how many technicians he can supervise effectively or how many subordinate managers he can organize into a productive effort. The Entrepreneur’s boundary is a function of how many managers he can engage in pursuit of his vision.
You come face to face with the unavoidable truth: You don’t own a business—you own a job! What’s more, it’s the worst job in the world! You can’t close it when you want to, because if it’s closed you don’t get paid. You can’t leave it when you want to, because when you leave there’s nobody there to do the work. You can’t sell it when you want to, because who wants to buy a job? At that point you feel the despair and the cynicism almost every small business owner gets to feel.
“The true question is not how small a business should be but how big. How big can your business naturally become, with the operative word being naturally? “Because, whatever that size is, any limitation you place on its growth is unnatural, shaped not by the market or by your lack of capital (even though that may play a part) but by your own personal limitations. Your lack of skill, knowledge, and experience, and, most of all, passion, for growing a healthy, functionally dynamic, extraordinary business. “In short, businesses that ‘get small again’ die. They literally implode upon themselves. “Not right away, necessarily. But over time they die. Atrophy and die. They can’t do anything else. “And the result of that is enormous disappointment, lost investment, shattered lives, not only the owner’s but those of the employees, the families of both the owner and the employees, the customers, the suppliers, the lenders, all of those people whose lives have somehow been intertwined with the life of this small business, and now with its death.
“Simply put, your job is to prepare yourself and your business for growth. “To educate yourself sufficiently so that, as your business grows, the business’s foundation and structure can carry the additional weight. “And as awesome a responsibility as that may seem to you, you have no other choice—if your business is to thrive, that is. “It’s up to you to dictate your business’s rate of growth as best you can by understanding the key processes that need to be performed, the key objectives that need to be achieved, the key position you are aiming your business to hold in the marketplace.
A Mature company is founded on a broader perspective, an entrepreneurial perspective, a more intelligent point of view. About building a business that works not because of you but without you.
IBM is what it is today for three special reasons. The first reason is that, at the very beginning, I had a very clear picture of what the company would look like when it was finally done. You might say I had a model in my mind of what it would look like when the dream—my vision—was in place. The second reason was that once I had that picture, I then asked myself how a company which looked like that would have to act. I then created a picture of how IBM would act when it was finally done. The third reason IBM has been so successful was that once I had a picture of how IBM would look when the dream was in place and how such a company would have to act, I then realized that, unless we began to act that way from the very beginning, we would never get there. In other words, I realized that for IBM to become a great company it would have to act like a great company long before it ever became one. From the very outset, IBM was fashioned after the template of my vision. And each and every day we attempted to model the company after that template. At the end of each day, we asked ourselves how well we did, discovered the disparity between where we were and where we had committed ourselves to be, and, at the start of the following day, set out to make up for the difference.
The Entrepreneurial Perspective adopts a wider, more expansive scale. It views the business as a network of seamlessly integrated components, each contributing to some larger pattern that comes together in such a way as to produce a specifically planned result, a systematic way of doing business. Said another way, the Entrepreneurial Model has less to do with what’s done in a business and more to do with how it’s done. The commodity isn’t what’s important—the way it’s delivered is. Thus, the Entrepreneurial Model does not start with a picture of the business to be created but of the customer for whom the business is to be created. It understands that without a clear picture of that customer, no business can succeed. To The Entrepreneur, the business is the product.
The Business Format Francise
The Business Format Franchise not only lends its name to the smaller enterprise but it also provides the franchisee with an entire system of doing business. And in that difference lies the true significance of the Turn-Key Revolution and its phenomenal success. The true product of a business is the business itself.
Armed with that realization, he set about the task of creating a foolproof, predictable business. A systems-dependent business, not a people-dependent business. A business that could work without him. Unlike most small business owners before him—and since—Ray Kroc went to work on his business, not in it.
The system integrates all the elements required to make a business work. It transforms a business into a machine, or more accurately, because it is so alive, into an organism, driven by the integrity of its parts, all working in concert toward a realized objective. And, with its Prototype as its progenitor, it works like nothing else before
The system isn’t something you bring to the business. It’s something you derive from the process of building the business.
It is critical that you understand the point I’m about to make. For if you do, neither your business nor your life will ever be the same. The point is: your business is not your life. Your business and your life are two totally separate things. Once you recognize that the purpose of your life is not to serve your business, but that the primary purpose of your business is to serve your life, you can then go to work on your business, rather than in it, with a full understanding of why it is absolutely necessary for you to do so. This is where you can put the model of the Franchise Prototype to work for you. Where working on your business rather than in your business will become the central theme of your daily activity, the prime catalyst for everything you do from this moment forward.
Pretend that the business you own—or want to own—is the prototype, or will be the prototype, for 5,000 more just like it. That your business is going to serve as the model for 5,000 more just like it. Not almost like it, but just like it. Perfect replicates. Clones. In other words, pretend that you are going to franchise your business. (Note: I said pretend. I’m not saying that you should. That isn’t the point here—unless, of course, you want it to be.) Further, now that you know what the game is—the franchise game—understand that there are rules to follow if you are to win:
The model will provide consistent value to your customers, employees, suppliers, and lenders, beyond what they expect.
The model will be operated by people with the lowest possible level of skill.
The model will stand out as a place of impeccable order.
All work in the model will be documented in Operations Manuals.
The model will provide a uniformly predictable service to the customer.
The model will utilize a uniform color, dress, and facilities code.
How can I create a business whose results are systems-dependent rather than people-dependent? Systems-dependent rather than expert-dependent. It is literally impossible to produce a consistent result in a business that depends on extraordinary people. No business can do it for long. And no extraordinary business tries to! Because every extraordinary business knows that when you intentionally build your business around the skills of ordinary people, you will be forced to ask the difficult questions about how to produce a result without the extraordinary ones. You will be forced to find a system that leverages your ordinary people to the point where they can produce extraordinary results over and over again.
Your Business Development Program is the vehicle through which you can create your Franchise Prototype. The Program is composed of seven distinct steps: 1. Your Primary Aim 2. Your Strategic Objective 3. Your Organizational Strategy 4. Your Management Strategy 5. Your People Strategy 6. Your Marketing Strategy 7. Your Systems Strategy
I believe it’s true that the difference between great people and everyone else is that great people create their lives actively, while everyone else is created by their lives, passively waiting to see where life takes them next.
In that regard, your Primary Aim is the vision necessary to bring your business to life and your life to your business. It provides you with a purpose. It provides you with energy. Your Strategic Objective is a very clear statement of what your business has to ultimately do for you to achieve your Primary Aim. It is the vision of the finished product that is and will be your business. In this context, your business is a means rather than an end, a vehicle to enrich your life rather than one that drains the life you have.
The commercial is saying, “Buy Chanel and this fantasy can be yours.” What’s your product? What feeling will your customer walk away with? Peace of mind? Order? Power? Love? What is he really buying when he buys from you? The truth is, nobody’s interested in the commodity. People buy feelings. And as the world becomes more and more complex, and the commodities more varied, the feelings we want become more urgent, less rational, more unconscious. How your business anticipates those feelings and satisfies them is your product.
“If you want it done,” I tell them, “you’re going to have to create an environment in which ‘doing it’ is more important to your people than not doing it. Where ‘doing it’ well becomes a way of life for them.”
Your Marketing Strategy starts, ends, lives, and dies with your customer. So in the development of your Marketing Strategy, it is absolutely imperative that you forget about your dreams, forget about your visions, forget about your interests, forget about what you want—forget about everything but your customer! When it comes to marketing, what you want is unimportant. It’s what your customer wants that matters. And what your customer wants is probably significantly different from what you think he wants. The question then becomes: If my customer doesn’t know what he wants, how can I? The answer is, you can’t! Not unless you know more about him than he does about himself. Not unless you know his demographics and his psychographics. Demographics and psychographics are the two essential pillars supporting a successful marketing program. If you know who your customer is—demographics—you can then determine why he buys—psychographics…And so, while the VP/Marketing and the VP/Operations and the VP/Finance each have their own specific accountabilities, they share one common purpose—to make a promise their customer wants to hear, and to deliver on that promise better than anyone else on the block!
“To do what? “To deliver the promise no one else in your industry dares to make! “That’s what marketing is, Sarah. That’s what your business must be. Alive, growing, committed to keeping a promise no competitor would dare to make.
That your Primary Aim and your Strategic Objective and your Organizational Strategy and your Management Strategy and your People Strategy and your Marketing Strategy and your Systems Strategy—all of them are totally interdependent, rather than independent of one another. That the success of your Business Development Program totally depends on your appreciation of that integration. And that your Prototype is that integration. If you understand all of that, then this book has been worth our time.
What I got out of it
Sounded like a pretty cheesy book but I got way more out of this than I expected. The entrepreneur/manager/technician, work on your business rather than in your business, continuous learning, get free from your job so that you can create jobs for others, build a “franchise” – something that can be replicated over and over again without fail (a systems thinking approach that is effective even if you never open another office/shop/etc…)
Reed Hastings recounts Netflix’s origin story as well as some of the cultural aspects that have made them the dominant media company of the past decade
If you want to build a culture of freedom and responsibility, the first step is to increase your talent density (hire great people, pay them top dollar, cull the mediocre), increase candor, and then remove unnecessary policies and rules (vacation, expense reports, dress codes, treat people as if they were responsible adults with good judgment…)
Removing mediocre performers has a surprisingly large impact on the culture, output, and happiness of everyone who remains, boosting already high performers even higher
Give feedback often start with employees giving the leader ship feedback get rid of jerks understand that you’re trying to leave people feeling optimistic and positive not be down because of your brutal honesty
Netflix’s travel and expense policy can be summarized in five words: act in Netflix’s interest
You are replacing rules and policies with leadership great people and common sense. For example the unlimited vacation policy must be followed up by the manager talking about what makes sense for the team so that you don’t hurt the company or your colleagues don’t take vacation in certain times we can only have one person out from our team at any given time etc.
For freedom and responsibility to really work there has to be repercussions that are known. For example at Netflix if you’re caught abusing the travel and expense policy you’re immediately fired no one strike you’re just out
Speed in every facet of decision making has tremendous second order effects
Big salaries, not big bonuses, are beat for innovation since people’s minds aren’t preoccupied with their target KPI or whatever metric their bonus is reliant upon. Bonuses and incentives are great for more mechanical and routine work but not so great for the creative. Pay top of salary estimates
Shining sunlight on mistakes, especially made by leaders, builds trust, encouraged others to take risks, and enhances velocity. if you have proven you’re confident and effective admitting your mistakes builds trust and likability whereas ineffective people shining a light on their mistakes only further a Rhodes peoples trust him
Don’t seek to please your boss but seek to do what is best for the company
Only a CEO who is not busy can truly do their job. You need to decentralize decision making as much as possible which enhances peoples accountability and excitement at work and allows the CEO freedom to think and beat the company
Adequate performance receives a generous severance package
The keeper test is important to build talent density. If someone on your team just told you they were leaving for another company would you fight for them? If not probably best to give them a generous severance package
Only say things about people that you’d be comfortable saying to their face
Lead with context, not control
Netflix’s north star is to be a company that is adaptable and flexible. They almost always pay more if that means getting additional flexibility
Pyramid and the tree – most organizations are structured like a pyramid but if innovation and creativity are your competitive advantage the structure like a tree is more effective. The boss is like the roots that helps keep the organization grounded and he is at the bottom setting the context rather than at the time controlling everything
What I got out of it
Freedom + Responsibility + Talent Density; candor, trust, shining spotlight on mistakes, do what’s best for the company and not for your boss, adaptability/flexibility > plans
Writings taken from Bezos’ annual shareholders letters with a bit of organization and context
In fact, when we lower prices, we go against the math that we can do, which always says that the smart move is to raise prices. We have significant data related to price elasticity. With fair accuracy, we can predict that a price reduction of a certain % will result in an increase in units sold of a certain percentage…Our judgment is that relentlessly returning efficiency improvements and scale economies to customers in the form of lower prices creates a virtuous cycle that leads over the long term to a much larger dollar amount of free cash flow, and thereby to a much more valuable Amazon.com. We’ve made similar judgments around Free Super Saver Shipping and Amazon Prime, both of which are expensive in the short term and – we believe – important and valuable in the long term
Our pricing objective is to earn customer trust, not to optimize short-term profit dollars. We take it as an article of faith that pricing in this manner is the best way to grow our aggregate profit dollars over the long term. We may make less per item, but by consistently earning trust we will sell many more items. therefore, we offer low prices across our entire product range. For the same reason, we continue to invest in our free shipping programs, including Amazon Prime. Customers are well informed and smart, and they evaluate the total cost, including delivery charges, when making their purchasing decisions. In the last 12 months, customers worldwide have saved more than $800m by taking advantage of our free shipping offers
Invention comes in many forms and at many scales. The most radical and transformative of inventions are often those that empowerothersto unleashtheircreativity – to pursuetheirdreams
Our heavy investments in Prime, AWS, Kindle, digital media, and customer experience in general strike some as too generous, shareholder indifferent, or even at odd with being a for-profit company. “Amazon, as far as I can tell, is a charitable organization being run by elements of the investment community for the benefit of consumers,” writes one outside observer. But I don’t think so. To me, trying to dole out improvements in a just-in-time fashion would be too clever by half. It would be risky in a world as fast-moving as the one we all live in. More fundamentally, I think long-term thinking squares the circle. Proactively delighting customers earns trust, which earns more business from those customers, even in the new business arenas. Take a long-term view, and the interest of customers and shareholders align.
A dreamy business offering has at least 4 characteristics. Customers love it, it can grow to very large size, it has strong returns on capital, and it’s durable in time – with the potential to endure for decades. When you find one of these, don’t just swipe right, get married
I’m talking about customer obsession rather than competitor obsession, eagerness to invent and pioneer, willingness to fail, the patience to think long term, and the taking of professional pride in operational excellence. Through that lens, AWS and Amazon retail are very similar indeed
In business, every once in a while, when you step up to the plate, you can score one thousand runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments
Many characterized as AWS as a bold – and unusual – bet when we started. “What does this have to do with selling books?” We could have stuck to the knitting. I’m glad we didn’t. Or did we? Maybe the knitting has as much to do with our approach as the arena. AWS is customer obsessed, inventive and experimental, long-term oriented, and cares deeply about operational excellence
Most decisions should probably be made with somewhere around 70% of the information you wish you had. If you wait for 90%, in most cases, you’re probably being too slow. Plus, either way, you need to be good at quickly recognizing and correcting bad decisions. If you’re good at course correcting, being wrong may be less costly than you think, whereas being slow is going to be expensive for sure.
Recognize true misalignment issues early and escalate them immediately. Sometimes teams have different objectives and fundamentally different views. They are not aligned. no amount of discussion, no number of meetings will resolve that deep misalignment. Without escalation, the default dispute resolution mechanism for this scenario is exhaustion. Whoever has more stamina carries the decision. So, opt for “disagree and commit.”
…We show him this problem and he looks at it. He stares at it for a while and says, “Cosign.” I’m like, “What do you mean,” and Yosanta says, “That’s the answer.” And I’m like, “That’s the answer?” Yeah, let me show you.” He sits us down. He writes out 3 pages of detailed algebra. Everything crosses out, and the answer is cosign, and I say, “Listen, Yosanta, did you just do that in your head?” And he says, “No, that would be impossible. Three years ago I solved a very similar problem, and I was able to map this problem onto that problem, and then it was immediately obvious that the answer was cosign.” That was an important moment for me because it was the very moment when I realized I was never going to be a great theoretical physicist, and so I started doing some soul-searching. in most occupations, if you’re in the ninetieth percentile or above, you’re going to contribute. In theoretical physics, you’ve got to be like, one of the top fifty people in the world, or you’re really just not helping out much. It was very clear. I saw the writing on the wall and changed my major very quickly to electrical engineering and computer science.
The way you earn trust, the way you develop a reputation is by doing hard things well over and over. The reason, for example, that the US military, in all polls, has such high credibility and reputation is because, over and over again, decade after decade, it has done hard things well. It really is that simple. It’s also that complicated. It’s not easy to do hard things well, but that’s how you earn trust. And trust, of course, is an overloaded word. It means so many different things. It’s integrity, but it’s also competence. It’s doing what you said you were going to do – and delivering. And so we deliver billions of packages every year; we say we’re going to do that and then we actually do it. And it’s also taking controversial stances. People like it when you say, “NO, we’re not going to do it that way. I know you want us to do it that way, but we’re not going to.” And even if they disagree, they might say, “We kind of respect that, though. They know who they are.”
What I got out of it
Inspiring and motivating – a peek into an incredible thinker, his vision, his thought process
Dee Hock gets to the root of what being a Chaordic organization means
Our current forms of organization are almost universally based on compelled behavior – on tyranny, for that is what compelled behavior is, no matter how benign it may appear or how carefully disguised and exercised. The organization of the future will be the embodiment of community based on shared purpose calling to the higher aspirations of people.
There is no ultimate being. There is only becoming
Paradox and conflict are inherent characteristics of chaordic organizations
Forming a chaordic organization begins with an intensive search for Purpose, then proceeds to Principles, People, and Concept, and only then to Structure and Practice. It can’t be done well as a linear process. Each of the six elements can be thought of as a perspective, a sort of “lens” through which participants examine the circumstances giving rise to the need for a new concept of organization and what it might become. The most difficult part is to understand and get beyond the origin and nature of our current concepts of organizations; to set them aside in order to make space for new and different thoughts. Every mind is a room filled with archaic furniture. It must be moved about or cleared away before anything new can enter. This means ruthless confrontation of the many things we know that are no longer so.
Purpose – a clear, simple statement of intent that identifies and binds the community together as a worth pursuit. Should speak to people and make them think that, “If we could achieve that, my life would have meaning
Principles – behavioral aspirations of the community. A clear, concise, unambiguous statement of a fundamental belief about how the whole and all the parts intend to conduct themselves in pursuit of the purpose. A principle is a precept against which all structures, decisions, actions, and results will be judged. A principle always has high ethical and moral content. It never prescribes structure or behavior; it only describes them. Principles often fall into two categories: principles of structure and principles of practice
People – when a sound body of belief is reasonably complete and agreed upon, the group can then begin to explore the people and organizations that would need to be participants in the enterprise in order to realize the purpose in accordance with the principles. This sounds simple, but rarely is. When people set aside all consideration of existing conditions, free themselves to think in accordance with their deepest beliefs, and do not bind their thinking with structure and practices before considering meaning and values, they usually discover that the number and variety of people and entities to participate in governance, ownership, rewards, rights, and obligations are much greater than anticipated. They usually find their deepest beliefs require transcendence of existing institutional boundaries and practices. Determining the people and institutions required to realize the purpose in accordance with the principles brings realization of just how narrow and restrictive existing institutions are in relation to the exploding diversity and complexity of society and the systemic nature of seemingly intractable social and environmental problems.
Concept – a visualization of the relationships between all the people that would best enable them to pursue the purpose in accordance with their principles. An organizational concept is perception of a structure that all may trust to be equitable, just, and effective. It is a pictorial representation of eligibility, rights, and obligations of all prospective participants in the community. The feedback part of the process never ends. Developing a new concept calls into question purpose, principles, and people. Every part of the process illuminates all subsequent and preceding parts, allowing each to be constantly revised and improved.
Structure – the embodiment of purpose, principles, people, and concept in a written document capable of creating legal reality in an appropriate jurisdiction, usually in the form of a charter and constitution or a certificate of incorporation and bylaws. It is the written, structural details of the conceptual relationships – details of eligibility, ownership, voting, bodies, and methods of governance. It is the contract of rights and obligations between all participants in the community
Practice – deliberations, decisions, and acts of all the participants in the community functioning within the structure of purpose in accordance with principles. long before the structural work is finished, everyone realizes they need not worry about the practices of the community
If you can accomplish all this, profit becomes a barking dog begging to be let it
What I got out of it
Dee Hock’s most distilled thinking on his concepts of business, creation, chaordic, and more – essentially, a manual for creating value, regardless of your field
Chaord comes from the combination of two words: chaos and order. This exemplifies the behavior of any self-governing organism, organization, or system which harmoniously blends characteristics of order and chaos; patterned in a way dominated by neither chaos or order; characteristic of the fundamental organizing principles and nature
Organizations moving from command and control to community with shared purpose calling to the higher aspirations of people. In a truly chaordic organization there is no destination. There is no ultimate being. There is only becoming
Community is not about profit, but benefit. We confuse them at our peril. When we attempt to monetize all value, we methodically disconnect people and destroy community. The nonmonetary exchange of value is the most effective, constructive system ever devised. Evolution and nature have been perfecting it for thousands of millennia. It requires no currency, contracts, government, laws, courts, police, economists, lawyers, accountants. It does not require anointed or certified experts at all. It requires only ordinary people, caring. True community requires proximity; continual, direct contact and interaction between the people, place, and things of which it is composed. Throughout history, the fundamental building block, the quintessential community, has always been the family. It is there that the greatest nonmonetary exchange of value takes place. It is there that the most powerful nonmaterial values are created and exchanged. It is from that community, for better or worse, that all others are formed. The nonmonetary exchange of value is the very heart and soul of community, and community is the inescapable, essential element of civil society…Nonmonetary exchange of value implies an essential difference between receiving and getting. We receive a gift. We take possession. It is a mistake to confuse buying and selling with giving and receiving. It is a mistake to confuse money with value. It is a mistake to believe that all value can be measured. And it is a colossal mistake to attempt to monetize all value
Through the 16 years of successful failure, the sheep had continued to read avariciously – poetry, philosophy, biography, history, biology, economics, mythology – anything that satisfied his curiosity about connectedness and relationship. He mastered nothing, nor did he wish to, but new ways of seeing old things began to emerge and new patterns to reveal themselves. The preoccupation with organizations and the people who hold power within them had slowly become an obsession
Leader presumes follower. Follower presumes choice. One who is coerced to the purposes, objectives, or preferences of another is not a follower in any true sense of the word, but an object of manipulation. Nor is the relationship materially altered if both parties accept dominance and coercion. True leading and following presume perpetual liberty of both leader and follower to sever the relationship and pursue another path. A true leader cannot be bound to lead. A true follower cannot be bound to follow. The moment they are bound, they are no longer leader or follower. The terms leader and follower imply the freedom and independent judgment of both. If the behavior of either is compelled, whether by force, economic necessity, or contractual arrangement, the relationship is altered to one of superior/subordinate, management/employee, master/servant, or owner/slave. All such relationships are materially different from leader/follower. Induced behavior is the essence of leader/follower. Compelled behavior is he essence of all the others. Where behavior is compelled, there lies tyranny, however benign. Where behavior is induced, there lies leadership, however powerful. Leadership does not imply constructive, ethical, open conduct. It is entirely possible to induce destructive, malign, devious behavior and to do so by corrupt means.
The first and paramount responsibility of anyone who purports to manage is to manage self; one’s own integrity, character, ethics, knowledge, wisdom, temperament, words, and acts…The second responsibility is to manage those who have authority over us; the third responsibility is to manage one’s peers – those over whom we have no authority and who have no authority over us – associates, competitors, suppliers, customers – the entire environment; the fourth responsibility is to manage those over whom we have authority (if we hire good people and induce them to practice our concepts, they will take care of themselves for the most part)
Management expertise has become the creation and control of constants, uniformity, and efficiency, while the need has become the understanding and coordination of variability, complexity, and effectiveness
Healthy organizations induce behavior. Unhealthy organizations compel it
Following Nature’s Lead
All things are a seamless blend of chaos and order
Particularity and separability are infirmities of the mind, not characteristics of the universe
Desire to command and control is a death wish. Absolute control is in the coffin
A principal thing they have in common is penalty for failure to evolve. Organisms resistant to a changing physical environment are biologicall obligerated; they physically die out. Organizations resistant to a changing social environment are economically destroyed; they socially die out. In truth, organisms and organizations are not separable. Nor can the physical world be separated from the social. In the deeper, larger sense, distinctions such as “physical, biological, and social” or “organism and organizations,” however useful for the insular, limited purposes, are deceptive in the extreme. All things are irrevocably interconnected in a cosmic dance drawn on by energy in the form of light from the sun
“The Cartesian/Newtonian world view has influenced thought far beyond the physical sciences, and accounting is no exception. Double entry bookkeeping and the systems of income and wealth measurement that evolved from it since the 16th century are eminently Cartesian and Newtonian. They are predicated on ideas such as the whole being equal to the sum of the parts and effects being the result of infinitely divisible, linear causes…Quantum physicists and evolutionary biologists, among others, now believe that it is best to describe reality as a web of interconnected relationships that give rise to an ever-changing and evolving universe of objects that we perceive only partially with our limited senses. In that “Systemic” view of the world, nothing is merely the sum of the parts; parts have meaning only in reference to a greater whole in which everything is related to everything else…Why should accountants continue to believe that human organizations behave like machines if the scientists from whom they borrowed that mechanistic world view now see the universe from a very different perspective? The language of financial accounting merely asserts answers, it does not invite inquiry. In particular it leaves unchallenged the world view that underlies [the way] organizations operate. Thus, management accounting has served as a barrier to genuine organizational learning…Never again should management accounting be seen as a tool to drive people with measures. Its purpose must be to promote inquiry into the relationships, patterns, and processes that give rise to accounting measures.” – H. Thomas Johnson
Neither the institutional nor the technical thinking made sense. It had always seemed to me that one of the principal tricks of evolution was to preserve the substance of the past by clothing it in the forms of the future. We would follow
Old Monkey Mind and I had spent countless hours trying to understand information and its relevant to organizations, asking our endless questions. What is the significant of the “inform” part of information? What is the nature of that which is received from external sources and “forms us” within? What is the nature of that which forms from within us which we then feel compelled to transmit, and how does it form others when it is received? What allows formation of information, permits it to endure unaltered, yet be available at any time for transformation in infinite ways? Why and from where came the universal, perpetual urge to receive and transmit information – the incessant desire to communicate? Is it an urge at all, or is it an unavoidable necessity – an integral component essential to life? Indeed, is it the essence of life itself? Or is ti a principle beyond life itself? Could it be the fundamental, formative essence that gives shape and distinction to all things – part of an inseparably whole universe? It helps to think what information is not. Certainly, it is not just another “thing”; one more finite, physical entity. Certainly, information is far more than digits and data. They may be components of it – the shape it sometimes takes. They may be of it, but they are not it. In a rare insight, Gregory Bateson proposed that “information is a difference that makes a difference.” If something is received that cannot be differentiated or, if once differentiated, makes no differences, he asserts it is just noise…Thinking about a society based on information and one based on physicality requires radically different perspective and consciousness. However, we prefer too often to ignore the fundamental differences and carry over into the Chaordic Age of managing information, ideas and values, concepts, and assumptions that proved useful in the mechanized, Industrial Age of machine crafting, the age of managing things; concepts such as ownership, finite supply, obsolescence, loss by conveyance, containment, scarcity, separability, quantifiable measurement, statistical economics, mathematical monetarism, hierarchal structuralism, and command-and-control management…As Sir Francis Bacon put it precisely centuries ago, in admonishing those who opposed the mechanistic concepts of Newton and Descartes: “They that reverence too much the old times are but a scorn to the new.”
It seems a principle of evolution, perhaps the fundamental principle, that the greater the capacity to receive, store, utilize, transform, and transmit information, the more diverse and complex the entity. It holds true from neutrino, to nucleus, to atom, to amino acids, to proteins, to molecules, to cells, to organs, to organisms. From bacteria, to bees, to bats, to birds, to buffalo, right on through to baseball players. CRUSTTI didn’t stop there. In time, information transcended the boundaries of organisms and led to communication between them, and eventually to complex communities of organisms
I = DC^2
The capacity to receive, store, utilize, transform, and transmit information equals societal diversity times societal complexity squared
We must begin with noise. Noise, in its broadest sense, is any undifferentiated thing which assaults the senses. It is pervasive and ubiquitous, whether auditory, visual, or textural. The supply of noise is infinite. Noise becomes data when it transcends the purely sensual and has cognitive pattern; when it can be discerned and differentiated by the mind. Data, in turn, becomes information when it is assembled into a coherent whole which can be related to other information in a way that adds meaning. (Bateson’s definition of information as “a difference that makes a difference.”) Information becomes knowledge when it is integrated with other information in a form that is useful for deciding, acting, or composing new knowledge. Knowledge becomes understanding when related to other knowledge in a manner that is useful in conceiving, anticipating, evaluating, and judging matters beyond the reach of information. Understanding becomes wisdom when informed by ethical, moral, and beneficent purpose and principle, along with memory of the past, and projection into the future. The fundamental characteristics of the opposite ends of this spectrum are very different. Data, on one end of the spectrum, is separable, objective, linear, mechanistic, and abundant. On the other end of the spectrum, wisdom is holistic, subjective, spiritual, conceptual, creative and scarce.
The labyrinthine Department of Justice, like all mechanistic, Newtonian, Industrial Age organizations, was fat on data and information and starved for understanding and wisdom
When there is an explosion in the capacity to receive, store, utilize, transform, and transmit information, the external world changes at a rate enormously greater than the rate at which our internal model evolves. Nothing behaves as we think it should. Nothing makes sense. At times the world appears to be staging a madhouse. It is never a madhouse. It is merely the great tide of evolution in temporary flood, moving this way and that, piling up against that which obstructs its flow, trying to break loose and sweep away that which opposes it. At such times, we experience extreme dissonance and stress. At the heart of that dissonance and stress is paradox. The more powerful and entrenched our internal model of reality, the more difficult it is to perceive and understand the fundamental nature of the changed world we experience. Yet without such perception, it is extremely difficult to understand and change our internal model.
Competition and cooperation are not contraries. They have no opposite meaning. They are complimentary. In every aspect of life, we do both. Schools are highly cooperative endeavors within which scholars vigorously compete. The Olympic Games combine immense cooperation in structure and rules with intense competition in events. As the runners leap from the blocks, competition and cooperation are occurring in a single, indistinguishable blur. Every cell in our bodies vigorously competes for every atom of nutrient swallowed and every atom of oxygen inhaled, yet every cell can sense when the good of the whole requires they cooperate by relinquishing their demands when the need of other cells is greater. Life simply cannot exist, let alone reach its highest potential, without harmonious existence of competition and cooperation.
Visa is not about credit at all, but of exchange of monetary value
Realization that money is now about data / information was instrumental in restructuring his thinking about money, banks, and credit cards
[Convincing Bank of America to join] – The bank should be the leader of a movement, not the commander of a structure
Can an organization be patterned on biological concepts and methods? The question seemed to contain its own answer. Such an organization would have to evolve, in effect, to organize and invent itself.
It should be equitably owned by all participants
Participants should have equitable rights and obligations
It should be open to all qualified participants
Power, function, and resources should be distributive to the maximum degree
Authority should be equitable and distributive within each governing entity
No existing participant should be left in a lesser position by any new concept of the organization
To the maximum degree possible, everything should be voluntary
It should be nonassessable
It should induce, not compel, change
It should be infinitely malleable yet extremely durable
For decades, Visa has been in the background, invisible to most people. The results of the best organizations is transparent, but the structure, leadership, and process are transparent.
The core of Visa was an enabling organization that existed for the sole purpose of assisting owner-members to do what they wished with greater capacity, more effectively, and at less cost
We reduced our thoughts to the simplest possible expression: the will to succeed, the grace to compromise
Although Visa arose from thinking about organizations as living, biological systems, I missed completely the need for an institutional immune system to thwart the viruses of old ways.
The concepts used did not belong to me. They belonged to evolution – to all people
The most abundant, least expensive, most underutilized and constantly abused resource in the world is human ingenuity
Mr. Carlson never promotes anyone. He “borrows” them for new assignments so that they can withdraw without feeling a failure if the new situation is unsuitable. If it proves productive, titles and rewards will follow
Understanding requires mastery of four ways of looking at things – as they were, as they are, as they might become, and as they ought to be. Mastering all four perspectives and synthesizing them into a compelling concept of a constructive, peaceful future is the true work of the genius that lies buried in everyone, struggling to get out. And the world is crying out for it. In our frantic attempt to know everything through use of the rational mind alone, we have fractured knowledge into hundreds of incestuous specialties and fragmented those specialties into thousands of isolated, insular trades and disciplines. The world is filling iwth people who know more and more about less and less. Within each specialty, we dismiss as largely irrelevant all things, events, and ways of understanding outside the ever narrower boundaries of our discipline. We can ignore all relationships not essential to our ever narrowing perspective. We can ignore all consequences not immediately affecting or affected by our ever more constricted pursuit. We can abdicate responsibility for even thinking about them. We can each decide and act with our ever smaller intellectual prisons and narrower mental cells, and defend our acts with logical, efficient, methodical rationality. Never mind that the sum of the whole is social, commercial, and biological madness.
Perspective is the Achilles heel of the mind, distorting everything we think, know, believe, or imagine…Our internal model of reality is how we make sense of the world. And it can be a badly built place indeed. Even if it is magnificently constructed, it may have become archaic. Everything that gave rise to it may have changed. Society and the natural world are never stagnant. They are constantly becoming. When it becomes necessary to develop a new perspective on things, a new internal model of reality, the problem is never to get new ideas in, the problem is tog et the old ideas out. Every mind is filled with old furniture. It’s familiar, it’s comfortable. We hate to throw it out. The old maxim is so often applied to the physical world, “nature abhors a vacuum,” is much more applicable to the mental world. Clear any room in your mind of old perspectives, and new perceptions will rush in. Yet, there is nothing we fear more. Weareour ideas, concepts, and perceptions. Giving up any part of our internal model of reality is worse than losing a finger or an eye. Part of us no longer exists. However, unlike most organs of the physical body, our internal model of reality can be regenerated but never as it was. And it’s a frightening, painful process. It is our individual perspective, the view from our internal temple of reality, that often so discolors and distorts perception that we can neither anticipate what might occur nor conceive what ought to be.
True power is never used. If you use power, you never really have it
The inevitable tendency of wealth is to acquire power. The inevitable tendency of power is to protect wealth. The tendency of wealth and power combined is to acquire ever more wealth and power. The use of commercial corporate form for the purpose of social good has become incidental.
A bit of carbon in iron makes powerful meta; a bit of truth in a lie makes powerful deceit
It is enough that error by corrected. It is excessive to insist it be admitted
Mistakes are toothless little things if you recognize and correct them. If you ignore or defend them, they grow fangs and bite
Businesses, as well as races, tribes, and nations, do not disappear when they are conquered or repressed, but when they become despondent and lose excitement about the future. When institutions reach that stage, people withdraw relevance from them and from those who purport to manage them. THey turn away. They stop listening.
What I got out of it
A simply superb book, one of the deepest most interconnected books I’ve read in some time
Why, he wondered, couldn’t a human organization work like a rain forest? Why couldn’t it be patterned on biological concepts and methods? What if we quit arguing about the structure of a new institution and tried to think of it as having some sort of genetic code? Visa’s genetic code eventually became its “purpose and principles” and its core governance processes, the details of which are spelled out in the following pages. But none of this would have come into being without the basic shift in thinking – to abandon the “old perspective and mechanistic model of reality” and embrace principles of living systems as a basis for organizing
The anthropologist Gregory Bateson said, “The source of all our problems today comes from the gap between how we think and now nature works.”
Educe – a marvelous word seldom used or practiced, meaning, “to bring or draw forth something already present in a latent, or undeveloped form.” It can be contrasted with induce, too often used and practiced, meaning, “to prevail upon; move by persuasion or influence – to impel, incite, or urge.”
Lead yourself, lead your superiors, lead your peers, employ good people, and free them to do the same. All else is trivia
Throughout the years, the Sheep continued to read avariciously, including much organizational theory, economics, science and philosophy. The preoccupation with organizations and the people who hold power within them became an obsession, which brings us to the heart of our subject this morning. Why, the Sheep asked time and time again, are organizations, whether governmental, commercial, educational or social, increasingly unable to manage their affairs? Why are individuals increasingly alienated from the organizations of which they are part? Why are commerce and society increasingly in disarray? Today, it doesn’t take much intelligence to realize we are in the midst of a global epidemic of institutional failure. Schools that can’t teach, welfare systems in which no one fares well, police that can’t enforce the law, judicial systems without justice, economies that can’t economize, corporations that can’t compete and governments that can’t govern. Even then, thirty years ago, the signs were everywhere if one cared to look. The answer to the Sheep’s questions has much to do with compression of time and events. Some of you may recall the days when a check took a couple of weeks to find its way through the banking system. It was called “float” and many used it to advantage. Today, we are all aware of the incredible speed and volatility with which money moves and the profound effect it has on commerce. However, we ignore vastly more important reductions of float, such as the disappearance of information float. As the futurist, James Burke, pointed out, it took centuries for information about the smelting of ore to cross a single continent and bring about the Iron Age. During the time of sailing ships, it took years for that which was known to become that which was shared. When man stepped onto the moon, it was known and seen in every corner of the globe 1.4 seconds later, and that is hopelessly slow by today’s standards. No less important is the disappearance of scientific float, the time between the invention of a new technology and its universal application. It took centuries for the wheel to gain universal acceptance–decades for the steam engine, electric light, and automobile–years for radio and television. Today, countless devices utilizing microchips sweep around the earth like the light of the sun into instant, universal use. This endless compression of float, whether of money, information, technology or anything else, can be combined and described as the disappearance of “change” float. The time between what was and what is to be; between past and future. Only a few generations ago, the present stretched unaltered, from a distant past into a dim future. Today, the past is ever less predictive, the future ever less predictable and the present scarcely exists at all. Everything is change, with one incredibly important exception. There has been no loss of institutional float. Although their size and power have vastly increased, there has been no new idea of organization since the concepts of corporation, nation-state and university emerged a few centuries ago.
Trust thyself; every heart vibrates to that iron string! – Ralph Waldo Emerson
Heaven is purpose, principle, and people. Purgatory is paper and procedure. Hell is rule and regulation
No part knew the whole, the whole did not know all the parts, and none had any need to. The entirety, like millions of other chaordic organizations, including those we call body, brain, forest, ocean, and biosphere, was self-regulating
If you have built castles in the air your work need not be lost; that is where they should be. Now put the foundation under them. – Henry David Thoreau
When our internal model of reality is in conflict with rapidly changing external realities, there are three ways to respond: First, we can cling to our old internal model and attempt to impose it on external conditions in a futile attempt to make them conform to our expectations. That is what our present mechanistic societal institutions compel us to attempt, and what we continually dissipate our ingenuity and ability trying to achieve. Attempting to impose an archaic internal model on a changed external world is futile. Second, we can engage in denial. We can refuse to accept the new external reality. We can pretend that external changes are not as profound as they really are. We can deny that we have an internal model, or that it bears examination. When the world about us appears to be irrational, erratic and irresponsible, it is all too easy to blame others for the unpleasant, destructive things we experience. It is equally easy to abandon meaning, engage in fantasy, and engage in erratic behavior. Such denial is also futile. Third, we can attempt to understand and change our internal model of reality. That is the least common alternative, and for good reason. Changing an internal model of reality is extremely difficult, terrifying, and complex. It requires a meticulous, painful examination of beliefs. It requires a fundamental understanding of consciousness and how it must change. It destroys our sense of time and place. It calls into question our very identity. We can never be sure of our place, or our value, in a new order of things. We may lose sight of who and what we are. Changing our internal model of reality requires an enormous act of faith, for it requires time to develop, and we require time to grow into it. Yet it is the only workable answer.
Members of the board brought to the table all the old assumptions about good management. The success of the organization created considerable tolerance of new and different management techniques.On the whole,however,each new approach was on sufferance. Each failure brought pressure to conform to the old ways. Since the board was deliberately structured so that management could not control its composition and to ensure 10 or 15 percent annual turnover, there were always new directors with a full load of old management baggage. They had little or no idea of the concepts that had led to the success the organization now enjoyed. No matter how much success we had, they were convinced it could be much greater if done in the manner to which they were accustomed. No matter what the failure,they were persuaded it could have been prevented, had it been handled in the traditional way. Occasionally, there was some truth in what they said. Always, there was no way to refute it. At the time, I did not understand the depth of the hold that mechanistic, dominator concepts had on the minds and hearts of people, including my own, nor how tenaciously and powerfully they would reassert themselves.It was not then apparent how difficult it was for people to understand and sustain the concepts; how long it would take for them to sink to the bone and become habitual conduct.The pressure to revert and conform, both from within and without the organization, was intense and unceasing. On the whole,we had poor methods and techniques and far too little of them to bring about the individual cultural change that a chaordic organization requires, nor did we have a leader who was fully alert to the need for it. Although Visa arose from thinking about organizations as living, biological systems, I missed completely the need for an institutional immune system to thwart the viruses of old ways.
If something was trying to happen and wanted to use me, I could say yes or no.That’s what free will is all about. If “no,” life would be pleasant, comfortable, at times, idyllic. If “yes,” it would mean day and night labor filled with stress, criticism, disappointment,and virtually no chance of success.But,if I held back would I be in denial of my becoming? A life worth living can’t be made of denial. It must be made of affirmation. In time, the essential question emerged. Is this what my life is all about? There it was,as simple and plain as that.There was no conceivable answer to the question. But, there was insatiable desire to find out. It was time to move on, wherever it led, whoever my companions, whatever the results, for as long as I could endure.
McDonald wrote Sloan’s biography and was barred from releasing it for a long time because of GM’s fears of revealing too much about their being a monopoly
Far from being the legendary crisp man of decision, Mr. Sloan was, when he chose to be, a master of ambivalence. He had described himself remarkably well in his testimony in the Du Pont suit: “It is generally my custom, when I get some resistance, to back out of it and try to do a selling job rather than to force the issue.” And he said: “I have never had much respect for my own ability as a negotiator. I am too apt to look at two sides of the question.”
Its twenty-eight pages, replete with organization charts, set forth the future design of the corporation now known in the famous corporate aphorism “decentralization with coordinated control.”
Mr. Sloan’s genius, as far as I could see, was in a complex of corporate arrangements and activities; his skill was in the internal strategies of the automobile industry and in the market: He could hold that industry, so to speak, in the palm of his hand.
The project had something useful about it for his state of mind after his wife died. On the occasion of his previous birthday, he had written me a thank-you note for noticing it, saying that at eighty “there is little to look forward to … but I have much to look backward on. And, in a way, that’s consolation.”
John J. Raskob was Pierre Du Pont’s mentor and guide in matters of finance, as Charles Kettering came to be in technology-both very good in their fields but with flaws that would endanger the survival of General Motors. With great foresight into the future of the automobile business, Raskob wrote down several good reasons for the Du Pont company to invest in General Motors. Among these reasons, which he numbered, was that together with Durant they could secure joint control of the company and “assume charge and be responsible for the financial operation of the company.” His Point Five would later bring big trouble. He wrote: “Our interest in the General Motors Company will undoubtedly secure for us the entire Fabrikoid, Pyralin, paint, and varnish business of those companies, which is a substantial factor.” The Du Ponts were persuaded, and in1917 the Du Pont company made the large investment in General Motors that gave them about a twenty-three percent interest in the company.
Before considering the subject of particular products it is advisable to outline the controlling purposes that presumably underlie the organization and proposed operations of the Corporation. That is, the whole picture should first be clearly drawn in order that the present particular subject may be considered, not just alone, but in its essential relations to the chief objectives of the General Motors Corporation.It is to be presumed that the first purpose in making a capital investment is the establishment of a business that will both pay satisfactory dividends and preserve and increase the capital value. The primary object of the General Motors Corporation, therefore, is to make money, not just to make motor cars.How is it proposed to earn satisfactory dividends on the investment? And how does the earning purpose of the General Motors Corporation differ from the business objectives of other manufacturers of automobile vehicles?A monopoly is not planned. It is recognized that there will always be competing cars. But it is believed that by “covering the market for all grades of automobiles that can be produced and sold in large quantities” the Corporation will be able to secure many advantages over manufacturers of but one or two grades; even if General Motors cars in the respective grades are no better than the best competing automobiles of the same grade. . . .(Ajs soon as practicable the following grades shall constitute the entire line of cars,(a) $450.00 – $600.00(b) $600.00 – $900.00(c) $900.00 – $1200.00(d) $1200.00 – $1700.00(e) $1700.00 – $2500.00(f) $2500.00 – $3500.00It is recognized that there will always be a considerable market for cars priced above $3500.00, but the demand for any one type will be limited to such a number as would not permit of “quantity” production. These might almost be called custom-built cars, and it is not recommended that the General Motors Corporation attempt to cover that field.
The field of cars of the first grade is now practically monopolized by the Ford. At present it is being invaded by Chevrolet. It is not recommended that the General Motors Corporation attempt to build and sell a car of the Ford grade, as the Ford sells at the lowest price within the first grade. Instead it is recommended that the General Motors Corporation market a car much better than the Ford, with a view to selling it at or near the top price in the first grade. It is not proposed to compete with the Ford grade, but to produce a car that will be so superior to the Ford, yet so near the Ford price, that demand will be drawn from the Ford grade and lifted to the slightly higher price in preference to putting up with the Ford deficiencies.It is believed that the converse of this effect will be produced when the new General Motors first grade car, selling at approximately $600.00, is compared with cars of competitors in the next highest grade, selling at $750.00 or slightly below. Even though the new General Motors (a) grade car may not be quite as good as competing cars selling at approximately $750.00, it should be so near the grade of competing cars selling at the middle of the second price range, that prospective buyers will prefer to save $150.00 and to yield the comparatively slight preference they might have for the competing car if the prices were nearly equal …
There should be absolutely no duplication within the Corporation of any car planned to cover a particular grade field, since a sufficientselection of models will be offered by the overlapping sales scopes of each model, above and below the limits of its planned price range. All competition within the Corporation itself should be eliminated.It is recognized that the future of the Corporation and its earning power depend on its ability to design and produce automobiles of maximum utility value and attractiveness of appearance, in such quantities and by such coordinated methods of efficiency as will result in a minimum cost for the models required to supply all the markets of greatest demand for automobiles….The core of the policy, as we wrote in My Years with General Motors, lay “in its concept of mass producing a line of cars graded upward in quality and price. This principle supplied the first element in differentiating the General Motors concept from the old Ford Model T
Frank Donovan, a lifetime close friend and a lawyer from Detroit. He was known among his friends and clients as a brilliant legal analyst with a nonaggressive temperament. No litigator. When we were both twenty, I remember him saying: “When there’s a fight, I pick up my hat and go home.” He had a large head, somewhat out of proportion to his medium build, and the kind of languid grace that was great for sitting around talking, as we had since our teens. Altogether these characteristics did not quite account for his having been captain of Notre Dame’s tennis team under Knute Rockne’s athletic directorship and three times tennis champion of Detroit.
What I got out of it
A bit boring and too much legal background but gave some good insights into Alfred Sloan and GM
Marc describes the formation and foundation of Netflix, his role, and the evolution of Netflix from DVD store/rental to dominant international media company. “Goal is to puncture myths but also reveal what they did and why it worked, turning Netflix from an unlikely idea into the media behemoth it is today – not let’s or principles but hard won truths (like distrust epiphanies)”
The daily car rides with Reed and Marc seem enviable – what an amazing gift to be able to share ideas and have them destroyed without it impacting the relationship
From the beginning, Reed was intent on focusing on a business with recurring revenues that scaled massively
In one of the brainstorms with Reid, Marc brought up a VHS delivery service. After doing research it became clear that the tapes and shipping was too expensive, but once DVD’s came out, the whole equation changed and the business model now seemed viable
One of Marc’s guiding philosophies is to have his team loosely coupled but highly aligned – show the team where you want to go but not how to get there. Treat people like adults, trust them, give them a vision to go all in on
It was expensive to acquire all the dvds at the beginning, trying to claim they have every dvd ever made, but they reframed it so that this expense was really cheap advertising. A dvd costs $20 but the reputation for having every dvd is priceless
Instituted a Tuesday date night with his wife where he would leave work at 5pm no matter what to spend time with her and no kids
Learned many of his leadership lessons from his time outdoors and exploring nature
Focus and doing your core competency extremely well is a matter of life and death for a startup
Environment of freedom and responsibility coupled with radical honesty is the foundation of Netflix’s culture
They were struggling getting people to rent DVDs although being at success selling online. Eventually they tested out the idea of a subscription service with no late fees and an automatic sending of the next DVD in your queue when you return the old one. Mark would never have thought this was the path Netflix would have taken but it was immediately successful, so they ran with it
Nobody knows anything. This isn’t an indictment, ira a reminder. If this is true, you have to trust yourself, try things, and be ok with failing
Randolph’s rules for success
Do at least 10% more than you’re asked to
Never state as fact something which you don’t know
Be curteous always, up and down
Don’t be afraid to make decisions when you have the facts
Be open minded but skeptical
Quantify whenever possible
You have to love the problem rather than the solution. This will keep you engaged and motivated even in difficult times
What I got out of it
Nobody knows anything so you won’t know whether an idea is good or bad until you try it. Marc’s enthusiasm is palpable even through the pages and the car ride him and Reed shared for years where they discussed and batted down ideas with radical honesty seems like an incredible gift
There have been some many superb books published in recent years dealing with successful busines sundertakings. This book, however, takes a contrapuntal viewpoint and adopts the perspective of learning from a business gone awry. It is much as is the practice at medical conventions – where it is generally considered that a greatl deal can be learned by not focusing on healthy people.
There are 52 total laws, the most compelling (to me), outlined below
There are no lazy veteran lion hunters – margin between victory and defeat is miniscule
If you can afford to advertise, you don’t need to
1/10th of the participants produce 1/3 of the output. increasing the number of participants simply reduces the average output
The last 10% of performance generates 1/3 of the costs and 2/3 of the problems
It is very expensive to achieve high unreliability. It is not uncommon to increase the cost of an item by a factor of ten for each factor of ten degradation accomplished
Any task can be completed in only 1/3 more time than is currently estimated
If a sufficient number of management layers are superimposed on top of each other, it can be assured that disaster is not left to chance
The optimum committee has no members
Hiring consultants to conduct studies can be an excellent means of turning problems into gold – your problems into their gold
The weaker the data available upon which to base one’s conclusion, the greater the precision which should be quoted in order to give the data authenticity.
The more time you spend talking about what you have been doing, the less time you have to do what you have been talking about. Eventually, you spend more and more time talkinga bout less and less until finally you spend all your time talking about nothing.
Managerial intellect wilted in competition with managerial adrenaline
In the words of Rick Mears, “to finish first you must first finish.”
Quantity has a quality all its own
An irate banker demadned that Alexander Graham Bell remove “that toy” from his office. The toy was the telephone. A Hollywood producer scrawled a rejection note on a manuscript that became Gone with the Wind. Henry Ford’s largest origianl investor sold all his stock in 1906. Today, Sears may sell $25,000 of goods in 16 seconds.
Adding people to speed up a late software project just makes it later
People are the key to success in most any underatking
Teamwork is the fabric of effective business organizations
Self-image is as important in business as in sports
Motivation makes the diference
Recognition of accomplishment (and lack thereof) is an essential form of feedback
Listening to employees and customers pay dividends – they know their jobs and needs better than anyone else
Delegation, whenver practicable, is the best course. As Plato suggested, justice is everyone doing their own job
Openness with empoyees and customers alike is essential to building trust
Customers deserve the very best
Quality is the key to customer satisfaction. It means giving the customer what was agreed upon – every time.
Stability of funding, schedules, goals, and people is critical to any smooth business operation. Avoid turbulence at all costs
Demanding that last little bit of effort from oneself is essential – it can make the difference against competitors who don’t have the will to put out the extra effort
Provision for the unexpected is a business person’s best insurance policy. It is said that the ultimate form of management is managing under uncertainty. One must identify sources of risks and unknowns and make provisions to overcome them – in the form of financial reserves, schedule reserves, and performance reserves. Promise only that which can be produced and produce that which has been promised.
“Touch Labor” – people who actually come into contact with the product – are the only certain contributors in any organization. Others may contribute – managers, lawyers, accountants, consultants, auditors – but they may not.
Rules, regulations, policies, reports,a nd organization charts are not a subsitutte for sound management judgment.
Logic in presenting decision options, consequences, benefits, and risks is imperative. Whenever parameters can be quantified, it is usually desirable to do so
Conservatism, prudent conservatism, is generally the best path in financial matters
Integrity is the sine qua non of all human endeavors including business. It has even been said that if rascals knew the value of honesty they would be honest simply because of their rascality.
Much of the above simply boils down to DISCIPLINE – and in particulars that finest form of the art – SELF-discipline. DIscipline not to take the easy way out, discipline to forgeo “nice-to-have” features, discipline to minimize change, discipline to demand a quality product, discipline to treat a customer fairly even when it costs, and discipline to “tough out” and solve the problems which will occur in even the best-managed undertakings. As Robert Townsend, the former chairman of AVIS, put it in his book Up the Organization, managers must have the discipline not to keep pulling up the flowers to see if their roots are healthy. Most of our problems, it seems, are, as could be their solutions, self-imposed.
David Packard walks through the evolution of Hewlett-Packard from tiny startup to behemoth
Finally, they hit upon the audio oscillator and sold eight units to Walt Disney, earning the company its first substantial revenues.
Culture and the HP Way
“But they had a great idea—the ultimate source of competitive advantage—if you can just see it,” I’d push back. “What might that be?” After ten or fifteen minutes, someone would likely voice the key point: Bill Hewlett and David Packard’s greatest product was not the audio oscillator, the pocket calculator, or the minicomputer. Their greatest product was the Hewlett-Packard Company and their greatest idea was The HP Way.
The point is not that every company should necessarily adopt the specifics of the HP Way, but that Hewlett and Packard exemplify the power of building a company based on a framework of principles. The core essence of the HP Way consists of five fundamental precepts.
The Hewlett-Packard company exists to make a technical contribution, and should only pursue opportunities consistent with this purpose;
The Hewlett-Packard company demands of itself and its people superior performance—profitable growth is both a means and a measure of enduring success;
The Hewlett-Packard company believes the best results come when you get the right people, trust them, give them freedom to find the best path to achieve objectives, and let them share in the rewards their work makes possible;
The Hewlett-Packard company has a responsibility to contribute directly to the well-being of the communities in which its operates;
Hewlett and Packard rejected the idea that a company exists merely to maximize profits. “I think many people assume, wrongly, that a company exists simply to make money,” Packard extolled to a group of HP managers on March 8, 1960. “While this is an important result of a company’s existence, we have to go deeper to find the real reasons for our being.” He then laid down the cornerstone concept of the HP Way: contribution. Do our products offer something unique—be it a technical contribution, a level of quality, a problem solved—to our customers? Are the communities in which we operate stronger and the lives of our employees better than they would be without us? Are people’s lives improved because of what we do? If the answer to any these questions is “no,” then Packard and Hewlett would deem HP a failure, no matter how much money the company returned to its shareholders.
Therein we find the hidden DNA of the HP Way: the genius of the And. Make a technical contribution and meet customer needs. Take care of your people and demand results. Set unwavering standards and allow immense operating flexibility. Achieve growth and achieve profitability. Limit growth to arenas of distinctive contribution and create new arenas of growth through innovation. Never compromise integrity and always win in your chosen fields. Contribute to the community and deliver exceptional shareholder returns. Behind these specifics lies the biggest “And” of all, the principle that underpins every truly great company: preserve the core and stimulate progress.
Any great social enterprise—whether it be a great company, a great university, a great religious institution, or a great nation—exemplifies a duality of continuity and change. On the one hand, it is guided by a set of core values and fundamental purpose that change little over time, while on the other hand, it stimulates progress—change, improvement, innovation, renewal—in all that is not part of the core guiding philosophy. In a great company, core values remain fixed while operating practices, cultural norms, strategies, tactics, processes, structures, and methods continually change in response to changing realities. Lose your core values, and you lose your soul; refuse to change your practices, and the world will pass you by.
Yet the ultimate test of a great company is not the absence of difficulty, but the ability to recover from setbacks—even self-inflicted wounds—stronger than before.
As we investigate this, we inevitably come to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile—they make a contribution to society (a phrase which sounds trite but is fundamental).
We must realize that supervision is not a job of giving orders; it is a job of providing the opportunity for people to use their capabilities efficiently and effectively.
If our main thought is to make money, we won’t care about these details. If we don’t care about the details, we won’t make as much money. They go hand in hand.
Our first obligation, which is self-evident from my previous remarks, is to let people know they are doing something worthwhile. We must provide a means of letting our employees know they have done a good job. You as supervisors must convey this to your groups. Don’t just give orders. Provide the opportunity for your people to do something important. Encourage them.
Profit is the measure of our contribution to our customers—it is a measure of what our customers are willing to pay us over and above the actual cost of an instrument.
Get the best people, stress the importance of teamwork, and get them fired up to win the game.
I found, after much trial and error, that applying steady gentle pressure from the rear worked best. Eventually, one would decide to pass through the gate; the rest would soon follow. Press them too hard, and they’d panic, scattering in all directions. Slack off entirely, and they’d just head back to their old grazing spots. This insight was useful throughout my management career.
Another example of sharing, though in a much different way, occurred in 1970. Because of a downturn in the U.S. economy, our incoming orders were running at a rate quite a bit less than our production capability. We were faced with the prospect of a 10 percent layoff. Rather than a layoff, however, we tried a different tack. We went to a schedule of working nine days out of every two weeks—a 10 percent cut in work schedule with a corresponding 10 percent cut in pay. This applied to virtually all our U.S. factories, as well as to all executives and corporate staff. At the end of a six-month period, the order rate was up again and everyone returned to a full work schedule. Some said they enjoyed the long weekends even though they had to tighten their belts a little. The net result of this program was that effectively all shared the burden of the recession, good people were not released into a very tough job market, and we had our highly qualified workforce in place when business improved.
GE was especially zealous about guarding its tool and parts bins to make sure employees didn’t steal anything. Faced with this obvious display of distrust, many employees set out to prove it justified, walking off with tools or parts whenever they could. Eventually, GE tools and parts were scattered all around town, including the attic of the house in which a number of us were living. In fact, we had so much equipment up there that when we threw the switch, the lights on the entire street would dim. The irony in all of this is that many of the tools and parts were being used by their GE “owners” to work on either job-related projects or skill-enhancing hobbies—activities that would likely improve their performance on the job. When HP got under way, the GE memories were still strong and I determined that our parts bins and storerooms should always be open. Keeping storerooms and parts bins open was advantageous to HP in two important ways. From a practical standpoint, the easy access to parts and tools helped product designers and others who wanted to work out new ideas at home or on weekends. A second reason, less tangible but important, is that the open bins and storerooms were a symbol of trust, a trust that is central to the way HP does business.
Many companies have a policy stating that once employees leave the company, they are not eligible for reemployment. Over the years we have had a number of people leave because opportunities seemed greater elsewhere. We’ve always taken the view that as long as they have not worked for a direct competitor, and if they have a good work record, they are welcomed back. They know the company, need no retraining, and usually are happier and better motivated for having had the additional experience.
No operating policy has contributed more to Hewlett-Packard’s success than the policy of “management by objective.” Although the term is relatively new to the lexicon of business, management by objective has been a fundamental part of HP’s operating philosophy since the very early days of the company. MBO, as it is frequently called, is the antithesis of management by control. The latter refers to a tightly controlled system of management of the military type, where people are assigned—and expected to do—specific jobs, precisely as they are told and without the need to know much about the overall objectives of the organization. Management by objective, on the other hand, refers to a system in which overall objectives are clearly stated and agreed upon, and which gives people the flexibility to work toward those goals in ways they determine best for their own areas of responsibility. It is the philosophy of decentralization in management and the very essence of free enterprise.
I don’t argue that the job can’t be done that way, but I do argue strongly that the best job can be done when the manager has a genuine and thorough understanding of the work. I don’t see how managers can even understand what standards to observe, what performance to require, and how to measure results unless they understand in some detail the specific nature of the work they are trying to supervise.
I learned everything I could about the causes of failure and decided to spend most of my time on the factory floor, making sure every step in the manufacturing process was done correctly. I found several instances where the written instructions provided the manufacturing people were inadequate, and I worked with them on each step in the process to make sure there were no mistakes. This painstaking attention to detail paid off, and every tube in the next batch passed its final test.
That was the genesis of what has been called MBWA. I learned that quality requires minute attention to every detail, that everyone in an organization wants to do a good job, that written instructions are seldom adequate, and that personal involvement is essential.
It needs to be frequent, friendly, unfocused, and unscheduled—but far from pointless. And since its principal aim is to seek out people’s thoughts and opinions, it requires good listening.
Linked with MBWA is another important management practice at Hewlett-Packard, and a basic tenet of the HP Way. It’s called the “open door policy.” Like MBWA, this policy is aimed at building mutual trust and understanding, and creating an environment in which people feel free to express their ideas, opinions, problems, and concerns.
The open door policy is very important at HP because it characterizes the management style to which we are dedicated. It means managers are available, open, and receptive. Everyone at HP, including the CEO, works in open-plan, doorless offices. This ready availability has its drawbacks in that interruptions are always possible. But at HP we’ve found that the benefits of accessibility far outweigh the disadvantages. The open door policy is an integral part of the management-by-objective philosophy. Also, it is a procedure that encourages and, in fact, ensures that the communication flow be upward as well as downward.
Bill’s audio oscillator represented the first practical, low-cost method of generating high-quality audio frequencies needed in communications, geophysics, medicine, and defense work. The audio oscillator was to become the Hewlett-Packard Company’s first product.
We designated this first product the Model 200A because we thought the name would make us look like we’d been around for a while. We were afraid that if people knew we’d never actually developed, designed, and built a finished product, they’d be scared off. Our pricing was even more naive: We set it at $54.40 not because of any cost calculations but because, of all things, it reminded us of “54°4o’ or Fight!” (the 1844 slogan used in the campaign to establish the northern border of the United States in the Pacific Northwest). We soon discovered we couldn’t afford to build the machines for that price. Luckily, our nearest competition was a $400 oscillator from General Radio, which gave us considerable room to maneuver.
At the end of 1939, our first full year in business, our sales totaled $5,369 and we had made $1,563 in profits. We would show a profit every year thereafter.
In those early days Bill and I had to be versatile. We had to tackle almost everything ourselves—from inventing and building products to pricing, packaging, and shipping them; from dealing with customers and sales representatives to keeping the books; from writing the ads to sweeping up at the end of the day. Many of the things I learned in this process were invaluable, and not available in business schools.
He said that more businesses die from indigestion than starvation. I have observed the truth of that advice many times since then.
Although the pressure to meet production deadlines was enormous, there was also lots of excitement and a great sense of camaraderie.
Eventually, because of big gains in productivity, the bonus to our entire workforce rose to as much as 85 percent of base wages. At that point, which was some time after the war, we abandoned this particular bonus plan. But in no way did we discontinue the practice of sharing profits among all our people. To this day, Hewlett-Packard has a profit-sharing program that encourages teamwork and maintains that important link between employee effort and corporate success.
Bill and I had decided we were going to reinvest our profits and not resort to long-term borrowing. I felt very strongly about this issue, and we found we were clearly able to finance 100 percent growth per year by reinvesting our profits. After some discussion with the members of the board, they seemed to be impressed with what we were doing but said they had a limit of 12 percent of profit they could allow on equity. I pointed out that our business had been doubling every year and that it would continue to do so for several years. I also told them that I had kept my salary at a lower level than it should have been because I did not think it was fair for my salary to be higher than Bill’s army salary.
We developed additional instruments, and later on, again working with Dr. Haeff, we built a device his group developed that was capable of jamming an enemy’s ship-board radar. It was at the core of what was code-named the Leopard project. We were very conscientious about meeting our delivery schedule on this project, working around the clock. I recall moving a cot into the factory and sleeping there many nights.
I believe this decision to focus our efforts was extremely important, not only in the early days of the company but later on as well. During the war, for example, we could have taken on some big—at least for us—production contracts. But that would have built the company to a level that probably couldn’t be sustained later on. I felt that we should take on no more than we could reasonably handle, building a solid base by doing what we did best—designing and manufacturing high-quality instruments.
The counter was so useful when it did work that our customers tolerated its unreliability.
Our collaboration with Stanford and Fred Terman continued, and in 1954 we expanded on the fellowship program and established what became known as the Honors Cooperative Program, which allowed qualified HP engineers to pursue advanced degrees at Stanford. The program made it possible for us to hire top-level young graduates from around the country with the promise that if they came to work for us and we thought it appropriate, they could attend graduate school while on full HP salary. Originally, the company paid part of their tuition as well, and more recently has paid all of their tuition. More than four hundred HP engineers have obtained master’s or doctorate degrees through this program. It has enabled us to hire the top engineering graduates from universities all across the country for a number of years—an important factor in the ultimate success of our company.
As I have said many times, our success depends in large part on giving the responsibility to the level where it can be exercised effectively, usually on the lowest possible level of the organization, the level nearest the customer.
There were about 4,000 people at this facility, and we were the first Americans ever to visit. It was obvious to me that what they were building would be entirely useless in modern-day combat, but I didn’t say anything at the time, except to compliment them on their workmanship.
Bill Hewlett and I were raised during that depression. We had observed its devastating effects on people, including many families and friends who were close to us. My father had been appointed as a bankruptcy referee for the state of Colorado. When I returned to Pueblo during the summers of the 1930s, I often helped my father in looking up the records of those companies that had gone bankrupt. I noted that the banks simply foreclosed on firms that mortgaged their assets and these firms were left with nothing. Those firms that did not borrow money had a difficult time, but they ended up with their assets intact and survived during the depression years that followed. From this experience I decided our company should not incur any long-term debt. For this reason Bill and I determined we would operate the company on a pay-as-you-go basis, financing our growth primarily out of earnings rather than by borrowing money.
Our long-standing policy has been to reinvest most of our profits and to depend on this reinvestment, plus funds from employee stock purchases and other cash flow items, to finance our growth. The stock purchase plan allows employees to apply up to a certain percentage of their salaries to purchase shares of HP stock at a preferential price. The company picks up a portion of the price of the stock. The plan has been in existence since 1959 and has provided us with significant amounts of cash to help finance our growth.
I was convinced we could correct the problem through greater self-discipline. I quickly visited nearly every one of our major divisions, meeting with a host of managers and giving them a lecture that was later characterized by one manager as “Dave’s give-’em-hell talk.”
One of our most important management tasks is maintaining the proper balance between short-term profit performance and investment for future strength and growth.
The pricing of new products is an important and challenging exercise. Often a product will be introduced to the market at a price too low to make an adequate short-term profit. The thinking is that “we’ll get our costs down and that will enable us to make a good profit”— either next month, next quarter, or next year. But that time seldom, if ever, comes. Often pricing also falls prey to the goal of “market share.” Many managers in American industry are caught up with the idea of capturing a larger share of a market, often by undercutting the competition’s prices. In the short term, that often results in an impressive sales volume . . . but at the expense of little or no profit.
What we did decide, however, was that we wanted to direct our efforts toward making important technical contributions to the advancement of science, industry, and human welfare. It was a lofty, ambitious goal. But right from the beginning, Bill and I knew we didn’t want to be a “me-too” company merely copying products already on the market.
A constant flow of good new products is the lifeblood of Hewlett-Packard and essential to our growth. Early on we developed a system for measuring the flow and success of new products.
At HP, as in other technical companies, there is no shortage of ideas. The problem is to select those likely to fill a real need in the marketplace. To warrant serious pursuit an idea must be both practical (the device under consideration must work properly) and useful. Out of those ideas that are practical, a smaller number are useful. To be useful an invention must not only fill a need, it must be an economical and efficient solution to that need. we often used to select projects on the basis of a six-to-one engineering return. That is, the profit we expected to derive over the lifetime of a product should be at least six times greater than the cost of developing the product. Almost without exception, the products that beat the six-to-one ratio by the widest margin were the most innovative.
How do managers provide encouragement and help the inventor retain enthusiasm in the face of such disappointment? HP shows off its first computer in 1967 at the IEEE trade show in New York City. Many HP managers over the years have expressed admiration for the way Bill Hewlett handled these situations. One manager has called it Bill’s “hat-wearing process.” Upon first being approached by a creative inventor with unbridled enthusiasm for a new idea, Bill immediately put on a hat called “enthusiasm.” He would listen, express excitement where appropriate and appreciation in general, while asking a few rather gentle and not too pointed questions. A few days later, he would get back to the inventor wearing a hat called “inquisition.” This was the time for very pointed questions, a thorough probing of the idea, lots of give-and-take. Without a final decision, the session was adjourned. Shortly thereafter, Bill would put on his “decision” hat and meet once again with the inventor. With appropriate logic and sensitivity, judgment was rendered and a decision made about the idea. This process provided the inventor with a sense of satisfaction, even when the decision went against the project—a vitally important outcome for engendering continued enthusiasm and creativity.
In 1994, HP’s sales in computer products, service, and support were almost $20 billion, or about 78 percent of the company’s total business. In 1964, our sales totaled $125 million and were entirely in instruments. Not a penny was from computer sales. This represents a remarkable transformation of our company and its business. It would be nice to claim that we foresaw the profound effect of computers on our business and that we prepared ourselves to take early advantage of the computer age. Unfortunately, the record does not justify such pride. It would be more accurate to say that we were pushed into computers by the revolution that was changing electronics.
Several years later, at a gathering of HP engineers, I presented Chuck with a medal for “extraordinary contempt and defiance beyond the normal call of engineering duty.” So how does a company distinguish between insubordination and entrepreneurship? To this young engineer’s mind the difference lay in the intent. “I wasn’t trying to be defiant or obstreperous. I really just wanted a success for HP,” Chuck said. “It never occurred to me that it might cost me my job.” As a postscript to the story, this same engineer later became director of a department . . . with his reputation as a maverick intact.
The fundamental basis for success in the operation of Hewlett-Packard is the job we do in satisfying the needs of our customers. We encourage every person in our organization to think continually about how his or her activities relate to the central purpose of serving our customers.
Noel, a key member of our top-management team, was a strong advocate for helping the customer, so much so that he wanted our sales engineers to take the customer’s side in any disputes with the company. “We don’t want you blindly agreeing with us,” he’d tell them. “We want you to stick up for the customer. After all, we’re not selling hardware; we’re selling solutions to customer problems.” Noel stressed the importance of customer feedback in helping us design and develop products aimed at real customer needs. He also insisted that our salespeople never speak disparagingly of the competition. This reflected our feeling that competitors should be respected, the type of respect that existed between General Radio and HP when Bill and I were starting out.
“More for less” became the goal for each new LaserJet model. This objective reveals a lesson learned from our experience with calculators. For many years we continued to introduce increasingly sophisticated calculators with greater capabilities at greater cost to consumers. Meanwhile, our competitors were offering basic features at a lower price. For the mass market, basic features were sufficient, and the lower-priced models decreased HP’s calculator market share. The sophisticated HP calculators sold to customers who needed more advanced capabilities—but we lost a large portion of the marketplace. With LaserJet printers, we decided that each revision would offer our customers greater capability at a lower price than its predecessor.
Kenzo Sasaoka, our manager in Japan, and he said that I had shown him the way—that gains in quality come from meticulous attention to detail and every step in the manufacturing process must be done as carefully as possible, not as quickly as possible. This sounds simple, but it is achieved only if everyone in the organization is dedicated to quality.
Especially in a technical business where the rate of progress is rapid, a continuing program of education must be undertaken and maintained.
Another requirement is that a high degree of enthusiasm should be encouraged at all levels; in particular, the people in high management positions must not only be enthusiastic themselves, they must be able to engender enthusiasm among their associates. There can be no place for halfhearted interest or halfhearted effort.
Thus, we made an early and important decision: We did not want to be a “hire and fire”—a company that would seek large, short-term contracts, employ a great many people for the duration of the contract, and at its completion let those people go. This type of operation is often the quickest and most efficient way to get a big job accomplished. But Bill and I didn’t want to operate that way. We wanted to be in business for the long haul, to have a company built around a stable and dedicated workforce.
Growth also affected the size and nature of company picnics. Bill and I considered picnics an important part of the HP Way, and in the early days we had an annual picnic in the Palo Alto area for all our people and their families. It was a big event, one largely planned and carried out by our employees themselves. The menu consisted of New York steaks, hamburgers, Mexican beans or frijoles, green salad, garlic French bread, and beer. The company bought the food and beer. It became customary for the machine shop people to barbeque the steaks and burgers, with other departments responsible for other parts of the menu. Bill and I and other senior executives served the food, giving us the opportunity to meet all of the employees and their families. In the early 1950s the company bought a parcel of land, called Little Basin, in the redwood country about an hour’s drive from Palo Alto. We converted part of it into a recreation area, large enough to have a picnic with two thousand people or more. We also made it available year around for our employees and their families to go overnight camping. This was such a popular benefit that we decided, later on, to duplicate the idea in other parts of the world where we had concentrations of HP people.
The underlying principle of HP’s personnel policies became the concept of sharing—sharing the responsibilities for defining and meeting goals, sharing in company ownership through stock purchase plans, sharing in profits, sharing the opportunities for personal and professional development, and even sharing the burdens created by occasional downturns in business.
In the United States and many other countries, employees participate in stock purchase plans and in cash profit sharing. U.S. employees with more than six months of service are eligible for profit sharing, and each year receive amounts calculated on the company’s pretax earnings. Over the years this payout has been as high as 9.9 percent and as low as 4.1 percent of base salary. Since the company has always been profitable, the program has continued uninterrupted since we started it in the 1950s.
An important responsibility of managers is the selection and training of their potential successors. Management succession is especially critical at the upper levels of an organization, where a manager may be responsible for a wide scope of complex activities involving the expenditure of many millions of dollars and the efforts of many thousands of people.
I have always felt that the most successful companies have a practice of promoting from within.
Today Hewlett-Packard operates in many different communities throughout the world. We stress to our people that each of these communities must be better for our presence. This means being sensitive to the needs and interests of the community; it means applying the highest standards of honesty and integrity to all our relationships with individuals and groups; it means enhancing and protecting the physical environment and building attractive plants and offices of which the community can be proud; it means contributing talent, energy, time, and financial support to community projects.
It took forty years for the company Bill Hewlett and I started in 1939 to reach one billion dollars in annual sales and a major part of that was from inflation. In the 1994 fiscal year that ended last October, we began the year with twenty billion dollars in worldwide sales and added five billion to that by year’s end. This occurred with essentially no inflation. Other technology companies have shown similar growth. Just as it has in the past, our growth in the future will come from new products. In 1994, we spent two billion dollars in new product development. Beginning in 1939 we generated at least six dollars of profit, spread over five or six years, for every dollar spent on new product development. By new products, I mean products that make real contributions to technology, not products that copy what someone else has done. This must be our standard in the future just as it has been in the past.
I had to work very hard at Latin, but the math and science courses were easy because I already knew about as much as the teachers did. I was elected president of my class all four years.
Bill went to a private elementary school, going to and from on a cable car. He did well with numbers and arithmetic but had great difficulty reading. He was thought to be a slow learner when, in actuality, he was dyslexic. But in those days no one knew what dyslexia was. He continued to have trouble reading and writing, and later on, in lecture classes, he couldn’t write notes fast enough to keep up with the lecturer. So, as is the case with many dyslexics, he learned how to listen, to file thoughts and information in a logical form and have them readily available from memory. “This procedure worked particularly well in learning math and science,” he says.
I learned everything I could about possible causes of failure, and I decided to spend most of my time on the factory floor to make sure every step was done properly. It soon became apparent that the instructions the engineering department gave the factory people were not adequate to ensure that every step would be done properly. I found the factory people eager to do the job right. We worked together to conduct tests and identify every possible cause of failure, and as a result, every tube in that batch of twenty passed its final test without a single failure. That was a very important lesson for me—that personal communication was often necessary to back up written instructions. That was the genesis of what became “management by walking around” at the Hewlett-Packard Company.
These miscellaneous jobs made us more sure of ourselves and our skills. They also revealed something we hadn’t planned but that was of great benefit to our partnership—namely, that our abilities tended to be complementary. Bill was better trained in circuit technology, and I was better trained and more experienced in manufacturing processes. This combination of abilities was particularly useful in designing and manufacturing electronic products.
Another benefit from ranching was my friendship with Bill Hewlett. By running the ranches together—as well as the company—Bill and I developed a unique understanding of each other. This harmony has served us well every single day in running HP.
Shortly after my arrival at the Pentagon, I called on all four of the Joint Chiefs in their offices and told them I wanted to work with them and that I needed their help. Bill and I had a deer hunt every year at our San Felipe ranch southeast of San Jose. He and I brought all the food, and we cooked and served the meals and washed the dishes ourselves with the help of our guests. In the spirit of friendship and collaboration, I invited the Joint Chiefs to join us at the deer hunt in 1969. They came and each got a deer. When it was time to wash the dishes, they rolled up their sleeves and helped us. That hunt helped establish a good rapport with the Joint Chiefs.
Before I went to Washington, even the people who encouraged me to go warned me that a career in business would ill prepare me for the frustrations of government bureaucracy. And they were right.
When i think of the phenomenal growth of the electronics industry over the last fifty years, I realize how fortunate Bill Hewlett and I were to be in on the ground floor. But it reminds me of a story I like to tell on myself. In my sophomore year at Stanford I took a course in American history and had the opportunity to study the westward movement beginning with the early pioneers and continuing throughout the nineteenth century. I remember lamenting that I had been born one hundred years too late, that all the frontiers had been conquered, and that my generation would be deprived of the pioneering opportunities offered our forebears. But in fact, we went on to make breathtaking advances in the twentieth century.
What I got out of it
Some incredible business lessons from one of the original silicon valley companies that started it all