Thursday Edition

dispatches from the new world of work

In Search of Excellence at (Almost) 25 ... and Standing Tall

In Search of Excellence will be 25 next year—believe it or not. A few days ago a Web posting suggested that Bob Waterman and I had fudged the data in the book.

It's simply not true.

But if that perception is rumbling around in cyberspace, it's all my fault.

I did an interview on the book with my great pal Alan Webber, Fast Company founder, a couple of years ago. I made the wretched mistake, in casual conversation, of saying we'd "fiddled the data" for In Search of Excellence.

What I meant had nothing to do with "fudging," or "fiddling," but was a comment only on the differences between our methodology for company selection and that of Jim Collins in Good to Great. Jim apparently had no prior convictions about which companies he'd examine, and created his list by applying certain financial criteria to a huge company database—and sight unseen, a set of superb performers emerged. By that standard, Bob Waterman and I did it "backwards." We were enamored of the "excellence idea," wanted to write about it, and thence sought initial "excellent company" nominations based on McKinsey and academic and corporate experts' subjective evaluations; only after getting a "subjective" list of nominees did we apply the financial screens that caused any number—such as GE (this was pre-Welch)—to drop off the list. Thus, by fiddling I simply meant that we hadn't followed a pure model of starting from a big list and using only financial data to extract unforeseen winners.

(Fact is, any like process is about 90% subjective—e.g., if you use-juggle different data screens, different years, you will get wildly different results/lists.)

For what it's worth, Bob and I subjected our subjectively determined candidates to six tough financial hurdles (see In Search of Excellence, page 22 et seq.), three representing growth, three representing absolute financial returns. Growth measures: compound asset growth; compound equity growth; average ratio of market value to book value. The "absolute" measures were: average return on total capital; average return on equity; average return on sales. We did our research in 1980, and arbitrarily used data covering 1961–1980. To qualify, a company had to have been in the top half on at least four of the six measures for the full 20-year period. Most handily exceeded this standard, but 19 of our original 62 company nominees dropped out, and we concentrated our research on the remaining 43.

Far more interesting, I think, is that given our subjective nomination process, we ended up examining companies that, in 1980, virtually no one had looked at. Absurd as it may seem, these "stealth" "cool" companies, circa 1980, included: Emerson Electric, Texas Instruments, Hewlett-Packard (then a $1-billion firm), Frito-Lay/PepsiCo, Johnson & Johnson, 3M, Caterpillar, Marriott, McDonald's, Intel, Disney, Delta Airlines, and, yes, little Wal*Mart.

While I'm on the topic of In Search of Excellence and retrospective perceptions thereof, I'll deal with the second "charge" against the book; namely, that several of "our" companies "failed." (For some wholly unknown reason, some people say "most of" "our" companies failed????) To be sure, the likes of Wang and Atari and Kmart are today embarrassments. Nonetheless, the overall performance of "our" firms has been little short of stunning. In 2002, on the 20th anniversary of the book, forbes.com held our publicly traded companies up to a high-amp searchlight:

One remarkable fact about In Search of Excellence remains: Its list of companies have held up quite well over time. The book, which our panel of experts recently voted the most influential business title in the last 20 years, focuses on 43 "excellent" companies. The list contains just a few arguably embarrassing picks, Atari and Wang Labs being the most prominent. But overall, the companies Peters and Waterman called excellent have easily outperformed the market averages any way you slice it.

In Search of Excellence didn't name the biggest companies and ride with winners: In 1982, when the book was published, just three of the 43 companies ranked among the top 25 by sales on The Forbes 500s. And just 22 of the 32 public companies were among the 500 largest. Those 22 ranked, on average, 125th on The Forbes 500s by sales.

Over the years, the companies grew. By 2002, 24 of the firms were among the largest 500 public companies, with an average Forbes 500s sales rank of 99.

The authors picked big companies considered "innovative and excellent" in a variety of industries that had shown strong growth and profitability between 1961 and 1980. The book doesn't purport to be an investment guide, but investing in these excellent companies would have been a very wise choice both in the short run and the long run.

Over a five-, 10- or 20-year period, the Excellence Index—an unweighted basket of the 32 public companies among Peters and Waterman's 43—substantially outperformed the Dow Jones Industrial Average and the broader S&P 500. Since October 1982, when the book was published, the companies on the authors' list earned an average total return of 1,305%, or 14.1% annually. This return outdistanced the DJIA companies, which earned an average annual return of 11.3%, and the S&P, whose companies earned an average annual return of 10.1%.

In other words, if you invested $10,000 in the Excellence Index 20 years ago and then did nothing at all, you would have $140,050. An equal investment in the Dow would have yielded just $85,500.

The Excellence index gets a boost from star performers such as Wal*Mart Stores and Intel. But its median company performance also easily bests the averages for each of the five-, 10- and 20-year periods.

Some might assume it easy to pick 30 or 40 companies that would outperform the Dow. But precious few mutual fund managers do it—even though that's their job and they can change their mix of companies at will. ...

Mistakes in In Search of Excellence? Absolutely. Things I'd say differently? Absolutely. But overall ... coulda been a lot worse. (And, boy-o-boy, do I ever wish I'd invested in "our" companies in 1982! Frankly, I considered it, but decided that such a move would destroy my credibility.)

Tom Peters posted this on 11/24/06.

Comments

Tall indeed! And while your unique legacy shall be entrenching "free enterprise" or some such worldwide like it has never been done before - I'm left with lifting weights and running and trying to avoid taxes ... while the "2007 Summer of Love" mantra has its grip on me [80 IQ after 4-mile run].

Meanwhile in '07 Trevouuur tries to emerge from Chapters' 11-19 bankruptcy and to settle dozens of lawsuits taken forward by rabid former football hooligans who somehow earned J.D.'s - and are on to his manifesto of "give all the money to front-liners."

Plus I'm getting no where with my pet peeve of "... when an olde girlfriend sneaks into my house late at night and slaps my face ..." ... is just me?

Posted by sean_summer_of at November 24, 2006 6:05 PM

Personally, I'm still stunned by figures! I mean, how many companies have been able to keep those rates after such a long time? How can you maintain such a success and keep a healthy rotation index? -team should change, shouldn't it? So, is it all about culture, values, "the company's way of life"?...

Posted by Pachi Lanzas at November 25, 2006 7:30 AM

Tom

Donâ€™t beat yourself up. You do not have to justify anything about the content of ISOE â€“ it is wonderful. In 1982 ISOE was THE ONLY book that made the subject of management remotely interesting to me compared to the boring dross I had read up to that point about management. So what if it has some mistakes? â€“ That just adds to the rich content and the charm of the book. George Bernard Shaw said â€˜A life spent making mistakes is not only more honourable but also more useful than a life spent doing nothingâ€™

Please keep making â€˜mistakesâ€™. If it were not for your writing I think management writing today would frankly still be full of that boring stuff we all know is only read by academics and leaves the everyday manager who is up to the their neck in the â€˜muck, blood and bulletsâ€™ completely detached - cold and uninspired. The â€˜expertsâ€™ say you â€˜popularized management.â€™ I would say you brought management theory from â€˜brain deathâ€™ to life, through simplicity.

ISOE will be your immortal gift to the world of management. Those who â€˜knockâ€™ your efforts to change the world of management need first to examine their own contribution.

Posted by Trevor Gay at November 25, 2006 5:19 PM

The important things about In Search of Excellence have nothing to do with whether the companies studied are doing well today. The book did not pretend to be a scientific study and it did not pretend it was picking companies for the ages.

The context is important. Japanese management, Japanese companies, and Japanese methods were ascendant. Books and articles called for American companies to act more Japanese, usually without any discussion of cultural differences. There was even talk that Japan would take over the economic world, leaving America in the dust.

In Search of Excellence was a look by two savvy consultants from the world's most revered consulting firm at what American companies were doing right. Another excellent book, The Art of Japanese Management had carried a similar message about a year before, but the stars aligned for In Search of Excellence and it became a best seller.

In Search of Excellence did what it set out to do: showed that there were American companies doing good things and describing what those things were. The book also accomplished two other things.

In Search of Excellence, along with The One Minute Manager, proved that a business book could be a best seller in the general market place.

In Search of Excellence also did something groundbreaking and important. It has become Tom's enduring legacy (since Bob Waterman went on to other pursuits) to establish the importance of enthusiasm, energy, humanity and spontaneity as counter and counterpoise to the "plan-the-error-out-of-it" school of management.

I think Tom's legacy, starting with In Search of Excellence, is that he changed the nature of the way we talk about management. That is no small thing and it has nothing to do with how the companies for In Search of Excellence were selected or how they have fared since the book was published.

Posted by Wally Bock at November 26, 2006 5:23 PM

Tom, it is amazing how the fundamentals you were guided by in creating that list, have been documented in Forbes over 20 years later.

More importantly the results of those companies in that, have proven themselves. That is timeless and holds relevance today.

Posted by Steve at November 26, 2006 7:40 PM

ISOE rocks! TP rocks!

I love this quote (dunno who said it...)

â€œExcellence can be obtained if you:
...care more than others think is wise;
...risk more than others think is safe;
...dream more than others think is practical;
...expect more than others think is possible.â€

Posted by K.Sriram at November 27, 2006 1:17 AM

K.Sriram, never seen the quote. Fantastic!

Posted by tom peters at November 27, 2006 8:17 AM

Wally, I frankly agree. I refuse to be measured by whether or not IBM's top bosses made the right calls over the last 25 years. I only "stoop to" this sort of thing on rare occasion. And I am analytic enough to be annoyed when an intelligent person says something like,"Well you know most of their companies had failed in 3 years".

Fact is we did what we did, the methodology was good enough for what the academics call "exploratory research," and with some luck we were able to play a role in shifting the nature of the debate over what makes for effective management of a Girl Scout Troop, small restaurant, or Big Co.

Frankly, Bob and I had good, plain fun talkin' to the folks we talked with and then writing and talking about the results.

It's a lot of fun to talk about treating people right, for example. And then, joy of joys, to actually do it. And MBWA is a lot more fun than cubicle imprisonment ... and it works.

Thanks for your comment. Made my day & week & ..

Posted by tom peters at November 27, 2006 8:26 AM

Thanks for the clarification Tom. I was confused by that Fast Company interview too.

Posted by kempton at November 27, 2006 1:31 PM

Okay. This is one Iâ€™ve been waiting forâ€¦release the hounds!

Iâ€™ve heard the argument that In Search of Excellence is out of date, or isnâ€™t â€œcredible,â€ etc. (especially since the FC article/"confessional). Iâ€™ve heard about the companies that didnâ€™t remain â€œexcellent.â€ Iâ€™m glad Tom spent time on it. I posted about it today, but hereâ€™s my quick take. Candidly, I was a little ticked off about what Tom said in the Fast Company article because it was too casual a comment for the great work he and Waterman did. The principles are still relevant. Could anyone point to one of the eight basic principles and call it generally irrelevant? Not without an agenda they couldnâ€™t.

The basic principles have always been relevant. The problem is that companies lose their way and drift away from the principles. The drift can come from a dozen different directions: ego, politics, bureaucracy, contentment, lack of ability to execute on those principles, etc.

Thatâ€™s often what makes the company (and management) irrelevant, not the principles themselves. Or, they look for management 201, 301, 501, 601, and forget â€œ101.â€ The world of management writing in the business world is flooded with hype and easy answers. There are only a handful of business books over the last fifty or sixty years that have made a permanent impact on the way we talk about, and do, business; they changed our vocabulary. In Search of Excellence was one of them. Thanks for the post, Tom. My guess is that itâ€™s probably been on your mind for a while, but difficult to do without sounding defensive or self-promoting. I, for one, believe it was long overdue.

Posted by steve smith at November 27, 2006 3:58 PM

The reaction to the FC article and your post on it reveal an entire host of social skews/prejudices that float around the concept of "management" in the U.S.

The core confusion happens, I think, around the idea that "management" = finance. Mainstream finance people gravitate towards the easily measurable and so they tend to ignore those things that aren't well-clarified by the numbers alone. Finance innovators tend to overshoot in the other direction; they pursue, Skillingfully, meaningless measures or make up numbers to support a direction they want or need or profit from politically.

The authors of ISOE always seemed to me to be exhibiting THE CORE SKILL of management -- pattern recognition...and not math. Find what you define as "excellence" (or another attribute); find a host of examples; study them to see how they got to that point; look for similarities and contrasts.

Finance has become even more politically powerful since 1981-2, and its particular limiting quirks get imposed on the practice of management now more than ever. Insetad of realizing that good management has a good chance of making good money, operations try to make good money and hope that means good management (a cargo cult if there ever was one).

How telling about our national struggle to adequately manage large organizations that the actual management techniques TP and Waterman applied to the study of management is faulted as not enough like bookkeeping or stock-picking, activities that are somehow mis-identifed as management.

The harder selection techniques Collins used are super -- but doomed to be made irrelevant by evolutionary changes. ISOE is every bit as significant now as it was then -- perhaps not all the details, but as a road map to how to do your own pattern recognition. THAT'S timeless.

Posted by jeff angus at November 28, 2006 10:45 AM

Jeff, agree. The fact is that Bob and I only ran the damn numbers to keeep the quant weenies happy. (Frankly, my reaction to the forbes.com analysis was mostly amusement.)

Also agree that from management to microbiology to baseball (funny I should mention that), pattern recognition is primo.

I've long been a fan of the quote from ** (**someone), "He knew the price of everything and the value of nothing"--or something to that effect.

(Jeff, you'd also appreciate this: the brief Colts mention at the end of this Post has gotten me in touch with one of those old Colts--God bless the Web!!)

Posted by tom peters at November 29, 2006 2:16 AM

Jeff: Whoops. The reference at the end of that last Comment was to Sunday's Pats game Post--since it's you I got into the sports mind frame.

Posted by tom peters at November 29, 2006 2:18 AM

Tom:
I have great memories of Lenny Moore ruining my childhood Rams, of Ray Berry looking so unimpressive in every way but getting the job done like clockwork, running into Big Daddy at a movie theatre Pro Bowl week and him being such a gracious behemoth; I hated those guys for beating us, but you had to respect their precision and improvisation.

I'm pretty sure Price/Value quote is Wilde (?from Earnest perhaps?).

Posted by jeff angus at November 29, 2006 11:48 AM

I'm pretty sure Price/Value quote is Wilde (?from Earnest perhaps?).

Sounds right, Jeff. On the other hand Wilde is a pretty good answer as the source of any decent quote. If you're declaiming in public, and want to avoid "anonymous," just say Wilde or Churchill (Twain?) and you can't be far off.

Posted by tom peters at November 29, 2006 12:13 PM

"A cynic is a man who knows the price of everything and the value of nothing" (Oscar Wilde).

Hey, I'm an accounting prof and I think there is too much emphasis on the numbers. Measurement is a useful tool but like any tool it must be used properly.

Posted by Scott Lane at November 29, 2006 5:12 PM

Tom:

Congratulations on the 25th anniversary of In Search of Excellence. I read it when it first came out and still refer to many of the items today. I particularly liked "Ready, Fire, Aim." I use that almost everyday in my marketing practice. I don't mean there is no planning, but many times it is necessary to just get off of the dime and make a move. Once you are underway, there is plenty of room for "course correction." It ties into a comment by a former Chairman of IBM, T. Vincent Learson who said, "It's not always necessary to make the right decision, but it is necessary to make the decision right."

Keep up the good work.

Bill Noonberg

P.S. Although I live in Northern California now, I also grew up in Baltimore. But I was a rival up the road at Loyola College.

Posted by Bill Noonberg at December 2, 2006 1:38 PM

It's not an exaggeration to say that this book changed my life. It was the first hardcover book (other than textbooks) that I bought. I think it cost me $25 Canadian dollars, an outrageous amount given my paltry salary in those days. After I had read it, underlined it, folded over pages, marked pages with paperclips and read it 4 more times, I drew the attention of our Board of Directors to the lessons in it. They bought copies for all its executives and launched a initiative to become an "Excellent" company. None of those copies were ever opened to the best of my knowledge, and the initiative was a failure. I moved on to greener pastures.

A few years later, I was able to get Tom to autograph it at a seminar in Calgary. It remains a treasured part of my large library, and is still a key reference tool for me today.

Happy 25th, Tom and Bob.

Posted by Brian Tingley at December 3, 2006 9:34 PM

In Search of Excellence was a book that was designed to make you think and ask what is excellence. For that it was a success. As for the companies that failed I still think of People's Express. Here was a company that was a success but then failed to build on the sucess. In my opinion, we learn as much from the failures as the success stories. So in many ways it still is a great book.

Posted by Stanley Capela at December 4, 2006 7:31 AM