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TheGreatest

BUSINESS

DECISIONS

ofAllTimeHOWAPPLE,FORD,IBM,ZAPPOS,ANDOTHERSMADERADICALCHOICESTHATCHANGEDTHECOURSEOFBUSINESS.ByVerneHarnishandtheEditorsofFortuneForewordbyJimCollins

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ACKNOWLEDGMENTS

Whenyoudelveintothegreatdecisionschronicledinthesepages,you’llfindthatinmostinstancesitwasthepeople involved that reallymattered.The sameholds true forproducing thisbook.First,wewant tothankFortunemanagingeditorAndySerwer,who,displaying thevisionandentrepreneurialspiritwe’velong admired him for, green-lighted this project in the same meeting in which we pitched it and thenprovided support all along theway.Fortune art directorEmilyKehe,workingwithTime Inc.’s talentedAnne-Michelle Gallero, applied their usual elegant sense of style to the design. Carol Gwinn, ourcopyeditorparexcellence,usedhersuperblanguageskillstosaveourselvesfromourselves.SteveKoeppandJoyButtsatTimeHomeEntertainmentInc.,thebook’spublisher,workedcreativelybehindthescenestomakethisprojectareality,andforthatwe’retrulygrateful.AndweextendourthanksandadmirationtoJimCollinsforprovidingsuchaninsightfulforewordtothebook.Last,abigbowtothewritersandeditorsonFortune’sstaffwhousedtheirin-depthknowledgeofbusinessandtheirnonpareilwritingskillstomakethisbookwhatIhopeyou’llfindtobeawonderful,informativeread.

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TODECISION-MAKERS

WHOKEEPMAKINGTHETOUGHCALLS

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TABLEOFCONTENTS

ForewordBYJIMCOLLINS

IntroductionByVERNEHARNISH

Chapter1AppleBringsBackSteveJobsByADAMLASHINSKY

Chapter2HowFreeShippingSavedZapposByJENNIFERREINGOLD

Chapter3WhySamsungLetsItsStarsGoofOffBYNICHOLASVARCHAVER

Chapter4AtJohnson&Johnson,theShareholderComesLastBYTIMOTHYK.SMITH

Chapter5WhyDaydreamingPaysOffBigat3MBYGEOFFCOLVIN

Chapter6HowIntelGotConsumerstoLoveChipsBYDAVIDA.KAPLAN

Chapter7Jack’sGECathedralBYDAVIDA.KAPLAN

Chapter8BillGatesDecidestoTakeaWeekOffBYDAVIDA.KAPLAN

Chapter9Softsoap’sBlockingDecisionBYBRIANO’REEFE

Chapter10ToyotaPursuesZeroDefectsBYALEXTAYLORIII

Chapter11ExtremeCustomerServiceatNordstromBYGEOFFCOLVIN

Chapter12TataTakestheStingoutofaPainfulSituationBYGEOFFCOLVIN

Chapter13BoeingBetsBigonthe707BYADAMLASHINSKY

Chapter14IBM’sOperationBearHugBYADAMLASHINSKY

Chapter15Wal-MartCreatesthe6a.m.MeetingBYHANKGILMAN

Chapter16EliWhitney:IsYourBusinessinTrouble?Pivot!BYGEOFFCOLVIN

Chapter17TheHPWayBYDAVIDA.KAPLAN

Chapter18HenryFordDoublesWorkers’WagesBYALEXTAYLORIII

AbouttheAuthorsGEOFFCOLVIN,HANKGILMAN,DAVIDA.KAPLAN,ADAMLASHINSKY,BRIANO’KEEFE,JENNIFERREINGOLD,TIMOTHYK.SMITH,ALEXTAYLORIII,NICHOLASVARCHAVER

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FOREWORD

ByJIMCOLLINS

Wetendtothinkthatdecisionsareverymuchabout“what.”ButwhenIlookatmy research notes or at interview transcripts from the executives we’veinterviewed,onethemethatcomesthroughisthat theirgreatestdecisionswerenot“what?”but“who?”Theywerepeopledecisions.Fundamentally,theworldisuncertain.Decisionsareaboutthefutureandyour

placeinthefuturewhenthatfutureisuncertain.Sowhatisthekeythingyoucandotoprepareforthatuncertainty?Youcanhavetherightpeoplewithyou.Let’stakeanonbusinesscaseandabusinesscasetoillustratetheimportance

of thepeoplepiece. In1978,JimLoganandhispartner,MugsStump,becamethe first people to climb theEmperor Face ofMountRobson in theCanadianRockies.Andto thisday,nearlyeverybodyelsewho’s triedthefacehaseitherdiedorfailedontheroute.WhenIaskedLogan,“WhywereyouabletodotheEmperorFace?”hesaid,“BecauseImadethesinglemostimportantdecision,Ipickedtherightpartner.”Hetoldmethattherewasthisoneplace,the“deathzone,”andoncetheywent

aboveit,theyreallycouldn’tretreat.Theyweregoingtoeithersummitordie—no going back. They didn’t know what they were going to find beyond thatpoint,andtheydidn’tknowwhattheweatherwasgoingtobe.Andso,therefore,what’syourgreatesthedgeagainstuncertainty?Havingpeoplewhocanadapttowhateverthemountainthrowsatyou.Inbusiness, let’s take the storyof a companyheading into a veryuncertain

world: Wells Fargo in the late 1970s. Everybody knows the storm ofderegulationisgoingtohit.Butnobodyknowspreciselyhowit’sgoingtoshakeout.Whenisitgoingtohit?Whatexactformisitgoingtotake?Whatimpactisitgoingtohaveonthebankingindustry?DickCooley,chiefexecutiveofWells

Fargoatthattime,wasveryclearwithuswhenwedidourresearch.Hesaid,inessence, I did not knowwhatwewere going to have to do to prevail throughderegulation, because it was an uncertain set of contingencies. Too many ofthem. But I did know that if I spent the 1970s building a team of the mostcapableexecutivespossible,theywouldfigureoutwhattodowhenderegulationhit.Hecouldn’tlaydownaplanforwhatwasgoingtohappen,becausehedidn’tknow what was going to happen. So his decision was actually a bunch ofdecisions about getting the peoplewho could dealwithwhatever deregulationturnedouttobe.Of course, once you have great people in place, you still have to make

decisions.Greatdecisionsbeginwithreallygreatpeopleandasimplestatement:Idon’tknow.Theresearchevidenceonthatisveryclear—thattheleaderswhoendedup setting things inplace that produced extraordinary results over time,andaseriesofgreatdecisionsovertime,reallywereverycomfortablesaying“Idon’tknow”untiltheyknew.And really, they were just being honest. I mean, which is best? Lying—

meaningsayingyoudon’tknowwhenyou’vealreadymadeupyourmind?Orpresumingtoknowwhenyoudon’tandthereforelyingtoyourself?Orspeakingthetruth?Whichis:“Idon’tyetknow,butIknowwehavetogetitright.”Typicallyincompaniespeopleexpecttheopposite.Theyexpecttheirleaders

to say clearly, “Here’s where we’re headed.” The CEO has already made adecision, andhisdefinitionof leadership is togetpeople toparticipate so thattheyfeelgoodaboutthedecisionhe’salreadymade.That’s wrong, because you’re ignoring people who might know a lot that

wouldbeusefulinmakingthedecision.You’reacceptingtheideathatbecauseyou’re in the CEO seat, you somehow know more or you’re smarter thaneveryoneelse.Butwhatyou’rereallydoingiscuttingyourselfofffromhearingoptionsorideasthatmightbebetter.Tocreateanatmospherewhereideasflowfreely,youhavetorecognizethat

yourpositioncanbeahindrancetogettingthebestinformation.Andsocanyourpersonality. My own greatest enemy is my personality—I can convince thepeopleonmyteamofapointofview.I’molderthantheyare.I’vedonemoreresearchthantheyhave.Iknowmorethantheydo.Icaninfluencethemperhapstoomuch and therefore not get the best answers. Sowhenwewere doing theresearchforGoodtoGreat,Ibuiltaculturethatbeganwithdisagreements,thatsetpeopleuptodisagreewitheachotheranddisagreewithme.I triedtoincreasewhatIcallmyquestions-to-statementsratio.I learnedthis

fromtheGoodtoGreatleaderswewerestudying.TheywerejustmarvelousatignitingdialogueanddebatewithSocraticquestions.AndItriedtomakeheroesout of those on my team who identified flaws in my thinking. At the nextmeetingImightsay,“IreallywanttogiveLeighorBrianorStefaniecredit.Shereallypushedmythinking,andIwasn’tlookingatthisright.”Ilookedforpeoplewithastreakofirreverenceandindependentthought.One

ofmy favorite researchers is a youngmanwhowent toPrinceton,majored inmedievalliterature,andthenjoinedtheMarineCorps.Now,that’sindependentthinking.Iwantedhimonmyteambecausehe’snotgoingtocarewhatIthink.Thereallycriticalpartcameindesigningtheresearchsothatforeverypiece

ofthepuzzle—foreverycase,everyanalysis—someoneontheteamknowsthatpieceaswellasIdoorbetter.Thiswasakeymechanismtoreducetheoddsthatmyauthorityandstrongpersonalitywouldoverridetheevidence.And I really want to underscore something. Decision-making is not about

consensus. It depends on conflict, and that’s the key. What we found incompanies that make good decisions is the debate is real. When ColmanMockler atGillette is trying to decidewhether to gowith cheaper, disposableplastic razors or more expensive ones, he asks marvelous questions. He’sSocratic. He pushes people to defend their points of view. He lets the debaterage.Andthisis,bytheway,notanisolatedcase.Wefoundthisprocessinallthe companieswe studied,when theymade a leap to greatness.The debate isreal.Itisreal,violentdebateinsearchofunderstanding.Then,intheend,theleadermakesthecall.It’sconflictanddebateleadingto

anexecutivedecision.Nomajordecisionwe’vestudiedwasevertakenatapointofunanimousagreement.Therewasalwayssomedisagreementintheair.Ourresearchshowedthatbeforeamajordecision,youwouldseesignificant

debate.Butafterthedecision,peoplewouldunifybehindthatdecisiontomakeitsuccessful.Again,andIcan’tstressthistoomuch,itallbeginswithhavingtherightpeople—thosewhocandebate insearchof thebestanswersbutwhocanthen set aside their disagreements and work together for the success of theenterprise.Creatingadebateiscrucial,but thereareotheringredientsthat leadtogreat

decisions.Mostpeoplestartwiththeoutsideworldandtrytofigureout,Howdowe adapt to it? Greatness doesn’t happen that way. It starts with an internaldrive.Andthere’sareallykeyquestionwithbigdecisions:Whatisthetruthofthissituation?Thereare threeparts to thisquestion.Thefirst is internal:Whatareourrealcorevaluesandourrealaspirations?Imean,whatdowereallystand

for?Whatdowereallywanttogetdone?Whatisinternallydrivingus?Ibelievethat it is the internal imprint that drives all the action.Everybodyharps about“It’s all about responding to the outside world.” But the great companies areinternallydriven,externallyaware.So the first question is, What is really driving us internally? The second

questionis,Whatisthetruthabouttheoutsideworld?Andinparticular,Whatisthetruthabouthowitoperatesandhowitischanging?Andthethirdquestionis,Whenyouintersectourinternaldrivewithexternal

reality, what’s the truth aboutwhatwe can distinctively contribute potentiallybetterthananyoneelseintheworld?Now, let’s lookatBoeing’sdecision tobuild the707.What are the factors?

First,youhavethevaluesofBoeing,whichhadtodowith“We’readventurers,forgoodness’sake.Welikedoingbig,adventurousthings.We’drathernotbeinbusiness than not do that.” And second, the aspiration to make Boeing evengreater than it was. Those are internal drives. They had nothing to do withadaptingtotheoutsideworld.Butthesecondquestion—Whatwasthetruthabouttheoutsideworldandhow

itwas changing?—well, thewarwas over. Therewasn’t going to be asmuchdemand for bombers. And there was a major change in technology, frompropellers to jets. And the demand for military aircraft was going to declinerelativetodemandforcommercialaircraft.Sothat’showtheoutsideworldwaschanging.On toquestionNo.3:What couldBoeingdobetter thananyoneelse in the

world? Well, they had jet technology. They’d been building those big stratobombers,theB-47andtheB-52.Theyhadexperience,sotheyknewtheycouldbuild a large-scale jet. Boeing confronted the truth, internal and external, andgraspedthatitcouldmakeadistinctiveimpactbybringingtheworldintothejetage—and that’s when Bill Allen pulled the trigger on the 707. (For more onBoeing’sdecision,seeChapter13.)Nodecision,nomatterhowbig,isanymorethanasmallfractionofthetotal

outcome.Yes,somedecisionsaremuchbiggerthanothers;someareforksintheroad.Butasfaraswhatdeterminesoutcomes,thebigdecisionsarenotlike60of100points.They’remorelikesixof100points.Andthere’sawholebunchofothers thatare like0.6,or0.006.Theyadduptoacumulativeresult.Businessschoolshaveregrettablytaughtusthatit’sallaboutthesingularcasedecision.Another big factor that affects decision-making is psychological. Do you

believe thatyourultimateoutcomesin lifeareexternallydetermined—“Icame

fromacertainfamily,Igottherightjob”?Ordoyoubelievethathowyourlifeturnsoutisultimatelyuptoyou,thatdespiteallthethingsthathappen,youareultimatelyresponsibleforyouroutcomes?Consider the airline industry, and thinkof all the events and factors outside

managerialcontrol thathavehit itsince1972:fuelshocks, interest ratespikes,deregulation, wars, and 9/11. And yet the No. 1 performing company of allpubliclytradedcompaniesintermsofreturntoinvestorsforthe30-yearperiodfrom1972 to2002 isanairline.According toMoneymagazine’s retrospectivelook in2002,SouthwestAirlinesbeat Intel,Wal-Mart,GE—allof them!NowwhatwouldhavehappenedifthefolksatSouthwesthadsaid,“Hey,wecan’tdoanythinggreatbecauseofourenvironment”?Youcouldsay,“Yeah, theairlineindustryisterrible.Everyoneinitisstatisticallydestinedtolosemoney.”ButatSouthwesttheysay,“Weareresponsibleforourownoutcomes.”Ofcourse,youcan’t entirelycontrolyourowndestinywithgooddecisions.

Luckisstillafactor.Butoverallourresearchisshowingthattheprimaryfactorsresidemoreinsideyourcontrol thanoutside.Yes, theworld throwsa lotatus,but the fundamental assumption needs to be like Southwest’s—the ultimateresponsibilityforyourdestinylieswithyou.Thequestionisnotwhattheworlddoes to you but how you make an impact on the world. Decision-making isultimatelyacreativeact.Our research shows one other variable to be vitally important for both the

qualityofdecisionsand their implementation. Ifyou lookatsomeof thegreatdecisionsinbusinesshistory,theexecutiveshadthedisciplinetomanageforthequarter-century, not the quarter. Look at Andy Grove deciding to abandonmemorychipsatIntel,BillAllenandtheBoeing707,RegJoneschoosingJackWelchtorunGE, theAppleboarddecidingtorehireSteveJobs,HenryFord’sdecisiontodouble thewagesofhisworkers,DarwinSmithsellingthemillsatKimberly-Clark,JimBurkestandingfirmintheTylenolcrisis,TomWatsonJr.andtheIBM360.Thoseleaderswereveryclearthattheirambitionwasforthelong-termgreatnessofthecompany.JIMCOLLINSistheauthorofBuilttoLast,GoodtoGreat,HowtheMightyFall,andGreatByChoice.ThisforewordisbasedontheeditedtranscriptofaninterviewFortuneconductedwithJimCollinsonMakingToughCalls.

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INTRODUCTION

ByVERNEHARNISH

THEDEATHOFSTEVEJOBSgavebirthtothisbook.Letmeexplain.Inthefallof2011,IwasinDelhivisitingRaghooPotini,ourIndiapartnerformyfirm, Gazelles, when our conversation turned to the topic of Jobs and howbrilliantApple’sdecisionwastobringhimbackasCEO.(NameanothermajorcorporationwheretheCEOdepartedforadecadeandwasthenrehired,onlytobringtheorganizationbacktoglory.)Ultimatelythatdecisionledtothecreation—justafewmonthsbeforeJobs’tragicpassing—ofthemostvaluablecompanyintheworld.Wasn’t this one of the greatest andmost unlikely business decisions of all

time?Ifso,whataretheothers?Andwouldn’titbewonderfultogettheinsidestoryonhowthoseindustry-changingdecisionsweremade?A truismof life is that success equals the sum totalof all thedecisionsone

makes. And as Jim Collins suggests in the foreword to this book, it’s thecombinationofthousandsofdecisionsthatleadtogreatness.Yetthereseemtobe a handful of decisions that stand apart from the rest—a few “black swan”moments, to borrow a phrase from Nassim Nicholas Taleb’s groundbreakingbookof the samename.Theyareoften those fateful “bet the farm”moments,whenaCEOcangoleftorright,ornotgoatall.Andthechoicesgreatleadersendupmakingareoftencounterintuitiveandmovecompanies, industries, andevennationsinentirelynewdirections.ThinkingoverthatSteveJobsconversationduringthelongflighthomefrom

India, I decided it was time for someone to pull together all these importantdecisions. I turned to my colleagues at Fortune magazine, where I’m acontributor,andpitched themthe ideaforabook.Tome, itmadesense toaskwriterswhohavelongcoveredthecompaniesandindustriesthatwouldappear

in the book to pen the chapters. They reacted with enthusiasm, and thusTheGreatestBusinessDecisionsofAllTimewasborn.Picking thebestbusinessdecisions is,ofcourse,moreart thanscience.The

search, in a sense, began some 20 years ago. At the time, I was looking forcoursematerialforanexecutiveprogramIhadlaunchedin1991onthecampusofMITwith EdwardRoberts andVince Fulmer.What the program needed, Ifigured, was a curriculum of insightful case studies that would appeal to thehigh-potentialCEOsattendingtheprogram.Whatbetterwaytodothisthanbyfocusing on great business decisions? Over the next two decades I started tocompile a list ofwhat I believe to be someof thebest decisionsmadeby themostsuccessfulcompaniesinhistory.In the end, the 18management decisions thatmade our final list stood out

fromothersbecausetheywerecounterintuitive—theywentagainstthegrainofpopular practice.WhowasAndyGrove to think he couldmake a commoditycomputerchipahouseholdname?Nowwehave“IntelInside.”Whatexecutiveinhisrightmindwouldgivehisemployeestimetodaydream—butthat’sexactlywhat3MCEOWilliamMcKnightdidin1948.Many of these great decisions eventually unleashed a storm of imitation—

Googlenowletsemployeesspendachunkof their timeon theirownprojects,some 50 years afterMcKnight at 3M set the precedent.A few of these ideas,however,likeBillGates’decisiontotakeaweekoffonceortwiceayeartoreadand think (a habit that helpedMicrosoft shift its strategy a number of times)remain largelyuncopied.That doesn’tmean thatGates’ThinkWeek approachmightnotbejustthethingforsomeoftoday’sbusinessleaders.Intheend,allthese great decisions have stood the test of time, having created tremendousvalueaswellaslessonsforrunninganybusiness.At first we attempted to organize the decisions into various buckets. My

company, Gazelles, developed a conceptual framework called the FourDecisions,whichemphasizesthemaincategoriesofdecisionsthatallcompaniesmustgetright.Theyare:People,Strategy,Execution,andCash.Itsoonbecameclearthatitdidn’tmakesensetostuffeachdecisionintooneoftheseconvenientboxes.Wealsothoughtaboutrankingthedecisions,presentingtheminareverseorderlikeaCaseyKasemradiojockcountdownofthetop40hits,butthat,too,seemed arbitrary. The only exceptionwas naming theNo. 1 greatest businessdecisionofalltime,whichwesaveforthelastchapterofthebook.Theharderwe tried to find a way to label these wildly diverse decisions, the more webecamestuck.Intheendwedecidedtoleteachstandonitsownmerit.

Nevertheless,Idohavemytopfivefavorites.Heretheyare,inreverseorder:

•NO.5:GENERALELECTRICJackWelch’sdecisiontogoall-inandfund Crotonville, a first-class training center, set the tone for thousands ofbusinessestocreatecorporateuniversities.ThatdecisionalsohelpeddevelopagenerationofleadersatGEwhohavegoneontoruncountlessothercompanies.

•NO.4:SAMSUNG:ThedecisionbythisSouthKoreanelectronicsgianttwo decades ago to launch an unprecedented sabbatical program, placing staremployees in far-flung places around the globe for a year, continues to driveSamsung’sprominenceasatop20brand.

•NO.3:WAL-MARTSamWalton’sdecisiontolaunchasimpleSaturdaymorningmeeting,forallemployees,inhisfirststorehasledto50yearsofrapiddecision-making,creatingoneofthelargestcompaniesintheworld.

•NO. 2:APPLE The decision to bring back Steve Jobs as CEO of thecompanyhefounded,afteradecade-longabsence,resultedin“thebestworkofhislife”andthemostvaluablepubliccompanyintheworld.

• NO. 1: FORD Henry Ford’s decision to double the wages of hisemployeesmeant thatworkerswereno longerviewedasdrones, tobepaid ascheaplyaspossible,but insteadasvaluableassets. In turn,workerscouldnowafford the very products they were producing. That triggered a consumerrevolutionthatwouldeventuallyhelpcreatethewealthiestnationonearth.Whatyouwon’tfindin thisbookisdeepor, for thatmatter,anyanalysisof

theneuroscienceofdecision-making.FormoreonthattopicreadmycolleagueLudaKopeikina’sbookTheRightDecisionEveryTime:HowtoReachPerfectClarity on Tough Decisions. Kopeikina based her book on research sheconductedon115CEOs.I’vehadherteachhertechniquestotheleadersinourexecutiveprogram.Thedetailsofherresearchandthatofothersarebeyondthescopeofthisbook.I also don’t expect this to be the final answer on the greatest business

decisionsofalltime.Iwanttospurdebateonthetopic.IwantMBAstowrestlewithandanalyzethelist.Iwantotherbusinessleaderstovalidateorcriticizetheselectionsasawayforallofustolearn.Mostofall,Iwantthesedecisionstoigniteandinspireconversationsinboardroomsandcafésabouthowtheymight

apply toone’sownbusiness—and thenhaveyoushareyour thoughtswith therestoftheworld.Iinviteyoutovisitwww.greatestdecisions.comtocontinuethedebateandtonominateyourowngreatdecisions.Wehopethatyouenjoythestoriesinthepagesthatfollowandbenefitfrom

theirsharedinsights.—VerneHarnish

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LET’SBRINGBACKSTEVE

ByADAMLASHINSKY

Severalfamousentrepreneurshavetakenbackthereinsoftheircompanies—MichaelDell,HowardSchultz(multipletimes)—butneverhasthefounderofamajorcompanycashedoutandthenbeenabsentformorethanadecadebeforebeingbroughtbacktosavehisownbaby.Founders,instead,aretypicallyrelegatedtohavingbuildingsandawardsnamedafterthem.Butfortheexistingleadershipessentiallytoadmitthey’vefailedandneedthefounderbackisastounding.InthecaseofSteveJobs,itresultedin“thebestworkofhislife”andcreatedthemostvaluablecompanyintheworld.Sometimesthesedaysboardsandinvestorsaretooquicktojettisonthefounderinfavorofprofessionalmanagement.Butforallacompanymightgainfrombringinginapro,itriskslosingthemagic,energy,andentrepreneurialvigorthatonlyafoundercanbring.—VerneHarnish

HISTORYOFTENAPPLIESagauzylayeroffilmtogreatdecisions.TaketheactionbytheAppleboardofdirectorsin1996tobringbackSteveJobstothe

companyhehadco-founded20yearsearlier.Inthedecadeandahalfbetweenthe return of Jobs and his death in 2011, Apple became the most valuablecompanyintheworld.Sowhoeverwasresponsiblemadeonehellofagoodcall,oneofthebestinbusinesshistory.ThefactsandcircumstancesofJobs’return,however,showthatbehindsome—perhapsall—greatdecisionsisacombinationofgreattimingandgoodold-fashionedluck.ItisimpossibletooverstatejusthowrottenastateofaffairsApplefounditself

induringits20thyearofexistence—especiallygiventhegloriousnarrativeofitsbeginning. A pioneer of the personal computer, Apple had been a computerindustrysuccessstorysincethe1980sonthestrengthofitsMacintoshcomputer.TheMacwas the first consumermachine touse the straightforward icons andcomputermousethatbecameindustrystandards.Undertheguidanceofdivisionhead Steve Jobs, the Mac was simple to use and powerfully marketed. Thefamous“1984”adcampaignAppledebutedatthatyear’sSuperBowl—upstartAppleportrayeditselfastheslayeroftheall-powerfulIBM,thenthedominantforceincomputing—remainsoneoftheadvertisingindustry’sproudestdisplaysof brand and image management. By 1985, when Steve Jobs was madeunwelcome at his own company by the chief executive he had personallyrecruited to run theplace, JohnSculley,Applewaswildlyprofitable,amarketshareleader,andaniconofAmericanentrepreneurialism.In the ensuing years, however, Apple stumbled badly. It expanded into

multiple product areas, from printers to the embarrassing Newton handheldcomputer.Itranabloatedsupplychain,withfar-flungfactoriesandwarehouses.Bloat defined its management ranks as well: Apple was a mishmash ofdysfunctional fiefdoms.“Apple’sstewardswere trying tocoastona reputationthatnolongermatchedupwiththereality,”wrotejournalistAlanDeutschmaninhis book, The Second Coming of Steve Jobs. “And, arrogantly, they weredemanding a premium price for products that no longerweremuch better, ordifferent,fromwhathundredsofotherPCmakerswereoffering.”IfApple’smanagementwasweak, itsboardofdirectorswasn’tmuchbetter.

In1993itreplacedCEOSculleywithApple’sGerman-bornoperationschief,aby-the-numbers executive namedMichael Spindler. Facing a decliningApple,Spindlerin1995triedpeddlingthecomputermakertoSunMicrosystems,adealthatfellapart.AroundthesametimesoftwarebillionaireLarryEllison,aclosefriendofSteveJobs’,consideredbuyingAppleandinstallinghisfriendasCEO.Ellisonneverturnedhistalkintoaction,andin1996theboard,dissatisfiedwithSpindler, turned to one of its own, Gil Amelio, chief executive of chipmaker

NationalSemiconductor.AmelioessentiallyneverhadachanceatApple.Withabackground selling components to other manufacturers, he had no consumerexperience.Hewas, inDeutschman’swords, “theultimatewrongguy.”Applewas outmaneuvered by Microsoft, which succeeded in making its softwarestandardacrosspersonalcomputersotherthanApple’s.Theresultstoldthestory,as Apple turned from cash gusher to money loser. In 1996, Apple lost $816million on $9.8 billion in sales, which were heading in the wrong direction:down11%fromthepreviousyear.ItwasduringthisdarktimethatApple’sboard,alreadyguiltyofbotchingthe

hiring of two CEOs, caught a break—though it nearly fumbled a third time.AmelioconvincedtheboardthatAppleneededtopurchaseasoftwarecompanyin order to gain the intellectual property and talent to replace Apple’s agingoperating system software. Itmade anoffer to a companycalledBe, runby aformerAppleexecutive,Jean-LouisGassée.Inaclassicexampleofoverreach,Gasséewasn’t satisfiedwithApple’soffer, and talksbetween the fallen leaderand the brash startup foundered. Around this time, Garrett Rice, a midlevelexecutiveatanotherSiliconValleycompany,NeXT,contactedatopexecutiveatApplewiththesuggestionthatAppleshouldbuyNeXT.ThefounderofNeXTwasnoneotherthanSteveJobs.HehadstartedthecompanyshortlyafterleavingApple,originallyasacomputermakertargetingtheeducationmarket.NeXThadfizzledasahardwaremaker,however,andwasonitswaytofailinginsoftwaretoo.GarretthadcalledApplewithouttheknowledgeofJobs,andApplestartedtalking to NeXT without anyone on Apple’s board knowing about it.(Interestingly, Garrett left NeXT in 1997, joined Apple six years later, andremainstheretoday.)Inlate1996talkswithBebrokedown,andApplebegannegotiatinginearnest

with NeXT, this time with Gil Amelio central to the discussion. Ameliounderstood the value of NeXT’s software and also of the effect on morale,product vision, and creativity that could come from persuading Steve Jobs torejoinApple.AmelioshouldhavebeenwaryofJobs.Hehadmetwithhim in1994whenAmeliojoinedtheAppleboard,andJobsaskedforAmelio’shelpinhaving himself named Apple’s CEO. Then again, Amelio may have beencomfortedbytheknowledgethatJobshadbeenanotoriouslyfractiousmanagerinhis first stint atApple and thatNeXTwasn’t considered a success.Thoughbrilliantandcharismatic,SteveJobsin1996wasn’tobviousCEOmaterial.What’smore, Jobs appeared to be so indifferent to rejoiningApple that he

refusedAmelio’s request to signanemploymentagreementwith thecompany,

preferringtobeaninformaladviser.Jobsalsodemandedthatalargeportionofthe$427millionApplepaidforNeXTbepaidoutincash—meaningthatJobswas less interested in the long-term incentive of ensuring a successfulacquisitionofNeXTthanhewasingettingpaid.(Jobsdidn’tneedthemoneyatthis point: The initial public offering the previous year of the computer-animationcompanyPixar,which Jobscontrolled,hadmadehimabillionaire.)JobsdidaskforaseatonApple’sboardofdirectors,arequestAmeliodenied.ThedealwasannouncedonDec.20,1996,andweekslaterJobsplayedaminorrole inaMacworldpresentation rememberedmostly fora rambling,disjointedperformancebyAmelio.Whathappenedoverthecourseof1997cuts totheheartof thebrillianceof

the decision to rehire Jobs. Amelio clearly wanted the Jobs magic at Apple,thoughAmelioalsoclearlywantedtokeephisjob.YetshortlyafterJobsbecamean“informaladviser”tohisformercompany,hebeganroamingitshallsasifhewere the boss. It was during this time that he met Jonathan Ive, a youngindustrial designer who the previous year had been named Apple’s chief ofdesign. Jobs admired prototypes Ive was working on, including one for atranslucent,all-in-onecomputer thatwouldbecome the iMac. JobsalsogrilledeveryonehemetonwhattheydidatApple,tryingtotakeameasureoftheplaceafterhavingbeengonesolong.Jobswasn’tanemployeeofApple.(Infact,hewasCEOofPixaratthetime.)

Hewasn’tasignificantshareholder.Hewasn’tevenamemberoftheboard.YettherumormillaroundApplebegantodetectasilentcoupinthemaking.“Soonmuch of Silicon Valley knew that Jobs was quietly wresting power fromAmelio,”wroteWalter Isaacson, the biographer of Steve Jobs. “Itwas not somuchaMachiavellianpowerplayasitwasJobsbeingJobs.”Ameliodidn’thelphimself.Hegaveanotherramblingperformanceamonth

after Macworld, this time at the Apple annual shareholders meeting. By thistime, Apple’s newest board member, former DuPont CEO Edgar Woolard,becamealarmedaboutAmelio.HediscussedAmeliowithJobsaswellaswithsenior executives at Apple. At the time Apple was in continual downsizingmode, andWoolardwas concerned about the company’s ability to achieve itsplan and also about employee morale. In July, after consulting with Jobs,WoolardspearheadedadecisionbytheboardtofireAmelio.WhileWoolardhadnoreasontobesurethatJobswouldstepinasCEO,hemusthavesensedthattheorganizationwasstartingtofollowtheyoungman’slead.ByfiringAmelio,Woolardhadmadeadecision thatwouldeventuallyhelpJobs regainpowerat

thecompany.Inasense,whathedecidedtodo—perhapsallhecoulddoatthatpoint—wasremoveanyobstaclestoSteve’sreturn.EvenafterAmeliohad left, Jobs stillwasunwilling tobecomeCEO,partly

outofconcernthathecouldn’tbeCEOofAppleandPixarsimultaneouslyandpartly because he wasn’t sure Apple would survive. Jobs did agree to joinApple’sboard,however,withoneunusual stipulation:HewantedeveryoneontheboardbutWoolardtoresignsothatJobscouldremaketheboardwithpeoplehetrusted.(WoolardpersuadedJobstokeeponeotherdirector,defenseindustryexecutiveGarethChang,buttheothersallwereshownthedoor.)WithAmeliogone,JobseffectivelybeganrunningApple.FredAnderson,the

company’schieffinancialofficer,becameinterimCEO.ButJobswasincontrol.He handled negotiations with Microsoft that resulted in a $150 millioninvestmentinApple,announcedinAugust,aswellasMicrosoft’scommitmenttocontinuemakingMicrosoftOfficefortheMacintosh.BySeptember,JobshadpurgedtheAppleboardandinstalledahandfuloffriends,includingEllisonandformerAppleexecutiveBillCampbell,intheirplace.Thatmonthheannouncedthathewouldbe“interimCEO,”a title thatwasshorthandedaroundAppleasiCEO.(ItisthefirstknowninstanceofApple’sfetishisticuseofthelower-casei.)Jobswasback,butinasensetheboardstillhadn’tdecidedtobringhimback.

The board hired a search firm to find a permanent CEO. But, according tosomeonewithknowledgeofthesearch,“nobodygreatwouldtakethejobatthatpoint.”OncetheboardhaddefinitelydecidedtobootAmelio,Jobswastheonlylogical person to step in.Yet it’s amatter of some debate years later towhatextenttheboardsoughtoutJobs.“TherewereafairnumberofusontheboardwhowerebuyingNeXTtobringStevebacktothecompany,”recalledBernardGoldstein,aninvestmentbankerwhowasamongthosedeposedfromtheboard.“We didn’t expect NeXT to bring us any technical breakthrough. I voted forStevetoreturneventhoughStevemadeitcleartomethathedidn’twantmetostay.”It’saconvenientstoryline,butalsoabitrevisionist.Theboardmemberswho

leftweremostlikelyfacedwithanultimatum:resignorlosehim.Also,JobsbythispointbadlywantedtobeCEOofAppleagain,yetheshrewdlywaitedforthe rightmoment to commit. Indeed, he didn’t formally drop the “i” fromhistitleuntil2000.Aboardthattwicehiredthewrongguyessentiallygotluckythethirdtimebyfailingtohiretherightguy—butgettinghisservicesanyway.Jobseventually would build a board of directors comprising highly accomplished

individuals who nevertheless were viewed as advisers to him rather than hisboss.Interimornot,thestepsJobstooktorevitalizeAppleareasdecisiveasthose

ofanyturnaroundCEOinthehistoryoftroubledcompanies.Hemovedquicklyto eliminate Apple’s divisional structure, choosing instead to unify decision-making, planning, and advertising around a one-company banner. He firedthousandsofmiddlemanagers;hiredalogisticsexecutive—thefutureCEO,TimCook—who would shutter Apple’s owned and operated factories andwarehouses; and killedmarginal products, including theNewton and an earlydigitalcamera,theQuickTake150.What made the return of Steve Jobs so compelling is how his leadership

matchedthecultureofthecompanythathehadfounded.Theemployeesaswellas Apple’s customers loved Jobs because he represented a sense of flair,showmanship, and pride that made people excited about Apple again. At aMacworldpresentation in early1998—months after taking control ofApple—Jobs showed the company’s fans an exciting lineup of new computers andinstilledasensethatApplewouldsurvive.Inasignaturemoveoftheatricality,heconcludedhisremarksandbegantowalkoffstage,beforepivotingbackandsaying, in a manner that reflected an afterthought: “I almost forgot. We’reprofitable.”TheprecisemotivationforreinstallingSteveJobsatAppleisirrelevanttoday.

Thefactthatithappenedhasalteredthelandscapeofglobalbusinessforyearstocome.

.

HOWFREESHIPPINGSAVEDZAPPOS

ByJENNIFERREINGOLD

Duringthedotcomboom,onlineshoeretailerZapposwasstrugglingtostandoutinacrowdedfield.Then,in1999,thefoundersmadeonedesperatedecision—toofferfreeshippingandfreereturns—thateventuallyhelpedthecompanyrealizethatitstruecompetitiveadvantagewasnotprice,butafanaticalattentiontocustomerservice.Keytothiswasthenotionthatanonlinebusinessneededtobemuchmorethanawebsite—thatitneededtocontroltheentireretailvaluechain,fromwarehousingtofillingorderstoshipping.TodaymuchoftheonlineindustryhascopiedtheZapposstrategy,andInternetsalesareskyrocketing.AdecadeorsoafterZapposmadethiscrucialdecision,theNationalRetailFederationreportedthatninein10retailersnowofferfreeshippingduringtheholidayseason.It’softenthesimplethingsthatbreakopenentireindustries.—V.H.

THERE’S A DEEP IRONY ABOUT momentous business decisions. Itstands to reason that because they are, indeed,momentous, theywould comeabout after intense analysis and hours or weeks of impassioned debate. Yetsometimestheoppositeistrue:Thedecisionsthatmakeorbreakcompaniesareoften cobbled together on the fly. Why? Because no one can come up withanythingbetter.That’s what happened at online shoe giant Zappos in 1999, where one

desperate decision—tooffer free shipping and free returns—eventually helpedthe company realize that its true competitive advantage was not price but afanaticalattentiontocustomerservice.Itwouldtakeseveralmoreyears,buttheseedsplantedwith the free-shippingdecisionwouldeventually leadZappos todefineitselfnotjustasanonlineshoecompanybutinsteadassomethingmuchmoregrandiose:acompanythatjusthappenstosellshoes,butstrivestoprovidethebestcustomerserviceontheplanet.In1999,however,survivalwastheonlythingonthemindofZappos’founder,

NickSwinmurn.ItwastheeraofPets.com,eToys,andevenKozmo.com,whichwouldhand-deliverapackofgumtoyourhouseforfree.Inthosedotcomboomdays, the scorecardwas tallied by eyeballs, not profits. The samewas true atZappos—or as it was originally named, shoesite.com, which Swinmurnproclaimed would become “the Amazon of shoes.” (It turned out to be aprescientcall:ZapposwouldbeacquiredbyAmazonin2009formorethan$1.2billion.) To fund his business, Swinmurn approached Tony Hsieh, a youngventure capitalist who had sold his own company, LinkExchange, for $265million.Hsiehagreedtoinvest—butonlyontheconditionthatSwinmurnbringon someone who actually knew shoes. So Swinmurn hired Fred Mossler, aformershoesalesmanatNordstrom,andHsiehagreedtofundthecompanyforafewmonthsuntilmorecouldberaisedfromlargerventurecapitalfirms.Butsellingshoesonthewebwasn’taseasyas,say,sellingchewinggum.For

starters, whowould buy shoeswithout trying them on?While Zappos gainedsometraction,itwasn’tbuildingenoughbusinesstoimpressthebiggerVCs,anditwasfastrunningoutofcash.Howtogetcriticalmass?AccordingtoMossler,eitherSwinmurnorhe(neitherexecutivecanrememberwho)threwouttheideaoffreeshipping.Intheensuingconversation,someonesuggestedtakingtheriskoutofreturningshoesbylettingacustomerorderseveralpairs,trythemallon,andnotbechargedfordoingso.Mossler and Swinmurn had no idea how much the gambit would cost, or

whether it would work—no one, to their knowledge, was offering anythingsimilar—but itdidn’tmuchmatter.Theywereoutofoptions.So inNovember1999theyplacedabannerannouncingfreeshippingonthetopofthecompany’sweb page. They didn’t even promote the free-returns part on themain site; acustomerhadtoclickthroughtothecustomerservicepagetoseethatmessage.“I’dliketosaytherewasalotofdebateandanalysis,”saysMossler,“buttherejustwasn’t.Youjustkindofwentwithyourguts.”Thegutsturnedouttobegolden.Notonlydidthenumberofcustomersgrow,

buttheconversionofcustomersfrombrowserstobuyersalsoimproved,whichin turnpersuadedHsieh to continue funding thecompany (hebecameCEO in2000).Eventuallyotherwebsitesalsobegantoofferfreeshipping,butitwasthefreereturnsthatmadeZapposstandout.Customerstook(andcontinuetotake)full advantage.According toSwinmurn, asmanyas40%of allZapposordersareultimatelyreturned.It’sahugecost—butthecompanyviewsitasmarketing(the onlymarketing cost, in fact), and the biggest returners are also themostloyalandhighest-spendingshoppers.I,forone,canattesttothethrilloftheUPSguyshowingupatmyofficedoor

withnotone,buteightpairsofblackboots,which I tryonandmodel formymorefashion-forwardcolleaguesbeforesimplyrepackingthelosersinthesamebox and sending them straight back. That convenience is why I don’t shopanywhereelseforshoes.FreeshippingandfreereturnssavedZappos.Butthemovewasimportantin

another way too; it caused the company to realize that its key competitiveadvantage was its relationship with the customer—not, as Swinmurn hadoriginallybelieved,having the largest selectionof shoes.That insight, in turn,informed Zappos’ 2003 decision to move away from letting the shoemakerscontrolstockingandshippinginfavorofmostlyholdingitsowninventory.SaysSwinmurn: “There came a point where we realized we were not really anInternetortechcompany;wewerereallyashoestore.”Lettingtheshoecompanieshandlefulfillmentwaslessrisky,ofcourse,since

Zappos would never have to take a hit on a thousand pairs of neon-greensneakers that no one wanted. But Hsieh realized that being able to guaranteewhenandhow the shoeswould showupatyourdoorwasas important to thecustomer as the return policy itself. Over a drink (Grey Goose and soda forHsieh, beer for Mossler), they decided—again without spreadsheets orMcKinseyconsultants—tomakeyetanothermomentousdecision.Suddenly thevirtual storewas, in fact, going tobeabrick-and-mortar store

too,withhundredsofthousandsofpairsofshoesinitswarehouse.Chancy,sure,butnowZapposwouldcontrolmostoftheinteractionwiththecustomer.AfterZapposfireditslogisticscompanyandstartedtobuilditsownsystem,cheekilycalledWHISKY(WareHouseInventorySysteminKentuckY),salesexploded—from $1.6 million in 2000 to $8.6 million the next year and $32 million thefollowing year. With this system Zappos could do what it wanted for itscustomers—includingsurprisingsomewithane-mailtellingthemitcouldshiptheirshoesintwodaysand,later,overnightratherthaninaweek.“Thelesson,”

says Swinmurn, “was if you can take something standard and make it feelpersonalized, that’s a great customer experience.” One loyal customer, Hsiehwrote inhisbookDeliveringHappiness,was soexcited thathe suggested thatZapposstartitsownairline.And finally, finally, Zappos did, in fact, undergo the kind of soul-searching

that all the management books say is supposed to precede a major businessdecision. It was 2002 and the companywas growing like wildfire—though itdesperately needed a line of credit to continue its expansion—but Hsiehwonderedwhethertherewassomethingmorefundamentaltodiscussthancash-flowlogisticsorshoebrands.“Dowewanttobeaboutshoes,”hewrote,“ordowewanttobeaboutsomethingbigger?”Mosslersaidthecompanycouldexpandinto clothing and handbags. But Hsieh, who was heavily influenced by JimCollins’Good toGreat, had something else in mind. He said that truly greatcompanieshadapurposethatwentbeyondtheproductitself;bytheendoflunchwithMossler,thetworealizedthattheboldestmovetheycouldmakewouldbeto define the Zappos brand as about one thing only: the very best customerexperienceofanycompany,onlineoroff.CouldZappospullitoff?Thethreeexecutivesthoughtitoverformorethana

month and decided to go forward at a time when the company was still notprofitable and its long-term survivalwas contingentongetting a lineof creditfrom Wells Fargo. Despite Zappos’ new logistics system and warehouse,shoemakerfulfillmentstillaccountedfor25%ofrevenues.But if thetriowereseriousaboutcustomerservice,theywouldhavetocutthecordsothattherewasnothing in the supply chain they couldn’t control. In March 2003, Zapposdecidedtoenditslastremainingvendorcontractsandgocompletelyonitsown.ThreemonthslaterZapposreceiveditslineofcredit.Andafewmonthsafterthat,Hsieh,searchingforaplacetolocateanewcall

center, came upwith another radical decision, onewith its roots plantedwayback in that shipping/return idea. As he wrote inDelivering Happiness: “Tobuild the Zappos brand into being about the very best customer service, weneeded to make sure customer service was the entire company, not just adepartment.WeneededtomoveourentireheadquartersfromSanFranciscotowherever we wanted to build out our call center.” So in late 2003, HsiehannouncedhewasmovingZapposfromSanFranciscotoLasVegas—and70ofthe90existingemployeesmadethemove.TodayZapposstilloffersfreeshipping.Itsreturnpolicy,once30days,isnow

afull365days.With$1.6billioninsales,itisaunitofAmazon,butonethathas

protected its zany, close-knit, cultlike culturewith a passion and even its ownbible—theZapposCultureBook.Zappos actively consults tomany companieson the subject of customer service, as well as how to build lasting corporatecultures.ItranksNo.11onFortune’sBestPlacestoWorklistandNo.3ontheNRFFoundation/AmericanExpressCustomers’ChoiceAwards.Andnoneofitwouldeverhavehappenedwereitnotforthatpoorlyresearched,desperate—anddeeplymomentous—gutdecision.

.

WHYSAMSUNGPAYSITSSTARSTOGOOFOFF

ByNICHOLASVARCHAVER

Samsunghadaproblem.Itsculturewasstaticandinward-looking.Then,intheearly1990s,LeeKun-Hee,chairmanoftheSouthKoreanelectronicsgiant,madeadecisionthatwouldreshapehisorganizationandcreateablueprintforglobalization.Hesentahandfulofthebrightestyoungemployeestofar-awaycornersoftheglobetoimmersethemselvesintheculture,learnthelanguage,andbuildnetworkssothatsomedaySamsungwouldknowhowtosupplythosemarkets.

Whatanamazinginvestmentinthefuture.TodaySamsunghasbecomeoneofthemostwell-knownandfar-reachingbrandsontheplanet.It’salessonmanyU.S.corporationscouldheed.Americansareoftenmissinginactionwhenitcomestoglobalbusiness.Germany’sexportspercapitaarealmostfourtimeshigherthanthoseoftheU.S.TheNetherlandsgovernmenthassponsoredaprogramsomewhatsimilartoLee’s:ItsendsretiredDutchexecutivestocountries,companies,andprojectsaroundtheworld.Theseglobetrottersthensourcevaluableopportunitiesforthemothership.Talkabout“Actlocal,thinkglobal.”—V.H.

STAGNATIONAND INSULARITY—they’re two of the most common

andperniciouscausesoforganizationaldryrot.Andbythelate1980sLeeKun-Heebegan to sense just such aweakening in the foundationofSouthKorea’sgiantSamsungGroup.Thechaebol’sproductswereubiquitousbutuninspiring:blandcopycatmicrowavesandelectronicssellingatmarginseven thinner thanthe company’s microchips. Meanwhile, family management combined with aConfucianculturethatveneratedseniorityandhierarchymadeSamsungastaticandinward-lookingcompany.In 1993, Lee, chairman of Samsung and son of the company’s founder,

explodedthattraditionwithwhathecalledtheNewManagementinitiative.HeimportedWestern-styleemployeeautonomy,promotionsandpaybasedonmeritrather than seniority, and an end to lifetime tenure, along with a dramaticcommitment to research and development, as part of an audacious gamble totransformSamsungintoacompanythatdesignsandmanufacturesleading-edgetechnology.Tosaythebetpaidoffwouldbeanunderstatement.Withinadecadeglobal revenue took off, and Samsung became an elite brand. Today, forexample, its Galaxy smartphones and tablets are among the few that cancompete with Apple’s iPhones and iPads for coolness. By 2011, Samsung’sbrand ranked as the 17thmost valuable in theworld, according to the annualInterbrandPoll,leavingSony—thecompanythatdefinedelectronicssupremacyfordecades—inthedust.ButitwasanotherprogramthatLeelaunchedin1990,justaheadoftheNew

Management initiative, that planted the seeds forSamsung’s transformation. Itwas a simple concept: Take a handful of the company’s brightest youngemployees,sendthemabroadtoimmersethemselvesinothercultures,andthenreapthebenefitsofincreasedglobalawarenessandknowledge.Thedecisiontolaunch the program was “pivotal in transforming Samsung into a globalpowerhouse,” says Sea Jin Chang, a professor at the National University ofSingaporeandauthorofSonyvs.Samsung:TheInsideStoryof theElectronicsGiants’BattleforGlobalSupremacy.Since1990 some4,700employeeshavebeenwhatSamsungcalls “regional

specialists,”servingyearlongsabbaticals in80nationsacrosstheglobe.“Whatstrikesme,”saysTarunKhanna,aprofessorattheHarvardBusinessSchoolwhohas written about Samsung and also taught courses for its executives, “is therecognition that people steeped in Korea and speaking only Korean wouldrequiresomeformofuniqueinvestmentstojump-startanengagementwiththerestoftheworld.”In truth, it was hardly a new idea. As far back as the late 19th century,

Japanese trading companies sent employees on training stints abroad, saysKyungmookLee,aprofessoratSeoulNationalUniversity,whohasspentyearsstudyingSamsung.Butthoseprogramswerelimitedinscope(typicallythreetosix months). And, he says, most of the Japanese companies later abandonedthembecausetheyweretooexpensive.Old idea or new,much of Samsung’smanagement resisted the notion, says

Kweon-taekChung,directorofthehumanresourcesandorganizationalresearchdepartment at the Samsung Economic Research Institute. They simply didn’tunderstand thepurpose.“In the1980s,”Chungsays,“goingonabusiness tripoverseas was rare in Korea, and they could not imagine sending employeesabroadforayear”forsomethingthatdidn’tseemlikework.Evenaftertheprogramlaunched,executivesgrumblednotonlyaboutthecost

—closeto$100,000perspecialistontopofsalaryandbenefitsforafullyear—but also about the fact that the companyhad togiveup itsyoung stars for15months.Theyworried that the regional specialistsmight get recruited toothercompaniesduringtheirsojourns.But chairmanLee,whowieldednearly uncheckedpower, brushed aside the

complaints and embraced theprogramon a large scale duringgood times andbadfortwodecadesandcounting.ObservesKhanna:Samsung’swillingnesstofund such an endeavor and its “apparently scant regard for short-termprofitabilityconcerns—evenduringthedepthsofthefinancialcrisis—arequiteunusual.”The regional specialist experience begins with what Khanna calls an

“extraordinary”three-monthbootcampatamassivecompanyfacilityinSouthKorea.Muchofthetrainingconsistsoflearningthelanguageofthecountrythespecialistwillbelivingin.(ThatinitselfwasoriginallyabigleapforacompanythatfordecadesretainedtheKorea-centricmindsetofanoperationthatbeganasalocalgeneralstorein1938.ButwhenSamsungbeganitscampaignintheearly1990s, it pushed its emphasis on foreign languages far beyond the regional-specialistprogram.Forexample,thecompanywentsofarastopostEnglishandJapanesephrases in itsbathrooms, so that employeescould learnevenas theywashedup.)The boot camp for regional specialists includes far more than language

training. There’s social and physical practice too. As a 1992 article about theprogramdescribedit,participantswere“awakenedat5:50forajog,meditation,andthenlessonsontablemanners,dancing,andavoidingsexualharassment.”Fromthere, the regionalspecialistsaredeployedabroadforoneyear. In the

earlydaysmanywent to theU.S. andEurope; in recentyearsmore andmorehave gone to emergingmarkets. Participating requires ameasure of sacrifice:Specialists undertake the mission alone, for example, and are not allowed tobringanyfamilymemberswiththem.But for all the training and discipline, the biggest surprise is the free-form

natureofSamsung’sprogram—particularlyinitsearliestincarnation.Thespiritwas truly “goof off and learn.” The mission was to imbibe the spirit of thecountry,meet people,make contacts, andwrite a report aboutwhat you find.Thatwasit.Consider Park Kwang Moo, one of the first regional specialists, whose

experiencewasrecountedina1992WallStreetJournalarticle.Hespentayearin the former Soviet Union, “living, eating, and drinking with Russians,”learning howbribes smoothed theway for everything from airplane tickets togasoline.“Oneday,”thearticlecontinued,“whilestoicallywaiting10hourswithscoresofRussiansforadelayedflight,hebegantounderstandRussia.‘Ifeltastrength in theirmisery. I felt likeaRussian.’”Thearticlewenton to recounthowPark’sbosspraisedhis80-pagereportonthesabbatical.“Thereisnothingin this about business,” the boss rhapsodized. “It is only about their drinking.Their idiosyncrasies. But in 20 years, if this man is representing Samsung inMoscow,hewillhavefriendsandhewillbeabletocommunicate,andthenwewillgetthepayoff.”Actually, it took a lot less than 20 years.By 2003, in an annual report that

specifically credited its regional-specialist program,Samsungproclaimed itselfthebestsellingbrandinRussia(aswellasinFranceandUkraine)andclaimedithadbeenselectedastheNarodnayaMarka,thebestnationalbrandinRussia.In truth, itcanbehard to identify thespecificachievementsof theregional-

specialistprogram,andwhenyoudo,theymayseemsmall-boreatfirstglance.For example, BillKim, a Samsung regional specialist in Indonesia during theprogram’sfirstyears,toldacompanyblogin2011that“anIndonesianIgottoknow tipped me off to unauthorized product-repair services that often led tobigger problems for consumers. Thanks to this information, we were able toprovideasaferguideforconsumersandmodifyourproductdesignstopreventunauthorizedrepairs.”A2011coverstoryonSamsungintheHarvardBusinessReviewco-authoredbyKhannaandLeecitedtheregional-specialistprogramasfostering personal connections to key figures in various countries and amuchbroaderunderstandingoflocalmarkets.But trying to identify the concrete results misses the program’s real

significance.As theHBR article noted, it brought in fresh ideas from abroad,impartinginformationaboutothermarketsandcorporatepractices.Theauthorsdescribeditas“arguablythecompany’smostimportantglobalizationeffort.”Itnurtured a generation of managers ready to pursue Samsung’s worldwideambitions,intheviewofYongsunPaik,aprofessorofinternationalbusinessandmanagement at Loyola Marymount University. And many of the regionalspecialists later get sent back to the areas they visited in senior positions atSamsung’s offices there. (Interestingly, Harvard’s Khanna notes that a secondglobalizationprogramatSamsung,whichentailsbringingnon-Koreansintothecompany in senior positions, has beenmuch less successful. To this day fewforeignershaveascendedtothetopranksofthecompany.)Overtheyearstheregional-specialistprogramhasevolvedinthedirectionof

increasedcontrol.Whereonce theparticipantscouldchooseanyareaof focus,theynowmakethechoiceincloseconsultationwithSamsung.Andthoughit’sstillayearlongprogramandretainsits“goof-off”quotient, thefree-formpieceof the mission has been reduced to six months. The second six months nowconsistsofamoreappliedindependentproject,inwhichparticipantstrytolearnsomethingwithtangiblebusinessutilityaboutthemarketthey’revisiting.Meanwhile,theprogramhasgainedstaturewithinSamsung.Whereoncethe

selectionsweremade by human resources officials, and line executivesmightcarp about losing top employees for a year, now the executives themselvesnominatetheirbestcandidates.Thathasbuiltmoremanagementsupportfortheprogram. And it has created a motivational tool that encourages competition.Youngemployeesviefortheprestigiousassignments.The success of Samsung’s program has inspired many imitators in Asia,

accordingtoChungoftheSamsungEconomicResearchInstitute.InKorea,hesays,largecompaniessuchasSKNetworks,HyundaiOilbank,Hanwha,andLGChemical have introduced similar programs, and Korea’s largest banks—Kookmin, Shinhan, and Woori—are sending bright young employees toemerging countries. In Japan, Chung says, Mitsubishi, Itochu, Sharp, andMarubenihaveallintroducedsomeversionofaregional-specialistprogram.Indeed, the underlying concept of exposing an organization, via its rising

talent, to new markets has become so accepted today as to seem obvious.Samsung’ssuccesssuggeststhebenefitsaresignificant—evenifthey’rehardtoquantify. SaysHarvard’sKhanna of Samsung’s program: “If onewere ever toattemptaconventionalcost-benefitanalysisofsomesort,Idon’tknowwhetheronewoulddecidethatthiswasagoodidea.ButIwouldhavetosaythatit’sa

brilliantidea.”

.

THESHAREHOLDERCOMESLAST

ByTIMOTHYK.SMITH

WhenJohnson&JohnsonlearnedthatbottlesofitsTylenolbeingsoldinChicagohadbeenlacedwithcyanideandhadleftsevendead,CEOJamesBurkesnappedintoaction.AtthetimetheFBIwasrecommendingagainstarecalltoavoidpanicduringHalloween.Evenso,Burkehadhiscompanypullofftheshelveseverybottleofthepainkillernationallyanddesignedatamper-proofbottle—allatacostof$100million.Burkelivedbythecredothataleader’sfirstresponsibilitywastothosewhouseJohnson&Johnson’sproductsandservices.Thewayhehandledthetragedybecameatextbookcaseforcrisismanagement:Revealallyouknowfastanddoeverythingnecessarytotakecareofyourcustomers.—V.H.

“AFLATPREDICTION I’LLMAKE is that youwill not see the name‘Tylenol’ inanyformwithinayear,’’JerryDellaFemina, theMadisonAvenueadvertisinggenius,toldtheNewYorkTimesonOct.8,1982.“Idon’tthinktheycan ever sell another product under that name. There may be an advertisingpersonwho thinkshe can solve this, and if they findhim, Iwant tohirehim,becausethenIwanthimtoturnourwatercoolerintoawinecooler.’’

Itwasaweekafteranawfuldiscoveryhadpetrifiedthenation:SomeonehadputlethaldosesofpotassiumcyanideintoExtraStrengthTylenolcapsulessoldin retail stores. Seven people in the suburbs ofChicago had died. Firefightersandpoliceofficershaddrivenaroundneighborhoodswithloudspeakers,warningpeoplenottotakethedrug.Terrorismwasn’tthetermmostpeopleusedforthecrime in that pre-9/11 era, but the entire country was certainly terrified ofTylenol.IthadbeenahugehitforJohnson&Johnson—thebestsellingpainkillerin the U.S., with 35% of the market. But now many people shared DellaFemina’sjudgment:Tylenolwasdoomed.Andyet…itwasn’t.WhentheTimesspoketoDellaFeminalessthanayear

later, he said, “I was absolutely wrong. I’m really happy I was wrong.” ThepapernotedthatComptonAdvertising,theagencythathandledTylenol,hadsentDella Femina a water cooler filled with wine. “I drank the wine and toastedthem,’’ Della Femina said, adding, “I’m going to send them some loaves ofbread.Let’sseewhattheycandowithbread.”HowJohnson&JohnsonsavedTylenol,anditscorporatereputation,isastory

that’swidelyregardedasthegoldstandardofcrisismanagement.Itwassimplein conception—do the right thing, transparently—and complex in execution,involving a recall costingmore than$100million, the introductionof tamper-resistantpackaging,andagamblebythecompany’sCEO,JamesE.Burke,togobeforethetelevisioncamerason60Minutes.Onepersonwhowaspresent—TomMurphy,theformerCEOofCapCities/ABCandaJohnson&Johnsondirectorfor 20 years—says that Burke’s management of the matter had its roots in acrucialdecisionhehadmadeyearsearlier toapply thecompany’scredo toallsituations.Thatcredo read thata leader’s first responsibilitywas to thosewhouseJ&J’sproductsandservices.Period.Bythetimethecrisishit,therewasnoquestion in his mind about how to handle it. “It was no decision for him,”Murphysays.“Hejustknewitwastherightthingtodo.”Thirtyyearslaterthemurdercaseisunsolved.Noonehasbeenchargedwith

thecrime.TheFBIrecentlyreopenedtheinvestigation,hopingthatadvancesinforensic technology and some new tips might lead somewhere. Investigatorshave asked a court to compel Ted Kaczynski, the imprisoned Unabomber, toprovideaDNAsample(hegrewupinaChicagosuburb).ForJohnson&JohnsonthecalamitybeganonThursday,Sept.30,1982.The

daybefore,twohealthypeoplehadsuddenlycollapsedanddied,andtwomorehadbeenhospitalized.Apairofoff-dutyfirefighters,discussing thecaseswitheachotherandwithparamedics,madetheconnection:Thevictimshadalltaken

Tylenol.Thefirefightersalertedtheirsuperiorsandthealarmwassounded,butnotbeforemorepeoplehadtakenpoisonedpills;thedeathtollwasseven.According to press reports at the time, an investigation was immediately

launchedatMcNeilConsumerProducts,theJohnson&Johnsonsubsidiarythatmanufactured Tylenol in two plants, to see whether a batch had becomecontaminated. Cyanide was kept at the plants for use by analytical labs. Butcompany executives soon calculated that the amount of cyanide found incontaminated capsules—asmuch as 65milligrams, well over the usual lethaldoseof50—wassohighthatsomeonewouldhavehadtodumpatonofthestuffintoabatch.Thatand thefact thatpoisonedpillscamefromdifferentbatches,andthatthedeathswereclusteredaroundChicago,ledthemandtheauthoritiestobelievethatsomeonewastamperingwithTylenolbottlesandleavingthemonstoreshelves.“Wehaveamadmanoutthere,”declaredIllinoisGovernorJamesThompson.Burke had been at Johnson& Johnson for 30 years by then, and had been

CEO for six. A marketing specialist, he had been born in Rutland, Vt., andeducated at theCollege of theHolyCross, the Jesuit institution inWorcester,Mass.Thedayafterthecrisisbroke,Friday,hebeganconsideringanationwiderecall.Calculatingaroughestimateofitscost,hecameupwith$100million.Some of his executives objected that such a recall would cause a general

panic.TheFBIfeltthesameway,accordingtoareconstructionoftheeventsbyRickAtkinsonintheKansasCityTimes.BurkeflewtoWashingtontoemphasizeto the agency that thiswaspotentially anational crisis.But theFBIagentshemet with resisted; they didn’t want to spark a panic just a month beforeHalloween.BurkewentovertotheFoodandDrugAdministrationtomakethecaseforarecalltothecommissioner,ArthurHayes.Whiletheyweretalking,anaidegaveDr.Hayesanote.ItsaidthatsomeonehadfoundstrychnineinTylenolcapsulesinCalifornia.Acopycatseemedtobeatwork.That did it. Opposition to a recall vanished. On Tuesday the company

announcedthatitwasyanking31millionbottlesofExtraStrengthcapsulesfromstores,thebiggestrecallinretailhistory.Burke then set up a team of seven senior executives and, according to a

DefenseDepartmentstudyofcrisismanagement,chargedthemwithansweringtwo questions: How do we protect the people? And how do we save thisproduct?Johnson & Johnson had been a press-shy company, but the crisis team

changedthatimmediately.Thecompanyheldpressconferences,boughtads,and

set up two toll-free telephone lines—one for consumers, andonewith a tapeddailyupdatefornewsorganizations.Burkewas asked for an interview byCBS’s60Minutes, a request that any

executive in his positionwould dread.He sought advice from his friend TomMurphy, who, as CEO of Capital Cities Communications, had expertise inbroadcasting.“Hecametousandsaid,‘Thesepeopleat60Minuteswant todoashow,’”

Murphy recalls. “60 Minutes had a reputation for really pulverizingbusinessmen. All the people at Johnson & Johnson, their advertising agency,theirpublicrelationspeople,said,‘Don’tdoit,Jim,they’lljustcutyouupoverthere.’”Murphythebroadcasterknewbetter:Heunderstoodthevaluetoanewsprogramofaneasy-to-understanddramawithanuplifting theme.“Wesaid60Minutesisdyingtodoashowwheretheyactuallysaysomethinggoodaboutabusinessman,” Murphy says. “So we talked him into doing it, and he was asensation.”FBIdirectorWilliamWebsterwasinterviewedfortheshowtoo.Hesaid to Mike Wallace, before 10 million viewers: “The attitude of topmanagement has been first the interest of the public, then assisting lawenforcement,andthentheirowncorporateconcernsfortheproduct.”Burke’s crisis team started looking for tamper-resistant packaging. Itwasn’t

widely used at the time, but a dozen or so types were available. A group atMcNeil was assigned to try to hack them—it was known internally asMachiavelli & Co. Before long the company settled on the triple-sealarrangement that is familiar today: a foil disk under the screw cap, a shrinksleeveonthebottleneck,andagluedcardboardbox.InNovember,Johnson&JohnsonlaunchedacampaigntoresurrectTylenolin

thenewcontainer.Bythenthedrug’smarketsharehadfallentoabout7%.Thecompanyissuedaprintadvertisementthatread,“ThemakersofTylenolwanttosayTHANKYOUAMERICA for your continued confidence and support.” Itannounced an offer to replace, free, any Tylenol that consumers had thrownaway.Itpublished40millioncouponsworth$2.50towardthepurchaseofanyTylenolproduct.Burkeheldasatellite-linkedvideonewsconference,unusualatthetime,withreportersin30cities.Hesaidthecompanyhadspentabout$100million to recall, test, and destroy Tylenol in the old packaging. Calling thecyanidepoisoningsa“terroristact,’’hesaidJohnson&Johnsonconsideredit“amoralimperative,aswellasgoodbusiness,torestoreTylenoltoitspreeminentpositioninthemarketplace.’’It worked. Tylenol’s market share was back up to 30% one year after the

crimes.Noting that fact, theNewYorkTimeswrote, “No onemay ever knowwhoorwhy.Butforthemakerofthepopularredandwhitecapsules,atleast,itisalmostasifnothingeverhappened.”Johnson&Johnsonisoneof thosecompanies thathaveacredo.Writtenby

then-chairman Robert Wood Johnson in 1943, just before the company wentpublic, it begins, “We believe our first responsibility is to the doctors, nurses,and patients, tomothers and fathers and all others who use our products andservices.”InthepastfewyearsJ&J’stopmanagementhasseemedtoignoreit,incurring so many quality-control breakdowns that the company has beenhumiliated in congressional hearings. Burke, who retired in 1989, took it toheart, though. Management guru Jim Collins, naming Burke one of the 10GreatestCEOsofAllTimeinaFortunemagazinearticle,argued thatpraisinghimforhishandlingoftheTylenolcrisismissesthepoint.“Burke’srealdefiningmoment occurred threeyears before,whenhepulled20key executives into aroomandthumpedhisfingeronacopyoftheJ&Jcredo,”Collinswrote.“Burkeworried thatexecutiveshadcometoviewthecredoasanartifact—interesting,but hardly relevant to the day-to-day challenges of American capitalism. Theteamsat thereabit stunned,wondering ifBurkewasserious.Hewas,and theroomeruptedintoadebatethatendedwitharecommitment.”Burke’s friend TomMurphy sees it a little bit differently. “Jimwould have

madethatdecisionwhethertheotherguysbelievedinthecredoornot,”Murphysays.“Hereallybelieved in that stuff.Everyonecamebefore thestockholders.Thestockholderscamelast.”

.

WHYDAYDREAMINGPAYSOFFBIG

ByGEOFFCOLVIN

Fornearlyacentury3Mhasbeenoneoftheworld’smostinnovativecompanies,creatingeverythingfromsandpapertomaskingtapetoPost-itNotestoDVDs.Yes,itswell-financedR&Dlabshadalotdowiththat,butmoreimportantwasadecisionthatmanyoftoday’sCEOshavelostsightof:Giveyouremployeestimetodaydream.Thelandmarkdecision,madein1948,toallowworkerstospend15%oftheirtimeontheirownprojectshaskeptthecompany’sinnovationenginehumming.Itledtothecorollarythat30%ofrevenuemustcomefromproductslessthanfiveyearsold,alegacythatisstillalivetoday.In2009,eveninthemidstofthefinancialcrisis,3Mlaunchedmorethan1,000newproducts.Gettingthemostoutofsuchapolicy,however,iseasiersaidthandone.Whatmanagerwantstogiveupcontrol?Here’show3Mmanagesits15%ruleandwhysomeoftoday’smostcreativecompanies,includingGoogle,havefollowed3M’slead.—V.H.

3M’S15%RULE—ONEOFTHEMOSTFAMOUScorporatepoliciesofanykind anywhere—has yielded billions of dollars of revenue for 3M, has helpedattract inventive, ambitious employees, has strengthened 3M’s corporatebranding as the innovation company, and has inspired other businessesworldwide to do the same. Adopting it was clearly one of the great business

decisions,yetthestorybehinditiswidelymisunderstood.Here’s how a 3M document puts it: “Regardless of their assignment, 3M

technicalemployeesareencouragedtodevoteupto15%oftheirworkinghoursto independentprojects.”Practicallyanyone in thebusinessworldcan tellyouthat this rule led to the invention of Post-itNotes, amonster hit product, andmany people can even tell you the story about the 3M scientist whosebookmarks kept falling out of his hymnal at choir practice, inspiring him todeveloptheideaandthetechnologyfortheproduct.It’sawonderfulstory,andit’ssortoftrue.Butit’salsomisleadingabouthow

thatinnovationactuallyhappenedandabouthowthingsgenerallyhappenat3M.Notethatthe15%ruleisn’tarule.Itdoesn’trequireanyonetodoanything.It

justsaysthattechnicalemployeesareallowedandencouragedtospend15%oftheir timeonwhateverstrikes their fancy.So let’scall itapolicyrather thanarule.Enormousvaluederivesnotfromitsbeingamandatethatwashandeddown

by aCEObut rather from its being a central element of the culture that goesback to thecompany’searlydays. It’s importantnotbecause someonehad thebrilliant idea of propounding it but because itwas present in the air everyonebreathed.Andwhilethe15%policyevolved,callingitagreatbusinessdecisionisstill

correct.Ithadtobeallowedandthenencouragedtoevolve,andin3M’searlydecades that took courage. The company struggled. Even when it gained itsfooting, itwasupagainstgiant competitors.Everymanager’s instinct in thosecircumstancesistoclampdownandexertmorecontrol,yet3M’sleadersdidtheopposite.Anyof 3M’sCEOs could have quietly rescinded the policy, and thetemptationmusthavebeengreatintoughtimes;thedollarbenefitswouldhavebeenimmediate,andnoonewouldeverhaveknownforsurewhathadbeenlost.YeteveryCEOhasresisted.Statingthepolicyformally,asCEOWilliamMcKnightdidin1948,wasakey

element of this great decision. Making the policy official—and, critically,includingthespecific15%figure—turneditintosomethingthatoutsiderswouldnotice and talk about. It also lent a useful distinction to a company thatincreasingly proclaimed its innovativeness. A skeptical customer or investormight ask, Why should I believe 3M is any more innovative than anothercompany?Theexplicit15%policywasareason.The policy’s fame came long after it was a de facto reality at 3M. In

explaininghowitcametobe,onecouldsaythatthiscompanywasalwaysonthe

lookoutfornewideas.Oronecouldsaythat3Mwasstartedbypeoplewhohadabsolutelynoideawhattheyweredoing.Bothexplanationsarevalid.The most striking feature of 3M’s early history is its founders’ utter

cluelessness and recklessness. In 1902 five businessmen from the northernMinnesotavillageofTwoHarborscalledtheirnewcompanyMinnesotaMining&Manufacturing,hintingattroublefromthebeginning—noneofthemhadanybackgroundinminingormanufacturing.But theareawasboomingas ironoreand other minerals were being discovered nearby. 3M’s founders intended tomine corundum, a super-hard mineral that could be used to make grindingwheels.After twoyearsofworkand investment, they found that theirmineralwasn’t corundum; it was anorthosite, a softer material that was terrible formaking grinding wheels. The founders gave up on selling the mineral anddecidedtostartmanufacturinggrindingwheelsthemselves,abusinessofwhichtheywereentirelyignorant.Thatdidn’tworkout.Sotheyturnedtheirfocustomakingsandpaper,anotherbusinesstheyknewnothingabout.Theonefortunateresultoftheirrepeatedfailureswasthattheywereforcedto

findanewinvestor,asuccessfulentrepreneurwhosuppliedcashandeventuallytook over as president. He knew nothing about sandpaper either but wasshrewder than the founders and guided the company to its first profitableproduct,anabrasivecloththat led3Mtothesandpaperbusiness.Gettingtherehadtaken12years.The company progressed slowly. In the early 1920s a young employee, an

engineeringschooldropoutnamedRichardDrew,wasdeliveringnewsandpapersamplestoalocalauto-bodyshopfortesting.Heheardworkersragingoverthelousytapetheyusedtomaskareasforpainting;whenremoved,ittookpaintoffor leftadhesiveon thecar.Drewpromised themhe’d invent somethingbetter,thoughhehadnoideahow.Afterweeksofwork,hisbosstoldhimtoknockitoffandgetbacktoworkonsandpaper.Drewkeptdevelopingthetapewhenhecouldsneakthetime.Theresult,introducedin1925,wasmaskingtape,oneof3M’sall-timehitproducts.We can see the forces shaping 3M’s culture. Almost from day one, the

companywassearchingobsessivelyfornewwaystomakemoney.Itdidn’tjustwant new products; it desperately needed them to stay alive. And when anemployee defied his boss to work on a product he was passionate about, heproducedamajorsuccess.Crucially,Drew’sbosswasWilliamMcKnight,thefutureCEOwhowasthen

generalmanager.Thatexperienceinparticular,themaskingtapestory,changed

McKnight’s view about managing researchers. That’s when the 15% policybegan,longbeforeitwasformalizedornamed.Adoptingitwasfarriskierandbraverthanitappearstoday.Givingemployees

such freedom not only surrendered managerial control but also directlycontradicted the leading business wisdom. It was the heyday of Taylorism,scientific management, time and motion studies. Employees weren’t humans;theyweremovingpartsinagiantmachine,andthelastthingyouwantedthemto do was think. Frederick Taylor was brutally clear: One of the firstrequirements foran ironworker,hewrote,“is thatheshallbesostupidandsophlegmaticthathemorenearlyresemblesinhismentalmakeuptheoxthananyother type.”And itwashard to sayTaylorwaswrong.Hismethods increasedproductivity so enormously, Peter Drucker has observed, that our prosperitytoday is simply unimaginable without him. Drucker has even called Taylor’sthinking “themost lasting contributionAmerica hasmade toWestern thoughtsinceTheFederalistPapers.”Whowoulddaretosaysuchthinkingisplainwrong?YetMcKnightand3M’s

otherleadersinthe1920sand1930srealizedthat industrialresearcherswereadifferentbreed,whatwenowcallknowledgeworkers,whoarebestmanagedbydifferentrules.Rigorousstudiesofcreativityandinnovationhaveblossomedinrecent decades, and they strikingly validate what 3M’s leaders figured outthroughexperience,orjustintuited.The central finding is thatmost of the time intrinsicmotivation is stronger

thanextrinsicmotivation insparkingcreativityandinnovation.Highlycreativepeopleare focusedon the task,noton themselves.They’reasking,Howcan Isolvethisproblem?,andnotWhatwillsolvingthisproblemdoforme?Tryingtopushcreativepeopledoesn’twork.Theyaren’tpushed;they’redriven.Thefindingholdsupstronglyanywayyoulookatit.Peoplewhoscorehighly

on tests of intrinsic motivation consistently produce work that in studies isjudgedmorecreative.Conversely,peoplelikeartistsandresearchscientists,whowork in professions that demand creativity, reliably score highly on tests ofintrinsicmotivation.The research findings sound like common sense, but they go further.Many

studieshavefoundthatwhenpeopleexpecttheirworktobejudgedbyothers,itislesscreativethanifthey’redoingitsolelyforthemselves.Evenknowingthatthey’re being watched results in less creativity. 3M’s leaders seemed tounderstandallofthatyearsbeforesocialscientistsprovedit.Theyalsoseemedtounderstandamoresurprisingfinding:Whenpeopleare

offered a reward for doing thework, they’re sometimes less creative—that is,introducingextrinsicmotivationcanactuallyreduceinnovation.Butitneednotbe so. Research has also found that the right kind of extrinsicmotivators canincreaseinnovation.Specifically,theexpectationofbeingrecognizedandgettingconstructive, nonthreatening feedback can motivate innovative people. 3Mintroduced thosemotivators long ago, establishing theCarlton Society, namedafter an early research chief, to honor the company’s most distinguishedscientists.In1951itcreatedthe3MTechnicalForum,avoluntaryorganizationwherescientistscouldpresenttheirideasandaskforadvice.Thoseinstitutionsfurnish recognition and helpful feedback—exactly what excellent researchscientistsreallyvalue.Inpractice, the15%policy ismushier than that precise 15%numbermight

suggest.Forresearchscientists,asformostknowledgeworkers, thedistinctionbetweenpersonal timeandworking timedoesn’tmeanmuchandneverdid.Acompanypublicationquotesanearlyresearcherrecallinganeralongbeforethe15% policywas enunciated: “People inCentral Researchwere on their honorwhen it came toworkinghours. If a guydecided togo fishingon aweekday,Carltonknewthetimewouldbemadeup.Ifhedecidedtoworkindependentlyon his own product idea, he had the freedom to do it—even if the boss saidotherwise.”Ontheotherhand,thenasnow,ifadeadlinehastobemet,yourfirstresponsibilityistomeetit;doyour15%timesomeothertime.The 15% rule also allowed 3M to make other conscious decisions that

enhanceitscorecompetency—innovation.OnenotableexampleisitsInnovationCenter inAustin,whichto thisdayprovidesemployeeswithnotonlythetimebutalsothespaceforinnovating.Thecenteritselfisdesignedcreatively.Ithas,forinstance,reflectiveroofpanelsthatmaximizedirectsunlightintothefacility.Thebreakroomsandrestroomsarelocatedinsuchawaythatvariousfunctionsbump into each other. Other specially designed rooms facilitate spontaneousinnovationsessions.The 15% policy has paid 3M richly. Sometimes it has yielded famous

products, like Scotchgard fabric protector and Micropore medical tape.Sometimes it has led to inventions the public has never heard of, such as amachine that improved the tape-manufacturingprocessandsaves thecompanymillionsofdollarsayear.As forPost-itNotes, the critical discovery—anadhesive that stuck topaper

andothersurfacesyetcouldberemovedwithoutdamagingthem—wasmadebyseniorscientistSpencerSilveraspartofhisnormalwork,notapersonalproject.

Nooneinthecompanysawauseforit.FiveyearslaterscientistArtFryhadhiseurekamomentwithbookmarksinhishymnal.Heorderedsomeoftheadhesiveandstartedapplyingittopaper.Theresultslookedpromising,butthetechnicalchallengesofgettingtheadhesiverightandcoatingpaperpreciselywerehuge.Hedidspendsome15%timeworkingonthem,butitwasnorenegadeproject;hisbossalsogavehimtimeandmoney.Sodon’tcreditPost-itNotestothe15%policy.Docreditthemtotheculture.The 15% policy has inspired other companies to imitate it directly. Most

famously,Googlegivesengineers20%oftheirtimetopursuetheirownprojects;so do Atlassian, an Australian software firm, and some smaller outfits.Morebroadly, 3M’s decision showed a doubtful world one of the knowledgeeconomy’s most important and counterintuitive principles: A company canimproveitsperformancebygivingupcontrol.

.

HOWINTELGOTCONSUMERSTOLOVECHIPS

ByDAVIDA.KAPLAN

ItwouldbefuntoimaginethemeetingwhereyoungassistantDennisCartersuggestedtoCEOAndyGrovethatIntelspendwhatwouldeventuallyamounttobillionsonanadcampaigntobranditscomputerchipwiththegeneralconsumer:But,Dennis,wecannameourdirectcustomersononehand.Whydoweneedanexpensiveconsumeradcampaignthathighlightsacomponentthatmostpeopledon’tunderstandorreallycareabout?Haveyoubeensmokingsomething?Anyway,therestishistory—Intelisoneofthemostrecognizedconsumerbrandsintheworld.Moreimportant,creatingthe“IntelInside”campaignwasacriticaldecisioninpreventingthecommoditizationofthecomputerchip.Consumerscouldbemadetocareaboutthechipinsidetheircomputer.InMichaelPorter’sfive-forcesanalysis,Intel’smovecreatedwhathemightcallamajorshiftinpower.Othercompanieshavediscoveredthatananonymousingredientofalargerconsumerproductmightachieveitsownidentity—considerwhatNutraSweet,Teflon,andDolbyhaveallaccomplished.—V.H.

PCSAREMADEOFVARIOUSCOMPONENTS:thecase,powerunit,

keyboard, mouse, hard disk, videocard, motherboard, and—the brains of theoperation—the microprocessor.Way back when, users of a Compaq no moreknewwhohad supplied those ingredients than aChevy owner knewwho hadmadetheradiatorunderthehood.“Quick,nameyourfavoritemicroprocessor!”was likely tomakepeople at a cocktail party conclude youwere a geek—andthentoflee. Intelchangedall that in1991.Until then, thehigh-techmarketinglandscapehadprettymuchconsistedofApple’srainbowlogoandIBM’sLittleTramp.ButifasmallblueChiquitastickercouldturnabananaintoamarketingicon,thenwhynotanIntelInsidelogoonacomputer?Evenbetter,whynotaddamodestjinglethatwouldbecomealegend?Those were the ideas behind Intel’s decision to talk directly to consumers

about its microprocessors—a revolutionary marketing strategy that wouldtransformIntel,themakerofanentirelyunsexycommodity,intooneofthemostrecognizedbrandsintheworld.Inarangeofrankingsoverthepastdecadeandahalf, Intel has been considered right up there with the likes of Coke,McDonald’s,andDisney.Manycomputeruserstoday,boastsanIntelcorporatehistory, “can recite the specification and speed of the processor, just like carownerscantellyouiftheyhaveaV4,V6,orV8engine.”Worldwide,aspartofa gigantic “cooperative” marketing program, thousands of PC makers nowlicense the Intel Inside logo, helping to sell their own products—along withIntel’s.HowtheIntelInsidecampaignhappenedisastoryofinstinctandnerve,luckandexecution.Intelhas longbeenaSiliconValleybehemoth.Founded in1968byGordon

Moore and Bob Noyce, Intel—its name was a play on “integrated” and“electronics”—aimedtobetheleaderindevelopingsemiconductormemoryformainframesandminicomputers,whichwereentirelythetoolsofbusiness.Withthe ascendance of the personal computer beginning in the early 1980s—ascompanies like Apple and Microsoft and Dell Computer blossomed—Intel’sbusinessmodelcametofocusonPCs.In1980,IntelwonthecontractforIBM’sheralded entry into the market, and by the mid-1980s the company had two-thirdsof theoverallmarket fordesktopmicroprocessors (or“chips”). In 2011,withnearly$44billion in annual revenue, Intel rankedNo.56on theFortune500.The genesis for Intel Inside came in 1988 from inside the cubicle of CEO

Andy Grove. His young technical assistant, Dennis Carter—who had twoengineering degrees, as well as an MBA from Harvard Business School—understood that the company faced challenges in thematuringmicroprocessor

market.Thesurprisingcause:theverysuccessofthemicroprocessor.BecauseofMoore’sLaw(namedaftertheIntelco-founder)—whichholds that thenumberoftransistorsonamicroprocessorroughlydoubleevery18to24months—Inteland other chip manufacturers were able to quickly make obsolescent eachgeneration of chip. So Intel’s 16-bit microprocessor—called the 286—wasreplacedwithinthreeyearsbythe386,a32-bitmicroprocessor.Troublewas,“nobodywasbuyingit,”accordingtoCarterina2002Harvard

BusinessSchoolcasestudy,“InsideIntelInside.”“Everybodywasstillweddedto our 286 chip. The 386 was a much better product, but it had only beenadopted in high-end products such as servers. PC manufacturers weren’t yetdisplacingthe286.”Thatwas“particularlytroublesome,”wrotetheauthorofthecase study, professor Youngme Moon, since Intel “was now on the verge oflaunching its fourth-generation microprocessor, the 486 chip.” CarterhypothesizedthatIntel’sstrategicproblemwasoneofmarketingratherdesign.“Inthepast,wehadalwaysfocusedourenergyonmarketing”toengineersatthecomputermanufacturers themselves. But as the number of consumers swelledandaslesssophisticatedITmanagerstookoverdecision-makingforwhichPCscompaniesshouldbuy,“designengineersdidn’thavethesamecloutanymore,”CartertoldMoon.Carter wondered whether “maybe the problem was that end users weren’t

awareof theproductdifferences.” Ifhewascorrect, the solutionwas to reachthose consumers and try to explain both that faster chips in fact producedsuperior performance and that Intel’s faster chips were better than thecompetition’s.He proposed a marketing test. Appealing directly to customershadabadnameatIntel.Intheearlydaysofthecompanyitbrieflyhadenteredthedigital-watchbusiness.MarketingfolksmadeanexpensiveproposedTVadthatstarredArteJohnson,ofRowan&Martin’sLaugh-In.Theadwassobaditneveraired—and,accordingtoCarter,“itleftabadtasteinIntelmanagement’smouth about end users.” Grove had his own practical concerns. “We’re notstructured” for it, he told his technical assistant. Carter persisted. “AndAndysortofthrewmeoutofhisoffice,”accordingtoCarter’saccountina2004oralhistoryforStanfordUniversityLibraries.ButGroveinearly1989agreedtothetest,tellingCarter,“Youbelieveit—yougodoit.”WhileGrovepromisedatotalbudget of $5million, he toldCarter, “Spend a tenth of that, and if you proveyourthesis,youcanspendtherest.”Withasmall teamatIntel,Carterfirstconductedenoughmarketresearchto

confirm that consumers indeed had the mistaken view that the 386 chip was

unnecessary—that the286wasperfectlyadequateand that the386mightevenpresentissuesofsoftwareincompatibility.Then,withanadagency,hechoseasinglemarket to takehis$500,000budgetsliceandseewhetherhecouldalterconsumermisperceptions in a six-week campaign. Denver provided relativelycheap, accessiblemedia:billboards.AnadmanaptlynamedChipShafer cameupwiththeelegantconceptcalledRedX:abig,bold“286”insideacircle,withalargered“X”spray-paintedoverthe“286.”Afteracoupleofweeks,anothersignwentupnextit:a“386”insideacircle.Ablitzofnewspaperadsaugmentedthe billboards. Themessage was clear, and those buying PCs got it: Sales ofcomputerswithIntel’s386microprocessorshotup.Subsequentresearchamongbuyers underscored that it was the ads that had converted opinions. It was amajormoment:CarterhadshiftedpowerinthemicroprocessorindustryfromthePCmakerstoakeysupplier.Someatthecompanywerehorrifiedthatinpromotingthe386thebillboards

hadtodisparageanotherIntelproduct.ButCartercarriedtheday.“LuckilyourRedXcampaignwassuccessfulnotonlyinDenverbuttheothercitiesaswell,”herecalledintheHarvardcasestudy.“Bythetimeourtestwascompleted,we’dcreatedabitofexcitementinthecompanybecauseithadworked.”Grovewasimpressed. Carter became head of marketing. He had demonstrated that ananonymous ingredient of a larger consumer product might achieve its ownidentity—akintowhatNutraSweet,Teflon,andDolbyhadaccomplished.The 386 drove the 286 into the ground—and then quickly came the 486.

Carter understood that branding individual, evanescentmicroprocessorswas afool’s errand. (Therewas also the problem of court rulings holding thatmerenumbers,like286or386,couldnotbetrademarked,soriskexistedthatadsforaPCwithsuchamicroprocessormightwindupbenefitingcompetitorslikeAMDwithcomparablechips.)Instead,Intelneeded“anumbrellabrand”tocoveranyiterationof chip. “We’re all engineers,” he toldMoon, “sowe approached thechallengebydoinglotsofresearch.Ourresearchshowedthat‘Intel’wasthebestname.We thenhad several ad agenciesgiveusproposals for taglines, andweended up choosing a dark-horse candidate becausewe really liked “Intel. TheComputerInside.”Evenso, that tagline riskedalienating theactualPCmanufacturers.“Icould

predict their initial reaction,” he recalled in the case study. “If Intel is thecomputer, then what are we?” The way out was cooperative advertising, inwhichthePCmanufacturerscouldbuildupcreditsforadvertisingdollarsbasedon howmany Intel microprocessors they bought.When the manufacturer ran

ads, it could recoup from Intel up to half the cost via the credits. AllmanufacturershadtodowasputIntel’slogoonthebezelofthePCandinanyads. Intel Inside became the logo. Intel and themanufacturerswere now in ittogether.Techcolumnistswerecertaintheplanwouldfail.Techcolumnistswerewrong.Dellsignedonimmediately—asdidhundredsmorebytheendof1991.AnearlyprintadintheWallStreetJournalshowedjusthowshrewdtheco-opsystemworked.WhileIBMtookoutthead(foritsPS/2)—onehorsechasingthetailofanother—theIntelInsideswirlgotequalbillingwithIBM.TheswirlintheJournalwasblack.Buteventuallyitwasreplacedinadswith

thedistinctivebluethatendurestoday,thoughIntelhasallowedcolorvariation.Intel’s own “How to Spot the Very Best Computers” ad showed an array ofdifferently colored Intel Inside swirls across the page. “It’s really quite easy,”consumersweretoldinwhatbecameknownasthe“measles”ad.“Justlookforcomputers thathaveagenuineIntelmicroprocessor inside.Either theIntel386,Intel386SX,Intel386SL,Intel486,orIntel486SX.WithIntelinside,youknowyou’ve got unquestioned compatibility and unparalleled quality.” Itwasn’t thestuffofCokepolarbearsorPepsipuppies,butitgotthejobdone.TVwas the obvious next step. Intel hiredGeorgeLucas’ cinematic special-

effects shop, Industrial Light &Magic, to make a spot. Done in the style ofFantasticVoyage,theslickaddidadramaticfly-throughinsideaPC’scircuitryandwounduphoveringoverthemicroprocessor.“Itwasveryvisibleandgotthemarketplace’s attention,”Carter said inhisStanfordoralhistory. “Thatwent alongway to really establishing the Intel image.” In1992, the first full yearofIntel Inside, sales worldwide increased 63%. In Europe, for example, brandawarenessamongPCbuyers rose from24% to94%by1995.Fora time Intelstuffed“bunnies”wereacollectibletoy,andBunnyPeople—colorfullydressedIntelfabricationplantemployeesdancingtoapulsating’70sdisco—appearedina1997SuperBowlad. “Nothing less than thewhimsical iconsof a go-goPCindustry,”declaredAdvertisingAge.TheubiquityoftheIntelInsidebrandmayhavebeenbestsymbolizedbythegiganticblueswirlemblazonedonthesixth-floorrooftopofIntelheadquartersinSiliconValleyuntil2002,whenreroofingeliminatedit.But itwas a three-second, five-note jingle,orwhat Intel calls “the bong”—

thatbecameIntel’ssignatureattributeinthemid-1990s.Playedattheendorthebeginning of every TV and radio co-op program ad, the instantly identifiablejingle energized the Intel brand.Though it’s gone through somemodificationsover the years, the notes remain the same: D-D-G-D-A (written by Walter

Werzowafromthe1980sAustrianbandEdelweiss).Ifthere’samorehypnotic,annoying jingle—yes, we’re well aware of “Meow Meow Meow Meow,”performedbyasingingcat—wedon’tknowofit.The iconic brand that was launched in 1991 endures. In the years since,

billionshavebeenspentbyIntelanditsco-oppartnersonadvertising.BillionsofIntelInsidestickershavebeenandputonPCsandelsewhere.IntelInsidehasbeen supplemented with such recognizable chip names as Pentium, soconsumerscould knowwhat to look for atBestBuy or online atDell. Intel’schip never was commoditized. The company’s share of the microprocessormarket has stayed near 80%. Intel surely makes a solid product. So do itscompetitors.Intelcantoutits“safety”and“reliability”and“quality”foralltime.WhattrulyseparatedIntelfromthepack—longafteritgotstartedintheworldofhightech—wasalittleswirlandabong.

JACK’SCATHEDRAL

ByDAVIDA.KAPLAN

You’reanewlymintedCEOwithastrugglingglobalcompany.Youmakethetoughcalltolayoffmorethan100,000peoplewhilesimultaneouslydecidingtoinvest$50millioninanexecutiveeducationcenter.Areyouflippin’nuts?“Weweredownsizingthecompany,andIneededaplacewherepeoplecouldcongregateandgetthemessagestraightfromthehorse’smouth,saysJackWelch,theformerCEOofGeneralElectric.“IusedGE’sCrotonvillecenterasavehicletoteachwhereweweregoingandwhy—ourcorporatevaluesandvision.”Thedecisionwasbrilliant.GEisiconicforhavinganinordinatenumberofalumsinCEOpositionsatothercompanies.DecadeslaterSteveJobsspentthelasttwoyearsofhislifeessentiallyperfectinghisownversionofCrotonvilleatApple.ThecorporateuniversitymodelmighthavebeenaroundbeforeJackWelch,buthemadeitvitalandsexy.—V.H.

INEARLY1981,JACKWELCHwasn’tyetknownas“NeutronJack”orthe “Most Admired CEO in the World.” At 45, after years ascending thecompany’s corporate ladder, he was just starting out as General Electric’syoungestchairmanandCEO.He immediatelystoodout. Indeciding to layoffthousands and restructure the company in his confrontational style, WelchtransformedGeneralElectric.But he alsomade a decision little-noticed at the

time that would wind up influencing his entire 20-year reign. He resolved tocreate aworld-class internal business school forGEmanagers.Best knownasCrotonville, because of its location in a hamlet of the same name in theNewYorksuburbsnorthofManhattan,theschoolisnowanessentialpartofWelch’slegacy.It didn’t start out thatway.Crotonvillewas founded by formerCEORalph

Cordiner in 1956—just a few miles away from the notorious Sing SingCorrectionalFacilityinOssining,N.Y.The53-acreretreatwasdesignedtofosterdecentralization. AsWelch himself explained it in hismemoir, Jack: StraightFromtheGut,“ThousandsofGEmanagersweretaughttotakecontroloftheirown operations with profit-and-loss responsibility.” It worked well for a longtime.InstructorsatCrotonvilletaughtcoursesbasedonGE’sBlueBooks,whichwere thousands of pages of do’s and don’ts. “Back in those days, the POIM(Plan-Organize-Integrate-Measure) principles spelled out in the Blue Bookswere like commandments,” recalled Welch, who arrived at GE in 1960 as a$10,500-a-year chemical engineer fresh out of the University of Illinois atUrbana-Champaign.“Butoncedecentralizationtookhold,Crotonvillewasusedless as a training ground for leadership development” and more as merely aforumfordeliveringtechnicalinstructionorcompanywidemessages.By the timeWelch tookover atGE,Crotonvillewasn’t seen as a nonpareil

provinggroundforexecutivetalent.Anybodycouldsignupforitsprograms—including those Welch called “the tired ones looking for a last reward.” NolongerwereGE’srisingstarstheonlyonestoattend.WelchthoughtCrotonville“wastired—realtired.”HehadbeenoneofsevencontenderstobecomeCEO—andhadn’tbotheredtoattendamultiweekcourseongeneralmanagement.Inanearlier time not attending might have been unheard-of. Welch had one otherbugaboo about Crotonville: Based on the single one-weekmarketing class hehadtakenthereinthelate1960s,herememberedthattheaccommodations,well,stank.“Managerswerebeinghousedinbarrenquarters,fourtoasuite,”Welchlamented in hismemoir. “The bedroomshad the feel of a roadsidemotel.WeneededtomakeourownpeopleandourcustomerswhocametoCrotonvillefeelthattheywereworkingforanddealingwithaworld-classcompany.”So he set out to shake things up—atCrotonville, as at the entire company,

whosetraditionalwayshadproducedtorporandcomplacency.Barelytwoweeksintohisadministration,WelchwenttoJimBaughman,aformerprofessorfromtheHarvardBusinessSchoolwhowasrunningCrotonville.“We’regoingtobemaking all kinds of changes in this company,” Welch told him, “and I need

Crotonvilletobeabigpartofit.”WelchthoughtCrotonvillewouldprovidethevehicle to get his messages out to key executives “in an open give-and-takeenvironment”—“theperfectplacetobreakthroughthehierarchy.”“Weweregoing throughradicalchange,”Welch toldme inan interviewfor

thisbook.“Wehadbecomeabloatedbureaucracy,andwehadtoomanylayersand filters on themessage.Weweredownsizing the company, and I needed aplace where people could congregate and get the message straight from thehorse’smouth.Iuseditasavehicletoteachwhereweweregoingandwhy:ourcorporatevaluesandvision.”Thatwasaviewconsistentwith thecenter’sorigins,butWelchbelievedthe

faculty, thecurriculum,and theatmosphereallhad tobeoverhauled.The firststep:Fixthephysicalplant.Welchcommittednearly$50milliontomodernizeCrotonvilleoverthecourseofthedecade:anewresidencecenter;anew“Pit,”the well of a brightly lit multilevel classroom center; and a helipad, so thatWelch and others could whiz in from corporate headquarters, otherwise anhour’s car ride away in suburbanConnecticutorManhattan.WhenBaughmangave Welch a chart-filled preview of his presentation to the GE board ofdirectors,Welchreplacedthespecific“paybackanalysis”figureonthelastchartwiththeword“INFINITE”tounderscoreWelch’sbeliefinthelimitlessROIforCrotonville.The decision to remake Crotonville naturally had its critics. It didn’t help

Welchthathewasproducingplentyofgristforthe“NeutronJack”mill.Withina few years of his taking charge, about 25% of the GE workforce was sentpacking—morethan100,000people.Byhisownadmission,Welchwas“addingfueltothefire”byinvestingmillionsinitemsheacknowledgedsomemightcall“nonproductive,” like a gym at headquarters. TheCrotonville upgrade fit intothat narrative, and critics within GE took to calling the resplendent new digs“Jack’sCathedral.”Thehighpriestwasunrepentant. “Youcan’t aim tobe thebestcompanyintheworldwithcinderblockcells,”Welchtoldme.“Youhadtohaveabeautifulsymbolofexcellence.”OnceCrotonville’sfacilitiesbecamefirst-class,Welchdemandedthesamefor

its students. Attendance would now be by invitation only. Crotonville hadbecomeaplacewhereyouputpeoplewhocouldaffordtobeawayfromworkforafewweeks,”Welchsaid.“Itwasnotaprizedassignmenttobe‘sentuptheriver.’Iwantedittobecomeaplacewherethereactionaroundthecompanywas,“Ohmigod,he got selected?!” (Let it be said that JackWelch was never shyaboutfomentingcompetitioninsideGE.)

What actually went on at Crotonville, in the classrooms and beyond,revolutionized the company. While there still were the standard array offunctional courses, ranging from new-employee orientation to marketing andfinance, thecrucialpartof thecurriculumcenteredconceptuallyon leadership.Thefacultycreatedthreelevelsofleadershipcourses,eachrunningthreeweeks:theManagementDevelopmentCourse(MDC)forpotentialstarswhowereearlyin their careers, the Business Management Course (BMC) for midlevelmanagers,andtheExecutiveDevelopmentCourse(EDC),forthoseWelchsaidhad “high-potential characteristics.” The EDC was so exclusive that nobodycouldgowithoutapprovalfromtheheadofhumanresources,thevicechairmen,andWelch. The “faculty” was made up of GE outsiders, like regular facultymembersfromHarvardandotherelitebusinessschools,thoughincreasinglyGEexecutives themselves taught at leastpartof the courses.Similarly,while casestudies—thebedrockofanMBAcurriculum—wereused,theywereincreasinglybasedonissuesatGEratherthanatotherlargecompanies.The MDC was offered roughly six to eight times a year. With up to 100

studentsineachclass,itwastaughtentirelyatCrotonville.Thetwohigher-levelcourses used what Crotonville called “action learning,” which tended toconcentrateonasingletopic,likequalitycontrol,orasinglecountry.Sometimestheclasses tookplace in thatcountry.Forexample,onthedaytheBerlinWallcamedown,GEwasteachingtheBMCthere.TheBMCwasofferedthreetimesayearandhad60managersperclass.TheEDCwas taughtbutonceannuallyandhadthreetofourdozenofGE’sbestandbrightest.BoththeBMCandtheEDCculminated inapresentationof recommendations toWelchandother topexecutives.Thatwasonewaytheparticipantscametounderstandhowseriouslythe brain trust took Crotonville. Today, 90% of GE’s top 600 managers arepromotedfromwithin.Welch and others viewed Crotonville’s managers qua students as in-house

consultants.“Theyevaluatedhowfastandeffective”GE’snewinitiativesweredoing, Welch said in Straight From the Gut. “In every case, there were realtakeaways that led to action in a GE business. Not only did we get greatconsulting by our best insiders, who really cared, but the classes built cross-businessfriendshipsthatcouldlastalifetime.”Bythe1990s,accordingtoWelch,Crotonvillehadcompletelyturnedaround,

andwas“anenergycenter,poweringtheexchangeofideas.”Teacherssawintheclassroom that they were getting the best students GE had to offer, and thestudents themselves—inpart becauseof thevery fact theyhadbeen invited—

bought into the notion of an in-house corporate university, much as they hadwhenCrotonvillebegan.Crotonville also began inviting inmajor GE customers, both to offer ideas

about “best practices” and to listen toGE’s ideas about them.For prospectivecustomers,suchcovetedaccessmightbewhyGEendedupgettingadealoveracompetitorofferingsimilarprices.SteveKerr,whoatonepointranCrotonvilleforGE,recalledthatwhenacustomerwasdecidingbetween,say,GEPlasticandABCPlastic,wherepriceandavailabilitywerebasicallyequivalent, the trumpcardGEplayedwasCrotonville.Kerrsaysthesalesconversationwouldgolikethis:“IfyoupurchaseGEPlastic,we’llthrowinsometicketsforyourleadershipteamtoparticipateinthehighlycovetedCrotonvilleeducationcenter.Afterall,it’snot about theplastic, it’s abouthelpingyoubecomeabetter leader soyousucceed.”Eventually the faculty became dominated by GE insiders, in large part

because Welch read in Fortune that Roger Enrico at Pepsi was teachingleadershipcoursestohisexecutives.ThesedaysthevastmajorityofCrotonvilleteachers come fromGE.Themain attraction for yearswasWelch.ThoughhehadaPh.D.andonceconsideredtheuniversitylife,hehadbeenanexecutivehiswholecareer.Evenso,hefanciedhimselfateacherandearlyonofteninformallytaught those at GE. One technician, Pete Jones, needed math help to get adegree. InWelch’s office in Pittsfield, Mass., he tutored Jones—and if Joneswasn’tpickingthingsupfastenoughontheblackboard,Welchthrewchalkonhim.Joneswouldgoontoa30-yearcareerteachinginthelocalschoolsystem.WelchlovedbeinginthePitatCrotonville,whereseveraltimesamonthheheldforth for fourhoursormore.Hewouldusuallyarrivenear theendofa three-weekcourse,afterotherteachershadprimedtheaudiencetoduelwithWelch.“Itwasoneofmyfavoritepartsofthejob,”herecalledinhismemoir,noting

that he taught roughly 18,000 students in 21 years. “Going there alwaysrejuvenatedme.”Welch’sMOwasn’tlecturingbutengaginginagive-and-take,thoughittookadecadebeforethestudentsdevelopedenoughgumptiontodoasmuch “giving” as the CEO. Before class, he would often arrange to havedistributedahandwrittenmemoofhisagenda.ForoneMDC,reproducedinhismemoir,hewantedtocover“Whatarethemajorfrustrationsyoudealwithonadailybasis?”and“Whatdon’tyoulikeaboutacareerinGEthatyouwouldliketoseechanged?”IntheEDCclass,heaskedwhatwouldtheydo“iftheywereappointed CEO of GE tomorrow,” which a few of them aimed for, if nottomorrow,thenoneday.Onemanager,JeffImmelt,didgoontosucceedWelch

(thoughWelchcan’trecallwhetherImmelteveransweredthequestioninclass).Sometimestheclasswouldcoverarecentmanagementorethicaldilemma,likehowtofireanemployeeorwhether tocloseadomesticplant—andsometimesthelineexecutivewaseventhere toexplainadecision.Thosewere“rich”and“personal”discussions,Welchwrote.“Everyoneintheroomleftknowingtheyweren’taloneinfacingatoughcall.”AfterafulldayinthePit,Welchmetstudentsinthereccenterfordrinksand

more debate.Over time students appreciated that theywere hearing aboutGEstrategystraight from theboss,whichwasnotalways thesame line theywerehearing from superiors back home. Any large organization struggles with thedisconnect between the message given out at the top and the message as it’sfiltered by those with their own agenda or merely a bad ear. Initially thatbureaucratic disconnect—Welch called it “pockets of resistance”—led toconfusion and annoyance among the students. Eventually, though, Crotonvillesucceededwildly in giving theCEOof amultinational colossus a convincing,authenticwaytosolvethatdisconnect.Welch used the liberating dynamic of Crotonville—openness, directness,

responsiveness—to create Work-Out meetings at various corporate locations.“Coaching”and“listening,”ratherthan“preaching”and“controlling,”werethewatchwords. During a session lasting a few days, prompted by outside“facilitators,” groups of 40 to 100 lower-level employees got to vent theirspleens—in theserviceof takingunnecessaryworkoutof theGEsystem.Thebest partmay have been thatmanagerswho attended the sessions had to giveyes-or-nodecisionson thespot forat least75%of the ideassuggested; if theycouldn’tdecide,theyhadtogiveadateforresolution.Whereas over the years tens of thousands have made it to Crotonville,

hundredsofthousandsbeganparticipatinginWork-OutsandothertrainingthatwereinspiredbythelessonsofCrotonville.ManyprogramsareintheU.S.,butanumberofothersareinsuchplacesasShanghai,Munich,AbuDhabi,Brussels,NewDelhi,andMozambique.“Smallwonder thatpeoplebegan to forget theirroles,”Welchwrote. “They started speaking up everywhere.”AGE applianceworkerput itbluntly toWelch:“For25yearsyou’vepaid formyhandswhenyoucouldhavehadmybrainaswell—fornothing.”That iswhatwaswrought byCrotonville,whichwas aptly rechristened the

John F. Welch Leadership Development Center. As of 2012, some 10,000students come through its doors each year. Half are from abroad. The GEWomen’s Network puts on a Leading & Learning summit for 150 women

leaders.A “journey toCrotonville,” boasts theGEmantra, “is something of apilgrimage—atransformativelearningexperiencethat,formany,canbecomeadefiningcareerevent.”Crotonville’s cultural legacy extends beyond its corporate boundaries.None

otherthanAppleseemstobetryingtoemulateit.Inspiredinpartbyhow“theHP Way” proved to be Bill Hewlett and Dave Packard’s most enduringcontributiontotheSiliconValleycanon(seeChapter17),SteveJobsspentpartof his final years aiming to perfect his own version of Crotonville: AppleUniversity, a secret executive-training program that would institutionalize thesurelyidiosyncraticgiftsofthelate,greatco-founder.Shockingtheworldofacademe,Jobsin2009convincedJoelPodolnytoleave

the deanship of the Yale School ofManagement to build it. Podolny’s job issomehowtoputtogetheracurriculumofpeopleandideasandwrittenmaterialsto showApplemanagershow to thrive, even if they couldnever—and shouldnever—seek to think as Jobs would have. Such is a formidable, perhapsimpossible, task. Before GE and Jack Welch made the corporate-universitymodelvitalandsexy,itwouldhavebeenanunthinkableassignment.

BILLGATESDECIDES

TOTAKEAWEEKOFF

ByDAVIDA.KAPLAN

Thehardestthingforleadersistokeepthemselvesandtheircompaniesrelevant.Giventheenormousshiftsintechnologytoday,it’seasytobecomeobsoleteovernight.Tokeepaheadofthepack,BillGates,whenheranMicrosoft,beganhiscelebrated“ThinkWeek.”Onceortwiceayearhewouldretreatfromtheworldtofocusdeeplyonatopiccrucialtothesoftwaremaker’sfuture.DuringhisThinkWeeks,GatesadmonishedMicrosoftexecutivestopivottotheInternetorfaceextinction,andgavethegreenlighttoXboxLive.AfterGateslefttorunhisfoundation,MicrosoftCEOSteveBallmerstoppeddoingThinkWeeks.OneyoungCEO,however,isreportedlyinterestedinpursuingthehabit:MarkZuckerbergofFacebook.Givenhisyouth,hisambition,andthathemayovertakeGatesastherichestindividualinAmerica,therewouldbeanicesymmetrytoit.—V.H.

FOREVERYJACKWELCH,maybethere’saBillGates.IfWelchusedGeneralElectric’ssprawlingteachingfacilityatCrotonvilletocontinuallyreinventthecompany(seeChapter7),GatesatMicrosoftdiditallbyhimself.From1992to2008,Gates’once-ortwice-a-yearThinkWeekwasaCrotonvilleuntoitself.Armedonlywithstacksofproposalsand,lateron,e-mails,Gates—sequesteredfromstaffandfamily—recalibratedhiscompany’sstrategicdirectionduringhisThinkWeeksinthePacificNorthwest.ItiswherehethoughtofTheRoadAhead,hisfirstbook;itwaswheretheconceptofXboxLivegotthegreenlight;itiswherethenotorious“InternetTidalWave”memobegan.Mostcompaniesarecollegial.SowasMicrosoft.Itsmostsignificantproductswerebornofteamwork.Butthecompany’scorealwayswassingularlymanagedbyGates—anditwastheodd,brilliantconceptionofThinkWeekthatallowedhimtocontemplate,cogitate,andplotMicrosoft’sfuture.Gateshadspent idyllicchildhoodsummersalong theevergreen-linedshores

of Hood Canal, southwest of Seattle. It made complete sense to him that hewouldretreattotherusticfamilycompoundtodohisThoreau-cum-Adam-Smiththinking.Here, inanupstairsstudywithaportraitofVictorHugoon thewall,waswherehewasmost comfortable andcouldconcentratewithoutdistractiononthebiggestpicture.“Ireallywantedtobealone,justreading,”hetoldmeinan hourlong look back in the spring of 2012. “I don’t eat breakfast, so thekitchenstaffwouldbringmealunchandadinner.Thechefswereverygood,soinno sensewas I deprived. Thatwasmy human contact during ThinkWeek,except talking tomywifeon thephoneafter Iwasmarried.Thatwasmysolehumancontact.” (Whenhiswife,Melinda,waspregnantoneyear,GatesdidaThinkWeekatahotelclosertoSeattle,incasehehadtorushback.)DietOrangeCrush sustained him during marathon 18-hour stretches. He kept a smallrefrigeratorinthestudysothathedidn’thavetowastetimemakingthejourneydownstairstothekitchen.Ifheneededabreak,hemightplaybridgeonline.Gates is thought of—fairly—as a ruthless businessman—driven by data,

intolerantofincompetence,competitivetoafault.Yetthere’sanotheraspecttohis psyche that prizes knowledge. In addition to chairman Gates, he can beprofessorGates,knowing that hedidn’t knowwhathedidn’t know—and thenattemptingtomasterafield,beitworldhealthpolicyoreducationreformattheGates Foundation these days, or PC operating systems and antitrust defensesbackwhenhewas runningMicrosoftday today.ThinkWeekofferedhim theopportunity to immerse himself. We all have stacks of memos, articles,manuscripts,thathauntourofficesandstudies—thePerilousPilesorTowersof

Doom. Think Week was Gates’ way of taking them on, in a way that anoccasionalproduct-brainstormingsessionnevercoulddo.“Ifyou’reanexecutiveinabusinesswherethere’salotofinventiongoingon

inuniversities,insmallcompanies—andyouhavewildthinkersinsideyourowncompany—youwanttohaveanhourtoreada15-pagethingtheywroteandthenstep back and think about it, give some feedback,” Gates explained. “It’s noteasywhenyouhaveafastandboomingcompany—you’rehiring,you’regoingoutandmeetingwithcustomers,you’vegotquarterlyearningstodealwith.Asknowledge builds out and new things emerge from smart people in your owncompany,aswellasfromoutsiders,youwanttobeuptodate.”Youcouldn’tdothatatcompanyheadquarters.“DuringthesixdaysofThinkWeek,Ididnothingotherthanreadingandsleepingandeating.”The notion for Think Week, which had its roots in Gates’ visits to his

grandmotheratthecanalinthe1980s,washisalone.“Therearepeoplewhotakeretreatsandgoofftofish,”hesaid.Buthisideawastoskipthefunanddevotethetimetowork.“Iwantedtoforcemyselftoreadfiveorsixrelatedpapersandthengotakeawalkandthenwriteupmythoughtsabout…whendocamerasreallycomein,whendorobotsreallycomein,whendoesspeechtranslationgettobeinggoodenough,howdothevariousformfactors—likephonesvs.tablets—relatetoeachother?”Initially,whenMicrosoftwasinitsyouth,GatesreadalotofPh.D.thesesand

scholarlypapersfromaroundthecountry.Theacademicmaterialwastypicallysuggested by Microsofties, based on something they’d heard. He also hadvarious pieces of software demonstrated for him by Microsoft programmers,thoughthatpartofThinkWeekwasseparatedoutafewyearslaterandbecamequarterlydemodaysatthecompany.In time,most submissions toGateswere based entirely on internal projects

and ruminations—often from lower-level researchers who had no managerialresponsibilityandwhomGateswasunlikelytoseeevenatademoday.Inthatway,anyoneatMicrosoft—evenasitgrewtotensofthousandsofemployees—hadashotatgainingtheboss’sear,andthebosswasabletotapthewattageofhisestimablyableworkforce.PeopleknewthatGatesreallydiddeepdivesintothematerial (and used clichés like “deep dive”), and the company, while notalways the creator of elegant software, nonetheless aimed high. In oneWallStreet Journal article, a Microsoft manager described Think Week as “theworld’s coolest suggestion box.” If the boss blessed a suggestion or okayed aproposal,itmightbethebiggestmomentinyourcareer.Thoughideaswerekey

forGates,hewellunderstood“thepositivemoraleeffect”thatThinkWeekcouldhaveonemployees.Early on, according to Gates, he got about 50 submissions—on paper and

brought to Hood Canal in cardboard boxes, with submissions color-coded bytopic and stamped MICROSOFT CONFIDENTIAL. “I read them all andcommentedonthemall,”hesaid.“Itwasjustmesittingtherewithapen,andIwouldscribbleonthethingandthengotypeupaWorddocument.”Commentswould go not only to the person who submitted a paper, but to a range ofexecutivesandengineerswhomGatesthoughtshouldreadthem.UltimatelyallhiscommentswereputonlineonaSharePointsite,wheretheywerecategorizedby topic.“Icould then tellwhoread themandhowlong thecommentswere,”Gatessaid.“AndwhenIwantedtoreply,Icouldjustsitthereelectronicallyandtypeinmycommentsonvarioussections.”Eventuallyallthesubmissionscameindigitalform.That “very good infrastructure” proved essential as more Softies sent in

material.Bythemid-1990sGatesusedanassistant to filter thesubmissions. Itwasalwayssomebodywhohadatechnicalbackgroundandwho,asGatesputit,“couldreadalotofstuffandjudgewhichthingsweregoingtobeworthhavingmereadornotread.”Thehigh-rankeditems—theywereactuallyranked—firsttotaledabout120.DuringthelastThinkWeeks(theyendedin2008),thenumberhad grown to nearly 400, soGates’ assistant had to create two categories: thesubmissions that Gates still read personally and those that wound up beforeanother Microsoft executive. Normally Gates did not want a smorgasbord oftopics.Instead,hepreferredtodrilldownonafewareas.Forexample,whenhewasinterestedinvisualrecognition,he’dwanttoreadallsubmissionsonit.“I’dreallybewanting to think,Okay, howbig a bet should the companymakeonvisual recognition? Or how does storage change when you get really cheapmemory?Howdoes that change thearchitectureof thedatabase? IsMicrosoftgoingtobeoutfrontonthat?”Most of what Gates sawGates wasn’t interested in. He said his comments

largely were telling folks, “This stuff doesn’t look very promising—let’s notworkonit.”SomepapersgaveGatesoverviewsaboutcomingconsumertrends,likedigitalphotography,interactiveTV,theriseofwirelesstechnology,andtheubiquity of GPS-enabled devices. Other papers brought him up to speed onongoing technical concerns, like microprocessor improvements or Internetsecurity or software piracy or— “one ofmy favorites!” he says—“everythingrelatedtosemiconductors.”Otherswerejustflightsoffancy—about,say,“magic

mirrors” (which had something to dowith letting you try on virtual outfits orinformingyouthatyourcollarwasn’tbuttoned).But now and then Think Week also gave Gates the time and space to

reposition the corporate supertanker that Microsoft had become. His seminal“InternetTidalWave”memoofMay 26, 1995, toMicrosoft executives is thebest illustration ofwhat ThinkWeek could spark.Thememowas inspired byvariousmaterialthatemployeeshadsenthim.Still,itwasGateswhosawthebigpicture—“the opportunity challenge,” in his geekspeak—even if he wasadmittedly late to thechallenge. In thememo,Gates recognized the threatandthehopeoftheNet,whichhedeclared“themostimportantsingledevelopmenttocomealongsincetheIBMPCwasintroducedin1981.”Sofromthatmoment,he “assigned” the Net “the highest level of importance” to Microsoft. Mosttellingly,hesignaledhisdeterminationto“matchorbeat”theservicesprovidedbyaSiliconValleystartupcalledNetscape,“acompetitor‘born’ontheInternet”that had a 70% share of the browser market. Thus began the browser wars,whichledtothesquashingofNetscape’swebbrowser—andU.S.v.Microsoft,theJusticeDepartment’santitrustsuitagainst thecompany thatwaseventuallysettledin2001.Musing about the Tidal Wave memo made Gates think about Microsoft’s

being late to theparty inother recentbattlesover Internet technology.He toldmethat“partofthefunofbeinginthetechnologybusinessisbeingup-to-date,”and “you don’t want to feel like you’re getting behind.” So it was “reallypainful,”hesaid,whena“trendgotfairlywellestablishedbeforeyouknowit’sgoingon.”ThinkWeekswereanefforttobeaheadoratleastnotfarbehind.ButThinkWeeks could only be about identifying ideas. You still had to executethem, and Gates acknowledged that Microsoft, for example—notwithstandingdiscussions about Internet search—“didn’t execute as well as Google did.”Though“weweretalkingaboutit,”hesaid,“thetalentweputonitandthewaywe conceptualized it”weren’t sufficient in retrospect. “That’s always going tohappen because there are thousands of companies trying specific things, and,youknow,999ofthemfail.Butthere’llbeonethathaspickedaverydedicatedapproachthatdoesreallycatchon,andofcourseGoogle’sthebestexampleofthat.”Some Think Week ideas have yet to be developed. Gates cites “how you

organizememoriesofyourkidsinadigitalworldsoyouhaveaneasywaytogoback and look and find things—not just photos, but report cards, movies,comments,e-mails,andstuff.”

GivenGates’ successwithThinkWeeks, thewonder is theydidn’t continueafter he left his day-to-day job atMicrosoft in 2008.Or that other companiesdidn’t try to imitate them. But Gates isn’t particularly surprised by either.“Peoplehavedifferentstyles,”hesaid.“Beingable tocommenton120papersandtakesixdayswhereyou’rejusttotallyfocusedonthat,that’smoremystylethan others’ style.… I just kind of like that, you know, pushingmyself super-hard.” He’s also a realist, knowing that if he alternatively had saved variouspaperse-mailedtohimandhadsaidtohimselfhewouldgettothemsomeday,heneverwouldhave.MostCEOsorotherleaders,hesuggested,wouldbehavethesameway.GateshasbeenaskedaboutThinkWeeksbyseveralCEOs(whomhedidn’t

wish to name) in such fast-changing industries as high tech, cars, drugs, andchemicals—buthehadthesensethatthepracticewastoo“hardcore”forthem.Healsosaidhe thoughtsomecompanieswere toobroad-gauged foraCEOtohaveThinkWeeks.TakeGeneralElectric.“It’skindoftheextremecase,”hesaid.“Whatareyou

going to get—a paper about polyethylene plastics, a paper about turbofan jetengines,apaperaboutmortgagederivativescomingoutofGEFinancial?It’ssobroad.”What theCEOofGE ismostlydoing is “pickingpeopleandbusinessmodels.He’snotreallypartofthequestion‘Areourrefrigeratorsabreakthroughornot?’”EvenatMicrosoftitself,theThinkWeektraditionended.“Therewasanotion

theymightcontinueasacommunityexercise,eventhoughpeoplemightnottakeafullweek,”Gatessaid.“ButonceIwasn’tthere,sortofasakeyaudiencetowriteallthesepapersfor—knowingtherewasareasonablechancethatI’dreadthemandwriteathoughtfulcommentonthem—thenitdidn’tcontinue.”Athisfoundation,Gatesdoesn’tdoThinkWeeksanymore.Hesaidthere’sno

reasonto,sincehenolongerhasanall-consumingmanagerialjob.“Ihavemoreabilitynowtospendunstructuredtime”withtopscientists,academics,doctors,andeducators.Andhegoesto“inventionsessions”atIntellectualVentures(IV),aprivateinvestmentandinventionlaboratoryforfieldsrangingfromsoftwaretobiotechnology.IVwasstartedbyNathanMyhrvold,thepolymathicformerchieftechnology officer for Microsoft. Gates uses his sessions at IV for topics onglobalhealthandsays theycanendupfunctioninglikeaThinkWeekon,say,malaria. “Because I’ll getmaybe 800 pages ofmaterial,more sometimes. I’llhavetosetaside2½daystoreadall thatstufftobeready,”Gatessaid.Inthatsense,forGates,themodelofThinkWeeksliveson.

SOFTSOAP’SBLOCKINGDECISION

ByBRIANO’KEEFE

It’stheearly1980s,andyou’vecreatedanentirelynewconceptinanoldindustry:aliquidhandsoapcalledSoftsoap.Looming isProcter&Gamble,a100-tongorillaable tocrushyou theminute thenewconceptgainstraction.Whatdoyoudo?Youbuytime.AsmallMinnesotabusinessmadetheriskydecisiontobuyup the entire U.S. supply of plastic pumps—some 100 million units—effectively blocking P&G fromlaunchingacompetitiveproduct.Itfoundabottleneckintheprocessandthencontrolledit.Applehasusedthisformularepeatedlybyidentifyingacriticalcomponentinkeydevicesandlockingupthesupplyforasignificant period, notably the flash memory drives used in its iPods. In the 19th century John D.Rockefellerpurchasedthecompanythatmadetheironringsusedtomakeoilbarrels.Bycontrollingthissmallbutcriticalcomponentoftheoilindustry,hethwartedcompetitors.TheSoftsoapstoryisallthemoreremarkablebecauseitisaboutanantoutmaneuveringanelephant.Here’showthecompanydidit.—V.H.

ROBERTTAYLORknewheneededtodosomethingradical.Theinventiveentrepreneurhadjustintroducedabrilliantconcept—handsoapinapumpbottle—that was roiling a centuries-old industry. Sales of his Softsoap wereacceleratingbeyondhismostoptimisticprojections.Butexperiencehad taughtTaylorthathisupstartcompany’ssuccessmightbeshort-livedoncesoap-making

giants like Procter & Gamble, Armour-Dial, and Colgate-Palmolive came tomarket with competing products. How could he slow down his larger rivalsenoughforhisbrandtogainlastingtractionwithcustomers?The plan Taylor hatchedwas both elegantly simple and spectacularly bold.

Like JohnD.Rockefellerbeforehim,Taylor foundabottleneck in the systemandownedit.MorerecentlyApplehasfollowedthesameformularepeatedly—identifyingacriticalcomponentinakeydevice,suchastheflashmemorydriveusedinitsiPods,andlockingupsupply.But Taylor’s success with Softsoap was particular striking given the odds

againsthim.“Togettomarketwithsomethingthat’strulydifferentisnevereasy,particularlywhen there are big incumbents that could choose to imitate you,”says Hugh Courtney, dean of the College of Business Administration atNortheasternUniversityandauthorof20/20Foresight:CraftingStrategyinanUncertainWorld.Taylor’s successwithSoftsoap showsahighdegreeofwhatCourtney calls “allocentrism,” or the ability to understand others and theirpropensityforaction.ThatinstinctgaveTaylortheleveragetoturnthetablesonhisrivals.Thestorybeginsonamorningin1977,wheninspirationstruckTaylorashe

was driving to work. At age 41, he had already proved himself to be anunusuallycreativeandambitiousbusinessman.AftergettinghisStanfordMBAandworkingfortwoyearsinsalesforJohnson&Johnson,Taylorhadfoundedhisowncompany,theMinnetonkaCorp.,in1964with$3,000andahunchthathe could make money selling fancy, packaged gift soap. He set up shop inChaska,Minn.,justoutsideMinneapolis,andinthebeginninghehiredwomentomakehand-rolled soapout of their homes.Before longhehaddeveloped anetworktodistributehisVillageBathlineofproductstodepartmentstoresandgiftshopsaroundthecountry.Taylor was a font of ideas. He quickly expanded into body lotion, scented

candles,bubblebath,andotheritems.Inasinglespringheonceintroduced78newproducts.Taylor took the companypublic in1968, andby the late 1970sMinnetonkawasupto$25millioninannualsales.HehadaddeddistributorsinEurope, Canada, andAustralia. But the restless CEOwas casting about for amass-market product that could take his company to the next level. He hadalreadyexperiencedamajorsetbackwhenClairolandGilletteknockedoffhispromising lineof fruit-scented shampoo, rushed their ownproducts tomarket,andsqueezedhimout.As he steered his car through traffic that morning, Taylor kept picturing a

sloppybarofhandsoapsittingonanotherwisepristinekitchenvanity—andhowtheuglysoapruinedthepicture.“I thought,Well,whynotputit inabeautifulcontainerandhaveapumpandit’sdisposable?”saysTaylor.“Anditmightbesomethingthatwouldappealtohousewives.Sothat’showthatallstarted.”Hetoldhischemists toget towork,andtheyquicklydevelopeda liquidsoapthatincludedemollientsinashampootypeofformula.A few months later he introduced the Incredible Soap Machine. It was a

pump-operated 16-ounce bottle of liquid soapwith flowers on it that sold for$4.95andcameinagiftbox.Taylorsolditindepartmentstores,whereitwasatremendoussuccess.WomenwroteletterstoMinnetonkaravingabouttheSoapMachine. But why, they wondered, couldn’t they buy it in drugstores andconvenience stores like regular bar soap? Spurred by the response, Taylordecidedthatifhereducedthesizeofthepackage,tookthebottleoutofthebox,lowered the price, and gave it a more generic name, he might have a mass-markethit—ifhecouldalsogettherightdistributionandfendoffthebigboys.Inthelate1970s,accordingtoa1995HarvardBusinessSchoolcasestudyby

AdamBrandenburgerandVijayKrishna,themarketforbarsoapintheU.S.wasabout $1.5 billion in annual sales and was dominated by a handful of largecompanies. The dominant brands were Dial from Armour-Dial, followed byIvoryandZest fromProcter&Gamble.LeverBrothers, theU.S.subsidiaryofUnileverandthemakerofDove,andColgate-Palmolive,withIrishSpring,wererightbehind.Theaveragepriceofabarofsoapwas23cents.Innovationwasinshortsupply.Bylate1979,Taylorwasreadytolaunchhisnewmass-marketliquidsoapand

hadsettledonaname:Softsoap.Aftermonthsoftestmarketing,hehaddecidedtosellitfor$1.59ina10.5-ouncebottle,theequivalentofmorethanfivebarsofsoap.Taylorwentoutandappointed91foodbrokersaroundthecountrytotakeSoftsoapintoterritorythatMinnetonkahadneverbeforepenetrated:groceryanddrug stores. The only problem was that many store managers wanted to putSoftsoap in the health and beauty section; Taylor fought to get it placed rightnexttothebarsoapsothatcustomerswouldunderstandthatitwasanalternativetosloppy,traditionalsoap.The response from testmarketswas so promising that early in 1980Taylor

took a huge gamble: He cut his first television ad and spent $7million on anational campaign to introduce Softsoap. At first nothing happened. Thecompanydidn’tgetonereorderforthreemonths.Inventorykeptpilingup.“MyCFOcame in to seemeonedayandsaid, ‘Bob,haveyougotanymoregood

ideas? Because this one just isn’tmoving through,’ ” says Taylor. But Taylorwasn’t worried. He reminded the CFO that their research had shown thathousewives,thetargetcustomers,neededtoseeaproductatleastthreetimesonTV before it fully registered with them. Taylor was confident that a wave ofsaleswouldsoonkickin.“Twoweekslaterwewereoutofstockoneverythingwehadinthewarehouse,”saysTaylor.“Itwascompletelysoldout,andthenwechaseddemandforeightorninemonthsbeforewewereeverabletocatchup.”BytheendoftheyearSoftsoaphadbroughtin$39millioninsales.At that point Taylor faced his biggest hurdle yet: competition. Dozens of

imitation products hit the market from small competitors. Much morethreatening was the fact that the big soap makers like P&G, Unilever, andColgatewerebeginningtotestproducts.ToTayloritwasstartingtolookalotlike his experience with fruit-scented shampoo. “We felt the competitioncoming,andtheyweretryingtocostusrightoutofthebusiness,”saysTaylor.“Theyweresellingliquidsoapattheirmanufacturedcost.”Headds,“TheonlythingthatIcouldthinkofwastoslowthemdown.”Atthebeginningof1981,TaylorphonedCalmar,theCaliforniacompanythat

manufacturedalltheplasticpumpsforSoftsoap,andaskedthepresidentandthesalesmanagertoflyoutforamajorstrategysession.Whentheyarrived,TaylortoldthemthatMinnetonkamightwanttobuyasmanyas100millionpumpsthatyear.“Well,theyalmostjumpedoutoftheirseatsbecausetheyhadnevertakenanorderthatbigintheirlives,”saysTaylor.“Isaid,‘Howwouldthisaffectyourmanufacturing?’ And they said, ‘It would pretty much close us down. Wewouldn’tbeabletoshiftanyproductionovertoourothercustomers.’”Committingtosuchagargantuanorderfeltrisky.Thebiggestorderhe’dever

placedbeforethatwasforabout5millionunits.ButTaylorwasprettysurehecouldswingitfinancially.“Wehadsomuchmoneyflowing,wewerefilthyrichbecauseofdemand,”hesays.Andheknewthatitwouldbeaneffectivewaytotemporarilycripplehiscompetition.Therewasonlyoneothermanufacturer intheU.S.makingplasticpumpsat thetime,anditdidn’tmaketherightkindtoworkinamass-marketproduct.Chinawasn’tyetafactorinmakingthekindofproductthatrequiredplastic-injectionmolding.Itwouldtakeweeksandweeksforanothermanufacturerjusttodesignandcutthesteelforapumpmold.TaylornegotiatedapricereductionwiththeCalmarexecutivesandplacedtheorderfor100millionpumpsonthespot.Taylor’sgamblepaidoffbig-time.Hisbigcompetitorswerestymied.“Wehad

themby the shorthairs,”he says.“Foragoodyear itdelayed them.”Salesof

Softsoapcontinuedtoaccelerate,andMinnetonkakeptitsNo.1positioninthegrowing market for liquid soap. Over the next few years Taylor developedSoftsoapspinoffsforshowersoap,worksoap,andmedicalsoap.The large soapmakers eventually did get tomarket and began to undercut

Minnetonkaonprice.In1983,P&G’sIvorybrandliquidsoapovertookSoftsoapfor the No. 1 spot in market share, according to the Harvard case study.Minnetonkalostmoneyinboth1982and1983,andTaylorwasforcedtoslashhisworkforce.ButtheestablishedbrandpowerofSoftsoapgaveTaylortimetoretrench.HedecreasedthesizeoftheSoftsoapbottleto7.5ouncesandloweredtheprice.By1985,SoftsoapwasbackastheNo.1brand,with36%ofsales,intheover$100millionmarketforliquidsoap.Ever the innovator, Taylor expanded into markets beyond soap. In 1983,

MinnetonkaintroducedCheck-Up,thefirstantiplaquetoothpasteintheU.S.andthefirsttobesoldinapump.Buthislargerrivalsquicklyrushedouttheirownpump and antiplaque products in the established brands, causing Check-Up’smarketsharetowither.Taylorfoundmoresuccesswithfragrances.In1980hehadboughttheCalvin

KleinCosmeticsbusiness,anditbegantotakeoffin1985whenhelaunchedtheperfumeObsessionwithamassive$17millionadvertisingcampaign. Itwasahugehit,withsalesof$50millioninthefirstyear.Thenhebroughtoutanotherwildly successful fragrance calledEternity. Taylor found the profitmargins inthe scent business to be much sweeter than in soap. “I could see that theconsumer goods business was going to be a dogfight long term,” he says. “Ithought,IcantakethesameamountofcapitalandputitintoCalvinKleinandmakesomuchmoremoney.”So when Colgate-Palmolive CEO Reuben Mark called Taylor in 1987 to

discussbuyingSoftsoap,hewasreadytomakeadeal.HeendedupsellingthebusinesstoColgatefor$75million.Andthen,acoupleofyearslater,hesoldtherest of the company to a subsidiary of Unilever, another of his old soapcompetitors,for$376.5million.Intheendtheindustrygiantsretainedcontroloftheir markets, but not before Robert Taylor taught them a lesson in businessstrategy.

TOYOTAPURSUESZERODEFECTS

ByALEXTAYLORIII

WhenToyotamadethedecisiontoputqualityfirst,themovewasn’tasobviousasitmightseemtoday.Thecompanywasstruggling.Whenitstartedshippingitsfirstcars to theAmericanmarket inthelate1950s,they were met with derision for their shoddy quality. In the midst of this crisis, president Taizo Ishidadecided to do one of the hardest things for any company—especially a Japanese one—to do. Toyotaadoptedtheideasofanoutsider—inthiscasethequalityguruW.EdwardsDeming—andturneditsentireorganizationupsidedown inorder to improve itself.Today the company’s quality system,knownas theToyotaWay,hasbeenadoptedbymanufacturersand,yes,evenservicefirmsaroundtheworld.TheToyotaWay,forexample,helpedthecompanydesigncarsfasterthanitscompetitors,provingthattheprocesswasjustasimportantfor“brainwork”asitwas“backwork.”Executingthisprocess,however,isalotharderthan it looks, and even Toyota in recent years has struggled with quality problems. By reapplying theToyotaWaywithrenewedvigor,thecarmakerisnowgettingbackontrack.Here’sToyota’ssecretsauce.—V.H.

IN 1961, TOYOTA STOPPED SELLING CARS in America andwithdrewfromthemarket indisgrace. Itclosed itsoffices inChicagoandSanFrancisco andmoved its headquarters fromBeverlyHills into rented space inHollywood.ThecompanyhadtotallymisreadtheU.S.marketbytryingtosellan underpowered, overpriced minicar with the durability of Kleenex. ThecompanywouldnotreturntotheU.S.until1965,butwhenitdid,itbroughtwithitanewcarwithmuchhigherqualityatamorecompetitiveprice.Thatinitiativelaunchedastringofsuccessesthatnowstretchesoverfivedecades.ThestoryofhowToyotatried,failed,andthendecidedtotryagainintheAmericanmarket—thiswith thehelpofan Iowa-bornstatisticiannamedW.EdwardsDeming—isuniqueintheannalsofmanagement.Toyotagotitsstartin1925asamakerofautomaticloomsandenteredthecar

business in 1936. After the war, one of its early successes was the Toyopet,which, despite its tiny, 58-horsepower engine, had become popular withJapanese taxi drivers because of its ruggedness and reliability. An expansion-minded Toyota had already launched an export business by selling trucks in

SouthAmerica. Executives believed itmade sense to combine the company’sstrengths and export cars aswell. For that, they decided to target theworld’ssinglelargestpoolofcustomers:Americans.The decision to target the U.S. came about this way, according to Toyota

JidoshaKabushikiKaisha inToyota: AHistory of the First 50 Years. ShotaroKamiya,presidentofToyotaMotorSales,hadvisitedAmericaonabusinesstripin1955andwasastonishedbythenumberofsmallcarshesaw.Nearly100,000wereontheroad—allofthemEuropeanandmostofthemVolkswagens.ToyotahadbeensuccessfulsellingitsLandCruiserSUVoverseas,soperhapsitcoulddo the same with passenger cars. But Toyota would have to move quickly.KamiyafearedthatthesuccessoftheEuropeanswouldcausetheU.S.toimposeimport restrictions. If theJapanesedidn’testablishapresence in theU.S., theyriskedbeingshutout.Kamiya’s proposal sparked a great debate within Toyota. Going up against

GM,Ford,andChryslerintheirhomemarketwithsmallcarsseemedtoogreatachallenge foracompany thathadbeenmakingcars for suchashort time.ButKamiya found a strong supporter in Taizo Ishida, president of Toyota MotorCorp. (The sales and manufacturing arms of Toyota operated as independentcompaniesfrom1950to1982.)IshidahadalsovisitedtheU.S.andnoticedhowlittleattentionDetroitwaspayingtosmallcars.ItwastheeraofV-8enginesandtailfins. Small cars like the Corvair and the Pinto wouldn’t be introduced foranotherseveralyears.IshidahadenjoyedsuccessexportingToyota’sautomaticlooms overseas, and he believed that the company could do the same withpassengercars.Hisargumentswontheday.Withminimumpreparation,ToyotaMotorSales

U.S.A.wasincorporatedinCaliforniainOctober1957.ItmadeitsheadquartersinBeverlyHillsandfoundanoldAmericanMotorsoutletinHollywoodtoserveasitsfirstdealership.OntheshowroomfloorweretheonlyToyotasintheU.S:apairofToyopetsedans.Toyotasolditsfirstcarearlyin1958,andbyyear’sendithadsoldjust268

more,alongwithoneLandCruiser.Thefeeblesalesperformancewasasignofalarger problem: The Toyopet (later renamed the Crown) was not ready forprimetime. In the rush tomove into theU.S., Toyota had shipped an inferiorproduct.Itcost$700morethanaVWBeetleandwasn’tnearlyasgood.Thecarvibrated badly at speeds over 60miles an hour and tended to overheat whendriven up mountains or in the desert. It also guzzled gas and stalled withoutwarning.

Toyota had discovered that it was uncompetitive, but it was too late. InDecember 1960, just three years after it arrived and its reputation in tatters,ToyotasuspendedU.S.operations.Ithadsoldfewerthan2,000cars.Foraproudcompany,itwasashamefulmoment.ThenToyotamadeadecisionthatwouldnotonlyreverseitsfortunesbutalso

would help revolutionize the way companies manufactured their products. Itreached outside its own culture and adopted the quality ideas of anAmericanbusiness consultant. W. Edwards Deming, the father of total qualitymanagement,wasaboutascharismaticasametal-turning lathe.A formalmanwith rural roots, hedressed inworn three-piece suits anddelivered lectures inblunt language. Unlike most consultants, who sell while they teach, he madelittleefforttowinoverhisaudiences;insteadheconfrontedthemwiththeirownmistakes.TheNewYorkTimeswrotethatDeming“spoketoseniorexecutivesasiftheywereschoolboys.”YetDemingsomehowmanagedtonavigatethatmostcomplex of cultures, Japan’s, and delivered a message that resonated withbusinessmenunusedtobeinglecturedbyagaijin.TheDemingPrize,foundedinhishonorin1950,immediatelybecamehighlysought-afterbycompaniesdoingbusinessinJapan,nonemoresothanToyota.Trainedasamathematician,DeminghadjoinedtheU.S.CensusBureauand

startedtoadviseitonsamplingtechniquesforthe1940census.DeminglefttheCensusBureau in1946 tobegin a consultingpractice, but ayear later hewascalledtoJapanbyGen.DouglasMacArthur’soccupationgovernmenttoadviseonsamplingtechniquesforacensusaimedatquantifyingthehousingshortageinthenation.DemingspenthisfreetimetouringthecountryandmadefriendswithseveralJapanesestatisticians.WhenhisjobwasfinishedhemovedbacktoAmerica,becomingaprofessor

atNewYorkUniversity.Deming returned to Japan in 1950with an invitationfrom the JapaneseUnion of Scientists and Engineers to raise the level of thecountry’sproduction standards. In June,Demingdelivered the first of adozenlectures to a standing-room-only crowd of 500. For the next threemonths hetaughthundredsofengineers,managers,andscholars—andatleastonegroupoftop executives—statistical process control and quality improvement. Demingtold the Japanesemanagers that if they followed his recommendations, “Theywouldcapturemarketstheworldoverwithinfiveyears.”Hisreassuringwordstoacountrystrugglingtorebuildmadehimahero.Demingpreachedasimpledoctrineastruetodayaswhenhefirstformulated

itmorethan80yearsago:Betterqualitywillreduceexpenseswhileincreasing

productivity and market share. He taught companies to treat production as asystem, involvingsuppliersandconsumersaswellas the factory. InDeming’sworld,mass-produced items that were supposed to be identical always variedfrom one another in practice. Therefore, industrial processes should include acycle for observing those variations and changing the process to reduce them.Thedefectsshouldbeanalyzed,changesmade,and theprocessrefineduntil itwasdoneright.Hisfavoritesayingwas“InGodwetrust;allothersmustbringdata.”His message particularly resonated with the post–World War II Japanese.

Deming believed that topmanagementwas responsible for 85%of all defectsandstressedtheneedforanappreciationoftheindividualworker.“Theworkerisnottheproblem,”hesaid.“Theproblemisatthetop.”InW.EdwardsDeming:TheStoryofaTrulyRemarkablePerson,JapanspecialistRobertB.AustenfeldJr.writes thatDeming showed the Japanese respect at a timewhen their self-esteemwasverylowandthelabelMADEINJAPANwassynonymouswithshoddy,disposable goods. Deming’s ideas dovetailed with many of Japan’s owntraditions.Japanhadlongheldhardworkandqualitycraftsmanshipasimportantvirtues.Demingpreached thatcompaniesmust treatworkersasassociates,nothiredhands.“Breakdownbarriers”and“driveoutfear”weretwoofhisguidingprinciples.In1961,stillwoundedbythefailureofitsU.S. initiative,Toyotadecidedto

revampitsmanufacturingsystemandadopt theDemingprinciplesaspartofasystemoftotalqualitycontrol.Apparentlyitdidsoonitsowninitiative.ThereisnoevidencethatDemingevervisitedthecompanyormadeanyovertures,butitis clear that some at the company were familiar with his work. Now firmlycommittedtothepassenger-carbusiness,Toyotawasmakingadeterminedefforttoimproveitsprocessesinafundamentalwayandachieveinternationallevelsofqualityandcost.Asafirststep,itaimedtoreduceprocessingdefects,customerclaims, and rework by 50%. It stated its goal publicly: It wanted to win theDemingPrizeforqualitycontrol.WhatToyotadiscoveredwasthatthedominantcauseofproductdefectswas

wear in the machines that made the parts. As machines wore down, theyproduced defective parts; productivity suffered while workers waited for themachines to be fixed or replaced. So Toyota changed the way it operated itsfactories. First, it stopped moving workers around and assigned themresponsibility for individual machines. Then it tackled dirt. Since dirt wasresponsible for thewear thatwascausingdefects,workerswere taughthowto

eliminateit.Thelaststepintheequationwassystematicpreventivemaintenanceandimmediateattentiontoproblems.Ifamachinestartedvibrating,forinstance,the operatorwas told to stopquickly and fix it.Years laterShoichiroToyoda,nowToyota’s honorary chairman,would explain, “We simply put quality firstandfollowthroughwiththehonestpracticeofdevelopingqualityproductsandqualitypeople.”Hemakesitsoundsimple,buttheimpactwasrevolutionary.TheDemingprinciplesworked,andthemessagestuck.Fouryearsafterithad

begun to apply the Deming principles, Toyota launched a sedan called theCorona thatwas specially engineered forAmerican drivers. Itwas evenmoreaffordable than the Toyopet but featured luxuries like air conditioning, anautomatic transmission, carpeting, sun visors, armrests, tintedwindows, and aglovecompartment.Moreover,itwasdesignedtobeinternationallycompetitiveandwithstand the rigors of high-speed highway driving.During development,technicalimprovementsweremadetoimprovedurabilityandhandling.Andthequalitywasvastlyimproved.ToyotawentbacktotheU.S.,andthistimeitwassuccessful: The Corona sold well. It achieved another goal as well. In 1965,Deming returned to Japan to present theDeming Prize formajor advances inqualityimprovementtoToyota’spresident,FukioNakagawa.The success of Toyota would prove infectious. Eager to unlock its quality

secrets,GMformedajointventuretobuildcarswithToyotaatanexistingGMassemblyplantinFremont,Calif.,beginningin1984.GM’sengineersexpectedToyota’s executives to be dazzled by the high technology and automatedequipment at Fremont, but Toyota had it ripped out and replaced with oldermachinery.Miraculously, the same plant was producing 50%more cars, withfewer defects than before.Demingwould have been amused.Years earlier hehadobserved,“AmericanmanagementthinksthattheycanjustcopyfromJapan—buttheydon’tknowwhattocopy!”Ford also tried to emulate Toyota. When Deming arrived at its Detroit

headquarters in February 1981, Ford executives were expecting a slickpresentationonquality.Deming,instead,insistedonaskingaboutthecompany’sculture and management philosophy. He questioned the way its managersoperated and said that management actions were responsible for most of theproblemsindevelopingbettercars.Statistical-controlchartsstartedappearinginthecompany’sfactories,andFordadoptedtheslogan“Qualityisjobone.”FordCEODonPetersen said, “We aremoving toward building a quality culture atFord, and themany changes that havebeen takingplace here have their rootsdirectlyinDr.Deming’steachings.”YetthelessonsfromDemingwereforgotten

when Ford became preoccupied with expansion. They weren’t revived until2006,whenaerospaceengineerAlanMulallyarrivedfromBoeingandbroughtDeming’s principles with him. “My entire business approach is based uponDeming’scontinualquality improvementforeverfoundation,”Mulallysaid.“ItisreallygainingmomentumhereatFordagain.”Unlikeotherqualityconsultants,Demingneverbuiltanorganizationaround

himself.AstheTimespointedoutinhisobituaryin1993,hecontinuedtoworkasasolopractitioneroutofanofficeinthebasementofhisWashington,D.C.,house.Asidefromabriefspikeinrecognitionfroma1980NBCdocumentary,heremainedmostlyunknowntothegeneralpublic,despitetravelingwidelyoncorporate assignments into his nineties. He never lost his characteristicbluntness. In the documentary he was asked, “If Japan can, why can’t we?”Demingreplied,“Anybodycanproducequalityifhelowershisproductionrate.That isnotwhatIamtalkingabout.Statistical thinkingandstatisticalmethodsare to Japanese production workers, foremen, and all the way through thecompany a second language. In statistical control, you have a reproducibleproduct hour after hour, day after day. And see how comforting that is tomanagement—they now know what they can produce, they know what theircostsaregoingtobe.”Having mastered the second language of quality, Toyota never forgot it. It

incorporated Deming’s principles into the Toyota Production System, and itremains at the very top of the list of the automobile industry’s highest-qualityproducers. Nor did it forget the lesson of what it meant to enter a marketunprepared.Thecompanyisrenownedfortheamountofdataitcollectsandtheanalysisitperformsbeforemakingabigdecision.Whenitgetsthingswrong—itneededthreetriestodevelopacompetitiveminivanandisstilltryingtomasterthe complexities of theAmerican pickup-truckmarket—it simply reloads andtriesagain.Intheprocessofcontinuousimprovement,Toyotagrewtobecomethelargest

autocompanyintheworldand,despitesetbacksfromnaturaldisastersin2011,itappearspoised to regain its title. Itnever forgot theAmericanwhohelped itgetthere.AcceptingtheAmericanSocietyforQuality’sDemingMedalin2005,two years after its namesake’s death, Toyoda offered this tribute: “Hewas aninvaluable teacher … playing an indispensable role in the development andrevitalization of post-war Japan.Aswe continued to implementDr.Deming’steachings,wewereable to raise the levelofqualityofourproductsaswellasenhanceouroperationatthecorporatelevel.IbelievethatTMC[ToyotaMotor

Corp.]todayisaresultofourcontinuedeffortstoimplementpositivechangeinpursuitoftheDemingPrize.”You could say, as they do in the Lexus commercials, that Toyota was

committedto“therelentlesspursuitofperfection.”

EXTREMECUSTOMERSERVICE

ByGEOFFCOLVIN

Nordstrom’sdecisiontoletcustomersreturnproducts—eveniftheydidn’tbuytheitematoneofitsstores—radicallyrevolutionizedtheserviceindustry.Todayweoftengivelipserviceto“Thecustomerisalwaysright,” but those companies that really knowhow to implement a returns policywill have a competitiveedge. Nordstrom created what management sage Jim Collins calls a “catalytic mechanism.” As Collinsdescribesit,itis“asimpleyetextremelypowerfulmanagerialtoolthathelpsorganizationsturngoalsintoresults.” By focusing on customer returns with no questions asked, Nordstrom found a way to turn itsaudaciousaspirationtobetheworld’sbestretailerintoaconcretereality.Here’showthatideawasborn,andhowNordstrommadeitwork.—V.H.

ITMUSTBESAIDUPFRONT that the company says the tire story isabsolutely true, though some people have wondered. What’s much moreimportant is that the story exists at all, and lives on. It’s a powerful symbol,representing a business policy that has greatly benefited a large retailer, hasinfluencedcompaniesofallkindsaroundtheworld,and,believeitornot,holdsthepotentialtonudgewholeeconomies.(Butmoreonthetirestorylater.)All that’s fairly impressive for a policy that began as a simple decision by

threebrothersrunningtwoshoestores.WearetalkingaboutthereturnpolicyofNordstrom, the Seattle-based retailer. The policy is that it will take virtuallyanythingbackandgiveyouarefund,noquestionsasked,regardlessofwhentheitemwasboughtorwhetheryouhaveareceipt.Abeat-upfive-year-oldpairofshoes?Nordstromwilltakethemback.Ajacketthatyouboughtyesterday,woretoapartylastnightwiththetagstuckedinside,andarereturningtoday?You’llgetyourmoneyback,andyouactuallydidn’thavetoleavethetagson.It’sthemostliberalreturnpolicyaretailercouldadopt.The decision wouldn’t have seemed momentous back when it was made

exceptthatNordstromwasthenasmallbusinessintheDepression,andinthosecircumstanceseverydecisionismomentous.Everett,Elmer,andLloydwerethesonsofJohnNordstrom,whohadcomeoverfromSwedenatage16.Hetried

his luckas a laborer andapotato farmer justoutsideSeattle, thenmade somemoneyintheKlondikegoldrushof1897.WhenhereturnedtoSeattle,heandanotherimmigrant,CarlWallin,startedalittleshoeshop(storefront:20feet)atPike Street and Fourth Avenue. Wallin & Nordstrom kept moving to largerquarters and eventually opened a second store, but remained a small, localbusiness.JohnNordstrom sold his interest toEverett andElmer in 1928;Wallin sold

themhisinterest(andremovedhisname)in1929.Lloydjoinedhisbrothersin1933aftergraduatingfromcollege.Thethreesonswerenowfullyinchargeoftheirtwo-storeempire,justintimefortheDepression’sworstdays.Seattle went bankrupt. Hooverville shantytowns sprang up. Hardly anyone

could afford new shoes. Nordstrom came within a month of shutting down.Somewhere in this period (even the brothers couldn’t pinpoint exactlywhen),theymade the ultimate contrarianmove and adopted their super-liberal returnpolicy. It would be satisfying to report that they foresaw the policy’sextraordinaryeconomicpower,butthatwouldnotbeaccurate.Thebrothersjusthated dealingwith the obviously unjustified return claims that are a small butinevitable part of retailing, so they decided not to fight them. They told theclerks not to bother fighting them either. As Elmer explained (quoted in TheNordstrom Way: The Insider Story of America’s #1 Service Company by Robert Spector andPatrick D. McCarthy), “We told them [the clerks], ‘If the customer is notpleased,shecancometousandwe’llgiveherwhatshewantsanyway.’”Itfollowsthatifastorewillneverdisputereturns,thencustomerscanreturn

anything.Anythingatall.Even,intheory,tires.Thetirestory,ifbysomestrangecircumstanceyou’veneverheardit,isthata

customer once returned a tire (or tires) toNordstrom and got a cash refund—eventhoughNordstromhasneversoldtires.Thestoryhastakenontheauraofmyth,andSnopes.com, thewebsite that investigatespopular legends,hasevenconcluded that it isn’t true. But the company says it actually happened at theFairbanks, Alaska, store in the 1970s. Nordstrom had recently moved into abuilding previously occupied by a business that did sell tires, and when acustomercameinsayingthiswaswherehehadboughthistires,theNordstromemployeesondutydecidedtorefundhismoney.What matters is that the policy is real, and the story encapsulates it

unforgettably.Butitwouldn’tbeworthtalkingaboutifitwereNordstrom’sonlyunusual trait. The return policy is the key element of an extreme customerservice philosophy that has helpedNordstrom thrive and grow through an era

whenmostregionalretailers,asNordstromlongwas,failedorgotboughtbyoneof the national giants. Nordstrom created what management consultant JimCollins calls a “catalyticmechanism.” This is a galvanizing, non-bureaucraticway,asCollinsputsit,toturnobjectivesintoperformance.Aswithmanyofthebestbusinessdecisions,thelargercorporateenvironment

makesitfarmoreeffective.Employeesaregivenextraordinarylatitudetomakecustomershappy.Ondayone,newhiresarealsotoldNordstrom’srules:“RuleNo.1:Usegood judgment inall situations.Therewillbenoadditional rules.”Thus,strictlyspeaking,Nordstromhasnospelled-outreturnpolicy.Thedefactopolicy derives from empowered employees and a culture that guides them tomove heaven and earth in finding a solution on behalf of the customer. Oneresult is countless stories—true ones—about salespeople heroics. Runningacross the street to buy from a competitor (at a higher price) an item thatNordstrom didn’t have in a customer’s size. Sending a tailor to a dissatisfiedcustomer’s home to alter a suit—and then refunding the price of the suit, justbecausethecustomerwasunhappyinthefirstplace.Takingbackshrunkenshirtsfrom a customer who admitted it was his fault—he hadn’t followed thelaunderinginstructions—andwhowasn’tevenseekingarefund, justadviceonhowtoundothedamage.Suchgenerositymayseemunwisetoahard-headedbusinessperson.Butmany

research studies have shown that liberal return policieswork—that theymorethan pay for themselves. The reasons are more numerous than you mightsuspect. They’re revealed by the findings of behavioral economics, for whichresearchers have won Nobel Prizes. The Nordstrom brothers didn’t win anyNobelPrizes,buttheyapparentlyunderstoodhumannature.Themostobviouseffectoftheirpolicyisthatitencouragespeopletobuy;if

you think you might be stuck with a purchase forever, you may refuse topurchase something even if you think—but aren’t sure—you’d like it.Economists call this “regret avoidance.” We are regret-minimizing machines.Thepain ofmaking a baddecision far outweighs the satisfactionofmaking agooddecisionon thesamescale.Nordstrom’s returnpolicy takes regretoutoftheequation.The policy also signals that Nordstrom merchandise is high quality. If it

weren’t,thecompanywouldn’tbewillingtoguaranteeit.Asubtlerbut surprisinglypowerfulelementof thepolicy iswhatbehavioral

economists call the endowment effect.Wevalue something thatweownmorehighly than we value the same thing if we don’t own it. That’s irrational, of

course, but a central finding of behavioral economics is that humans arefundamentallyirrational.Ordinaryitemsbecometreasuredpossessionsonceweownthem,andthelongerweownthem,themoretreasuredtheybecome.Thegeniusof theNordstromreturnpolicy is that itcombinesall thosedeep

human tendencies. Itmakes themerchandise appear to be of high quality andmakesbuying thingseasy, sinceyouknowyoucanalways return them—so ifyoucan’tdecidebetweenthebluesuitandthegraysuit,whynottakethembothhome? There’s no rush to choose once you get them home, since items arealwaysreturnable,soevenifthebluesuitisn’trevvingyourengine,youmayaswell wait a bit longer, just to be sure. Yet after you’ve bought them, and thelongeryouownthem,theendowmenteffectmakesyoueverlesslikelytoreturneitherone.Thebusiness case for theno-questions-asked returnpolicy is clearly strong.

Butanyonethinkingofadoptingasimilarpolicyshouldbeawarethatitisn’tassimpleasitmayseem.Aseffectiveasthepolicyhaslongbeen,italsogivesrisetofourparadoxesthatNordstromhashadtomanageskillfully:

•Nordstrom isn’t a charity. It’s a ferociously competitive, growth-orientedretailer, and salespeople are expected tomeet ambitious sales goals—meaningnetsales,orsalesminusreturns.Sosalesstaffaregettingpotentiallyconflictingsignals: Move as much merchandise as possible out the door, but take backanythingandeverythingwithasmile.

•Nordstrom pays salespeople by commission, which at other retailers canleadtoawfulcustomerexperienceswithpredatory,high-pressureclerks.Akeyelement of Best Buy’s success in the 1990s was the elimination of salescommissions, which improved the customer experience, while Circuit Citycontinuedtopaycommissions;CircuitCityfinallyeliminatedcommissionstoo,but too late, and it failed.Nordstromwants its salespeople to be a customer’strusted adviser while also motivating them to sell each customer as much aspossible.

•Nordstrom holds frequent internal sales competitions, pitting sales staffagainst one another. Motivating a salesperson to take sales away from acolleague,which is howsuch competitionsplayout at other retailers, seemsadiceystrategyforachievinggreatcustomerservice.

•Themost fundamentalparadox is thatas the returnpolicyhas takenonalife of its own, it can appear to contradict the use-your-judgment policy offreedomanddiscretionforsalespeople.Thecontradictionappearsexplicitlyinastory from the Spector andMcCarthy book. It reports that Bruce Nordstrom,CEOin the1970sand1980s,would tellsalespeople,“Ifacustomercameintothestorewithapairoffive-year-oldshoesandcomplainedthattheshoeswereworn out and wanted her money back, you have the right to use your bestjudgment togivemymoneyaway.Asamatteroffact, Iorderyoutogivemymoneyaway.”YetorderingsalespeopletodoanythingisnottheNordstromway.HowhasNordstrommanagedthoseparadoxes?Theansweristheculture,the

norms and values that pervade daily life in the company and that saywe canbalancethecontradictionsinthoseparadoxes;weknowthey’llallworkout—weknowthebig-picturestrategyworks.That’sacautionarymessageforcompaniesdrawntotheno-questions-askedreturnpolicybutlackingthesupportingculture,becauseculturechangeisneverquickorpainless.A liberal return policy obviously costs money, and Nordstrom continues to

believe that thecost isagood investment.But fraudandabuseof retail returnpolicies appear to be getting worse. The National Retail Federation estimatesthat 8% of all returns in the U.S. are fraudulent, costing some $18 billionannually, and fraudulent returns are growing faster than retail spending. Theproblemgoesfarbeyondshopperswhoreturnclothesafteroneortwowearings(called“wardrobing”inretail)orwhoreturnnon-defectivemerchandisethathassimplywornout.Somepeoplegodumpsterdivingtofindreceiptsforitemsthatwereboughtwithcash;thentheygotothestore,shopliftthoseitems,andtakethemtothereturncounterwiththereceipts.It’sabrilliantscheme;afencewillpayonlya fractionofa stolen item’sprice,but the returncounterpays100%.AndatNordstromyoudon’tevenneedthereceipt.It’sunlikelythatNordstromwouldeverchangeitsstatedpolicy,butlikeother

retailers,it’susinginformationtechnologytokeepbettertrackofcustomersandtheirbehavior.Itcanidentifythosewhoabusethereturnpolicy,atleastsomeofthem,andinrarecasesitwillevenaskaserialabusernottocomeback.Nordstrom is nearly unique in accepting returns at any time evenwithout a

receipt. (Other retailers—Kohl’s,REI,L.L. fBean,Costco—alsoaccept returnswithoutatimelimitbutdorequireavalidreceipt.)Becauseofitsextraordinarycustomerserviceoverall,NordstromhasbeenAmerica’smostinfluentialretailerbyfar,citedbyconsultantsandbusinessprofessors,reportedonby60Minutes,and

studiedbymanagersinmanyindustrieswhowanttoservecustomersbetter.CouldNordstromeveninfluenceacountry?Chineseretailersgenerallydon’t

permit returns, or do so only within severe limits. Chinese consumers arenotoriously stingy shoppers; they spend little and save almost 40% of theirincomes. Researchers at China’s Renmin University asked consumers aboutfactors that might influence their buying: income, interest rates, retailercredibility, shopping-environment comfort, the retail return policy, and others.The most important factor, consumers said, was the return policy. Theyestimatedtheywouldbuy27%moreifofferedalenientreturnpolicy.Theysaidthey passed up buying opportunities a huge 43% of the time because ofuncertainty.China’s top economic priority is growing its consumer economy—getting

people to buy more. In the past, when the country focused on expanding itstechnology and industrial sectors, it learned from Western scientists andmanufacturers.Maybenowit’stimetolearnsomethingfromacertainretailer.

TAKINGTHESTINGOUTOFAPAINFULSITUATION

ByGEOFFCOLVIN

TataSteelfacedaproblemthathasconfrontedmanycompaniesbeforeandsince:howtogetridoflotsofpeople.Doitwell,andyourcompanybecomesmorecompetitivewhileyourformeremployeesgoontoproductivecareerselsewhereandtelltheworldthecompanyisafair,honorableinstitution.Doitbadly,andyourproductivitystagnatesbecausethebestpeopleleaveandyou’rereviledbymedia,politicians,andsocietyforbeingheartlessandgreedy.TataSteel’sCEOmadeadecisionthatledtoanoveldownsizingapproachthattoday’sleadersshouldheed.Onecan’thelpbutthinkitpaidoffinmanydifferentways.PerhapsyearslatertheTataGroupfounditeasiertowingovernmentandunionapprovalsofitsinternationaldeals,suchasitsacquisitionsofTetleyTea,CorusSteel,andJaguarRoverGroup.Here’showTatadidit.—V.H.

WHEN J.J. IRANIWALKED into his regular quarterlymeetingwith theshopstewardsatthesteelplanthemanaged,heknewthismeetingwouldnotberegular.Hewouldbediscussingverybadnews,news thatnoone in the roomhadeverheardbefore.Thiswasthesprawling,rusting,smoking,antiquatedTata

SteelplantinthetownthatTataSteelhadbuilt,Jamshedpur,India.Theyearwas1993.Thenewswasthatsomeemployeeswereactuallygoingtolosetheirjobs.Itwasunbelievable.NooneeverlosthisjobatTataSteel.Itexistedtogive

peoplejobs.Onceyouworkedthere,yourjobwasguaranteed,andafter25yearsyouwere guaranteed that your son or daughter could alsowork there. It wasbeyondlifetimeemployment;itwaseternalemployment.Ofcourse,ithadtoend,andnowIranihadtoexplainwhy.Ashebegan,one

oftheshopstewardsstoodupandshouted,“You’retakingawayoursons’jobs!”Irani responded, “You’reworried about your son’s job, but I’mworried aboutyourjobandmyjob.Ifwedon’tmakethesechanges,neitheroneofuswillhaveajob.”Inretrospect,hesays,thatwasaturningpointinhiscampaigntoconveythe

newreality:“Themessagewassenthowverysickwewere.”TataSteel’sbasicproblemofinefficiencywasn’tunusual,butitsseveritywas

incredible.Thecompanyrespondedwithanuncommonsolution,onethatinfactseemedcrazy—irrationalonitsface.WhenanIndianindustrialistheardaboutit,hesent Iranianote:“Youeitherhave toomuchmoneyornotenoughbrains.”Yet Irani’s solution has proved to be one of thewisest decisions in thewholerealmofemployeerelationsandcorporateculture.For the 40 years before 1991 it hadn’t mattered that Tata Steel was

egregiously uncompetitive vis-à-vis the world’s other big steelmakers. Thecountry’sclosed,socialisticeconomykeptforeigncompetitorsout,anddomesticcompetitors, including Tata itself, were under tight government control. InIndia’s through-the-looking-glass system, inefficiencywasgoodand efficiencywas bad. The main responsibility, dictated by the government, of a largecompany like Tata Steel was to employ lots of people—the more, the better.Costsweren’taworry;governmentcontrollersensuredthatthecompanywouldsellwhat itmade.Ofcourse, theamountofsteel thecompanymadeeachyearwassetbythegovernment.That’showefficiencybecameasin;producingmorethanthespecifiedoutputwasillegal,andcompaniescouldbeprosecutedforit.In any case, there was no reason to buck the system. Irani explains, “The

governmenttolduswhattomake,howmuchtomake,whotosellto,andhowmuch to charge. What we paid in salaries was recompensed to us by thegovernment through the steelprice. If someone in thegovernment asked for ajobforanieceornephew,TataSteelwouldmoreoftenthannotsayokay.”Asaresult,hesays,“wehadnoincentivetomodernize.”Everythingchanged in1991,whenIndia finally facedeconomicreality.The

rest of the world had been booming through the 1980s, and the communistcountries had finally thrown off their chains, but India was crumbling andstarving. After a balance-of-payments crisis in early 1991, requiring anInternational Monetary Fund bailout, the government launched the radicalchanges of converting the economy from socialism to capitalism. That meantderegulation, privatization, and opening up to international trade. Tata Steel’sincentivesdidn’tjustshift;theysuddenlyreversed.Now competing against the world’s best steelmakers, Tata Steel had to get

radicallybetter,andfast.Itsfacilitiesandprocesseswereancient.Thecompanydidn’tknowhowmanyemployeesithadandneededthreemonthstofigureoutthetotal(about78,000).Theyincludedsome3,000secretariesandofficeboys.The accounting department employed 32 chauffeurs, security people, and“peons,” a job category that translates as “gofer” in American English. Thecompanyhadadepartment thatmadepaintandanotherthatmadeice.Ithadadairyfarm.Thosewerenotfeaturesofasleeklycompetitivemodernsteelmaker.TataSteelwasproducingabout100 tonsof steelperman-year.Anefficient

producer like America’s Chaparral Steel was producing about 1,000 tons perman-year.Yes,thoseIndianman-yearswerelessexpensive,butnotenoughso.TataSteel faced a problem that has confrontedmany companies before and

since:howtogetridof lotsofpeople.Doitwell,andyourcompanybecomesmore competitive while your former employees go on to productive careerselsewhereand tell theworld thecompany isa fair,honorable institution.Do itbadly, and your productivity stagnates because the best people leave, whileyou’re reviled by the media, politicians, and society for being heartless andgreedy. Solving the problem is never easy—but unique factors made itextraordinarilydifficultforTataSteel.The challenges beganwith the vast Tata enterprise’s unusual role in Indian

society. The founding genius, JamsetjiNusserwanji (J.N.) Tata,was an ardentnationalistwhowantedIndiatobeprosperous,peaceful,andfreeofBritishrule.He was also a follower of the Parsi religion, as his descendants, who havecontinuedtorunthecompany,remaintothisday.Thereligionisfoundedonthenotionthatlifemustbededicatedtocharityandjustice.Fromthebeginningofhis career, J.N.Tata,whohad studied to be aParsi priest,waspursuinggoalsmuchlargerthanprofit.After starting the business as a trading house in 1868 and then getting rich

manufacturing textiles,Tata formeda long-termplanofhowhis familywouldinfluenceIndia’sfuture.Besidescontinuallyexpandingintonewbusinesses,he

establishedacharitabletrust,theJ.N.TataEndowmentforHigherEducation,in1892. Tata charities have since proliferated almost beyond number, intomedicine,science,education,thearts,sports,andotherfields;theyhavetouchedmillionsofIndians.Likeallhissuccessors,J.N.Tataleftthebulkofhiswealthto charitable foundations, so that today various trusts own about two-thirds ofTata Group. The company is fiercely competitive, but as a former managingdirector, Alan Rosling, has said, “Wemakemoney so our owners can give itaway.”TataGroupalsohadestablishedalongrecordoftreatingworkersbetterthanit

had to and better than other employers did. Itwas among the first companiesanywheretoadoptaneight-hourworkday(in1912),maternitybenefits(1928),andprofitsharing(1934).AmassfiringclashedloudlywithTata’sheritageandwithIndia’sexpectations

ofthecompany.CompoundingthechallengewasTataSteel’slocation.MostofTataSteel’soperationswereintheremotetownofJamshedpur—whereironore,fuel,andwatertransportwereallavailable—atownTataSteelbuiltandwhichJ.N. Tata had begun planning before his death in 1904. It was and remains acompany town in the best sense:Workers get free housing, freemedical care,andfreeeducation,allofithighquality.Streetsarewideandparksplentiful.TheU.N. in 2004 included Jamshedpur among six global examples of excellenturban planning. The problem is that when Tata Steel fires workers inJamshedpur,noothermajoremployerexiststohirethem.It’slikethrowingthemoverboard.Thatwas theenvironment inwhichJ.J. Iranihad todesignaplan for firing

thousandsofworkers.Alaborunionrepresentedtheworkers,soIranibeganbymakinghiscasetoitsleaders.Theunionhadn’tcalledastrikesincethe1920s,andbothsideswantedtomaintainpeaceifpossible.ButIraniwasemphaticthatafewthingswouldhavetochange.Thecentralfactwas thathugenumbersofworkershad togo. Inaddition, theunionwouldhave toagree toeliminate therule that guaranteed sons and daughters a job. “I told the union this cannotproceed,”Iranirecalls.“Otherwisewe’djusthaveaone-for-onesubstitutionandnever get a reduction.”Beyond the union’s accepting that change, Irani didn’texpectmuchhelpfromit.“ItoldthemIunderstandnounioncanrecommendtoitsmembers a reduction in force,” he says. So he didn’t ask union leaders toendorsetheaction;hejustaskedthemnottoopposeit.Iranitookhistime,partlytomakesureemployeesunderstoodthereasonsfor

the change and partly so he could devise the right program. He didn’t begin

implementing the plan, called theEarlySeparationScheme (ESS), until 1994.Here’showitworked.The company chose the workers who would be offered the exit package

—“otherwise the best peoplewould have gone,” says Irani. Those offered thepackage could decline it and keep their jobs, but if they later decided theywantedthepackage,itwouldbelessgenerous.And itwasstartlinglygenerous.Workersunderage40wouldbeguaranteed

theirfullsalaryfortherestoftheirworkinglives,untilnormalretirementatage61.Olderworkerswouldbeguaranteedanamountgreaterthantheirsalary,from20% to 50% greater depending on their age. If they died before reachingretirement age, their familieswouldkeep receiving the full paymentsuntil theworkerwould have reached that age. If they continued to live in Jamshedpur,they and their dependents—sons younger than 21, unmarried daughters, andparents—would continue to get freemedical care; if they left, they’d get freemedicalinsurance.Theywouldhavetogiveuptheircompanyhousing,buttherewasnorush;they’dhavethreeyearstofindsomeplaceelse.TheESSwassolavishthatitraisesanobviousquestion:Iftheobjectiveisto

becomemore efficient and reduce labor costs by getting rid of workers, thenwhatcouldpossiblybethepointofgivingthoseworkerstheirfullsalaries—ormore—plusbenefits,fortheirentireworkinglives?Financiallyitwouldbeasifthey’dnever left,yet theywouldn’tbearound todoanywork.That’swhy theindustrialistwroteIranitheletteraboutTatahavingexcessmoneyorinsufficientsmarts.That assessment turned out to be mistaken. The program wasn’t as

economicallycrazyasitfirstappeared.Whileworkerswhotooktheofferwouldget their full salaries or more, that amount would stay constant until age 61instead of increasing, as itwould if they remained employed; norwould TataSteelhavetopaypayrolltaxormakeretirementplancontributions.TataSteel’slaborcostswouldbegintodeclineimmediately,thoughgradually,andovertimewoulddeclinemorerapidlyasrecipientsofthepackagereachedretirementageingrowingnumbers. In themeantime, theycould takeanother full-time job—Tataprovidedintensivecounselinginhowtogetone—andearnfarmoreintotalthantheywouldhavemadeatTata.The ESS continued for years and is still used intermittently. By 2004, Tata

Steel’sworkforcehadshrunk from78,000 to47,000,withabouta thirdof thereductionfromnaturalattrition.Lowerlaborcostscombinedwithover$1billionof new investment turned Tata Steel into a far more efficient, globally

competitivefirm.Companiesaroundtheworldhavegonethroughthesamebasictransition,but

few have had to transform their culture so radically. Tata Steel’s mission fordecadeshadbeentocreatejobs,notwealth,toemploybureaucrats’nephewsandthen their sons and grandsons. Now its stance had to change dramatically—“frompatriarchaltopractical,”asthecompanylaterputit—withoutwreckingTataGroup’selevatedplace in Indiansociety.TheESSachieved thatgoalandsetthestagefor20yearsofunprecedentedexcellentperformancebyTataGroup.Diditpayoffinotherways,perhapsbyeasinggovernmentandunionapprovalsofTataGroup’s later internationaldeals,suchas itsacquisitionsofTetleyTea,CorusSteel,andJaguarRoverGroup?There’snodirectevidencethatitdid.Butonecan’thelpsuspecting.Morebroadly,thisdecisionbyaninefficientcompanyinafailingThirdWorld

economy set an example thatWestern companies now find useful years later.Researchshows that thepublic in thedevelopedworlddistrustsbusinessmorethanever;people increasinglyjudgecompaniesnotbyoperatingresultsbutbyhow they treat employees and by their role in society. Tata understood thosedynamics long ago. Turns out the company had plenty of brains. Themoneyfollowed.

BOEINGBETSBIGONTHE707

ByADAMLASHINSKY

Sixtyyearsagowhenyouembarkedonaflight,you’dbeaboardapropplane.BoeingCEOBillAllenhadadifferentvision:thatconsumerswouldembracethespeed,convenience,andcomfortofjettravel,andthattherealgrowthwouldbenotinthedefenseindustrybutintheciviliansectoroftheboomingglobaleconomy.AndhewaswillingtoriskBoeing’sfutureonit.In1952hepersuadedhisboardtoinvest$16millionintheBoeing707,thefirstU.S.transatlanticcommercialjetliner,aplanethatwouldalterthecourseofBoeing’shistory.Thecompanyinvested$185millioninthe707alltold,$36millionmorethanBoeing’snetworthatthetime.WhenAllendecidedtolaunchthe707,hehadnoordersinhand.HesimplybetbigthatBoeingcouldproduce—andthatcustomerswouldbuy.Hisgambleonthe707foreshadowsSteveJobs’goingbyhisguttocreatetheiPod,theiPhone,andtheiPadbeforemanycustomershadevenconceivedofthem.Ittakescouragetowageracompany’sfutureonavision;Allenshowedushow—andchangedthehistoryofaviation.—V.H.

HERE’SASHOCKER toeven thecasualstudentofaviationhistoryundertheageof,say,75.AtthedawnofthejetageBoeing,oneoftoday’sdominantmakersofcommercialaircraft,wasanonentityinthebusinessofbuildingplanesfor airlines. That’s right. In the years following World War II, when U.S.industrywasretoolingforcivilianproduction,Boeingwasprimarilyamakerofmilitaryaircraft.

ItsfamousB-52bomberandacompaniontankerhadprovedthattheSeattlecompanyhadtherightstuffwhenitcametojetaircrafttechnology.Butfortheairlines, jetsweren’t commercially viable:Converting to jet technologywouldrequireamassiveinvestmentthatcouldpockmarktheirbottomline.Instead,aslateasthemid-1950scivilianfliersbouncedalongatrelativelylowaltitudesinnoisy,uncomfortable,slow-movingpiston-engineaircraftliketheDouglasDC6,the Boeing 377 (also known as the Stratocruiser), and the LockheedConstellation.YetBoeing,whilewellpositionedtotakeadvantageoftheshifttosuperiorjet

engine technology,was ill equipped tomake the case for airlines.By then theaeronautics giant had endured a 20-year stringof financial flops—theClipper,the Stratocruiser, and the Stratoliner. It seemed Boeing didn’t have the rightDNAwhenitcametosellingtocustomerswhoweren’tinuniform.Itdidcountairlinesascustomers,butBoeing’ssalespeopleweren’twellrespected,itstrackrecord was poor, and its engineers viewed warriors, not tourists, as their endusers.Intheeyesoftheairlines,BoeingcompetitorDouglasAircraftwaseverything

theSeattlecompanywasnot.Withtheexceptionofthewaryears,Douglashadbeen building commercial aircraft uninterrupted since 1934. The stalwartDouglas-builtDC-3hadruledcommercialaircorridorsforyears.Likealatererain the computing industry, when corporate buyers “never would be fired forbuying from IBM,” airline executives in the 1950s had the tightest ofrelationshipswithDouglas,whoseplanesweremanufactured inSantaMonica.FewairlinebigshotsevenknewanyoneatBoeing,whosebomberswerebuiltinSeattle.Ifanymanufacturerwasgoingtodragairlinesalongtothejetageparty,thebettingwasonDouglas,notBoeing,playinghost.Asifunfamiliaritywithitscustomersweren’tenoughofanobstacle,Boeing

facedanotherchallengeasitpondereditsmoveintopassengerjets:safety.Atthetime,theflyingpublicwasspookedbyaseriesofcrashesofjetsmanufacturedby Britain’s De Havilland, whose Comet would later become the firstcommercial jetliner to fly a scheduled transatlantic route. With the Cometgrounded in the mid-1950s, any decision to embrace jets would involveconvincing passengers asmuch as the airlines themselves of the virtues of jettravel.In other words, the safe choice for Boeingwould have been to stick to its

defense industryknitting.TheU.S.AirForce—andotherair forcesaround theworld alliedwithAmerica—would needBoeing’s bombers and tankers in the

expandingColdWar.Boeingcouldsimplyhavestayedthecourse.Thatwouldn’tbetheplanofBoeing’spost-warpresident,WilliamMcPherson

Allen.Boeing’sculturewasonewhereitsworkersenjoydoingbig,adventurousthings—likebuildingsomeofthebest,fastest,andmostaccuratebombersintheworld. In that spirit, Allen made a prototypical great decision, an honest-to-goodness bet-the-company move on civil aviation in the form of a singleproduct.A graduate ofHarvardLawSchoolwho had joinedBoeing as its corporate

counsel, Allen turned down an offer to become Boeing’s president in 1944because he thought an engineer should run the company. Once he’d beenpersuadedtotakethejob,however,BillAllenprovidedthestrategicleadershipBoeing needed.Hewas convinced that consumerswould cotton to the speed,convenience,andcomfortofjettravel,andthattherealgrowthwouldbeinthecivilian sector of the booming global economy, most importantly in the U.S.AllenwassosureofhisconvictionthathewaswillingtoriskBoeing’sfinancialfutureon it. In1952hepersuaded theBoeingboardofdirectors to invest$16million in what would become the Boeing 707, the first U.S. transatlanticcommercialjetlinerandtheplanethatwouldalterthecourseofBoeing’shistory.Itwasjustoneplane,butitremadeacompany,anindustry,andtheverycultureofitstime.TherewasnothingobviousinAllen’sdeterminationtopushforwardwiththe

707, andBoeing’s deficiencies in the civilian-airlinemarketwere only part oftheproblem.“Ithinkit’sthebiggestbusinessdecisionofthe20thcentury,”saidMichaelLombardi,Boeing’scorporatehistorian.“Thatdecisionjustflippedthemarketaround.Therewasnodemandat thetimeforjetairplanes.Theairlinesweren’t interested.AndBoeinghadarealopportunity toexpandbusinesswiththeAir Force.” The demand issuewas real.When Boeing’s wide-bodied 747madeitsdebutmorethanadecadelater,thecompanyhadanorderinhandfromPanAmWorldAirwaysbeforeproductionbegan.Withthe707,Boeing’sAllensimplybetthatifcompanycouldproduceit—thencustomerswouldbuyit.Allen used the $16 million the board had allocated to build a prototype,

knownastheDash-80.ItbuiltonlyoneDash-80,butthecraftalsoservedasaprototypeforajettanker.ItisatthispointthatBoeingreceivedsomegenerousandserendipitousaidfromtheU.S.government.Thecompanysecuredanearlyorder for a handful of jet tankers from the Air Force that helped justify theinvestment in theDash-80.Thedealalsobought theaircraftmaker the time itneededtoget theairlinesexcitedaboutanewpassengeraircraft, looselybased

on theDash-80, thatwouldbe renamed the707. (According toLombardi, thecompany had always assigned sequential model numbers to its designs, and“700” was next up for its new line of jets. Marketing department executivesdecidedthat“Model700”didnothaveagoodringtoit,sotheydecidedtoskipaheadtoModel707,whichseemedcatchier.)Thefirstproductionversionofthe707 flew a test flight on Dec. 20, 1957, five years after the plane had beencommissioned.Whentheplanewasreadyto launch,Boeingencounteredanotherstumbling

block.SimultaneouslyDouglashadbeendevelopinga jetliner itself: theDC-8,whichwould have capabilities similar to the 707’s. It was the beginning of acompetitive trend in the aeronautics industry.TodayAirbus typically developssimilar aircraft at the same time Boeing rolls out a new model. AirlinesunsurprisinglyplacedordersfirstwithDouglas,whosemodelhadtheadvantageofbeinganinchwiderthantheprototypesforthe707.Inanotherbigbetforanalreadyexpensiveproduct,Boeingrevampeditsdesign,makingthe707aninchwiderthantheDC-8—whichhelpedBoeingsecureitsfirstordersfromPanAm.So ill-prepared was the Boeing sales force that Allen assigned his ownexecutivestocallonairlineaccounts.UnitedAirlinesandthenothersfollowedsuitafterPanAm,and thesuccessof the707wasassured. (Theeleventh-hourretoolingmeantthatthe707neverwouldbecomehugelyprofitableforBoeing.But themarket share it gainedenabled futureplanes tomakeup for the707’sfinancialshortcomings.)The707waslikenothingairlinepassengershadseen.Theplanethatbecame

thelong-rangemainstayforPanAmandotherairlines—the707-320—was153feetlong,hadawingspanof146feet,andcouldfly3,735nauticalmiles.Gettingairline executives to write the check to buy Boeing’s planes was one thing.Persuading the flying public to get on board was something else. Boeinglaunched a print and broadcast advertising campaign that emphasized safety,comfort, and speed. The tagline for onememorable ad: “Only seven hours tobrush up on your French.” It was a visionary use of business-to-consumeradvertisingforabusiness-to-businessproduct,adecisionnotunliketheoneIntelmade.(SeeChapter6).Averageconsumersobviouslydonotbuyairplanesanymorethanconsumerschooseacomputerbasedonthechipinside(beforeIntel’sfamous campaign). They also don’t typically choose an airline based on themakeofaircrafttheairlineflies.Yethowmanyfrequentfliersstillthinkofthephrase,drilledintotheirheadsbytheaircraftmaker’sconsumercampaign,“Ifitain’tBoeing,Iain’tgoing.”Italsoisaclassicexampleofdoublingdownona

bigbetbysupportinganinvestmentwithadditionalinvestment.Much as the U.S. was beaten to the punch in its space program by the

Russians, aU.S. jet aircraftwas not the first to fly theAtlantic commercially.BritishOverseasAirwaysCorp.flewfirst,fromLondontoNewYork,onOct.4,1958, with a De Havilland Comet 4. But Pan Am was a fast follower—andultimatelyasuperiorone.Themaidencommercialflightofthe707wasonOct.26,1958,threeweeksaftertheBOACflight.Afirst-classseatsoldfor$505.Thebackoftheplanewentfor$272.(Thepriceswerecomparabletowhatcustomerswouldhavepaidonpiston-engineplanes.)StrongheadwindscausedthePanAmflight,dubbedthe“ClipperAmerica”tostopforrefuelinginNewfoundland.ButwhentheplanetoucheddownatLeBourgetAirportinPariseighthoursand41minutesafterleavingNewYork,aneweraincivilaviationwasborn.The707grewtobecomeasmuchaculturaliconasatransportationvehicle.

TheswimwearcompanyJantzencalleditsswimsuit line“the707.”EveryU.S.president from Dwight D. Eisenhower to George H.W. Bush flew on an AirForceOnethatwasamodifiedversionofa707.Alltold,Boeinginvested$185millioninthe707.Accordingtoa1957articleinFortune,thatwas$36millionmorethanBoeing’snetworththepreviousyear.ThetransformationforBoeingwascomplete.Inlateryearsitswide-bodied747woulddominatelong-haulandinternational travel. Its smaller 737 would become the workhorse of airlinesaroundtheworld,areliable,cost-efficientaircraftwhosestandardpartsremainwidelyavailable.BoeingsothoroughlybesteditserstwhilefoeDouglasAircraftthatwhenBoeingboughtMcDonnellDouglas(theresultofanearliermerger),itwasprimarilytoboostitsmilitaryofferings.Inthisway,Boeingreturnedtoitsroots,areminderofwhereithadbeenbeforethe707changedeverythingforthecompany—andtransformedthehistoryofaviation.

IBM’SOPERATIONBEARHUG

ByADAMLASHINSKY

Intheearly1990s,IBMhadhitawall.Itwashemorrhagingmoneyaswellaslosingmarketshare,avictimofthetrendtowardpersonalcomputersandawayfromIBM’smainframes.LouGerstner,whohadbeenaMcKinseyconsultantandthenCEOofAmericanExpress,wascalledinostensiblytobreakupBigBlue.ButfirstGerstnermadeadecisiontoensurethatIBM’sleadershipwas“backintouch”withreality.InwhathecalledOperationBearHug,Gerstnerandhislieutenantstraveledtheworldtalkingtokeycustomers.Whattheyheardchangedthedestinyofthecomputergiantandeventuallymadeitoneofthemostvaluablecompaniesintheworld.Oftenseniormanagementtooquicklygetsisolatedfromtherealitiesofthemarketplace.OperationBearHug,aunique“first100days”initiativeamongFortune500CEOs,wasanantidotetothat—andanapproachmorecompanieswoulddowelltoemulate.—V.H.

IN 1990, THREE YEARS BEFORE LOU GERSTNER was namedchief executive of the beleaguered computing giant IBM, another iconic U.S.companyranabrillianttelevisionad.AbaldingCEO,suitjacketoffbuttieand

veston,addresseshisassembledexecutivestoletthemknowthattheirfirmhadbeenfiredthatmorningbyoneofitsoldestcustomers.“After20years,hefiredus,” says theexecutive. “He saidhedidn’tknowusanymore.”TheCEO thenexplains that the company had lost touchwith its customers, that it relied toomuchonphonecallsandfaxes—thiswas1990,remember—andnotenoughonface-to-face communication. Then (cue the solo piano tones of GeorgeGershwin’s“RhapsodyinBlue,”whichbecameaUnitedAirlinesanthematthetime), theexecutive’ssecretarybeginshandingoutplane ticketenvelopeswiththefamiliarUnitedlogoonthem.TheCEOexplains,“We’regoingtosetoutfora little face-to-face chat with every customer we have.” When one of hisexecutivesobjects,“But,Ben,that’sgottobeover200cities,”ourheroreplies,“I don’t care.” Ben, of course, will visit that “old friend who fired us thismorning.”United’spointiscrystalclearinlessthan60secondsofairtime:Getbackintouchwithyourcustomers—andflyourairplanestodoit.Louis V. Gerstner required slightly longer than a minute to figure out that

IBM, too, had a problem relating to its customers. But not much more. Hisdecision to implement a real-life version of United’s fictionalized CEO’sdirectivewasamongthemostimportantthingshediduponjoiningIBMin1993.That one decision—to embrace IBM customers in what became known asOperation Bear Hug—led to a cavalcade of other decisions. Taking what helearnedfromhiscustomers,Gerstnerinshortorderloweredpricesonmainframecomputers, sold off unproductive assets (including the company’s prized artcollection), andchosenot tobreakup IBM(aseveryoneexpectedhim todo).Most important, he emphasized and invested in a then insignificant part ofIBM’sbusiness:consulting.GerstnersawthatitcouldhelpcustomersintegratethedisparatepiecesoftechnologytheyhadpurchasedfromIBMandothersovertheyears.InsomanywaysGerstnerwasnottheobviouschoicetorunIBM,fordecades

theworld’spreeminenttechnologycompany.Afterall,hewasnotatechnologist.Originally aMcKinsey management consultant, he had run credit card issuerAmerican Express, essentially a marketing operation. He also had been theturnaround leader of cigarette and cookiemakerRJRNabisco, at the time themergedresultofthelargestandmostcontroversialleveragedbuyoutofitsday.TheIBMhe joinedwas losingmoneyaswellasmarketshare,avictimof thetrendtowardpersonalcomputersandpiecemealsoftwareapplications—boththeoppositeofIBM’smainframecomputerswiththeirintegratedsoftware.Itsstockpricehadplummetedfrom$43in1987to$12inearly1993,whenGerstnermet

IBMstockholdersforthefirsttime.Gerstner’shiring largelywasgreetedwithderision.“Gerstner lacksany real

knowledgeofthecomputerindustry,sohewasapparentlybroughtintorunIBMlike a holding company of various businesses—more like a General Electric,withitsrangeofdivisionsproducingeverythingfromlightbulbstojetengines,than like the completely integrated IBM of the past,” wrote journalist PaulCarroll in his definitive 1993 account of IBM’s demise, Big Blues: TheUnmaking of IBM. Carroll, whose book went to press shortly after Gerstnerjoined IBM,asserted thatGerstnerwould“beable toapplyonlymanagement-consulting dogma to IBM,” as opposed to the grand vision or breakthroughproducts thathadcarried thecompany inearlierdays.Withouteitherof those,Carrollwrote,“Gerstnerwilljustbefiddling.”Gerstnerknewafewthingswell,however.Forstarters,heusedacomputer,

unlikehispredecessorat IBM,JohnAkers. (Still, inanearlymeetingwith thenews media, he couldn’t identify the brand of laptop he used.) Critically, atAmericanExpresshewasalargebuyerofinformationtechnology.Assuch,heunderstoodacommoncomplainthebeganhearingfromIBM’scustomers: thattheneweraofindividualizedsoftwareprogramsandnoncompatibleequipmentwascausingheadaches forcorporate ITbuyers. Inotherwords,heunderstoodtheplightoftheIBMcustomerbecausehehadbeenone.Indeed,weeksafterjoiningIBM,Gerstnermetwithagroupoftopcustomers

andexplainedhisperspective.“IbeganbytellingmyaudiencethatacustomerwasnowrunningIBM,”Gerstnerwroteinhisbook,WhoSaysElephantsCan’tDance?,whichhepublishedin2002.“Ihadbeenacustomeroftheinformationtechnology industry far longer than Iwould ever be an IBM employee, [and]whileIwasnotatechnologist,Iwasatruebelieverthatinformationtechnologywouldtransformeveryinstitutionintheworld.”Gerstner was appalled by the lack of customer orientation he found at the

ultrapoliticalandheavilybureaucraticIBM.Hesawmoreinfightingthanhesawconcernfor theneedsofcustomers.At the timeIBMexecutiveshadassistantsassignedtothemwhowereup-and-comingexecutivesthemselves.Theyservedastafffunctionanddistinguishedthemselvesbypreparingdetailedpresentationsratherthanbyhavingintimateknowledgeoftheircustomers.Customerspolledby Gerstner early in his tenure were so dissatisfied that he told the sameaudience,“EverythingatIBMwouldbeginwithlisteningtoourcustomersanddeliveringtheperformancetheyexpected.”TheshockingstateofaffairswasinstarkcontrasttoIBM’scustomer-focused

legacy. Harvard management professor Bill George, who had previously runmedical-devicemanufacturerMedtronic,hadasummerjobatIBMinthe1960s,when IBMwas as powerful as a sovereign nation. Back then, IBM “was thebusiness community’s role model for customer service,” George wrote in hisbook Authentic Leadership: Rediscovering the Secrets to Creating LastingValue. He recounts an internal sales conference—which he compared to areligious rally—in which a senior official displayed a map showing eachinstanceofacompanythathadboughtproductsfromanIBMcompetitor.“Oursales teamwasdispatched tovisit100%of thesecustomersover thenext twodaysandconvertthemtoIBM—now!”GerstnerclaimsnottohavebeenacommittedstudentofIBM’shistory.Yethe

understoodthatlisteningtocustomersheldthekeytoimprovingthefortunesofa companywith a still powerful butdiminishingmarketpresence. In fact, anydominant company that gets into the position of being so successful that itdoesn’t feel it needs to listen to its customerswoulddowell to considerwhatGerstnerdidshortlyafterjoiningIBM.Inameetingwiththe50topexecutivesatIBM,hesaidhewantedthemeach

to visit aminimum of five big customers over threemonths. “The executiveswere to listen, to show the customer thatwe cared, and to implement holdingactionasappropriate,”Gerstnerwroteinhismemoir,whichdevotesachaptertoOperation Bear Hug. “Each of their direct reports (a total of more than 200executives)was todo the same.”Moreover,Gerstnerwantedhis executives tolistencarefullyenoughthat theycouldreport theirfindingsdirectly tohim.Hewantedshortreports—onetotwopages,maximum—abouttheBearHugvisits,andhewantedthereportsalsosenttoanyoneelseatIBMwhocouldhelpwithany problems the visitors had unearthed. (Chain of command was aninstitutionalized aspect of the IBM culture, and Gerstner wanted to break thechain.) Gerstner wrote that Operation Bear Hug was “a first step in IBM’sculturalchange.”NotonlywasIBMgoingtoberemade“fromtheoutsidein,”buttheCEOactuallywasgoingtopayattentiontowhattopexecutivesdidandholdthempersonallyresponsible.TheimpactontopIBMerswasimmediate.“Loucameintothecompanyasan

interloper, an outsider,” recalls Nicholas Donofrio, who ran the mainframeoperation at the time. “He was looking for something to rally the seniorleadershiparound.”Withhindsight,Donofrio reflects thatOperationBearHugaccomplishedthreeobjectives:ItgotIBMbacktoitscustomer-focusedroots;itprovidedGerstnerwithrawmarketintelligenceandinsightsonthebusiness;and

itgavethenewCEOasenseoftheleadershehadinherited.TheabilityoftheCEOtogatherinformationalonemadeBearHugworthwhile,recallsDonofrio.“Louhasanamazingcapacitytoread,”hesays.Like“Ben” in theUnitedAirlinescommercials,Gerstner savedsomeof the

keypartnerandcustomermeetingsforhimself.HemetwithAndyGroveofIntelandBillGatesofMicrosoft,aswellasJimManziofLotus,whichIBMunderGerstnereventuallywouldbuy.Byhavingcandidconversationswithtopleadersin the technology industry—leaderswho had the technical skills thatGerstnerlacked—hewasabletoidentifyIBM’sweaknessesandtobegintobuildanideaofIBM’sstrategicstrengthsaswell.InstitutingOperationBearHuglooksinretrospectlikeanobviousdecision.In

fact, ithelpedGerstnercounteractevenbiggerdecisionsthathadbeenmadeatIBMbeforehearrived.WhenGerstnerwalkedinthedooratIBM,thecompanyalreadywaspreparing tobreak itselfup. Ithad retained investmentbankers toreadyinitialpublicofferingpresentationsandaccountants topreparethebooksofitsvariousdivisionstobecomeindependentcompanies.What Gerstner heard from customers he met, coupled with the Bear Hug

reportsandhisownexperiencesatAmericanExpress, ledhimtoacompletelydifferent conclusion: For the time being, IBM made sense together. Owningcomputing components like mainframe computers, PCs, disk drives, andsemiconductors gave IBM institutional knowledge that its competitors lacked.What’s more, themainframe business IBM invented and dominated for yearscould be profitable again, as long as IBM didn’t keep prices so high thatcompetitorsgrabbeditsshareofthemarket.Themost important lesson fromshoweringattentiononcustomerswas their

dissatisfaction with their IT purchases. In the same speech in which Gerstnerfamously announced that IBMdidn’t need a vision “right now” asmuch as itneeded better execution and customer focus, he slyly presented in public theseedsofIBM’sgrandvision.“Wearegoingtocontinuetobe,infact, theonlyfull-serviceproviderintheindustry,butwhatourcustomersaretellingusistheyneed IBM to be a full-solutions company,” Gerstner said in July 1993. “Andwe’regoingtodomoreandmoreofthatandbuildtheskillstogetitdone.”Observersfocusedonhardwareandsoftwareprobablywouldhavemissedthe

emphasison“solutions”thatday.Infact,overthenextdecadeIBMwouldshiftits entire emphasis to providing high-margin “solutions” for its clients,frequently in the form of lucrative consulting and hardware/software strategyintegrationprojects.ItiswhatsetIBMapartfromthecompetition,andtheseeds

for the strategic shift were sown in the advice IBM sought from its owncustomers in what Gerstner, never the most lovable of business executives,dubbedOperationBearHug.Oneof thepartnersGerstner solicited inhis firstdays at the company neatly summed up Gerstner’s accomplishment: “LouGerstner has defined his sandbox, and it is a very big sandbox and a veryappropriateoneforIBM,”Intel’sAndyGrovetoldFortunein1997.Withafocusonitscustomers,Gerstneralsointroducedsomeinnovationsthat

arestandardpracticeatIBMtoday.TheyincludetheconveningofCIOcouncils,groups of chief information officers, also known as customers, that IBMperiodically brings together to discuss industry trends—and how IBM’s goodsand services can help customers take advantage of them. Today the companyhandsoutanannualIBMGerstnerAwardforClientExcellencetotheteamsthatgo above and beyond the call of duty in serving customers. “Ben” would beproud.

WAL-MART’SSATURDAYMORNINGMEETING

ByHANKGILMAN

FiftyyearsagoWal-MartwasnothingmorethanasinglestoreoutsideBentonville,Ark.OnedayfounderSamWaltonmadeadecisionthatchangedthedestinyofhiscompany:HestartedgatheringhisemployeesearlySaturdaymorningsinthestore’sofficeandhadthemgooverthepreviousweek’snumbers.Whatwasselling?Whatwasn’tselling?Howdidsalescomparewiththepreviousweek?TheSaturdaymorningmeetingbecameamainstayasWal-Martgrewintotheworld’slargestretailer,andstillexiststothisday.ThemeetingputWal-Martdaysaheadofthecompetition—andyoucanarguethatit’sbeendaysaheadeversince.Theretailerperfectedtheartoflearningfastandactingfast,andintheprocessdiscoveredthatyoudon’thavetobeyearsahead,justdaysahead.Here’showSamcametothismomentousdecisionandwhy.—V.H.

SOMETIMES A PRETTYGOODDECISION ends up being a prettygreatdecision.Youjustmightnotknowitatthetime.That’s the story ofWal-Mart’s legendarySaturdaymorningmeeting held at

the company’s Bentonville headquarters. Part pep rally, part merchandisingseminar,parttown-hallforum,theSaturdaymorningmeetingwasforyearstheenginethatdrovetheWal-Martmachine.IthelpedWal-Martbecometheworld’s

largest company—depending on the year—with 10,000-plus stores (includingSam’sClub)producingsalesofabout$447billionannually.Itworkeditsmagicwhenthecompanywasasmallcollectionofdiscountstores.Itworkedwhenitbecametheworld’slargestandmostdominantretailer.Youcouldargueit’sthemostfamousmanagementmeetingever.Itallstartedin1962.FounderSamWalton,a24/7executivebeforetheycalled

it24/7, thought itwasn’t fair that theclerkswereworkingSaturdayswhile thecompany’s executives were, say, watching their kids’ Little League games orplaying golf. Sam’swife,Helen, felt differently, according toFortune’s BrentSchlender in his 2005 story on themeeting. She believed that the company’smanagersworkedhardenough,andthatitwasimportantforthemtospendtimewiththeirfamilies.No matter. Sam believed that you couldn’t even think of a career in retail

withoutworkingweekends.That’swhenalargepartofthebusinesswasbeingdone.Andthat’swhyWaltonwouldspendearlySaturdaymorninginthestore’sofficegoingoverthepreviousweek’snumbers.Whatwasselling?Whatwasn’tselling?Howdidsalescomparewiththepreviousweek’s?The store’s workers had to arrive early. As Schlender wrote: “He’d hold a

meetingbeforetheopensignwashungoutandsharehisobservationswiththewholecrew,asktheiropinions,anddecidewhatitemstoputonsaleanddisplaymoreprominently.”Thataccomplishedanumberofthings.Forone,itmadehisemployeesfeela

lotbetteraboutworkingforWalton. It showed thathe trusted them.Itshowedthey were part of the business. It also showed he was willing to be in thetrencheswiththem.Thatwasnosmallthing.Icoveredthecompanyinthe1980sandwasconvincedthatWaltonandhisexecutiveshadfiguredouttheholygrailofretail:Keepyourminimum-wageemployeeshappy,andyourcustomerswillbehappy—andthenyourinvestorswillbehappy.It’sonethingtohaveasmallweeklymeetingwhenyourunoneortwostores.

It’s another game altogetherwhen you’re growing and adding employees.Butthe tradition continued: Every Saturday, Walton would require his salariedemployees to showup, share theweekly sales results, andmake plans for thefollowingweek.Themeetingalsoprovidedhisemployeesaweeklylessoninmerchandising.

Again, thiswas at the core ofWal-Mart’s success over the years, even as thestore became amultibillion-dollar chain.A few years back I interviewedSamWalton’s friend and successor, David Glass. One of the big results of the

Saturday morning meeting, he explained, was that it was a way to distributeinformationabout thebusiness toeveryone in thecompany. Ithelpedmake itsemployees,well, shopkeepers. “Samshared total informationwitheveryone ineverystore,ineverycommunity,”saidGlass.“Hefeltwewereallpartners.Hewasabsolutelyright.Hebelievedeveryoneshouldbeanentrepreneur.Ifyouranthe toy department in a store inHarrison,Ark., you’d have all your financialinformation.Soyou’rejustlikethetoyentrepreneurofHarrison.”Though it may not have been obvious at the time, the Saturday morning

meeting letWal-Mart competewithKmart,whichwasmuch stronger in thosedays. In the mid-1970s, Wal-Mart was only a fraction of the size of Kmart,whichwas considered state-of-the-artwhen it came to discount retailing.OnewayWalton figuredhecouldcompetewasspeed. If thebatterydisplaywasn’tgeneratingenoughsalesfromitsspotat the localWal-Mart,everystorewouldmovethedisplaytoanotherpartofthestoreonMondaymorning.“The idea of [the Saturdaymorningmeeting] is very simple,”DavidGlass

said.“Nothingveryconstructivehappensintheoffice.Everybodyelsehadgonetoaregionalofficessystem—Sears,Kmart,everybody—butwedecidedtosendeverybody from Bentonville out to the stores Monday through Thursday andbring them back Thursday night. On Friday morning we’d have ourmerchandisingmeetings.ButonSaturdaymorningwe’dhaveoursalesmeetingfortheweek.Andwe’dhavealltheinformationfromthepeoplewhohadbeenoutinthefield.They’retellinguswhatthecompetitorsaredoing,andwe’dgetreportsfrompeopleintheregionswhohadbeentravelingthroughouttheweek.”Withthatinhand,Wal-Martcouldmovefast,saidGlass.“Sowedecidethen

what corrective action we want to take. And before noon on Saturday, theregional manager was required to call all his district managers, giving themdirectionsastowhatweweregoingtodoorchange.BynoononSaturday,wehad all our corrections in place. Our competitors, for themost part, got theirsales results onMonday for the priorweek.Now they’re 10days behind, andwe’vealreadymadecorrections.”Thatwasnosmallthing.YoucanarguethattheSaturdaymorningmeetingnot

onlyledtothedeclineofKmartandSearsintheruralmarkets,andeventuallyallmarkets,butalsowasthebeginningoftheendofalotofstodgyindependentmerchants.(That’sgood—andbad!)First,thebigguys.AsGlasswouldtellyou,Kmartwassostrongandsosmart

in the 1970s that it refused to mess with its formula of uniformity in itsoperations.

In other words, what was good enough for Springfield, Mass., was goodenough for Beaufort, S.C. Bigmistake.Wal-Mart, meanwhile, was taking thebestofwhatKmartwasdoing,made itbetter,and implemented thosechangesrapidly.Wal-Martexecutiveswould thenmakeadditionalchangesonaweeklybasis, based on the information they gleaned from the Friday and Saturdaymeetings. If a lot of high-margin dog food was selling well, executives inBentonvillewouldmakesurethestoreshadmoreanddidn’trunoutofit.Simplyput,Wal-Martwasalotbetterthaneverybodyelse.Itsspeedandabilitytobeentrepreneurialalsospelleddoomformanysmall-

townretailers.Alotoftheblame,eventothisday,goestoWal-Mart’spowertoextractlowpricesfromitssuppliers.(Anothergreatdecision:Wal-Martwasoneof the first chains to buy directly frommanufacturers instead ofwholesalers.)But the ability of store managers to run their own show and have big-cityproductsallinoneplace—andattherightprice—waswhatreallydidinmom-and-popstores.ThestrategyhaditsrootsintheSaturdaymorningmeeting,ofcourse,andthe

entrepreneurialspiritthatthemeetinggenerated.Sowhat is theSaturdaymorningmeeting like? In theearlydays itwasone

giant share-a-thon: Employees touted their best ideas—the famous Wal-Mart“greeter”wasaconceptdevelopedbyastoreemployee.Someexecutiveswouldshow best-practices videos and use the occasion to reiterate company rules,among other things.Remember, only a few years ago the companywas oftenundersiegefromunionsandthemediaforitsemploymentpractices.Overtheyearsthemeetingsbecamealittlestale,andexecutivesworriedthat

headquarters employeeswould lose focus. To freshen things up, the companystartedbringingingueststars,fromAdamSandlertoOprahWinfreytoPeytonManning. I had the chance to see Gov. Bill Clinton in action. (He answeredquestionsrangingfromforeign-policytradeissuestotheArkansasRazorbacks.Youcouldtellyou’dbehearingfromhimagain—that’sforsure.)“Thepointwastomakeitinterestingenoughtowhereeverybodywantstobe

there,eventhoughit’saSaturdaymorning,”DavidGlasstoldFortune.“Butyouhadtobecarefulhowyoudidthat,becauseitbecomesmorefuntodothatthantofixtheproblems.”Themeeting also became a greatway for vendors to strut their stuff. Even

Steve Jobs, co-founder of Apple as well as the animation company Pixar,showedupwearinghiscompanybaseballcaptopeddleFindingNemoin2003.“IlovegoingtotheSaturdaymorningmeetingnotonlybecauseit’ssuchagreat

show, but because they’re really smart andwe learn a lot about retailing andmerchandising,” Jobs told Fortune’s Schlender. Other executives, like formerGeneralElectricCEO JackWelch,would come to pick up tips from theWal-Martway.TodaytheSaturdaymorningmeetingattheBentonvilleheadquartersmaynot

be theway itwasback in theday.You could say it’s nowmore strategic andbroad.Themoredetailedissuesarehandledinamyriadofothermeetingsduringthecourseoftheweek.Andtodayittakesplaceonlymonthly.But it still helps to keep the company in touchwithwhat’s goingon in the

field and, perhapsmore important,making the headquarters and others in theempire feel involved. Meanwhile, the original meeting, or the spirit of it, isduplicatedonvariousdaysoftheweekeverywhereineverystore:Numbersaredoled out to staff, and employees have the chance to present their best ideas,someofwhichmaybeuploadedtotheweeklymerchandisemeetings.OreventotheSaturdaymorningmeetingitself.

ISYOURBUSINESSINTROUBLE?

PIVOT!

ByGEOFFCOLVIN

TwocenturiesagoEliWhitneyenvisionedasystemfortransforminggunmaking—thenacraftofskilledartisans—intoaprocessperformedbyunskilledworkers.Hedecidedtodobusinessinawaythatexistednowhereelse.Hissystemofinterchangeablepartsradicallyalteredmanufacturing,allowingitscaleinawaynoonehadeverimagined.Today’smanagersoftengetcaughtupinincrementalchange.WhatwelearnfromWhitneyisthatwhenabusinessisatacrossroads,itsleaderssometimesneedtoriskeverything,evenbeforethesolutionoroutcomeisfullyunderstood.Inmanagementparlance,Whitney“pivoted”frommakingcottonginstomass-producingguns.Morerecentbusinesshistoryholdsexamplesofsimilardramaticpivots:PolaroidfounderEdwinLandabandonedhisplanforcreatingpolarized(thusthename)windshieldsandheadlightstoproducethefirstinstantcamera—tokeephisinvestorsfromlosingtheirmoney.Andinthe1980s,whenIntelwasgettingcrushedinmemorychips,AndyGrove“pivoted”outofhiscompany’smainbusinessandswitchedtomicroprocessors.EliWhitneywouldbeproud.—V.H.

EVERYTHING YOU KNOW ABOUT Eli Whitney is wrong, but thelittle-known truth is enough to enshrine him as one of the world’s greatbusinesspeople. He indeed changed the history of theworld economy, as youlearnedlongago.Justnotquiteinthewayyouthink.Hediditmost lastinglynot throughaninvention,aswewereall taught,but

through a great business decision, a brave, bet-the-ranch decision at a criticalmoment in his life that shaped the way all products are manufactured, eventoday, and inspired efficiencies that make modern life possible. He was anentrepreneurandavisionary.Virtuallynoneof that isconveyedinelementary-schooltextbooks,whichiswheremostpeoplebeginandendtheiracquaintancewithWhitney.Heiscelebratedasaninventor,asanyAmericanschoolchildwilltellyou.That’swherethemisinformationbegins.EliWhitneydidnot invent thecottongin;his experiencewith thatmachine

did,however,setthestageforhislater,momentousbusinessdecision.Anumberofcottongins—“engines”fortakingseedsoutofcottonfibers—alreadyexistedin1793,whenWhitneytraveledfromhishomestateofConnecticuttoGeorgia,thenamagnetforambitiousYankees.Thetroublewasthatexistingginsworkedonlywithlong-staplecotton,knownasSeaIslandcotton,whichgrewinsandysoil;mostoftheSouthcouldsupportonlyshort-staplecotton,fromwhichseedshad to be separated by hand, a process so costly the crop was barely worthgrowing.Whitney, at age 28, invented a gin that worked with short-staple cotton,

revolutionizing the economy of the South and radically altering the course ofU.S. history—just as we learned in school. Yet even this isn’t quite right.Whitney’s original design included significant flaws, and some scholars nowbelieve they were corrected by Catherine Littlefield Greene, widow of theRevolutionary War general Nathanael Greene. Whitney was staying at herplantationatthetime.Anothermyth:ThecottonginmadeWhitneyrich.Indeed,it’softenregarded

as the foundation of the legendaryWhitney business empire,which continuedwell into the20thcentury;an indirectdescendant,JohnHayWhitney, foundedtheventurecapital industrybystartingJ.H.Whitney&Co. in1946. In realitythe cotton gin nearly ruined Whitney. Though he obtained a patent, cottongrowers and processors flagrantly violated it, challenged it forcefully in court,and influenced state legislatures to pass laws entitlingWhitney to a piddlingfraction of the profits the machine made possible. Whitney fought back,spendingmoreonthebattlethanhegotfromit.Whenhefinallyshutdownhis

cottonginfactory,hewasstrugglingtoavoidbankruptcy.SoherewasWhitney’ssituationin1798:He’sbackinNewHaven,33years

old, world famous, and almost broke. At this point in his business career,Whitneymadeapivotsoaudaciousitseemsinsane.TheU.S. government neededmuskets.WarwithFrancewas looking likely,

andEuropewassuchacauldronthatallmajornationswerehoardingweapons,sotheU.S.couldn’tbuygunsthere.Americangunmakerswereslow.Theywerehighly skilled craftsmenwho fashioned eachmusket individually, producing afewweaponsayear,andtheycouldn’tpossiblymeetthegovernment’sdemand.Whitney proposedmaking the guns by a completely differentmethod—and

herewe encounter at least twomoremyths.One is that in his plans tomakefirearms efficiently, Whitney originated the idea of interchangeable parts. Hedidn’t. The other myth surrounds a memorable scene in which WhitneydemonstrateshisideatoPresidentJohnAdamsandskepticalmilitaryofficialsbybringing several muskets to Washington, disassembling them, mixing up theparts, and then reassembling them—and everything fits! The demonstrationhappened,butatleastonescholarnowsaysitwasrigged,astallingtactictobuyWhitney timeon a government contract that by thenwas runningwaybehindschedule.The real story is a bit less inspiring for inventors but far more so for

businesspeople. Whitney said he would do business in a way that existednowhere else on anywhere near the scale he envisioned. He would produce10,000muskets for apriceof$134,000. Itwasamammoth transactionby thestandards of the young country, and it putWhitney at enormous risk.Hewasnowon thehook todeliver thoseguns.Hewasalmost insolventandhadbeenforcedtoborrowthemoneyheneeded.Andheneededalot:Hehadnofactory,noemployees,nomachines formakingguns.Hehadnevermadeagun inhislife.Thiswas thedecision thatchangedeverything.Thegovernmentagreed to it

becauseWhitneywas famous, because itwas desperate, and becausewhat heproposedmadesense.Whitney envisioned an entire system for transforming a craft performed by

skilledartisansintoaprocessperformedbyunskilledworkers.AsheexplainedinalettertoTreasurySecretaryOliverWolcott,“Oneofmyprimaryobjectivesistoformthetoolssothatthetoolsthemselvesshallfashiontheworkandgiveto every part its just proportions, which once accomplished, will giveexceptionaluniformitytothewhole.”

Thetoolswill fashion thework.So, forexample,hecreatedafiling jig thatpreventedtheworkmanfromfilingapartatthewrongangle.Hecreateddrillingplatestoensurethatallholesweredrilledintherightplace—andthesameplace.Heengineeredstopsonlathesso thatpartscouldn’tbe turnedtoomuchor toolittle.HebuilthisfactoryonthebanksoftheMillRiveroutsideNewHavensohecouldusewaterpowerratherthanmusclepower.Eachworkerwoulddojustonething.Notmakeonepart.Doonething.Some

gunmakersinEnglandandtheU.S.weretryingasysteminwhicheachworkermadejustonepart.Butmakingsomethingevenassimpleasatriggerinvolvesseveralsteps—forgingthemetalinthebasicshape,filing,polishing,hardening.Whitney’sworkerswoulddojustonething.TheindividualelementsofWhitney’ssystemwerenotnew.Mostnotably,the

idea of interchangeable parts was hardly novel. How could it have been? It’sobvious.EvidencesuggeststheancientGreekswereontoitformakingships.ASwedish clockmaker, Christopher Polhem, was using interchangeable partsalmost100yearsbeforeWhitneystartedmakingmuskets.Frencharmsmakerswere working on the idea in the 18th century, and while Whitney was juststarting to organize his factory, Simeon North was making pistols for thegovernmentusinghighlystandardizedpartsjust20milesaway.Historiansnowbelievethattrue,fullinterchangeabilityofgunpartswasn’tachievedbyanyoneuntil after Whitney’s death in 1825—some say at the government’s Harper’sFerry,Va.,armoryin1827;othersattheSpringfieldArmoryinMassachusettsinthe1840s.Nor was Whitney the first to assign workers to a single task in multistep

manufacturing. On the contrary, the practice was well established in someindustries and had been famously described by Adam Smith in hisWealth ofNations (1776), where his example of the pin factory forever epitomized thedivisionoflabor.Theideaofusingwaterpowerwasofcourseancient.Theelementsofthesystemweren’tnovel—yettheideaofcombiningthemat

largescaleinanendeavorlikegunmakingwasrevolutionary.Divisionoflaborwas fine formaking a rudimentary product like pins, but gunswere precisioninstrumentsrequiringhighlyskilledcraftsmen,orsoitwasthought.Dittowithwater power: It made sense for grinding grain, but what good was it togunsmiths,whoworkedatabenchusinghandtools?GettingWhitney’slarge,fundamentallynewsystemtoworkwasnoteasy.He

had tobuildanewriversideoperationanddesignnewmachines thatcouldbepowered by water and could make gun parts in large quantities with high

precision.Hebuilt housing forhisworkers.He tried tohire skilledcraftsmen,but theyalreadyknewhowgunsweremadeanddidn’t likebeing told todo itdifferently; Whitney found that unskilled workers were cheaper to hire andeasiertotrain.Hiscontractcalledforhimtodeliver10,000musketsin28months.Thetime

passed,andhedidn’tdeliverevenone.That’swhenhetraveledtoWashingtonforhiscelebrateddemotothePresident;heneededacontractextensionandgotit.Hecontinuedtodesignmachines,buildbuildings,hireworkers,andstrugglewith his new method of making a complex product. In September 1801 hefinally delivered a fewmuskets.He didn’t deliver the last of the 10,000 until1809,10yearsafter thecontracthadbeensigned.Whetherhemadeadimeofprofitisimpossibletocalculate,butifhemadeanythingatall,itwasn’tmuch.Yet itwas clear thatWhitney’s new systemworked. Itwas the future.One

reason the first contract required 10 years to fulfill is that he was constantlyrefiningtheprocessanddesigningnewmachines.Hewonmorecontracts,andatlonglasthegotrich.The system Whitney used became known as the American system of

manufactures. He emphatically did not develop it alone. Other entrepreneurswere working feverishly on similar systems, as were the U.S. governmentarmories.Marc Brunel, the famed English engineer, was combining the sameelements(inmakingpulleyblocks)atexactlythesametimeasWhitney.YetWhitney deservesmore credit than anyone else for the development of

thisworld-changinginnovation.Partlythat’sbecauseheusedittomanufactureacomplex product.A gun comprises dozens of parts, some of themquite smallandintricate,eachrequiringmanydifferentoperationstoproduce.Whitneyhadtomassivelyreconceivehowgunsaremade,devisingwaysforeachpart tobeproduced by unskilledworkers rather than by artisans, designing and buildingnewmachines for thoseworkers to use.Gunswere advanced technology, andWhitney’sapplicationofthenewsystemwasitsmostimpressiveearlyuse.Whitney deserves credit also because,more than anyone else, hemade the

American system famous. His multibuilding manufacturing complex,Whitneyville, became a tourist attraction. Brunel’s work in Britain waspioneering,butthenewsystemdidn’tcatchonthereuntilthemid-19thcentury,andwhenitdid,itwasimportedfromAmerica.The American system shaped our world in profound ways. By enabling

unskilled employees to work in factories, it hastened the migration of farmworkerstocitiesandopenednewopportunitiesformany.Italsoenabledwomen

and children to work in factories, with devastating effects as the centuryprogressed. Skilled artisans found their skills devalued and their social statusdiminished.Thenewsystemledtoanothernewconcept,theassemblyline;withthefabricationofpartsnowseparatedfromthejoboffittingthemtogether,therearoseawholenewclassoffactoriesdevotedtoassemblingthepremadeparts.TheAmericansystemwasinevitable.Butitneedn’thavedevelopedasearly

asitdid,orintheU.S.Ifithadn’t,America’sjourneytobecomingtheworld’slargesteconomywouldhavebeenradicallydifferent.Historyadvancedasitdidin large part because of Whitney’s decision to risk everything on a newproductionsystem,evenbeforehehimselffullyunderstoodwhatitwouldbe.

THEHPWAY:PUTTINGTRUSTBEFOREPROFIT

ByDAVIDA.KAPLAN

TheprevailingwisdomincorporateAmericaduringHewlett-Packard’ssaladdays—andperhapstodayaswell—wasthatmanagement’schiefresponsibilitywastoshareholders.FoundersBillHewlettandDavePackardbelievedthattobefartooconstricted.Nordidtheywanttheiremployeestobecomearchetypesofthemid-century“organizationman,”whosubordinatedallindividualitytothecorporation.HewlettandPackardmadethedecisiontocreateamanagementphilosophybuiltaroundafundamentalrespectforemployees.TheHPWay,asitcametobecalled,instilledteamwork,trust,andrisktakingthroughouttheorganizationandbecameatemplateforhowtoday’smostsuccessfulcompanies,fromStarbuckstoGoogle,operate.Intheend“theirgreatestproductwastheHewlett-PackardCo.,andtheirgreatestideawastheHPWay,”wrotethemanagementexpertJimCollins.—V.H.

QUICK,NAMETHEMOSTRIDICULED,reviledcompanyofthepastseveralyears.Thinkof theSiliconValleygiant that spiedon itsownboardofdirectorsandreporters,leadingtocongressionalinvestigations.Orthecompanythat went through three CEOs in less than seven years, each ousted underembarrassing circumstances. The company, of course, is Hewlett-Packard, the

Americanmultinationalwithmore than$100billion in revenueandmore than300,000 employees. If therewere amanagement tome of the period called InSearchofIncompetence,HPmightbethestarringchapter.Once upon a time, though, Hewlett-Packard was an icon of the Valley,

lionized for its corporate values, management philosophy, and fundamentalrespectforemployees.Overthecourseofitshistorydatingtothelate1930s,thatoverarchingethoscametobeknownasthe“HPWay”—andthedecisiontoviewthe HPWay as a sort of prime directive governing the company made HP avisionary. Though Hewlett-Packard would make computers, printers, pocketcalculators,frequencycounters,andotherproducts,itwasthewayitdidthingsthat gave HP its cachet. After all, in the beginning, its co-founders had nothunderboltidea,notevenamediocreone.Itsearlyprojects:abowlingfoul-lineindicator,agadgettomakeaurinalflushautomatically,andanelectronic“shockjigglemachine” to help people loseweight. In the end “their greatest productwastheHewlett-PackardCo.,andtheirgreatestideawastheHPWay,”wrotethemanagementguruJimCollins,whoactuallyworkedatHPinthe1980s,in2005.The notion of institutionalmoralitywas prettymuch unknown inAmerican

businessbeforeHP.WhileprofitsandgrowthwerenecessaryconditionsofHP’ssuccess,itwastheculturethatinspiredsomanyothercompaniesintheValleytotry to emulate it. None other than Steve Jobs often remarked that the ValleybeganatHP,and thecompanywasamodel toentrepreneurs(even ifatAppleComputerJobswasatotalitarian,secretivemanagerwhocouldbedisrespectfulof employees). Jobs had good reason to have a love affairwith the company.Whenhewasineighthgrade,heneededpartsforaschoolproject.Hefounda“WilliamHewlett”inthephonebookandcalledhimup.“IsthistheBillHewlettofHewlett-Packard?”askedthe12-year-oldJobs?“Yes,”repliedHewlett.AfewdayslaterJobsgotaridetoHP’sofficesandpickedupabagfullofelectronicsthatHewletthimselfhadcollected.(JobslatergotasummerjobatHP,wherehebecamefriendswithemployeeSteveWozniak.ThetwowouldlaterstartApple,whichinasenseisadescendantofHP.)In 1998, when I was researching a book on the history of the Valley that

becameTheSiliconBoys, Iwas e-mailing back and forthwith Jobs about theValley’sorigins.HewalkedthemilefromhishouseinPaloAltotoreadmethehistoricallandmarkplaque“BirthplaceofSiliconValley,”postedinfrontofthecelebratedgarageat367AddisonAvenue. Itwas there thatDavePackardandBillHewlettinthelate1930sbuiltHP’sfirstproduct,anaudiooscillatorcalledModel200A(sodesignated,Packardexplained,“becausewethought thename

wouldmakeuslooklikewe’vebeenaroundforawhile”).TheHPWay isn’t a single setofprescriptions.Rather,over theyears ithas

become an amalgamof corporate principles—originally announced by the co-founders,diminutiveHewlettandBunyanesquePackard,or“Bill”and“Dave,”as they were known. The “Bill and Dave” part was less a reflection of anyparticular avuncularity and more a commonsense utilitarian approach tomaximizing employee productivity and customer satisfaction. The prevailingwisdomofHP’searlydays—andperhapstodayaswell—wasthatmanagement’schief responsibility was to shareholders. Hewlett and Packard believed thatprincipletobefartooconstricted.Nordidtheywanttheiremployeestobecomearchetypes of the mid-century “organization man,” who subordinated allindividualitytothecorporation.Instead,Hewlett andPackardcameupwitha small seriesofobjectives that

theyreducedtowritingforeveryoneatthecompanytosee.TheinitialiterationcameoutofHP’sfirstoff-siteof20seniormanagersin1957—twodecadesafterthe company’s founding. The objectives centered on people, financials,organization,specialization,andcommunityinvolvement.WithHPthenatmorethan 1,000 employees, Packard reflected in his memoirs, it had become“increasingly difficult for Bill and me to know everyone well and to have apersonal knowledge of everything that was going on.” Such were predictablegrowingpains.“SowefeltitessentialthatdespiteHP’sgrowth,”Packardwenton, “we try to maintain a small-company atmosphere and to have our keymanagers thoroughly familiarwith ourmanagement style and objective.”Andthosegoalswouldnotsimplybeimposedtop-down:“BillandIfeltstronglythatif ourmanagers and supervisorswere tobeguidedbywrittenobjectives, theyshouldhaveapartindevelopingthem.”SuchessentialfaithintheindividualwasthecoreoftheHPWay.Whetherin

the first version published by Hewlett and Packard in 1957 or as they wererefinedinthemid-1990sunderanewgenerationofleadership,theidealsdidn’tchange. “We have trust and respect for individuals,” states one principle aswrittenoutinthe1990s.“Weapproacheachsituationwiththebeliefthatpeoplewant todoagood jobandwill do so,given theproper tools and support.Weattracthighlycapable,diverse,innovativepeopleandrecognizetheireffortsandcontributionstothecompany.HPpeoplecontributeenthusiasticallyandshareinthesuccessthattheymakepossible.”Similarly,anotherprinciplestated:“Peopleateverylevelareexpectedtoadheretothehigheststandardsofbusinessethics,”wiselyadding that“asapracticalmatter,ethicalconductcannotbeassuredby

writtenHPpoliciesandcodes;itmustbeanintegralpartoftheorganization,adeeply ingrained tradition that is passed from one generation of employees toanother.”Howdidsuchgeneralitiesmanifestthemselvesinthedailylifeofthecompany?The story goes thatHewlett—ever the tinkerer—came towork oneSaturdayandcouldn’tget intoanequipment storeroombecause itwas locked.Thereuponhebroke in,got themicroscopeheneeded—andpostedanote thattheroomwasnevertobelockedagain.Thatkindofnominalgesturemightseemlikepap,allthemoresoasacompanygrowslarge,butit’ssuchactsthatsignalastyle,aboutwhichwordgetsaround.Thecompanyassumedeveryworkerwasworthyunlessprovenotherwise.Job

securitywasassumedatHP;masslayoffsandruthlesscost-cutting—derigueurattributes of modern business in the Valley and elsewhere—were largelyanathema.According to theoldHP joke, theonlyway toget fired involved arevolverandyourboss.Duringadownturninthe1970s,everyonetooka10%cut inpay—andeveryotherFridayoff.Whenanemployeegot tuberculosis inthe1940s,HPaidedhimnotonly financiallybut created a catastrophichealthinsurance plan.Workers got flextime scheduling in the 1960s.Everybodywaseligibleforbonusestiedtoproductivity,asystemthatturnedintoprofit-sharingforall,whichtodayisstandardoperatingprocedureinSiliconValley.UntilHPgrewtoobig,theco-foundersthemselveshandedoutthebootyattheChristmasparty.Companybeneficence in turnproducedgreat employee loyalty—you stayed

foracareer,despitetemptationsfromothersintheValley.There’sareasonHPwasknownasa“countryclub,” thoughitschartermemberswereratherfolksycharacters. At company picnics, Hewlett and Packard served up New Yorksteaks and brew. In 1980,whenPackard and hiswife invited a dozen visitingChineseofficials to their retreat on theCalifornia coast, he realized at the lastminute thathedidn’thaveanychopsticks in thehouse.Thesolution:Hewentinto his workshop and made a dozen sets out of redwood—which the guestsaskedhimtoautographassouvenirs.CanyouimaginetitanslikeBillGatesorJackWelchdoingthat?Teamworktoo—whichcouldbeatoddswithindividualism—waspartofhow

Hewlett andPackardmanaged. “We recognize that it isonly througheffectivecooperation within and among organizations that we can achieve our goals,”statesathirdtenetoftheHPWay.“Ourcommitmentistoworkasaworldwideteamto fulfill theexpectationsofourcustomers, shareholders,andotherswhodepend upon us. The benefits and obligations of doing business are shared

amongallHPpeople.”Fordecades“Bill”and“Dave”expectedtobecalledjustthat,andtheycalledemployeesbytheirfirstnames.Theco-foundersaimedtostripothersignsofhierarchy:Theyopeneddoors,knockeddownwalls,solicitedopinions from the bottom up, and practiced what came to be known byconsultants as “management by walking around.” The latter practice—impromptu movements rather than structured visits—made workers feel theywereallinbusinesstogether.It also benefited the bottom line.According to theHPWay,when egowas

muted and egalitarianism was prized, “we achieve our common objectives,”which include“growth”and“profits.”Utopian though theHPWaysometimessounded,itwasintheserviceofanestimablycorporatepurpose.Evenso,inthepursuit of growth and profit, as yet another tenet states, HP “encouragesflexibility and innovation” in the distinct technical areas in which it chose tospecialize in.Thecompany strongly supportedemployees seeking to “upgradetheir skills andcapabilities throughongoing traininganddevelopment,”whichwas“especially important ina technicalbusinesswhere the rateofprogress israpid andwhere people are expected to adapt to change.”At one point in the1950s,HewlettsuggestedthatengineersbebannedfromdoingregularworkonFridaysandinsteadbetoldtobrainstorm—“tothinkbluesky.”WhileHewlett’snotionoffree timeto innovatedidn’tquitecatchonatHPas itdidat3Mandlater at Google (See Chapter 5), it did send the message to engineers to beexperimentalandnottofearmakingmistakes.IthelpedthatHewlettandPackardhadasharedsenseofvalues.Hewlettliked

totellthestoryaboutaranchtheyownedtogether.Once,whentheareawashitby a disaster, Hewlett called the ranch foreman and said he wanted to offerfinancial assistance to the community but wanted his gift to be anonymous.“That’sfunny,”repliedtheforeman.“Mr.Packardtelephonedaboutahalfhouragowiththeexactsamerequest.”TomPerkins, thenonpareilSiliconValley investorwho in 1972 co-founded

the venture capital firm today known as Kleiner Perkins Caufield & Byers,learned firsthand what the HP Way was—what individuality married toteamwork looked like.TrainedasanMITengineerand thengettingaHarvardMBA,Perkinsgothisfirstfull-timejobatHPin1957.HPtypicallydidn’thireMBAs and the co-founders were skeptical about it. And so it was that theimpeccablycredentialedPerkinswenttoworkinthemachineshoponalathe.Single and charming, he spent much of his free time in San Francisco

surveying the social scene. During his first summer he dated Ellen Davies, a

member of one of the city’s bluest-blooded families. At one dinner with hermother, he was told, “So, Ellen tells me you’re a machinist. You have tounderstandwe’reofacertainpositionhere.”Hedidn’tget to see thedaughteragain. Eventually Perkins was put in charge of all independent companysalesmen, then later helped organize anR&Ddepartment and jump-startHP’sentrance intominicomputers.AndPackardmadeadecision thatwouldchangehis life:He allowedPerkins toworkonhisowncommercial ideaon the side,whichbecameasmaller,cheaperlaserandwhichhesoldformillions—andthuswaslaunchedhisVCcareer.PerkinsneverforgotthestartPackardgavehim—anditwasPerkins’devotiontoPackardthatPerkinscitedasareasonthathe,asaboardmember,resignedinprotestamidtheHPboardroomspyingscandalof2006.Packarddiedin1996,Hewlettfiveyearslater.Theydidnotlivetoseetheir

company hit the shoals—from the rocky merger with Compaq, to the stockmarketdoldrums,totheoustersofCEOs(allofwhomhadbeenbroughtinfromoutside HP). If Hewlett and Packard had been around, they might’ve askedwhetherthecompany’stravailsweretheresultoflosingitsHPWayormerelyafunctionof the inevitable challenges confronting thosewho succeed legendaryfounders.TheywouldsurelyarguethattheirHPWaywas,andis,strongenough,ultimately,totriumphagain.

THESINGLEGREATESTDECISIONOFALLTIME?

HenryFordDoublesHisWorkers’Wages

ByALEXTAYLORIII

WhenHenryFordraisedthewagesofhisworkersin1914from$2.50to$5aday,hismoveflewinthefaceofconventionalwisdom.Afterall,laborersweredrones,tobepaidaslittleaspossible.Ford,however,hadcometobelievethatworkerswereimportantassets.Doublingtheirwageswouldboostmoraleandlowerturnover.Inturn,workerscouldnowaffordtheveryproductstheywereproducing.Thattriggeredaconsumerrevolutionthathelpedcreatethewealthiestnationonearth.Speedforward100years.CompaniesinIndiaandChinaarewrestlingwiththesameissue.Apple’sChinesefactorieshavedoubledwagesoverthepastthreeyears,givingthecomputermaker,someexpertsbelieve,acompetitiveedge:theabilitytoattractthebestemployees.Apple’smovesarealsoearlysignsofaChinamovingtowardamoreconsumer-driveneconomy.—V.H.

HENRY FORDHADA PROBLEM—he was becoming too successful.The growing popularity of theModel Twas causing him to rethink his ideasabout mass production. He had introduced the moving assembly line at hisHighlandPark,Mich.,plantin1913,andithadworkedfarbetterthanhecould

haveimagined.Theyearbeforetheassemblylinewasinstalled,hehaddoubledproductionoftheModelTbydoublingthesizeofhisworkforce.Thefollowingyearhenearlydoubledproductionagain,but this timehedid itwith thesamenumberofworkers.Theassembly linehadmade theplantsoefficient that theHighlandParkpayrollactuallyfell.Thetroublewas,employeeturnoverwasacceleratingatanalarmingrate.The

dispiriting, mind-numbing work on the line was causing workers to quit enmasse.Themen(anditwasallmenbackthen)reactedtotheirnarrowlydefined,repetitive,andphysicallydemandingjobsbyleavingthem.Actingontheadviceofhisdevotedlieutenant,JamesCouzens,Forddecided

to take radical action. As Steven Watts wrote in his 2005 biography, ThePeople's Tycoon: Henry Ford and the American Century, they created asensation.OnJan.5,1914,FordandCouzenssummonednewspaperreporterstotheplanttopublicizechangesinemploymentpoliciesatHighlandParkthattheyhopedwouldimproveemployeeretention.First,thecompanywasreducingtheworkdayfromninehours toeight.Second, itwasmoving to threeshiftsadayinsteadoftwo,openinguplotsofnewjobs.Butthebignewscameinthethirdannouncement:Subjecttocertainconditions,Fordwouldmorethandoublethebasicrateofpayto$5aday.The11-year-oldcompanywaswillingtospendanadditional $10 million annually to improve productivity and the lives of itsworkers.

HENRYFORDGIVES$10,000,000IN1914PROFITSTOHISEMPLOYEES,proclaimed theDetroit Free Press the next day. The news spread quickly beyond southeastMichigan. “Amagnificent act of generosity,” declared theNew York EveningPost.Bythefollowingday,anarmyofjobseekersthatwouldeventuallynumber12,000appearedattheplantgates,huddlingtogetherforwarmthinthefreezingcold. Fights broke out, and the Detroit police were called to break up adeveloping riot. Within a week, Ford received some 14,000 more jobapplicationsbymail.Itwasaremarkableeventinindustrialhistory.Fordwantedtopaythemalivingwagesothat,hewouldlaterexplain,they’d

have spending money to stimulate the economy. In years to come, intrusivemeddling in workers’ lives and bloody confrontations with organized laborwouldputFord’sreputationasafriendof theworkingmanina lessfavorablelight.Buttherewasnodenyinghisinitialachievement:Initiatingthefive-dollardaywas amasterstroke that paid huge dividends for the company and turnedplainspoken businessmanHenry Ford into the nation’s leading reform-mindedthinker.“Withthispolicy,Fordoverturnedtheolderrobber-baronimageof the

Americanbig—businessman,”Wattswrote“Hecameforwardasanewkindofbusinessleaderwhosoughttosharethewealthandprosperitygeneratedbyhiscompany.”Although some of his ideas, notably his anti-Semitism, were demonstrably

primitive, historians see Ford as a product of the Progressive movement thatflourished from the 1890s to the 1920s. Behind such leaders as TheodoreRoosevelt and William Jennings Bryan, its supporters aimed to reformgovernment, education, and industry, promote women’s suffrage, and prohibitalcoholic beverages. For the workingman, they agitated for reduced workinghours,improvedwagesandworkingconditions,andastrongerroleforfamilies.Until1914,Fordhadbeenpreoccupiedbuildinghisyoungbusinessanddidn’t

haveareputationforbeingespeciallygeneroustohisworkers.Hepaidthegoingrateforlabor:$1.90fora10-hourdayin1908,$2.50adayby1913,alongwithamodestannualproductionbonus.ButasFordMotorturnedoutmoreandmorecars,thequalityoftheworkforcedeclined.Whiletheymayhavebeenhappytoholdajob,workersat“Ford’s”chafedundernine-hourdaysandsix-dayweeks,subsistence wages, primitive factory conditions, and abusive supervisors. Theassemblylinedemandedrigidlydefinedjobsthathadtoberepeatedflawlesslyandrequiredlittleimagination.Illtreated,themenrespondedwithsloppyworkandlookedfordiversions.AuthorRobertLaceywroteinFord:TheMenandtheMachine that Ford himself had witnessed a brawl during a walk through theplantwithhissonEdsel.Themost visiblemanifestations ofworker discontentwere absenteeism and

turnover. Researcher Stephen Meyer, in The Five Dollar Day: LaborManagement and Social Control in the Ford Motor Company, 1908-1921,calculated that on any given day 10% of theworkforce didn’t show up. Thatmeantthatsome1,300to1,400extramenwereneededonstandbytokeeptheintegratedproductionsysteminoperation.Withayearlylaborturnoverof370%,Ford managers had to hire 52,000 workers just to maintain Highland Park’sexistingcomplement.WhenthecompanydecidedinDecember1913toissueaChristmasbonustoworkerswhohadbeenonthejobmorethanthreeyears, itfoundthatoutof15,000employees,only640qualified.AnothersignofworkerdiscontentthatcaughtFord’seyewasaspikeinunion

activities.MeyerwritesthatboththeradicalIndustrialWorkersoftheWorldandthe more conservative American Federation of Labor threatened to organizeautoworkers in1913.LaborunionswereanathematoFord,andhewouldholdofforganizers, sometimeswith fists andclubs,until theUnitedAutoWorkers,

formedin1935,broughtcollectivebargainingtoFordin1941.Hehadbeguntotake small steps to improve working conditions, installing a regular bonussystemandestablishingamedicaldepartmenttotreatworkplaceinjuries.Laterhewouldgoontodevelopa20-acreparkwithathleticfields,playgrounds,andabandstand.Toputa lidon theworkforcechurn,FordandproductionexecutiveCharles

Sorensen conceived the Five-Dollar Day. It camewith some strings attached.Theheadlinepaywasdividedintotwoparts:wages(about$2.40perdayforanunskilled worker) and “profits” (about $2.60 per day). All workers receivedwagesfortheirworkatHighlandPark,buttheysharedintheprofitsonlyiftheyweredeemedworthy.Sixmonths’servicewasrequiredtoqualify.Marriedmenwereeligible,asweremenunder theageof22whoweresupportingwidowedmothers or brothers and sisters.Allwomen supporting families also qualified.But unmarried women and men who were not supporting dependents wereexcluded. Ford made it clear that a “clean, sober, and industrious life” wasrequiredtoreceivethehigherpay.Anemployeehadtodemonstratethathedidnotdrinkalcoholorabusehisfamily.Moreover,hehadtomakeregulardepositsin a savings account, maintain a clean home, and be of upstanding moralcharacter. Workers who accepted the new wage would also be subject tocompany rules about how to conduct themselves during off-hours. As Fordexplainedit,“Theobjectwassimplytobetter thefinancialandmoralstatusofthemen.”Toenforcehislifestyledictates,Fordmobilizedanarmyofinvestigatorsthat

atonepointnumbered200.Theywereexpected,Laceywrites,“tomakeatleasta dozen house calls every day, checking off information about marital status,religion,citizenship,savings,health,hobbies,lifeinsurance,andcountlessotherquestions.”Tohelpthemmeettheirquotas,FordprovidedeachinspectorwithanewModelT, a driver, and an interpreter for help in ethnic neighborhoods. Itwasa radical idea,and itwasnotdestined tobe long-lived.As theautomakergrewlarger,individualhomeinspectionsbecameimpracticalanduneconomical,and Ford tired of defending the practice. “It tended to paternalism, andpaternalismhasnoplace in industry,”hewrote inhis autobiography. “Welfareworkthatconsistsinpryingintoemployees’privateconcernsisoutofdate.”Few businessmen followed Ford’s example of the Five-Dollar Day. Not

surprisingly, therewereworries thathigherwageswould lead tohigherprices,withno improvement in thestandardof living.The leadingspokesmanfor theoppositionwas theWallStreetJournal. It editorialized: “To inject tenmillions

intoacompany’s factory, and todouble theminimumwage,without regard tolengthof service, is to applyBiblicalorSpiritualprinciples intoa fieldwherethey do not belong. [Ford] in his social endeavor has committed economicblunders,ifnotcrimes.”Competingautomakerswereappalledbythemoveanddenounced it.They railed that the labormarketwouldbe thrown into turmoil,andtheywouldbebankrupted.GeneralMotorsraisedwagesslightlybutwasnotabletomeetthe$5leveluntilyearslater.The complaints turned out to be mostly groundless; the predicted inflation

never materialized, and the Five-Dollar Day turned out to be an excellentinvestment.Moneywasneveranissue,accordingtoMeyer.Thefirstyear’scostof some $10 million was less than the dividends paid out to shareholders of$11.2million.Workersresponded;withinayear,annuallaborturnoverfellfrom370%to16%,productivitywasup40%to70%,andthenumberofreplacementworkershiredwouldfallfrom53,000to2,000.Between1914and1916,Ford’sprofitsdoubledfrom$30millionto$60million.“Thepaymentoffivedollarsaday for an eight-hour day was one of the finest cost-cutting moves we evermade,”Fordlatersaid.Between1910and1919,hereducedtheModelT’spricefrom around $800 to $350, solidified his position as the world’s greatestautomaker,andmadehimselfabillionaire.Results from the secondhalfofFord’s experiment resonated: expanding the

overall market for the Model T. In his comments to reporters at the Januaryannouncement, he said, “We believe in making 20,000 men prosperous andcontented rather than follow the plan of making a few slave drivers in ourestablishmentmillionaires.”Inlateryearsheexpandedontheidea.Inhis1922collaborationwith SamuelCrowther,MyLife andWork, Fordmaintained that“all other considerations aside, our own sales depend in a measure upon thewageswepay.Ifwecandistributehighwages, thenthatmoneyisgoingtobespent,anditwillservetomakestorekeepersanddistributorsandmanufacturersandworkersinotherlinesmoreprosperous,andtheirprosperitywillbereflectedinoursales.Country-widehighwagesspellscountry-wideprosperity.”Economistscalleditthehigh-wagedoctrine:Ifacompany’sprofitsaretiedto

localconsumption,theamountofconsumptionshouldincreasewithwagesandwealth.Fordcontinuedhispolicythroughoutthe1920s,raisinghisworkerspayto $6 a day, and he saw a connection between his policies and the economicboomof theTwenties. “Theplain fact is that thepublicwhichbuys fromyoudoes not come fromnowhere…One’s own employees ought to be one’s ownbestcustomers. [Bypayinghighwages]weincreased thebuyingpowerofour

ownpeople,andtheyincreasethebuyingpowerofotherpeople,andsoonandon.Itisthisthoughtofenlargingbuyingpowerbypayinghighwagesandsellingatlowpriceswhichisbehindtheprosperityofthiscountry.”Due to Ford’s success, the high-wage doctrine became part of the

conventionalwisdomofthe1920s.Itwasamajorforcebehindoneofthemostsignificantlabor-policydevelopmentsofthecentury:theminimum-wageactof1938. According to economists Jason Taylor and George Selgin, “ThesubstantialpushwhichwouldeventuallyleadtothefirstfederallyimplementedwagefloorsintheUnitedStatescamefrombusinessmenandeconomists,manyof whom believed that high wages would stimulate demand, production,employment,andprofits.”FordwouldcontinuehispolicyintotheearlyThirties,raisingthewageto$7adayintheteethoftheGreatDepression.The debate rages on.Neo-Keynesians likePaulKrugman andRobertReich

continuetoarguethathighwagesnaturallycreateconsumerdemandandthatalittleinflationisn’tabadthing.Supportersofthelow-wagedoctrineassertthateconomicprosperityisbestservedbylowwagesthatdon’tthreateninflationorsqueeze profits.Risingwages,while good for the individual, are construed asbadfortheoveralleconomy.Henry Ford never faltered in his belief in the value of his actions. In an

interviewinSeptember1944,hedeclaredhisintentiontoraisethewagesofhisworkers“assoonastheGovernmentwouldallowhimtodoso.”“AslongasIliveIwanttopaythehighestwagesintheautomobileindustry.

Ifthemeninourplantswillgiveafullday’sworkforafullday’spay,thereisnoreasonwhywecan’talwaysdoit.Everymanshouldmakeenoughmoneytoownahome,apieceofland,andacar.”Forddied2½yearslater,buthisnoblesentiments outlived him, and the five-dollar day ranks, alongside the movingassemblylineandtheModelT,asoneofhisgreatestachievements.

ABOUTTHEAUTHORS

GEOFFCOLVIN

AFortunesenioreditor-at-large,Colvinisawriter,speaker,andbroadcasteronleadershipandmanagement.HisbooksincludeTalentIsOverrated:WhatReallySeparatesWorld-ClassPerformersFromEverybodyElseandTheUpsideoftheDownturn:ManagementStrategiesforDifficultTimes.

HANKGILMAN

Fortunemagazine’sdeputyeditor,GilmancoveredWal-Martinthe1980sfortheWallStreetJournalandthetrademagazineChainStoreAge,andlaterasaneditorandwriterfortheBostonGlobe,NewsweekandFortune.HeisthewinneroftheGeraldLoebcareerachievementawardforediting.

DAVIDA.KAPLANKaplanisacontributingeditoratFortuneandadjunctprofessorofjournalismatNewYorkUniversity.BeforethathewasaneditorandwriteratNewsweekfor20years.HeistheauthorofbestsellerTheSiliconBoys;TheAccidentalPresidentwhichbecamepartofthebasisforHBO’SEmmy-winningdramaRecount;andMine'sBigger,a2008LoebAwardBestBusinessBookoftheYear.

ADAMLASHINSKY

Lashinsky,asenioreditor-at-largeatFortune,coversSiliconValleyandWallStreetandisacontributortotheFoxNewsChannel.HeistheauthorofInside

Apple:HowAmerica'sMostAdmired-andSecretive-CompanyReallyWorks.

BRIANO’KEEFEO’KeefeisaFortuneassistantmanagingeditorwhowritesandeditsfeaturestoriesonarangeoftopics—fromsciencetosportstofinance.Healsocoordinatesthemagazine’scoverageofthecommoditiesmarkets.

JENNIFERREINGOLD

ReingoldisasenioreditoratFortuneandanexpertonmanagementissues.Sheisco-authorofConfessionsofaWallStreetAnalystandFinalAccounting:Ambition,Greed,andtheFallofArthurAndersen.

TIMOTHYK.SMITHSmithisFortune’sseniorfeatureseditor.Hesayshehaswrittenaboutmanygreatbusinessdecisions,buthasnevermadeone.HeisthewinneroftheGeraldLoebcareerachievementawardforediting.

ALEXTAYLORIIITaylorisaFortunesenioreditor-at-largewhohascoveredtheglobalautoindustryforthreedecades.Hismemoir,SixtytoZero,waspublishedin2010byYaleUniversityPress.

NICHOLASVARCHAVERVarchaverhasbeenaneditorandwriteratFortunesince1999.HewonaGeraldLoebawardin2010foranarticleheco-authoredonBernieMadoff.

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