Building Great Organizations –
A Review of Important Literature
By A V Vedpuriswar
Much has been written about organizational excellence. Here, we look at some of
the most cited works and try to capture the essence.
Part – I
The 4 principles of enduring
By Christian Stadler
Harvard Business Review, July - 2007
Research by Stadler reveals that in terms of total return for
shareholders, top companies did 62 times better than the general
An investment of $1 in 1953 would be worth $4,077 today.
By contrast, the comparison companies beat the general market by
a factor of eight, and $1 would have reaped $713.
Stadler’s four principles of enduring success
Exploit before you explore.
Diversify your business portfolio.
Remember your mistakes.
Be conservative about change.
Exploit Before You Explore
To measure exploration, Stadler used R&D spending as a percentage of sales and
patents issued as a percentage of sales. For exploitation, he used return on equity,
return on sales, and return on investment.
Though they did not neglect exploration, as a strategy the winners consistently
preferred exploitation efforts to exploration initiatives.
Companies can compensate for insufficient exploration capabilities by being more
efficient exploiters. But they are not able, over the long run, to make up for a lack
of exploitation capabilities through better exploration.
In other words, great companies don’t only innovate. They grow by efficiently
exploiting the fullest potential of existing innovations.
Glaxo vs Wellcome
When Henry Wellcome started his business together in 1880, he wanted to make a
name for himself as a medical pioneer. In pursuit of this aim, he sponsored much
of the field research then under way in tropical medicine.
Glaxo’s story was very different. Founder Joseph Edward Nathan, started a new
subsidiary in 1905 to commercialize a patent he had purchased for manufacturing
dried milk. Thanks to a well-organized marketing campaign waged by his son Alec,
the company quickly became Britain’s leading supplier of dried infant milk.
Seventy-six years later, Glaxo repeated the trick with Zantac, the ulcer
medication it introduced in 1981. At the time, the leaders were SmithKline,
Pfizer, and Eli Lilly. Glaxo was a latecomer, launching Zantac five years
after SmithKline’s best-selling ulcer medication, Tagamet.
Zantac had no remarkable scientific or medical advantage over Tagamet.
The only difference was that Zantac was packaged in such a way that fewer
pills were required each day.
SmithKline continued to invest heavily in R&D, but Glaxo fared much better
in terms of sales and profitability so much so that it was eventually able to
purchase its more innovative competitor in 2000.
Ericsson Vs Nokia
Ericsson’s strong army of researchers had made the company a pioneer with its
GPRS wireless data communication and third-generation mobile technology
standards. Unfortunately, these advances came at a high price: large-scale
duplication of research efforts, hefty R&D expenditures, and big, risky bets on the
future direction of mobile technology. When the telecom industry entered into
recession in 2001, Ericsson was hit hard. It laid off approximately 60,000 people
and closed many research centers. Eventually it decided to combine its mobile
business with Sony’s.
Nokia, on the other hand, focused on exploitation. With margins under pressure in
the mid-1990s, Nokia streamlined operations, cut inventories, and renegotiated
component prices and delivery terms. When the telecom industry entered a
recession, Nokia was far better prepared than Ericsson, and it remains a leading
global competitor in mobile telephony.
Diversify Your Business Portfolio
Few people today would dispute that conglomeration is a poor strategy. But firms
focusing on a single business or set of capabilities too do not seem much better
when viewed from a long-term perspective.
Single-business companies perform very well in the short run, but over several
decades, a different picture emerges.
Many of the single-business firms simply cease to exist. Once their primary offering
reaches the end of its life span, the only possible next steps are decline, merger, or
Which is why great companies are as suspicious of focusing too narrowly as they
are careful about diversifying.
Alliance vs A&M: Product diversification
The story of the German insurance giant Allianz, is a study in how to build a broad
customer base. From its creation in 1890, the company had a strategy of
diversifying its business portfolio.
On the other hand Aachener und Münchener (A&M), founded in 1824, showed little
ambition to become a broadly based insurance provider. While Allianz went from
strength to strength, A&M struggled.
Lafarge vs Ciments Francais: Geographic
Geographic diversification is as important as product range, as the contrasting
experiences of the two leading French cement producers show.
Lafarge began as a family-controlled cement producer in southern France. Lafarge felt
that it could not rely on its home market alone and diversified internationally at an early
The first step abroad was a large contract to deliver 110,000 tonnes of lime for the
construction of the Suez Canal in 1864.
After World War II, Lafarge used the cash generated by post war growth to speed its
internationalization and diversify into related industries, such as aggregates and ready-
When the first oil crisis ended the building boom in France in 1973, Lafarge was doing
business in 15 countries. Growth opportunities in the developing world thus
compensated for the slowdown in France.
Originally, in 1846, a producer of Portland cement in northern France, Ciments
Francais operated almost exclusively in France for the next 100 years.
Ericsson vs Nokia: Vendor diversification
Supply-side diversification also matters. On March 17, 2000, a fire in a Philips
factory in Albuquerque, New Mexico, disrupted the global mobile-phone supply
Nokia had alternative suppliers in the U.S. and Japan, which were able to deliver
most of the components destroyed in Albuquerque.
Ericsson, on the other hand, had no backup suppliers. In an early cost-cutting
exercise, the company had decided to concentrate on a single supplier – and paid
the price. While the Albuquerque incident had no lasting negative effect for Nokia,
it marked the beginning of Ericsson’s steady decline in mobile telephony.
Remember your mistakes
What really separates the great companies from the good ones is that the great
companies also remember their mistakes.
They take learning from mistakes very seriously, taking care not to make the same
Shell vs BP
Take the case of Shell. Henri Deterding had led the merger in 1907 of his Royal Dutch
Petroleum Company with Shell Transport and Trading to form the Royal Dutch/Shell
Group. Deterding’s strong personality and impressive record gave him a position of
unchallenged power inside Shell. Unfortunately, it also put him in a position to consider
financial and moral support for Adolf Hitler, whom Deterding saw as the man most
likely to preserve Europe from the Communists. Luckily for Shell, he retired in 1936,
before he could make any commitments that would have embarrassed the company
The company did not forget its narrow escape: Deterding’s successors were never
allowed to be so powerful. In 1964, the board rejected advice from McKinsey &
Company to install an American-style chief executive officer, whose official powers
would have matched those Deterding once wielded. Instead, the board installed a
Committee of Managing Directors as the top executive authority in the company. Its
chairman was only marginally more responsible than its other members.
These arrangements stayed in place for decades, and only recently – following a
crisis triggered by the company’s overstatement of its proven oil and gas reserves
– has Shell opted for a classic CEO leadership model. Still, even now, it has
remained remarkably careful to avoid placing an authoritarian leader at the top.
BP, in contrast, appears not to have drawn any lessons when in 1951 Iran
nationalized its assets, which accounted for fully 75% of the company’s oil supply.
After receiving compensation two years later following a coup, BP failed to diversify
its asset base significantly in the ensuring decades, ending up heavily dependent
on a small number of sites in Alaska and the North Sea.
As oil prices plummeted toward the end of the 1990s, those assets lost value, and
BP found itself caught short again. BP is now as heavily dependent on sites in
Russia and other former Soviet states as it was on its Iranian assets.
HSBC vs Standard Chartered
The Hong Kong and Shanghai Banking Corporation was set up in 1865 by the
merchant community in Hong Kong to finance international trade. A close
relationship with the bank’s main customers guaranteed a strong start, but there
were also drawbacks.
Financing investments in fixed assets in China turned out to be riskier than
anticipated, and access to London capital was more complicated for HSBC than it
was for its UK-based competitors. HSBC was badly affected when a severe
recession struck in 1873.
The bank decided to adopt a more balanced management approach.
In 1876, it established a second executive board in London, creating a balance of
power between the trade finance business in the East and the capital allocation
center in London.
The bank also continued to build up reserves and made sure that senior managers
no longer had business interests outside the bank.
Standard Chartered, in contrast, did not learn from its biggest mistake, which was
creating a centralized London-based management system, which had a limited
understanding of the China market.
It lost major business to HSBC on numerous occasions – in the mid-1860s, for
instance, it lost out because repayment periods for trade bills were shortened by
London against the advice of local managers.
Nonetheless, the company stuck to the old system. In the following decades, the
firm survived despite, not because of, its centralized management. Local branch
managers simply ignored orders from London, which they saw as unfit.
Be Conservative About Change
Great companies go through radical change only at very selective moments in their
Jumping onto every new management wave is not for them.
These companies use their core values and principles as guidelines and approach
change in a culturally sensitive manner that requires patience to work through.
Siemens took a very deliberate approach to its changes, initiating them only when it
could see a clear strategic case for restructuring the business portfolio and then taking
its time over implementation to make the transformation as painless as possible for the
Change came to Siemens for four reasons, any one of which would on its own have
provided ample justification.
First, management recognized that the long-standing separation between its high-
current (power generation) and low current (telecommunications) technologies was no
Second, as the group faced pressure to merge these two subsidiaries, management was
also aware that the company’s long-standing consumer business was fitting less and
less well with the high- and low-current activities, which were driving growth.
Third, on top of these strategic considerations was the fear of what would happen when
then-chairman Ernst von Siemens retired.
Finally, the German government was preparing legislation that would force the
corporation to reveal sensitive information about its operations unless it consolidated its
Siemens was very deliberate in the way it responded to those pressures. It began
laying the groundwork for the disposition of its consumer businesses in 1957, when it
brought its radio, TV, and appliances businesses together to create a new subsidiary,
Siemens Electrogeräte. Over the following years, it closed or sold off the radio and TV
production businesses, leaving it with a rump appliance business, which it spun off into
a joint venture with Robert Bosch, a leading appliance maker, in 1967, a full decade
after it had begun the process. Initially, BSH Bosch und Siemens Hausgeräte was
hardly more than a joint sales force, and only over the years did it start to integrate
The company was no less deliberate in its response to the pressure to integrate the
low current and high current subsidiaries. Halske and Schuckert. The decision to
merge them was announced in 1965, but it was not until 1969 that the two subsidiaries
were formally replaced by six divisions: components, data technology, energy
technology, installation technology, medical technology, and telecommunications.
Culturally, the change took even longer. Management left many of the traditional
arrangements and practices in place for as long as 20 years after the reorganization
had been formally completed. Arguably, the convergence was not completed until the
late 1980s, when another transformation process was initiated. In contrast, silver
medalist AEG took a far hastier and less sensitive approach.
Part – II
Good to Great
By Jim Collins
Good to Great
Jim Collins makes some pertinent observations, in his book, based on extensive
Larger-than-life, celebrity leaders who ride in from the outside are negatively
correlated with taking a company from good to great.
The good-to-great companies do not focus principally on what to do to become
great. They focus equally on what not to do and what to stop doing.
Technology and technology-driven change have virtually nothing to do with the
transformation from good to great. Technology can accelerate a transformation,
but cannot cause a transformation.
Mergers and acquisitions play virtually no role in igniting a transformation from
good to great. Two big mediocre entities joined together never make one great
The good-to-great companies pay scant attention to managing change, motivating
people, or creating alignment. They create the right conditions so that the
problems of commitment, alignment, motivation, and change do not have to be
dealt with separately.
The good-to-great companies have no name, tag line, launch event, or program to
signify their transformations. Indeed, some were unaware of the magnitude of the
transformation at the time. Only later, in retrospect, did it become clear. They
produced a truly revolutionary leap in results, but not by a revolutionary process.
The good-to-great companies are not, by and large, in inherently attractive
industries. In fact, some are in terrible industries. Greatness is not a function of
circumstances. Greatness, is largely a matter of conscious choice.
Compared to high-profile leaders with big personalities who make headlines and
become celebrities, the good-to-great leaders are self-effacing, quiet, reserved,
even shy. These leaders are a paradoxical blend of personal humility and
Good-to-great leaders first get the right people on the bus, the wrong people off the
bus, and the right people in the right seats. Then they figure out where to drive it.
Every good-to-great company embraces unwavering faith that it will succeed,
regardless of the difficulties. At the same time, such companies have the discipline
to confront the hard reality, however unpleasant it might be.
Going from good to great implies a better understanding of competence. Just
because something is a company’s core business, or because it has been doing it
for years does not necessarily mean it can be the best in the world at it. And if it
cannot be the best in the world in its core business, then its core business cannot
form the basis of a great company.
All companies have a culture, some companies have discipline, but few companies
have a culture of discipline. When there is discipline, hierarchy, bureaucracy and
excessive controls are not needed. A culture of discipline combined with
entrepreneurship, leads to great performance.
Let us examine some of these points in a little more detail.
Level 5 Leadership
Compared to high-profile leaders with big personalities who make headlines and
become celebrities, the good-to-great leaders seem to have come from Mars. Self-
effacing, quiet, reserved, even shy – these leaders are a paradoxical blend of
personal humility and professional will. They are more like Lincoln and Socrates
than Patton or Caesar.
First who… Then What.
Good-to-great leaders first got the right people on the bus, the wrong people off the
bus, and the right people in the right seats – and then they figured out where to
Confront the Brutal Facts (Yet Never Lose Faith)
Good-to-great companies embrace the Stockdale Paradox.
They maintain unwavering faith that they can and will prevail in the end, regardless
of the difficulties,
at the same time have the discipline to confront the most brutal facts of their current
reality, whatever they might be.
The Hedgehog Concept (Simplicity within the Three
To go from good to great requires transcending the curse of competence. Just
because something is a core business – just because the company has been
doing it for years or perhaps even decades – does not necessarily mean the
company can be the best in the world at it.
And if the company cannot be the best in the world at its core business it
absolutely cannot from the basis of a great company.
It must be replaced with a simple concept that reflects deep understanding of three
A Culture of Discipline
All companies have a culture, some companies have discipline, but few companies
have a culture of discipline.
When a company has disciplined people, it does not need hierarchy.
When there is disciplined thought, bureaucracy is not needed. Disciplined action
obviates the need for excessive controls.
A culture of discipline combined with entrepreneurship leads to great performance.
Good-to-great companies think differently about the role of technology.
They never use technology as the primary means of igniting a transformation.
Yet, paradoxically, they are pioneers in the application of carefully selected
The Flywheel and the Doom Loop
Those who launch revolutions, dramatic change programs, and wrenching
restructuring are unlikely to succeed.
No matter how dramatic the end result, the good-to-great transformations never
happened in one fell swoop.
There was no single defining action, no grand program, no one killer innovation, no
solitary lucky break, no miracle moment.
Rather, the process resembled relentlessly pushing a giant heavy flywheel in one
direction, turn upon turn, building momentum until a point of breakthrough, and
Part – III
Built to last
By Collins and Porras
Built to last
By Collins and Porras
According to Collins, the Good-to-Great ideas lay the groundwork for the ultimate
success of the Built to Last ideas.
Good-to-Great provides the core ideas for getting a flywheel turning from build up
through breakthrough, while Built to Last outlines the core ideas for keeping a
flywheel accelerating long into the future and elevating a company to iconic
Each of the Good-to-Great findings enables all four of the key ideas from Built-to-
Last. Those four key ideas are:
Clock Building, Not Time Telling. Building an organization that can endure and
adapt through multiple generation of leaders and multiple product life cycles; as
opposed to being built around a single great leader or a single great idea.
Genius of AND. Embracing both extremes on a number of dimensions at the same
time. Instead of choosing A or B, the built to last companies figure out how to have
A and B – purpose and profit, continuity and change, freedom and responsibility,
Core Ideology. Instilling core values and core purpose as principles to guide
decisions and to inspire people throughout the organization over a long period of
Preserve the Core/Stimulate Progress. Preserving the core ideology as an anchor
point while stimulating change, improvement, innovation, and renewal in everything
else. Change practices and strategies while holding core values and purpose fixed.
Set and achieve Bhags consistent with the core ideology.
Part – IV
In Search of Excellence
By Peters and Waterman
The 8 attributes of excellent companies
Peters & Waterman identified eight attributes that characterised excellent,
A bias for action. These companies like to get on with it. Even though these
companies may be analytical in their approach to decision making, they are not
paralyzed by endless analysis. In many of these companies the standard operating
procedure is ”Do it, fix it, try it.“
Close to the customer. These companies learn from the people they serve. They
provide unparalleled quality, service, and reliability – things that work and last.
Autonomy and entrepreneurship. These companies foster many leaders and many
innovators throughout the organization. They don’t try to hold everyone on so short
a rein that they can’t be creative. They encourage practical risk taking, and support
Productivity through people. The excellent companies treat the rank and file as
the root source of quality and productivity gain. They do not regard capital
investment as the fundamental source of efficiency improvement.
Hands-on value driven. CEOs walk the plant floors and regularly visit retail outlets
and assess them on the factors the company holds dear.
Stick to the knitting. While there were a few exceptions, the odds for excellent
performance seem strong to favour those companies that stayed reasonably
close to businesses they know.
Simple form, lean staff. The underlying structure, forms and systems in the
excellent companies are elegantly simple. Top-level staffs are lean.
Simultaneous loose-tight properties. The excellent companies are both
centralized and decentralized. Even as they push autonomy down to the shop
floor or product development team, they are fanatic centralists around the few
core values they hold dear.
Part – V
Understanding the new paradigm
The Individualised corporation: Ghoshal & Bartlett
Transformation of management roles & tasks
Operating level managers Senior level managers Top level managers
Changing role From implementers to From controllers to coaches From resource
entrepreneurs allocators to institutional
Primary value Focus on productivity, innovation, Support and coordinate to bring Provide a sense of
added growth within frontline units large company advantage to direction, commitment
independent frontline units and challenge to people
Key activities & Creating and pursuing new growth Developing individuals and Challenging embedded
tasks opportunities supporting their activities assumptions and
Attracting and developing resources Linking dispersed knowledge, Institutionalizing a set of
& competencies skills and best practices norms and values to
across units support cooperation
Managing continuous performance Managing the tension between Creating an overarching
improvement within unit short term performance and long corporate purpose and
term ambition ambition.
Management competencies for new roles
Role/Task Attitude / Traits Knowledge / Experience Skills / Abilities
Operating level entrepreneurs Results-oriented competitor Detailed operating knowledge Focuses energy on
Creating & pursuing Creative, intuitive Knowledge of business’s Ability to recognize potential
opportunities technical, competitive and and make commitments
Attracting and utilizing scarce Persuasive, engaging Knowledge of internal & Ability to motivate and drive
skills & resources external resources people
Managing continuous Competitive Persistent Detailed understanding of the Ability to sustain organizational
performance improvement business operations energy around demanding
Senior management People-Oriented Integrator Broad Organizational Develops People and
developers Experience Relationships
Reviewing, developing, Supportive, patient Knowledge of people as Ability to delegate, develop and
supporting individuals and their individuals and understanding empower
initiatives how to influence them
Linking dispersed knowledge, Integrative, Flexible Understanding of the Ability to develop relationships
skills and practices interpersonal dynamics among & build teams
Managing short term and long Perceptive, demanding Ability to link short term Ability to reconcile differences
term pressures priorities and long term goals while maintaining tension
Top level leaders Institution-Minded Visionary Understanding company in its Balances alignment and
Challenging embedded Challenging Stretching Grounded understanding of the Ability to create an exciting,
assumptions & setting stretch company, its businesses & demanding work environment
Building a context of Open minded, fair Understanding of the Ability to inspire confidence and
cooperation and trust organization as a system of belief in the institution and its
structures, processes and management
Creating an over arching sense Insightful, inspiring Broad knowledge of different Ability to combine conceptual
of corporate purpose & ambition companies, industries and insight with motivational
Part – VI
Getting into action mode
The importance of purposeful action: Creating a
bias for action: Ghoshal & Bruch
Most managers know roughly if not exactly what is to be done but few get around
to action mode.
People who exhibit purposeful action possess two critical traits: energy and focus.
Energy implies a high level of personal involvement and effort, engaged, and self-
Focus requires discipline to resist distraction, overcome problems and persist in
the face of unanticipated setbacks.
Four kinds of managerial behaviour
The Frenzied: They are highly energetic but very unfocused and appear to others
as frenzied, desperate, and hasty.
The Procrastinators: They postpone the work that really matters to the organization
because they lack both energy and focus. They often feel insecure and fear failure.
The Detached: They are disengaged or detached from their work altogether. They
are focused but lack energy and often seem aloof, tense, and apathetic.
The Purposeful: They get the job done. They are highly focused and energetic and
come across as reflective and calm, amidst chaos.
Motivation and Willpower
Motivation might suffice in helping managers sustain organizational routines. But
the more important tasks are usually complex and require creativity and innovation.
When dealing with ambitious goals, high uncertainty and extreme opposition,
managers have to rely on a different force, the power of their will.
Willpower goes beyond motivation. It enables managers to execute disciplined
action, even when they are disinclined to do something, uninspired by the work, or
tempted by other opportunities. Willpower gives managers an insatiable need to
Willpower enables managers to overcome barriers, deal with setbacks, and
persevere to the end. Wilful managers resolve to achieve their intention, no matter
The Three Traps of Nonaction
The trap of overwhelming demands
The trap of unbearable constraints.
The trap of unexplored choices.
The trap of overwhelming demands.
Purposeful action-takers manage their demands by:
developing an explicit personal agenda
practicing slow management
structuring contact time
shaping demands and managing expectations.
The trap of unbearable constraints.
To unshackle themselves from this trap, purposeful action-takers adopt strategies
Mapping relevant constraints
Selectively breaking rules
Tolerating conflicts and ambiguity
The trap of unexplored choices
The third trap of non action is unexplored choices.
Many managers concentrate on immediate needs and requirements.
They do not perceive or exploit their freedom to make choices about what they
would do and how they would do it.
Unleashing Organizational Energy for Collective
The real challenge for most organizations is to tap their energy and channelise it into
Corporations that have succeeded for long periods in a relatively stable
environment often settle into the comfort zone.
Characterized by weak but positive emotions such as calm and contentedness,
they lack the internal vitality, alertness, and emotional tension necessary for
initiating bold, new strategic initiatives.
Inertia stems from the belief that they have found the ultimate success formula.
Companies in the resignation zone have the same low-energy intensity as those in
the comfort zone.
But these people find themselves in the grip of weak emotions, such as frustration
Typically, they suffer from low levels of emotional commitment, alertness, and
Persistent mediocrity makes people lose their confidence in dealing with problems
Believing that nothing they can do would make any difference, they passively
resign themselves to their fate.
Companies in the resignation zone believe that they are simply not good enough to
Companies in the corrosion zone show a high degree of energy, intense levels of
activity and emotional involvement.
They draw that intensity from strong emotions, such as anger, fear, or hate.
The interplay of high energy and destructive responses is one of the most
debilitating energy states in which a company can find itself.
With much of the company’s energy dedicated to internal conflicts, rumors,
micropolitics, or other destructive activities, the effort needed to cope with fear,
suspicion, and rivalry drains people’s vitality and stamina, leaving little left for
Unlike companies in the corrosive, resignation and comfort zones, those in the
productive zone display high emotional tension, alertness, and activity.
Employees work with a sense of urgency, driven by enthusiasm, positive
excitement, joy, and pride in their work rather than anger, fear, or internal rivalry.
Typically, these companies strive for challenges that surpass the routine, the
obvious, and the normal.
While low-energy companies look for standardization and institutionalization,
avoiding surprises and risks whenever possible, companies in the productive
zone thrive on surprises, the excitement of the unknown, and novel
A sense of urgency and alertness, allows them to process information and
mobilize resources rapidly.
Inevitably, these organizations also have leaders who direct their people toward
shared purposes, channeling the company’s potential by aligning its collective
perception, emotions, and activities to pursue business-critical activities.
Slaying the dragon and Winning the princess
Companies that achieve truly radical change have leaders who adopt one of three
approaches for focusing the energy of their organizations and moving them into the
Some adopt the slaying-the-dragon strategy, driving their people out of the comfort
zone by focusing their emotion, attention, and action on a crisis or a threat to
Others pursue a winning-the princess strategy, moving their organizations into the
productive zone by building people’s enthusiasm for realizing a specific, motivating
A few others use a combination of these strategies
Strategies for summoning willpower
There are six strategies that leaders can use to help managers summon their will
Strategy 1: Help managers visualize their intention
Strategy 2: Prepare managers for obstacles
Strategy 3: Encourage managers to confront their ambivalence
Strategy 4: Develop a climate of choice
Strategy 5: Build a self-regulating system
Strategy 6: Create a desire for the sea
Building employee loyalty
Broad loyalty to an organization is increasingly difficult to achieve and sustain.
Besides, such general commitment, even if achieved, does not necessarily lead to
purposeful action on specific tasks.
A diffused sense of organizational loyalty often creates a taken-for-granted kind of
relationship between managers and the company that actually dulls the edge of
The best way leaders can build effective organizational commitment, is through a
bottom-up style that emphasizes personal ownership and commitment to specific
initiatives and goals.