• Tweet

  • Post

  • Share

  • Save

  • Get PDF

  • Buy Copies

  • Print

When your company is doing well, acquirement is pouring in, and your stock is rising, how do you know if y'all could be doing better? How tin can yous tell which of your management practices are making the difference and which are simply doing no visible harm? Benchmarking is the obvious answer, but non by comparing poor companies with skillful ones. The manner to get at this problem is to compare good companies with even better ones.

That'due south exactly what nosotros did. For the last four years, Hans Hinterhuber, Franz Mathis, and I have led a team of viii researchers in a study of Europe'due south oldest and best companies, which we call the Enduring Success Projection.

To date, most of the research on loftier performance has focused on U.S. companies. The seminal piece of work of Jim Collins and Jerry Porras, popularized in their 1994 best-selling book Built to Terminal, is merely one case in signal. This is not entirely surprising: U.S. corporate data are relatively sound and easily available, and American schools tend to dominate business academia. Indeed, extending the research to European companies proved daunting, as much of the data we used were far from readily bachelor.

Our goal was to understand why some companies take managed to perform at a very high level over very long periods of time. What can we learn from their experience? What did they practice that prepare them apart from other one-time, large corporations that, while successful (else they would not have lasted so long), were not so extraordinary? To answer these questions, we compared each firm in a sample of companies that had turned in infrequent performance over the past 50 years with some other old visitor in the same industry (and preferably from the same country) whose functioning was solid but non quite as good. (For the full list of companies, meet the exhibit "What Do We Mean by 'Great'?") Over the life of the project, a board of seasoned directorate—Alfred D. Chandler, Jr.; Arie de Geus; Edgar Jones; Michael Mirow; Jerry Porras; Peter Schütte; Risto Tainio; and Gianmario Verona—supported our efforts.

Companies that have applied the four principles of enduring success have been rewarded with exceptional long-term operation gains. In terms of total return for shareholders, top companies did 62 times amend than the general market. An investment of $1 in 1953 would be worth $four,077 today. By dissimilarity, our comparison companies beat the full general market by a cistron of 10.5, and our $one would have reaped $713.

The project yielded four main findings, which we call the iv principles of enduring success:

1. Exploit earlier you explore.

Throughout their history, the great companies in our sample accept all emphasized exploiting existing assets and capabilities over exploring for new ones.

2. Diversify your business concern portfolio.

Good companies tend to stick to their knitting, merely the nifty companies know when to diversify. They are careful also to maintain a wide range of suppliers and a broad base of customers.

3. Remember your mistakes.

Great companies tell and retell stories of past failures to make sure they don't repeat them.

4. Exist conservative about change.

Swell companies very seldom make radical changes—and take great care in their planning and implementation.

ane. Exploit earlier you explore. In managing growth, the tension between leveraging existing assets and developing new ones is well known. Great companies have a clear priority: exploitation.

2. Diversify your business organization portfolio. Great companies are adaptive. They diversify their supply bases, products, customers, and geographic markets.

3. Remember your mistakes. Great companies practice non autumn into the same trap twice. Meaningful stories are passed on from i generation to the adjacent from which successive generations draw clear object lessons.

iv. Be bourgeois about change. Neat companies go through radical change but at very select moments in their history, and they do so cautiously.

These conclusions took us by surprise. Non only were some of the principles counterintuitive (Would you await sustained exploitation to beat out sustained innovation?), simply many of the usual suspects were missing. We fully expected, for instance, to find that corporate civilisation was a differentiating cistron; in that location has certainly been a lot of literature proclaiming corporate values as a key to performance. Just when nosotros looked more closely, we plant that while a potent corporate culture is a sine qua non for success, it does not make the difference between a good visitor and a groovy one. Gold medalist Siemens, for example, has a stiff culture that can exist traced dorsum to visitor founder Werner von Siemens. But and then does AEG, the silver medalist we compared it with. The same applies to other silver medalists in our sample, like Prudential, Ericsson, and BP.

We as well observed that companies have to work very, very hard to attach to the iv principles in the confront of the abiding temptation to diverge from them. Nokia, for example, had always managed operations extremely well, but it near forgot about this when innovative new cell phones generated fantastic acquirement growth opportunities. The company set overly ambitious sales targets, which increased costs and created logistics and quality problems; profits fell in the mobile phone business. Picking up the alarm signals, Nokia renewed its focus on profitability rather than growth: The product mix was narrowed and execution was returned to the acme of the calendar, ensuring continuous strong performance. Similar Nokia, the other gold medal companies that for a while deviated from the principles usually turned in performances beneath their comparing companies in that menstruation.

In the post-obit pages, I'll depict and illustrate our 4 principles in detail. First, though, let me explicate in more depth how nosotros arrived at them.

The Project

With support from the OeNB Jubiläumsfonds, we began our project with all 40 European companies older than 100 that featured in the Fortune Global 500 of 2003. Over the next four months, nosotros calculated those companies' total shareholder returns (TSR) for each of the last 50 years.

Collecting the data we needed to make this estimation was trickier than nosotros expected. Centralized financial databases for British companies get back only to 1964; for continental European companies, they extend merely to 1972. By visiting libraries, stock exchanges, and corporate archives, we were able to find old reports and newspapers containing near of the data nosotros sought. Finland turned out to be particularly tough. It was only when Seppo Ikäheimo from the Helsinki School of Economics kindly pointed us toward Kim Lindström, an elderly investor who is often referred to as Finland's Warren Buffett, that we were able to obtain the necessary numbers.

From the 40 companies nosotros tracked, we selected ix whose stock had outperformed the major market indexes (Dow Jones, DAX, and FTSE) by a factor of at least 15 over the entire period. Their average functioning, of course, was much higher: These gilt medalists outperformed the marketplace by a gene of 62. We then looked for a ready of comparison companies, ideally a match in terms of country, industry, and historic period. Every bit their longevity implies, these silver medalists also turned in solid performances (outstripping the marketplace by a factor of 10.5) and even chirapsia out the gold medalists at times and for relatively short periods (half-dozen years in one exceptional case simply commonly for only a year or two).

Having nerveless the raw information and selected our paired samples, we then surveyed and interviewed financial analysts and business organization scholars to identify the fundamental performance indicators for the industries represented in our ii samples. We found eight to 10 such measures for each manufacture (which were not always the aforementioned) and adamant that the gold medalists outperformed their counterparts, on average, in 90% of them. (See the showroom "What Makes the Difference?")

Through a survey of fiscal analysts and business scholars, nosotros identified the eight to ten key functioning indicators for each industry in our study. Applying a U-test of statistical significance, we were able to determine which factors fabricated the operation difference between gold and silver medalists.

With our sample and the fiscal data in place, nosotros were ready to begin a conscientious assay of each pair of companies, a procedure that was to take three and a half years. This analysis involved a detailed report of the corporate histories of each company (In the case of HSBC, this comprised iv volumes totaling 3,114 pages!) We then collected and coded thousands of pages of material (articles, archival cloth, organizational charts, project reports, and so on) to ensure that we did non miss any crucial developments. We talked to hundreds of analysts and scholars and conducted formal interviews with active and retired executives from the companies in our two samples. Throughout this process, a number of hypotheses emerged about the basic differences between the bang-up companies and the merely good ones, which we discussed and tested confronting the hard information. In the concluding stages of this project, Davis Dyer from Winthrop Grouping and the Monitor Company challenged our ideas in the low-cal of current management thinking. Four of these hypotheses survived the tests: our 4 principles of indelible success.

While the overall pattern was remarkably consistent beyond time and throughout all industries, nosotros are aware of the limitations of our work. The complexity and diversity of history e'er produces counterexamples. Inquiry in other regions might also reveal different insights. Our intention is merely to contribute to the ongoing discussion about what really works—not to claim discovery of the ultimate truth.

Let me at present plow to the get-go principle of enduring success.

Principle one: Exploit Earlier You Explore

Publicly available data on company operation offer no uncomplicated measure that captures the tension between exploration and exploitation for many industries over fourth dimension. We decided, therefore, to look at multiple metrics. To measure out exploration, we used R&D spending as a percentage of sales and patents issued as a percentage of sales. For exploitation, we used return on disinterestedness, return on sales, and return on investment.

Historical analysis of the companies reveals a articulate pattern: Though they did non neglect exploration, as a strategy the gold medalists consistently chose to pursue exploitation efforts over exploration initiatives. It seems that companies can compensate for insufficient exploration capabilities by being more efficient exploiters. Simply 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 introduce their way to growth—they abound by efficiently exploiting the fullest potential of existing innovations. The contrasting tales of Glaxo, the consummate exploiter, and Wellcome, the inspired innovator, illustrate this point very conspicuously. (Glaxo purchased Wellcome in 1995, but they were independent of each other long enough for united states to treat them as 2 companies in this report.)

When Henry Wellcome started his concern together with Silas Burroughs in 1880, he wanted to make a proper noun for himself as a medical pioneer. In pursuit of this aim, he sponsored much of the field inquiry then nether way in tropical medicine—arguably the biotech of its time. He actively encouraged the researchers he supported to publish their findings, a practise largely unheard of at the fourth dimension. Inevitably, the pioneering piece of work he sponsored produced commercial products, and for a long time the visitor prospered. But after he handed over operational command to George Eastward. Pearson in 1924, the commercial success began to fade, even though the quality of the firm's science remained undiminished. The trouble, nosotros found, was that the scientists in Wellcome's research labs had past then largely lost involvement in commercial success. What they really cared nearly was their reputations as researchers. Every bit the once closely linked worlds of medical research and commerce started to carve up, Wellcome was left on the incorrect side.

Glaxo'southward story was very different. Founder Joseph Edward Nathan, who with his brother-in-police created the company equally a general merchant in 1861, started a new subsidiary in 1905 to commercialize a patent he had purchased for manufacturing stale milk. Thank you to a well-organized marketing campaign waged by his son Alec, the visitor apace became United kingdom'southward leading supplier of dried infant milk. Information technology was to exist the first of many occasions that the firm exploited someone else'south invention.

Seventy-vi years after, Glaxo reprised the play a joke on with Zantac, the ulcer medication it introduced in 1981. At the time, ulcer treatment was one of the hottest areas in pharmaceutical inquiry, and the leaders were SmithKline, Pfizer, and Eli Lilly. Glaxo was a latecomer, launching Zantac five years later on SmithKline'due south best-selling ulcer medication, Tagamet. Zantac had no remarkable scientific or medical reward over Tagamet. The only difference was that Zantac was packaged in such a manner that fewer pills were required each solar day.

According to conventional wisdom in the manufacture, a me-also product like Zantac could never win more than 50% of the market place. But Glaxo viewed the apparent 2d-mover disadvantage as an opportunity. As the pioneer, SmithKline had already invested in educating doctors about the new type of ulcer medication, and Glaxo's market place inquiry indicated that doctors viewed Zantac equally "another Tagamet"—in other words, as a production whose benefits they were very familiar with. Glaxo's salespeople therefore could concentrate on promoting the benefits of Zantac versus Tagamet. Glaxo decided to put a cost premium on Zantac to stress its superiority over Tagamet. It was a bold but successful move.

Throughout this fourth dimension, 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 somewhen able to purchase its more innovative competitor in 2000 (once more ownership, rather than building, its pipeline).

We observed the market's preference for exploitation over exploration again and again throughout our sample. At Ericsson, for example, a thirty,000-strong army of researchers had made the company a pioneer with its GPRS wireless data communication and 3rd-generation mobile applied science standards. Unfortunately, these advances came at a loftier price: big-scale duplication of research efforts, hefty R&D expenditures, and big, risky bets on the hereafter management of mobile technology. When the telecom industry entered into recession in 2001, Ericsson was hit hard. It laid off approximately lx,000 people and closed many inquiry centers. Somewhen it decided to combine its mobile business organisation with Sony's.

All the while, Nokia, its stronger competitor (which entered the telecom sector in the 1960s, long ago enough for united states to treat it equally a telecom visitor), focused on exploitation. With margins under force per unit area in the mid-1990s, Nokia formed troubleshooting teams to streamline operations, cut inventories, and renegotiate component prices and delivery terms. When the telecom industry recession hit, Nokia was far meliorate prepared than Ericsson, and it remains a leading global competitor in mobile telephony.

Principle 2: Diversify Your Business Portfolio

Information technology's a well-known rule of strategy that diversification works only if the diversifying company can exploit economies of scope by combining related businesses. Feel tends to carry the rule out. In the 1960s and 1970s, for instance, consultants and academics argued that corporations needed to diversify their portfolios to reduce the touch of dips in the economic bike. They presented convincing empirical research to back this argument, and many firms followed their advice. Practically everyone regretted the decision. The urge to diversify persisted fifty-fifty afterwards the disasters of the 1970s: In the 1980s, BP remained in the diet business, for instance, including fish feed. France's largest h2o utility, Vivendi, saw itself as a budding media and entertainment grouping.

Few people today would dispute that conglomeration is a poor strategy. Merely the antidote—firms focusing on a single concern or set of capabilities—does not seem much better when viewed from a long-term perspective. Unmarried-business organisation companies do indeed perform very well in the short run, merely when we observe these corporations over several decades, a unlike moving-picture show emerges: Many of the unmarried-business firms only cease to exist. A study by Richard Whittington of Oxford'due south Saïd Business School and Michael Mayer of the University of Bath School of Management of the top 100 domestically owned industrial firms in France, Germany, and the United kingdom bears this out. Using a measure of diversification developed in the 1970s past Richard Rumelt of UCLA'due south Anderson School of Management, Whittington and Mayer institute that 68% of the single-business companies that had fabricated the top 100 in 1970 dropped out by 1983, and 42% of the firms that were in the top 100 in 1983 dropped out by 1993. Firms with multiple—merely related—businesses fared rather better: Only 37% of those listed in 1970 failed to remain on the list by 1983, and 35% of those on the listing that year dropped off by 1993. Information technology's not hard to imagine why single-business firms might struggle to stay on the listing. In one case their principal offering reaches the end of its life span, the only possible next steps are refuse, merger, or auction.

Few people would dispute that conglomeration is a poor strategy. Simply cracking companies are as suspicious of focusing too narrowly equally they are careful near diversifying.

Which is why slap-up companies are as suspicious of focusing too narrowly every bit they are careful about diversifying. The story of the German insurance giant Allianz, another of our gold medalists, 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. Its very outset foray into the market place was arguably a diversification, since the company's founders decided to avert writing fire insurance premiums—so the staple (if declining) business organisation of nearly insurers—and full-bodied instead on a new type of policy, sold largely by strange companies: transport insurance. As Germany industrialized, the bet paid off, and the company soon had a cash cow on its easily. Instead of plowing the proceeds back into the ship business, Allianz quickly branched out into the fledgling casualty, and and then the industrial, insurance businesses, selling its first equipment policies in 1900, simply x years afterwards the corporation's creation.

Over the next two decades, Allianz continued to diversify. By 1918, it had created a whole segmentation focused on the new marketplace for car insurance, and within a few years it became the dominant player in the life insurance marketplace, with the foundation of Allianz Life equally a joint venture with Munich Re and several banks. Allianz'due south move into this business had been advisedly prepared in advance; in 1918, Allianz had discussed a partnership with life insurer Karlsruher Lebensversicherung. Failing to reach an understanding, Allianz formed a partnership with Friedrich Wilhelm Lebensversicherungs in 1921 whereby the 2 insurers cantankerous-sold each other's products, providing Allianz with an opportunity to gain insight into the life business. A closer marriage failed, but based on these experiences, Allianz formed its own business in 1922. Within three decades of its cosmos, Allianz had become the leading German insurance company in all the lines of insurance it offered, both life and nonlife.

Silver medalist Aachener und Münchener, founded in 1824, showed little appetite to become a broadly based insurance provider. "Schuster bleib bei deinen Leisten" (loosely translated as "stick to your knitting") is an one-time German proverb that aptly describes the company's approach. In stark contrast to Allianz, A&M did not diversify out of its original business organization (selling fire insurance to farmers) for the kickoff forty years of its existence so only when increased competition and slowing need for the policies forced its paw. When it did diversify, the new businesses represented little more production extensions. A&M's first diversifications were in reinsurance and insurance confronting hail, both of which were targeted at its existing client base. This reflected the attitude of A&M's agents, who did not feel they were capable of selling to factories.

Not until 1924—a century after the visitor was founded and 25 years after first considering the possibility—did the first real diversification occur, with A&M'due south acquisition of the Aachen-Potsdamer Lebensversicherung, a life insurance business organization. Another step to gain a broader base of customers was the formation of the Rheinische Gruppe, a loose cooperative of 15 insurance companies with A&Thousand, Colonia, and Vaterländische at the core. Both deals were steps in the correct management, just they proved too little likewise late. The life insurance business concern was relatively small-scale, and the Rheinische Gruppe never quite cohered, leaving A&M heavily dependent on its rural business organisation. When Russia occupied East Germany after Globe War Ii, an agricultural region that gave A&M 40% of its fire insurance business was lost entirely.

Geographic diversification is as important as product range, every bit the contrasting experiences of the two leading French cement producers evidence. Gold medalist Lafarge began as a family-controlled cement producer in southern France. In a business that in the eighteenth and early nineteenth centuries relied heavily on regional contacts, the family was well positioned to succeed, enjoying as it did a particularly good human relationship with officials of the country-run Corps des Ponts et Chaussées (Department of Bridges and Roads). Simply Lafarge felt that it could not rely on its domicile marketplace lonely and diversified internationally at an early engagement. The first step abroad was a large contract to deliver 110,000 tonnes of lime for the construction of the Suez Canal in 1864. Other projects followed in Kingdom of spain, Italia, Hellenic republic, Lebanese republic, Republic of chile, Russia, Serbia, Romania, and Bulgaria. After World War II, Lafarge used the cash generated by postwar growth to speed its internationalization and diversify into related industries, such every bit aggregates and ready-mix concrete. When the start oil crunch ended the edifice boom in France in 1973, Lafarge was doing business in fifteen countries. Growth opportunities in the developing world thus compensated for the slowdown in French republic.

The story of Ciments Français was quite the opposite. Originally, in 1846, a producer of Portland cement in northern France, the firm operated almost exclusively in France for the next 100 years. The simply exception was a minor presence in Morocco, starting in the 1950s. In 1971, Ciments Français united with Poliet et Chausson to become the largest cement producer in French republic, just earlier the oil crisis, which drove down revenues in its main marketplace in the Paris region by 40% between 1974 and 1979. The company never recovered. In 1992, the biggest shareholder, the French bank Paribas, sold a 40% stake of Ciments Français to Italcementi.

Supply-side diversification also matters. On March 17, 2000, a fire in a Philips manufacturing plant in Albuquerque, New Mexico, disrupted the global mobile-phone supply chain. Gold medalist Nokia had alternative suppliers in the U.Due south. and Nippon, which were able to jump in and evangelize virtually of the components destroyed in Albuquerque. Silvery medalist Ericsson, on the other hand, had no fill-in suppliers. In an early toll-cutting exercise, the visitor had decided to concentrate on a unmarried 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.

Principle three: Call up Your Mistakes

Powerful experiences oftentimes develop into enduring stories that are passed on from generation to generation. Successful companies, naturally, take skillful stories to tell, and they tell them constantly. This exercise helps motivate people and inspires them to human activity in ways that produced success in the past and are probable to continue to in the hereafter. Glaxo, for example, never tires of retelling the story of Alec Nathan'southward successful marketing campaign for dried milk, and visitor leaders drew on this story explicitly seven decades after for the Zantac launch.

Only what actually separates the slap-up from the proficient is that the bang-up companies too remember their mistakes. Take the example of Shell. In the years earlier World War 2, Shell was very much a ane-man ring. Henri Deterding had led the merger in 1907 of his Royal Dutch Petroleum Company with Trounce Transport and Trading to form the Majestic Dutch/Crush Group. Nether his firm control, the corporation prospered and became one of the main rivals to the great American oil companies that emerged from the breakup of the Standard Oil Trust.

Deterding'southward stiff personality and impressive record gave him a position of unchallenged power within Crush. Unfortunately, it also put him in a position to consider fiscal and moral support for Adolf Hitler, whom Deterding saw equally the man most probable to preserve Europe from the Communists. Deterding visited Deutschland frequently and eventually married a German. Luckily for Shell, he retired in 1936, earlier he could brand any commitments that would have embarrassed the company later on.

The company did not forget its narrow escape: Deterding's successors were never allowed to be so powerful. In 1964, the board rejected communication from McKinsey & Company to install an American-style chief executive officer, whose official powers would accept matched those Deterding once wielded. Instead, the lath installed a Committee of Managing Directors every bit the top executive say-so in the company. Its chairman was just marginally more responsible than its other members. These arrangements stayed in place for decades, and only recently—following a crunch triggered by the visitor'southward overstatement of its proven oil and gas reserves—has Beat opted for a classic CEO leadership model. Still, even at present, it has remained remarkably careful to avoid placing an disciplinarian leader at the top. "On the one side, we take our chief executive with more power to drive speed or to put his foot down about the things he wants to accomplish, and at the same time nosotros idea how nosotros can put checks and balances effectually that person," says Jeroen van der Veer, Shell's CEO, in describing this transformation of the governance construction.

BP, in contrast, appears not to have drawn whatever lessons when in 1951 Islamic republic of iran nationalized its assets, which accounted for fully 75% of the company'due south oil supply. After receiving bounty two years after 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 Northward Sea. As oil prices plummeted toward the end of the 1990s, those assets lost value, and BP found itself defenseless brusque once again. Doggedly repeating its mistake, it embarked on a new elephant hunt and is now as heavily dependent on sites in Russian federation and other former Soviet states every bit it was on its Iranian assets.

Although BP has already suffered dramatically from its failure to observe the principle of diversification, it is articulate the company has non taken the lesson to middle. It is striking how easily and then-CEO John Browne brushed off concerns virtually taxes and the role of the Russian state. "The temperature always keeps changing—from cold to medium," he said in a 2005 interview in the Guardian, "just the back taxes were sorted out for 2001, and I expect there will exist farther large claims for 2002 and so on, merely equally these are not unusual. There are many other places in the earth where big claims are made. Discussions usually take place, and a settlement is reached."

Gilt medalist HSBC likewise recalls the lessons of its past mistakes. The Hong Kong and Shanghai Banking Corporation was set up in 1865 by the merchant community in Hong Kong to finance international merchandise. A close human relationship with the bank's principal 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 admission to London capital was more than complicated for HSBC than it was for its UK-based competitors. This hit HSBC doubly difficult when a astringent recession struck in 1873. The bank decided to adopt a more balanced management approach, which continues to dominate its strategy to this day. In 1876, it established a second executive board in London, creating a balance of ability betwixt the trade finance business organization in the East and the capital allocation centre in London. The depository financial institution too increased its efforts to build up reserves and made sure that senior managers no longer had business interests outside the depository financial institution.

Argent medalist Standard Chartered (the Chartered Bank of India, Australia and China at its founding in 1853), in contrast, did not acquire 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 confronting the advice of local managers. Withal, the company stuck to the onetime system. In the post-obit decades, the house survived despite, not because of, its centralized management. Local branch managers simply ignored orders from London, which they saw as unfit.

Principle four: Be Conservative About Change

Schumpeterian logic tells us that creative destruction is the just fashion to survive in modern commercialism: Modify is inevitable, and information technology's better to atomic number 82 than follow information technology. At least that'southward the conventional wisdom. Great companies beg to differ. They go through radical alter only at very selective moments in their history. Jumping onto every new management wave is not for them. They use their core values and principles as guidelines and arroyo modify in a culturally sensitive manner that requires patience to piece of work through.

Schumpeterian logic tells us that creative destruction is the only manner to survive in modern commercialism. Great companies beg to differ. They go through radical change very, very selectively.

In the 1960s, golden medalist Siemens and archrival AEG were operating in the same business environs: a postwar Frg that was enjoying miraculous economic growth and providing great opportunities for companies in electrical engineering. Broadly speaking, the two corporations had like strategies and structures. Both were geared toward growth, and both had ambitions to establish themselves in foreign markets. Both should accept fared very well into the 1970s. Merely while AEG had been able to catch up with Siemens in the 1950s, its profit margins started to fall at the terminate of the 1960s, never to recover again. What happened?

The answer seems to lie in the way the two companies managed major changes in the 1960s. Gold medalist Siemens took a very deliberate approach to its changes, initiating them just when it could run into a clear strategic case for restructuring the business portfolio and and so taking its time over implementation to make the transformation as painless as possible for the workforce.

Change came to Siemens for four reasons, whatsoever one of which would on its ain take provided ample justification. First, management recognized that the long-standing separation between its high-current (power generation) and low-electric current (telecommunication) technologies was no longer advisable. Indeed, duplications in research and production had been primarily acquired by a lack of cooperation between its Halske (low-current) and Schuckert (high-electric current) subsidiaries. 2nd, every bit the group faced pressure to merge these two subsidiaries, direction was as well aware that the company's long-standing consumer business was fitting less and less well with the high- and depression-current activities, which were driving growth. Third, on top of these strategic considerations was the fright of what would happen when and so-chairman Ernst von Siemens retired. In the absence of a family unit heir, no one in the organization could ensure that the company's independent subsidiaries would piece of work together effectively. Finally, the High german government was preparing legislation that would force the corporation to reveal sensitive information well-nigh its operations unless it consolidated its subsidiaries.

Siemens was very deliberate in the way it responded to those pressures. It began laying the background for the disposition of its consumer businesses in 1957, when information technology 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 subsequently it had begun the process. Initially, BSH Bosch und Siemens Hausgeräte was inappreciably more than a joint sales forcefulness, and only over the years did it start to integrate production.

The company was no less deliberate in its response to the pressure to integrate 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 past six divisions: components, data technology, energy technology, installation technology, medical engineering science, and telecommunication. Culturally, the alter 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. Indeed, for years people at Siemens used to talk nigh the "dice Männer von Schuckert und dice Herren von Halske" (the men of Schuckert and the sirs of Halske), capturing the two very unlike cultures. Arguably, the convergence was not completed until the late 1980s, when another transformation procedure was initiated.

Silver medalist AEG took a far hastier and less sensitive approach. Alter took root just with the date of Hans Heyne as CEO in 1962 and was primarily motivated by his desire to reduce costs while maintaining growth. As a board statement explained at the time: "Nosotros have to concentrate all our forces on the reduction of costs. This should exist accomplished specially through reorganization." The result was that AEG reorganized radically and chop-chop, without making any existent changes to its overall business portfolio.

On the surface, some of Heyne'southward changes (the creation of v new units and the consolidation of AEG's radio and telecom businesses with those of its subsidiary Telefunken) diameter a superficial resemblance to the reforms then taking identify at Siemens. The strategic issue, however, was entirely the reverse. Whereas Siemens had consolidated its consumer businesses to dispose of them, AEG consolidated its radio and telecom businesses to hold on to them.

By 1970, AEG became a virtually unmanageable conglomerate, and Heyne's abrasive personality and leadership fashion had left deep wounds. Heyne'due south personal distrust of AEG'south traditional business practices is evident from a statement in which he refers to advice he received from other managers in the manufacture: "These men advised me well, but they also told me prior to taking over AEG that I need to secure special mandates from the board to cover my dorsum. Otherwise I would non go anything through in AEG, where things have been on the same track for years.'' Despite his intentions, he created an atmosphere in which managers were unable to have responsibleness, a culture that stood in stark dissimilarity to long-standing tradition. Fear, not creativity, took hold. Many top managers left, and those who remained were often referred to every bit Heyne's Würstchen (Heyne's little sausages).• • •

We sometimes think we live in the most revolutionary of times. But recalling challenges of the past should remind united states of america that every generation thinks it lives in the most revolutionary of times. The outstanding companies in our sample survived and prevailed during the Great Depression, two world wars, and 2 free energy crises, non to mention the advent of the telephone, the boob tube, and the computer. They did so by consistently adhering to the four principles of indelible success. There is no reason why nosotros should not be able to use the aforementioned nautical chart to navigate the stormy seas of global competition and confusing data technologies today.

A version of this article appeared in the July–August 2007 upshot of Harvard Business Review.