New Opportunities for Excellence in a Freer World
April 27, 1994
President, The Independent Institute:
Good afternoon, ladies and gentlemen. My name is David Theroux, I am the president of The Independent Institute, and I am delighted to welcome you to our Independent Policy Forum program today. As many of you know, the Institute regularly sponsors programs featuring outstanding experts to address major social and economic issues, especially as they may relate to important new books.
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Here in California, we are experiencing unprecedented change as a rather anemic economic recovery continues apace. But, change is todays constant in any industry you can name. Half of the Fortune 500 companies in 1980 fell off the list by 1990, and the trend is accelerating. And although during this period, American business as a whole created 20 million new jobs, the Fortune 500 lost over 3 million jobs. Todays global marketplace is demanding radical business change to survive.
At this special Independent Policy Forum, a decade after his landmark book, In Search of Excellence, our speaker today, Tom Peters, will draw upon his newest best-selling book, Liberation Management, to discuss this process of revolutionary restructuring. In Liberation Management, we see that any business firm must increasingly be in the knowledge extraction, integration and application business. Todays biggest companies are dismembering themselves, voluntarily, in record numbers in order to compete. Management is flattening organizational structures, linking everyone into every function, and then linking directly to the customer. Our program will discuss why centralized bureaucracies can no longer excel. The new knowledge workers must be liberated to operate in fast, non-bureaucratic information networks and project teams. Workers aiming to thrive must become self-starters, constantly re-training themselves, with employers facilitating the new entrepreneurship. Business strategy is becoming the purview of moderate-size, highly accountable, entrepreneurial business units that are very, very close to the marketplace. And through this marketizing of the firm, government bureaucracies must be curtailed in their constraints on entrepreneurship and innovation. From computers to chemicals, railroads to financial services, farming to telecommunications, the old structures are crumbling as the biggest shift since the Industrial Revolution continues apace. And, those who adapt will see a new era of prosperity.
We are delighted to sponsor this special program today. More than anyone, Tom Peters has demonstrated in his best-selling books, tapes and seminars, how to implement the dynamics of business entrepreneurshipof organizing people in service to the customer. His book, In Search of Excellence, co-authored with Robert Waterman, created a worldwide sensation. And his subsequent books have searched out and championed pioneering patterns for business excellence. But in Liberation Management, Tom Peters has further integrated the work of Nobel Laureate free market economist, F. A. Hayek, with the global high-tech revolution and the many new managerial innovations arising around the world.
Hayek was clearly one of this centurys greatest economists and political philosophers. He, along with Ludwig von Mises of the Austrian school of economics, founded by Carl Menger in Vienna in 1871, developed our understanding of the market process and entrepreneurship as the driving force for all human progress. What distinguished this school of thought then and now from the dominant collectivist views has been its recognition that the intricacies of all social and economic interaction stem from the choices and actions of individuals, who serve as entrepreneurs for change. Hayek further showed how market processes differed in kind from the dysfunctional workings of government bureaucracy and state planning, whose revenues and operations remain insulated from the normal accountability to consumers that every business firm must attend to if it is to survive in a freely competitive market.
It is fitting that this year marks the 50th anniversary of Hayeks international bestseller, The Road to Serfdom, which first called the worlds attention to the dangerseconomically and politicallyof the trend toward the centralization of social and economic decision-making in state bureaucracy. The book in fact is dedicated to the socialists of all parties. This and later books, including his brilliant work, The Fatal Conceit, fostered a new classical liberal revolution, based on the tradition of John Locke, Thomas Jefferson, and Adam Smith, that has since spread worldwide. We have of course since seen the Soviet empire collapse and economic liberalization become the cutting edge of change in much of Europe, South America, and Asia. In the U.S., this movement for decentralization, individual economic and civil liberties, and the Rule of Law continues apace despite current nostalgia in Washington for the 1930s heyday of government central planning in its health care, employment, environmental, and other proposals.
Now in Liberation Management, Tom Peters has dedicated the book to Hayek for his masterful devotion to markets, human liberty and individual entrepreneurship, and to others who have contributed to the new entrepreneurship. Before Tom Peters co-wrote In Search of Excellence, business books rarely made it to national best-seller lists and never to the top of the list. But beginning in the mid-1980s, Toms books, including A Passion for Excellence and Thriving on Chaos were on The New York Times non-fiction list for seven years running. Each book has been translated into a dozen or more languages and has been a bestseller from Malaysia, Japan, Australia and China to Ireland, Sweden and Brazil. And, Liberation Management, has just been published in a superb paperback edition.
The Christian Science Monitor has called Tom, The grand guru of management success, and Newsday describes him as Chief executive of excellence, incorporated. A member of the Board of Advisors of The Independent Institute, Tom is the founder of the Tom Peters Group, three training and communications companies with offices in Palo Alto, California. He also writes a weekly syndicated newspaper column for Tribune Media Services, has authored more than 100 magazine and journal articles, and has hosted numerous PBS television shows. Tom was a principal at McKinsey & Company from 1974-81, becoming a partner in 1977. He received two engineering degrees from Cornell University and business degrees from Stanford University, including his Ph.D. I am very pleased to introduce him now to speak on The New Opportunities for Excellence in a Freer World, after which he will be happy to answer your questions. May I present Tom Peters.
Presentation by Tom Peters:
It is a pleasure to be here with you this afternoon. My experience in book publishing, and perhaps some of you have had similar experiences, is that one turns over ones manuscript to the publisher on a given day and then magically six months later the book appears. Consistent with the themes that The Independent Institute, myself and many others support, I decided that with the new book, I would get involved in a larger part of the process, using independent contractors to work on various parts of the activity. I turned to a magazine designer because it did not seem necessarily true to me that books should be quite as boring as they typically are. So I worked with the magazine designer, and when I talked to the publisher, he kept talking about months while the designer kept talking about hours. The publisher would give him as a possible schedule-window two months to work on a task, and he would tell me that normally he takes about 4 hours. I was sympathetic because I was paying the bill. The long and short of it is that on this past Sunday night, we turned the final manuscript over to the publisher, and books will begin their trip from the factory to the bookstores approximately at noon next Tuesday.
It was an interesting experience to put it mildly. In fact, the reason that there is a new book is precisely that. I would like to think that each of those succeeding books that I have released have turned up the heat under this central entrepreneurial message. I thought I had gone about as far as I could go with Liberation Management but I dont think so at all. Today, in fact, what I want to talk to you about is this new world and an even more entrepreneurial vision for corporations, and perhaps go a little bit beyond that.
The changing nature of the economy accidentally came home to me last October 18th. I was giving a speech somewhere, a city with which I am very familiar, and under my hotel room door that morning were two newspapers. There was the salmon colored copy of The Financial Times. The headline said, 400,000 European Auto Parts Workers Jobs in Jeopardy. Indeed, the jobs were threatened because European auto-part maker productivity is running merely one-third of the Japanese and about two-thirds of that in the U.S. So 400,000 European workers woke up with a hangover, to put it mildly, on October 18th.
But, at least one person had a good day that day because the other academic journal that was under my door was USA Today. There the headline hit a little bit closer to home. It talked about a young man, age 20, who bounces spheroids for a living. This spheroid-bouncer had never bounced a spheroid professionally, and yet, our very own Golden State Warriors found it to be a sensible economic decision to offer young Chris Weber $74.4 million for the potential of fifteen years of his service. Now I love that story. Im not happy obviously for the 400,000 European auto workers, but it does speak to this phenomenal, dramatic incredible change in todays economy, where literally, in an interview in the Harvard Business Review about two/three months ago, the chief executive officer of Silicon Graphics, perhaps the leader in sophisticated work station hardware, Ed McCracken, said, Well, look, we are wed to the future by our leading-edge customers. He explained that leading-edge customers used to mean such organizations as the United States Air Force, but he now said the perfect definition of the leading-edge customer, from right up the road a little bit, is, naturally and of course, Industrial Light and Magic, the special effects folks, in the largest industry in the world, entertainment.
We are watching a shift in the economy, which, frankly, in most of my travels sometimes even in the Bay Area but definitely outside of the Bay Area, makes people very nervous. I can assure you I was not invited back to speak to the Detroit Economic Club when I told them, If you could only get your trade balance up to where Madonnas is. About two-thirds of her revenue comes from offshore, and you cannot say the same about that of General Motors, Chrysler and Ford, despite the dramatic improvements that they have made.
The point to me is very simple, terribly important, abstract, and pragmatic. I think you would have to be a total idiot, and I mean that quite literally, not to agree that we are in the midst of the most dramatic change in commerce in the last couple hundred years. Could there be any question whatsoever that this is the biggest change since people came off the farms into the cities? I dont think there could be. Now, to me that is a very very practical statement. It is a practical statement in the sense that I can understand at the age of 51, language like, This is the biggest deal since the end of World War II, this is the biggest deal since my fathers time. If I stretch maybe I can even think in terms of, This is the biggest deal since my grandfathers time. But what does it mean to be part of, in the midst of, and trapped by the biggest change in 200 years?
What it means, quite simply, and this really is the entrepreneurial bedrock logic; nobody knows what the hell theyre doing. There are no gurus. There are no experts. I dont even believe a word that Im saying. But, if we dont have a clue, which I think is a legitimate state, then that suggests that the only guaranteed mistake is not to try stuff.
Yesterday I spoke to the Newspaper Association of America. I told them I dont know what the hell is going to happen to the Information Highway. Dont ask me. I said the only thing I can guarantee you is that if you dont get your toes wet, your ankles wet, your knees wet, your entire body wet, and if you dont make a complete ass out of yourself in the course of the next couple of years, you havent got a snowballs chance of participating in this activity. I also said to them I know why youre going to fail. You are going to fail because you are not going to fail with sufficient bravura, and out there somewhere are another ten or a hundred thousand and ten would-be Teddy Turners, 109 out of 110 of whom will fail, which is totally irrelevant, and one out of every 110 of whom like Ted Turner will completely redefine the name of the business. I said youre problem is that if Ted Turner applied to you for a job he wouldnt get past the first six minutes of the interview. I think that really is the critical issue.
My message in a nutshell for us even in this absolutely fabulously exciting Bay Area -- and I remain as bullish on California as anybody possibly could is this: I think the greatest thing thats happened to us in a lot of respects is that we are reducing our dependency on the big defense industries in Southern California. And if both the Right and the Left can get it into of their heads to quit knocking immigrants and we continue to let the Vietnamese and the Hispanics and everyone else in the world to do their thing, weve got a brilliant future.
Well, what kind of a world is it? I had to make a potential deal with the devil a few months ago. I was giving a seminar in London and at the seminar one of the sets of participants was from a company called Inmarsat (International Marine Satellite Corporation). After my seminar the Chief Executive Officer came up to me and he said, Tom, I will make you a deal. I used, as you will see in a moment, 35 mm slides to illustrate my presentations, and he said, I will send you my favorite slide if you will agree to use it first in your presentations. I said tell me what the hell is on it and he said no. I said, How can I promise? He said, Its very simple, you dont get the slide if you dont make the promise. He was an interesting guy, and so I decided somewhat reluctantly that I would make him the deal. Well, he sent me the slide and it was indeed the appropriate one to begin a presentation today.
I hope those of you to my left can see it at least a little bit. The slide quite simply is an Inmarsat satellite attached to the back of an elephant, several hundred miles from the end of nowhere. Ladies and Gentlemen, the global village has arrived. The truth of the matter is the thing that David Theroux and I and all those associated with The Independent Institute believe in -- associated with freer trade and so on and so forth -- is something we should get ourselves worked up about, something we should worry about. But the real secret that we cannot allow out of this room is that satellites on the back of elephants make most of what governments do totally irrelevant. That cannot be stopped by any set of regulators, and so we are in an environment where literally the world is at our fingertips.
It is a scary and terrifying environment. I was in India a couple months after receiving this and one of my stops was in Bangalore, India, where the Motorola Company has a software design center that is creating sophisticated software for its advanced wireless world satellite communications system. Not only were they doing sophisticated and advanced software designs there but the little Motorola center there had just been certified by the Carnegie Mellon Software Certification Institute as having designed the highest quality software that anybody had ever recorded. As I said to a group of very conservative business people and small manufacturing companies a few weeks later in a seminar in the United States, this is going to come as a surprise to you but they aint all making sandals over there! That is again the nature of this beast.
Liberation Management in its hardcover edition weighed three and a quarter pounds, and it took 763 pages to get it out of my system. As one reviewer said, If you dont like the book, it makes a hell of a paper weight. Being a believer in free markets I said, I dont give a damn whether you read the book or use it as a paper weight; the royalties are the same. The truth of the matter is, which I am loathe to admit, especially since some of you havent yet bought your paperback copy, is that I can summarize the 763 pages in 6 words and the six words are right here. Crazy times call for crazy organizations.
In fact, so much do I believe that that the title of the new book is Crazy Times Call for Crazy Organizations. We turned up the heat as hard as we could in Liberation Management and yet frankly the thing that has been keeping me awake at night for the last 15, 16, 18, 20 months since that book was sent to the publishers is the fact that here in 1994 or 1993 when I began to scratch this particular itch, companies are still phenomenally boring in terms of trying to deal with a phenomenally unboring time. For, in fact, this sentence though it uses the C Word twice is the antithesis of a crazy sentence. It is a cold, calculative, linear, logical, rational, Cartesian sentence that even a Frenchman could love.
There is no doubt whatsoever about the first two words of the sentence. It is a crazy time. None of us would deny that. If I can hook you intellectually onto the first two words of that sentence then Ive got you because it is clear that, if the times are mad that our organizations, organizational structures, organizational arrangements to deal with those times must be as well.
This is the symbol which runs through the new book. It is not the time of change, it is the time of revolution. Mr. Lopez sometimes loved, sometimes hated former General Motors. Now with Volkswagen, he spoke to European auto makers in the late fall of 1993 and he said the time for kaisan (the Japanese word for constant improvement that most of us, many of us, are practicing in our companies) is past. It is time for quantum leaps, not five or six or seven percent a year but 30 or 40 or 50 or 60% a year, and I believe that he is precisely right.
We spent the 1980s learning about constant improvement, and God bless us, it paid off. It is a fabulously important idea that most of us are not doing it well enough, and yet even if we were doing it very well, it is still not enough, it is not nearly enough. The experience I had that was kind of my certification of this happened this past June. I had decided the time had finally come to get a lap-top computer. Ive been programming since 1965. I charge a lot of money for my seminars, and I was getting nervous about being the only businessman flying in the front of the plane without a lap top. Some potential customer is going to see me, and Im going to be in deep yogurt, and I figure I could program in a few games anyway and have a nicer flight. So I decided to get my lap-top, did a little bit of research and decided the best I could possible do in every sense of the word would be to get myself an Apple PowerBook 165C, which indeed I acquired.
I made one small mistake though, and that is I did not consult with the in-house consultant, namely my 27 year-old son. So I brought my PowerBook home, proud as a peacock, particularly in my own new-found independence in doing such things and I said to Rob, Look at what Ive got, a 165C. Isnt it a beauty? Now any number of you are parents, and you know that uniquely contemptuous look with which a child can eyeball his or her parent. Rob looked at me, his lips curled, and he said, Oh, how nice you got one of the antiques. He said, I think its been out now for nearly 120 days.
Now, he is a smart kid, and he realized the insanity of what he had said before the words escaped from his lips and so he grinned. The truth of the matter is that, grin or not, he was right. In June, I bought my Apple 165C. It had been announced in March, and lo and behold, on December 1, 1993, Apple did discontinue it as an antique.
Literally, we are in an environment today whether were talking about grocery store products, financial service products or hardware from Apple Computer where something that is 90 days old can legitimately be called worthy of insertion in the Smithsonian Institution. That is the nature of the beast, and I would suggest it goes significantly beyond the word, change. I wave my arms around; I raise my voice; Peter Drucker does neither. Peter Drucker is given to understatement and that is an overstatement. Peter writing about a year or so ago in the Harvard Business Review said, Every organization has to prepare for the abandonment of everything it does. That is not a mellow statement. Reading in unison, Mr. Drucker did not say that the average organization should be prepared to experience significant change in the midst of a turbulent environment. No! The key words in that sentence are: every, everything and abandon.
I mean, to the best of my knowledge in the English language, you cannot go much further than those three words, and yet I suggest that the perennial understater, Mr. Drucker, has got it exactly right. Well what does that mean? Yes indeed, as David said, Ive been yelling and screaming about flattening bureaucracy for about 10 or 12 or 15 years. I remember standing at podiums like this 5, 6, 7 years ago begging and pleading with executives, Please expand your span of control from one to seven up to one to fifteen, and I would get these terrified looks. One to fifteen? I dont like that number very much.
Our friends down south in Palo Alto, Hewlett-Packard, are making a ton of money in the printer business these days. One of the most profitable parts of the HP operation is the HP Inc. Jet Printer operation out in Colorado. Nine thousand employees, a pretty good number, in corporate headquarters, if we must use that term for people. The person who runs it is chief of research and development and two administrative assistants.
One section in Liberation Management I featured ABB Asea Brown Boveri, the giant heavy industrial old fashioned company headquartered in Zurich, Switzerland. Lets take a look at ABB Asea Brown Boveri for a minute. I use the example for several reasons: its not Silicon Valley; its not Industrial Light and Magic; its in heavy engineering activities where economic scales and theory should still hold sway. Moreover, its not an American company. The truth is that we dont hire and fire promiscuously in the United States but everybody else in the world thinks we do. So, I chose a European company where in fact labor mobility is approximately zero. Now, Percy Barnevik is the boss of ABB Asea Brown Boveri. In 1980, he took over Asea of Sweden as Chief Executive and inherited a corporate staff of 2,000. In the next 100 days, he reduced it from 2,000 to 100. In 1987, Barnevik merged Asea of Sweden with Brown Broveri of Switzerland and inherited a corporate staff of 4,000. In the course of the next 6 months, he reduced it to 200.
Today, Mr. Barnevik runs a $30 billion heavy engineering enterprise called ABB Asea Brown Boveri from a nondescript headquarters building near the train station in West Zurich with a corporate staff of 100 professionals and 50 supporting clerical people. The logic is this: 2,000 in the headquarters staff at Asea; 4,000 in the headquarters staff at Brown Boveri gives us 6000 people. Corporate center today employs 150 ataffers. That is to say 58.5 out of every 60 senior middle manager staff professionals were found to be excess baggage. That is the nature of attempting to compete in a flatter, more rapidly changing environment, and the logic is impeccable.
In my interview with Barnevik about 5 or 6 months ago, he said, Tom, it is simple. Given the production that is now coming in from all over the world, every market in which I compete is in surplus. If you are in surplus how do you win? Quality, service, constant innovation, closer to the customer than the next person. And he said, Where do those attributes come from? They come from obsessed, zealous, committed individuals. And he said, Look, youre not totally stupid. Have you ever heard of an obsessed, zealous group of 5000 people? The magic was Barnevik got rid of 58 and a half out of every 60 people at the corporate headquarters, took the remaining 200,000 people and broke heavy engineering ABB Asea Brown Boveri into 5,000 amazingly independent profit centers averaging only 40 people each. That is his secret. I think its the most extraordinary experiment in organizational change in a giant industry since Alfred Sloan started decentralizing General Motors back in 1920 prior to the subsequent 60 years of re-centralization.
So thats the beast were talking about. Im here to tell you in that regard that I got it wrong. I didnt just get it wrong, I got it very wrong. Naturally, Im delighted that a lot of you bought In Search of Excellence in the 1980s, but I did something in retrospect that is borderline immoral. We talked about getting closer to the customer. We talked about empowering employees. The truth of the matter is that it is virtually immoral to talk about the empowerment of employees and getting close to the customer if youre doing it in a seven or eight layer bureaucracy, let alone a God-awful eighteen-layer bureaucracy, public or private.
I put the score up here on this slide, Jack Welsh one, Tom Peters zero. The 1990s version of General Electric, Chairman Jack Welsh sounds like the 1980s version of Tom Peters. He talks about getting a small companys soul into a big company body. He talks about liberation. Well Jack is allowed to talk about it because in fact during the 80s, he did the hard work of getting rid of the structural gunk that made words like liberation and small companies so legitimate once.
Some of you may remember, its almost been forgotten that in the 80s Jack had the nickname, Neutron Jack. He would visit a headquarters building of an operation and when he left, the building would be standing, but the people would all be gone. This little piece of logic is why precisely against the advice of everybody whose advice I seek that if you read through Liberation Management, unlike my other books, you will find out that the first 50 percent of the book focuses on organizational, structural issues. Not until you have waded through the hard work are you allowed to talk about the customer stuff, and I think thats the right way to go.
The logic is very simple. Carl Sagan, writing in Shadows of Forgotten Ancestors, said that active mutators in placid and stable times tend to die if they are selective against reluctant mutators: And quickly changing times are also selected against. David Theroux cited the statistics of the loss of 3 million jobs in the Fortune 500 while the rest of the country gained 20 million to say that essentially even today in 1994, the average Fortune 500 firm remains a reluctant mutator in clearly very, very active times.
What does it mean to go after the new opportunities? Percy Barnevik says that in a heavy engineering firm, the magic number is about 40 people. Very interesting, except that I still find people proclaiming regularly that if we want to go after this opportunity, we need a couple hundred million dollars for that particular start-up. The Japanese have got concentrated corporate assets and you Americans are screwing around in Silicon Valley with a bunch of half-ass entrepreneurial businesses. Its the biggest, best half-assed on Earth, incidentally.
Lets look at the numbers. Inc. Magazine every year publishes its list of the 500 fastest-growing companies in the United States. My statistics come from the Inc. 500 list of 1992. On that list were hamburger flippers, which is not to denigrate hamburger flippers because MacDonalds today is one of the highest tech companies around. On the list are hamburger flippers, overnight express companies, biotech companies, software companies, super computer companies, anything you can name. What did it cost other then a lot of time and a lot emotion and a lot of energy and a lot of commitment to get them started? Thirty-four percent of the Inc. 500 in 1992 were started with less than $10,000, 59 percent were started with less than $50,000 and fully three quarters of the Inc. 500 were started with less then $100,000. It is more than it has ever been, a magical, entrepreneurial time.
James Morse, writing in the Harvard Business Review a while back, put it this way. He said the only sustainable advantage comes from out-innovating the competition. I am fan of the total-quality movement. You would be fool not to, and it has perhaps been one of the two or three most significant things associated with improved American competitiveness in the last 15 years. Nonetheless, as the market becomes more vigorous, as software design equals the best in the world and comes from Bangalore, India, what will be the winning formula for the years ahead? Yes, it will be good quality; yes, it will be good service; but above all, it will be the abil-ity (if Americans wish to retain the incredibly relatively high wage rates which we have) to inno-vate faster, applying brain power faster, behaving more entrepeneurially than the next guy can.
I have this funny view. Its not very ideological. Its just sort of idiosyncratic. I think that other than our entrepreneurial spirit in our financial markets, as well as among our people as a whole, the single asset as we move towards this age of more information and creativity, that the Americans have that has the largest lead over the rest of the world, is our higher education system. There just is nobody anywhere that can match the Cals, the MITs, the Cal Techs, and the Stanfords. The proof of the pudding is when you look at the number of people from outside of the United States that have come to get their Ph.Ds in the United States -- something is going on there. The wonderful news is that most of them fall in love with the half wonderful news. The selfishly wonderful news is that half of them fall in love with the United States and never go home, which is great for us, but rather a tragedy in part for those countries which could use that brain power.
I believe that universities are hopelessly screwed up, very hierarchical systems. There is a funny little thing here. There are a lot of us at some level ideologically opposed to tenure. I dont like the idea of tenure at face value. The other side of the coin is that if youve got a system of tenure, it means that a faculty of 1,200 people consist of 1,200 people who have no reason whatsoever to listen to the president of the institution.
When he was president of Stanford, Donald Kennedy used to give a speech and among the things he mentioned in that speech is that there are about 73 institutions which have been consistently in existence for more then 1,000 years. One of them is the Catholic Church, one of them is the Government of Iceland, and the other 71 are universities. My suspicion is that in a funny way, the university with its islands of tenure is actually a surprisingly entrepreneurial environment, i.e., the administration cannot screw with you, which to me is always a good idea at any particular institution.
There are million things universities could do better. My net take on it is that universities, and research universities in particular, rank right at the top of the list or near the top of the list of the most valuable assets that the United States of America has, but as in all areas of human endeavor, we need to pursue radical decentralization and de-bureaucratization in order to unleash their full potential.