When your company is doing well, revenue is pouring in, and your stock is rising, how do you know if you could be doing better? How can you tell which of your management practices are making the difference and which are merely doing no visible harm? Benchmarking is the obvious answer, but not by comparing poor companies with good ones. The way to get at this problem is to compare good companies with even better ones. That’s exactly what we did. For the last four years, Hans Hinterhuber, Franz Mathis, and I have led a team of eight researchers in a study of Europe’s oldest and best companies, which we call the Enduring Success Project. To date, most of the research on high performance has focused on U.S. companies. The seminal work of Jim Collins and Jerry Porras, popularized in their 1994 best-selling book Built to Last, is just one case in point. 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 available. Our goal was to understand why some companies have managed to perform at a very high level over very long periods of time. What can we learn from their experience? What did they do that set them apart from other old, 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 exceptional performance over the past 50 years with another old company in the same industry (and preferably from the same country) whose performance was solid but not quite as good. (For the full list of companies, see the exhibit “What Do We Mean by ‘Great’?”) Over the life of the project, a board of seasoned advisers—Alfred D. Chandler, Jr.; Arie de Geus; Edgar Jones; Michael Mirow; Jerry Porras; Peter Schütte; Risto Tainio; and Gianmario Verona—supported our efforts. What Do We Mean by “Great”? Companies that have applied the four principles of enduring success have been rewarded with exceptional long-term performance gains. In terms of total return for shareholders, top companies did 62 times better than the general market. An investment of $1 in 1953 would be worth $4,077 today. By contrast, our comparison companies beat the general market by a factor of 10.5, and our $1 would have reaped $713. The project yielded four main findings, which we call the four principles of enduring success: 1. Exploit before you explore. Throughout their history, the great companies in our sample have all emphasized exploiting existing assets and capabilities over exploring for new ones. 2. Diversify your business portfolio. Good companies tend to stick to their knitting, but the great 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. Be conservative about change. Great companies very seldom make radical changes—and take great care in their planning and implementation. Four Principles of Enduring Success 1. Exploit before 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 portfolio. Great companies are adaptive. They diversify their supply bases, products, customers, and geographic markets. 3. Remember your mistakes. Great companies do not fall into the same trap twice. Meaningful stories are passed on from one generation to the next from which successive generations draw clear object lessons. 4. Be conservative about change. Great companies go through radical change only at very select moments in their history, and they do so cautiously. These conclusions took us by surprise. Not only were some of the principles counterintuitive (Would you expect sustained exploitation to beat out sustained innovation?), but many of the usual suspects were missing. We fully expected, for example, to find that corporate culture was a differentiating factor; there has certainly been a lot of literature proclaiming corporate values as a key to performance. But when we looked more closely, we found that while a strong corporate culture is a sine qua non for success, it does not make the difference between a good company and a great one. Gold medalist Siemens, for example, has a strong culture that can be traced back to company founder Werner von Siemens. But so 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 also observed that companies have to work very, very hard to adhere to the four principles in the face of the constant temptation to diverge from them. Nokia, for example, had always managed operations extremely well, but it nearly forgot about this when innovative new cell phones generated fantastic revenue 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 warning signals, Nokia renewed its focus on profitability rather than growth: The product mix was narrowed and execution was returned to the top of the agenda, ensuring continuous strong performance. Like Nokia, the other gold medal companies that for a while deviated from the principles usually turned in performances below their comparison companies in that period. In the following pages, I’ll describe and illustrate our four principles in detail. First, though, let me explain in more depth how we 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, we 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 we expected. Centralized financial databases for British companies go back only to 1964; for continental European companies, they extend only to 1972. By visiting libraries, stock exchanges, and corporate archives, we were able to find old reports and newspapers containing most of the information we 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 we tracked, we selected nine 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 performance, of course, was much higher: These gold medalists outperformed the market by a factor of 62. We then looked for a set of comparison companies, ideally a match in terms of country, industry, and age. As their longevity implies, these silver medalists also turned in solid performances (outstripping the market by a factor of 10.5) and even beating out the gold medalists at times and for relatively short periods (six years in one exceptional case but usually for only a year or two). Having collected the raw data and selected our paired samples, we then surveyed and interviewed financial analysts and business scholars to identify the key performance indicators for the industries represented in our two samples. We found eight to ten such measures for each industry (which were not always the same) and determined that the gold medalists outperformed their counterparts, on average, in 90% of them. (See the exhibit “What Makes the Difference?”) What Makes the Difference? Through a survey of financial analysts and business scholars, we identified the eight to ten key performance indicators for each industry in our study. Applying a U-test of statistical significance, we were able to determine which factors made the performance difference between gold and silver medalists. With our sample and the financial data in place, we were ready to begin a careful analysis of each pair of companies, a process that was to take three and a half years. This analysis involved a detailed study of the corporate histories of each company (In the case of HSBC, this comprised four volumes totaling 3,114 pages!) We then collected and coded thousands of pages of material (articles, archival material, organizational charts, project reports, and so on) to ensure that we did not 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 great companies and the merely good ones, which we discussed and tested against the hard data. In the final stages of this project, Davis Dyer from Winthrop Group and the Monitor Company challenged our ideas in the light of current management thinking. Four of these hypotheses survived the tests: our four principles of enduring success. While the overall pattern was remarkably consistent across time and throughout all industries, we are aware of the limitations of our work. The complexity and diversity of history always produces counterexamples. Research 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 now turn to the first principle of enduring success. Principle 1: Exploit Before You Explore Publicly available data on company performance offer no simple measure that captures the tension between exploration and exploitation for many industries over time. We decided, therefore, to look at multiple metrics. To measure 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 equity, return on sales, and return on investment. Historical analysis of the companies reveals a clear pattern: Though they did not 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. 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 innovate their way to growth—they grow 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 clearly. (Glaxo purchased Wellcome in 1995, but they were independent of each other long enough for us to treat them as two companies in this study.) When Henry Wellcome started his business together with Silas Burroughs 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—arguably the biotech of its time. He actively encouraged the researchers he supported to publish their findings, a practice largely unheard of at the time. Inevitably, the pioneering work he sponsored produced commercial products, and for a long time the company prospered. But after he handed over operational control to George E. Pearson in 1924, the commercial success began to fade, even though the quality of the firm’s science remained undiminished. The problem, we found, was that the scientists in Wellcome’s research labs had by then largely lost interest in commercial success. What they really cared about was their reputations as researchers. As the once closely linked worlds of medical research and commerce started to separate, Wellcome was left on the wrong side. Glaxo’s story was very different. Founder Joseph Edward Nathan, who with his brother-in-law created the company as a general merchant in 1861, 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. It was to be the first of many occasions that the firm exploited someone else’s invention. Seventy-six years later, Glaxo reprised the trick with Zantac, the ulcer medication it introduced in 1981. At the time, ulcer treatment was one of the hottest areas in pharmaceutical research, and 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. According to conventional wisdom in the industry, a me-too product like Zantac could never win more than 50% of the market. But Glaxo viewed the apparent second-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 research indicated that doctors viewed Zantac as “another Tagamet”—in other words, as a product 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 price premium on Zantac to stress its superiority over Tagamet. It was a bold but successful move. Throughout this time, 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 (once again buying, 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 30,000-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. All the while, Nokia, its stronger competitor (which entered the telecom sector in the 1960s, long ago enough for us to treat it as a telecom company), focused on exploitation. With margins under pressure 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 better prepared than Ericsson, and it remains a leading global competitor in mobile telephony. Principle 2: Diversify Your Business Portfolio It’s a well-known rule of strategy that diversification works only if the diversifying company can exploit economies of scope by combining related businesses. Experience tends to bear the rule out. In the 1960s and 1970s, for example, consultants and academics argued that corporations needed to diversify their portfolios to reduce the impact of dips in the economic cycle. 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 even after the disasters of the 1970s: In the 1980s, BP remained in the nutrition business, for instance, including fish feed. France’s largest water utility, Vivendi, saw itself as a budding media and entertainment group. Few people today would dispute that conglomeration is a poor strategy. But the antidote—firms focusing on a single business or set of capabilities—does not seem much better when viewed from a long-term perspective. Single-business companies do indeed perform very well in the short run, but when we observe these corporations over several decades, a different picture emerges: Many of the single-business firms simply cease to exist. A study by Richard Whittington of Oxford’s 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 UK bears this out. Using a measure of diversification developed in the 1970s by Richard Rumelt of UCLA’s Anderson School of Management, Whittington and Mayer found that 68% of the single-business companies that had made 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—but 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 list that year dropped off by 1993. It’s not hard to imagine why single-business firms might struggle to stay on the list. Once their primary offering reaches the end of its life span, the only possible next steps are decline, merger, or sale. Few people would dispute that conglomeration is a poor strategy. But great companies are as suspicious of focusing too narrowly as they are careful about diversifying. Which is why great companies are as suspicious of focusing too narrowly as 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 first foray into the market was arguably a diversification, since the company’s founders decided to avoid writing fire insurance premiums—then the staple (if declining) business of most insurers—and concentrated instead on a new type of policy, sold largely by foreign companies: transport insurance. As Germany industrialized, the bet paid off, and the company soon had a cash cow on its hands. Instead of plowing the proceeds back into the transport business, Allianz quickly branched out into the fledgling casualty, and then the industrial, insurance businesses, selling its first equipment policies in 1900, just ten years after the corporation’s creation. Over the next two decades, Allianz continued to diversify. By 1918, it had created a whole division focused on the new market for auto insurance, and within a few years it became the dominant player in the life insurance market, with the foundation of Allianz Life as a joint venture with Munich Re and several banks. Allianz’s move into this business had been carefully prepared in advance; in 1918, Allianz had discussed a partnership with life insurer Karlsruher Lebensversicherung. Failing to reach an agreement, Allianz formed a partnership with Friedrich Wilhelm Lebensversicherungs in 1921 whereby the two insurers cross-sold each other’s products, providing Allianz with an opportunity to gain insight into the life business. A closer union failed, but based on these experiences, Allianz formed its own business in 1922. Within three decades of its creation, 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 ambition to become a broadly based insurance provider. “Schuster bleib bei deinen Leisten” (loosely translated as “stick to your knitting”) is an old German proverb that aptly describes the company’s approach. In stark contrast to Allianz, A&M did not diversify out of its original business (selling fire insurance to farmers) for the first 40 years of its existence and then only when increased competition and slowing demand for the policies forced its hand. When it did diversify, the new businesses represented little more than product extensions. A&M’s first diversifications were in reinsurance and insurance against hail, both of which were targeted at its existing customer 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 company was founded and 25 years after first considering the possibility—did the first real diversification occur, with A&M’s acquisition of the Aachen-Potsdamer Lebensversicherung, a life insurance business. 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&M, Colonia, and Vaterländische at the core. Both deals were steps in the right direction, but they proved too little too late. The life insurance business was relatively small, and the Rheinische Gruppe never quite cohered, leaving A&M heavily dependent on its rural business. When Russia occupied East Germany after World 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, as the contrasting experiences of the two leading French cement producers show. 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 relationship with officials of the state-run Corps des Ponts et Chaussées (Department of Bridges and Roads). But Lafarge felt that it could not rely on its home market alone and diversified internationally at an early date. 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 Spain, Italy, Greece, Lebanon, 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 as aggregates and ready-mix concrete. 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. 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 only exception was a small presence in Morocco, starting in the 1950s. In 1971, Ciments Français united with Poliet et Chausson to become the largest cement producer in France, just before the oil crisis, which drove down revenues in its main market 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 factory in Albuquerque, New Mexico, disrupted the global mobile-phone supply chain. Gold medalist Nokia had alternative suppliers in the U.S. and Japan, which were able to jump in and deliver most of the components destroyed in Albuquerque. Silver medalist 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. Principle 3: Remember Your Mistakes Powerful experiences often develop into enduring stories that are passed on from generation to generation. Successful companies, naturally, have good stories to tell, and they tell them constantly. This practice helps motivate people and inspires them to act in ways that produced success in the past and are likely to continue to in the future. Glaxo, for example, never tires of retelling the story of Alec Nathan’s successful marketing campaign for dried milk, and company leaders drew on this story explicitly seven decades later for the Zantac launch. But what really separates the great from the good is that the great companies also remember their mistakes. Take the case of Shell. In the years before World War II, Shell was very much a one-man band. 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. Under 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’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. Deterding visited Germany frequently and eventually married a German. Luckily for Shell, he retired in 1936, before he could make 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 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. “On the one side, we have our chief executive with more power to drive speed or to put his foot down about the things he wants to achieve, and at the same time we thought how we can put checks and balances around that person,” says Jeroen van der Veer, Shell’s CEO, in describing this transformation of the governance structure. 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. Doggedly repeating its mistake, it embarked on a new elephant hunt and is now as heavily dependent on sites in Russia and other former Soviet states as it was on its Iranian assets. Although BP has already suffered dramatically from its failure to observe the principle of diversification, it is clear the company has not taken the lesson to heart. It is striking how easily then-CEO John Browne brushed off concerns about 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, “but the back taxes were sorted out for 2001, and I expect there will be further large claims for 2002 and so on, but equally these are not unusual. There are many other places in the world where large claims are made. Discussions usually take place, and a settlement is reached.” Gold medalist HSBC also 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 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. This hit HSBC doubly hard when a severe 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 power between the trade finance business in the East and the capital allocation center in London. The bank also increased its efforts to build up reserves and made sure that senior managers no longer had business interests outside the bank. Silver medalist Standard Chartered (the Chartered Bank of India, Australia and China at its founding in 1853), 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. Principle 4: Be Conservative About Change Schumpeterian logic tells us that creative destruction is the only way to survive in modern capitalism: Change is inevitable, and it’s better to lead than follow it. At least that’s the conventional wisdom. Great companies beg to differ. They go through radical change 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 approach change in a culturally sensitive manner that requires patience to work through. Schumpeterian logic tells us that creative destruction is the only way to survive in modern capitalism. Great companies beg to differ. They go through radical change very, very selectively. In the 1960s, gold medalist Siemens and archrival AEG were operating in the same business environment: a postwar Germany that was enjoying miraculous economic growth and providing great opportunities for companies in electrical engineering. Broadly speaking, the two corporations had similar strategies and structures. Both were geared toward growth, and both had ambitions to establish themselves in foreign markets. Both should have fared very well into the 1970s. But while AEG had been able to catch up with Siemens in the 1950s, its profit margins started to fall at the end 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 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 workforce. 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 longer appropriate. Indeed, duplications in research and production had been primarily caused by a lack of cooperation between its Halske (low-current) and Schuckert (high-current) subsidiaries. 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. In the absence of a family heir, no one in the organization could ensure that the company’s independent subsidiaries would work together effectively. Finally, the German government was preparing legislation that would force the corporation to reveal sensitive information about its operations unless it consolidated its subsidiaries. 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 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 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. Indeed, for years people at Siemens used to talk about the “die Männer von Schuckert und die Herren von Halske” (the men of Schuckert and the sirs of Halske), capturing the two very different cultures. Arguably, the convergence was not completed until the late 1980s, when another transformation process was initiated. Silver medalist AEG took a far hastier and less sensitive approach. Change took root only with the appointment 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: “We have to concentrate all our forces on the reduction of costs. This should be achieved particularly through reorganization.” The result was that AEG reorganized radically and rapidly, without making any real changes to its overall business portfolio. On the surface, some of Heyne’s changes (the creation of five new units and the consolidation of AEG’s radio and telecom businesses with those of its subsidiary Telefunken) bore a superficial resemblance to the reforms then taking place at Siemens. The strategic effect, however, was entirely the opposite. 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 style had left deep wounds. Heyne’s personal distrust of AEG’s traditional business practices is evident from a statement in which he refers to advice he received from other managers in the industry: “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 back. Otherwise I would not get 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 take responsibility, a culture that stood in stark contrast to long-standing tradition. Fear, not creativity, took hold. Many top managers left, and those who remained were often referred to as 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 us 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 two energy crises, not to mention the advent of the telephone, the television, and the computer. They did so by consistently adhering to the four principles of enduring success. There is no reason why we should not be able to use the same chart to navigate the stormy seas of global competition and disruptive information technologies today.
