In the last blog post, you learned that 100% of the manufacturing companies revered as Built to Last just 20 years ago are now significantly underperforming their competitors or their industry on the critical benchmark of profit per employee.
In this post, we’ll take a closer look at the manufacturing companies who were identified as winners in the remaining two business bestsellers, Good to Great and Great by Choice.
Good to Great was released in 2001 with a new set of top-performing companies “that defy gravity and convert long-term mediocrity or worse into long term superiority“, along with comparison companies who’d failed to make the leap from good to great. New strategies included Hedgehogs, Flywheels, and the Doom Loop.
There’s only one problem. Those unbeatable strategies did not continue to produce results.
100% of The Good to Great Companies in the manufacturing sector are no longer industry leaders.
Abbott Labs is still a Fortune 500 company, yet they did not defy gravity for the long term – while still successful, its profit per employee cratered in comparison to the average profit per employee in the industry, which is 10 times bigger than Abbott’s.
Kimberly Clark bought out their comparison company, Scott Paper, and still beats the industry average by a reasonable margin, but its profit per employee is only 1/3 of the industry leader’s.
Nucor’s innovative “mini-mill” steel production system was once touted as the future and certainly proved to be a better business model than their Good to Great comparison firm, Bethlehem Steel, which went bankrupt. However, Steel Dynamics’ profit per employee now exceeds Nucor’s by almost 20%.
In Great by Choice, Collins looked at companies who beat their industry stock indices by a minimum 10X multiple during extremely rapid industry shifts and tumultuous times. The research once again included comparison companies with sluggish stock valuations. This is an interesting research methodology, as often stock price is not linked to corporate performance, as illustrated below by Biomet.
With only one exception, each of the manufacturing-related Great by Choice companies are underperforming new leaders in their industry.
Amgen is very highly profitable, and beats the industry average for profit per employee… but still falls well behind the performance of today’s industry leaders, Biogen, Celgene, and Gilead Sciences.
Biomet merged with Zimmer in 2015, and is currently losing money, although its stock price has climbed by 42% since the merger.
Intel has had its ups and downs but continues to deliver performance well above the industry average, and 6x the performance of its comparison company AMD. However, its closest competitors are performing at a level that is approximately 50% higher than Intel.
Stryker continues to outperform its industry average profit per employee by a factor of 3.
Why weren’t these success strategies predictive of success?
Once again Collins was careful to warn readers that just like a sports team, past performance is not a guarantee of future performance. As such, especially if your business is currently hitting all your goals and is successful, you can’t rest on your laurels and expect solid performance to continue. In fact, I often speak with CEOs who thought their performance was great… until they benchmarked their profit per employee vs their peers. If you haven’t downloaded the Benchmark Report yet, do it now.
Being named “great” likely led many of these companies into complacency, where they continued to do what they’d always done because is was labeled success. That’s a very human response not to rock the boat, and in fact, Tom Peters popularized the term “stick to the knitting” as a management mantra in his 1970’s bestseller In Search of Excellence (later the subject of controversy over claims of “fake data”).
However, the failure of these companies to thrive going forward is a wake-up call that you need to ask some tough questions on whether your goals and strategies are keeping pace with global and industry forces, whether you’re positioned to weather change, and whether you have a deep enough war chest to sustain you in challenging times. On a scale of 1-10, how would you assess yourself?
What can we learn from those who failed to maintain their industry leadership vs Stryker, who continues to outperform? Let’s look at the same 3 timeless strategies noted in Part 1 of this series:
- You’re profitable. All of these companies are profitable – some very highly profitable – with the exception of Zimmer Biomet. However, with the exception of Stryker, all of them are less profitable than their competitors, who are able to build stronger war chests to help them fund change and maintain growth.
- Stryker’s performance is the result of CEO John Brown’s (CEO 1977-2005, retired as Chairman in 2010) single-minded performance goal of “20% net income growth every year”, which is a critical driver of the profit-per-employee equation. According to many it was not a goal, it was “the law”, and Brown built an entire culture of rewards and interventions in support of it (including the infamous “snorkel award” for divisions that were underwater on their numbers). Stryker hit that growth goal more than 90% of the time.
- Brown also had the discipline to squirrel that cash away on the balance sheet, which gave them the ability to make strategic acquisitions when the industry shifted to hospital buying groups and it became clear that only the few largest players would survive. I find that discipline of cash management is very rare – in fact, its such a challenge for the CEOs I work with that I teach a specific Piggy Bank structure to embed a behavior of taking profit off the table twice a month.
- He also had a ceiling on growth, which provided the self-control to hold back and wait for the right opportunities to grow. What opportunities would that type of consistent performance mean to your company? (Ask me about how you can create a culture of profitable behaviors that create a war chest to fund change.)
- Your employees are engaged. Brown added another success element to the clear net income goal and supporting culture.
- He made the tough choices to move people out of seats where they were failing, or off the bus if they did not achieve their improvement plan. In every single firm I’ve ever worked with, I’ve had to help CEOs get the guts to eliminate the underperformers they’d known about for a long time. I wasn’t good at it either during my early days in leadership roles; none of us are.
- Often when clients implement ProfitU™ (the innovative system that builds a culture of engagement by building profitable behaviors), the underperformers de-select themselves and move one. (Let’s Talk about whether ProfitU™ is right for your company… or if you’re not quite ready for that, just ask me for a free copy of my “donkeys and racehorses” matrix – it works like a charm to help you finally take the necessary steps with your underperformers.)
- Your customers are loyal and profitable for you. Every executive of the clients I work with can initially tell me who their BIGGEST customers are. But typically, not one of them can tell me with any certainty who their most profitable customers are, unless they check gross margin. Unfortunately, it’s below the gross margin line where all the profit leaks out of a customer.
- By the time a ProfitU™ team completes their 2-day kickoff, at the start of the program, all key staff knows exactly which customers are profitable and which ones are not, and have created a list of behaviors that clearly illustrate why. From that point on, they can change internal and customer behaviors to improve profitability. Would that information be helpful for your company?
- The real power is in understanding where your customers are going, so that you can meet them there with the right products and services at great margins (and many of those likely don’t exist yet!). In ProfitU™ we do that through a process called Value Creation Conversations, where senior executives meet with customers not to sell, but to serve by listening. (Find out more.)
- Stryker is an expert listener, renowned for its close working relationships not just with the doctors and buying groups who make the purchase decision, but with the nurses who deal with the patient-recovery process. They listen. They learn. They improve. They create higher value. They dominate their industry.
I’ve been able to collect an unbelievable the information from the Value Creation Conversations. I’m amazed by how much information has come back with opportunities to grow our business with the clients and easy fixes that can help improve our relationships with them.!!!! In 30 years of business I’ve never had so much fun collecting this type of information, what a tool! We’ve been able to collect amazing testimonials that will help us grow new business. Here’s a surprising thing… I love the fact that the ProfitU involves the whole team and has a positive spillover effect on all of our accounts – ProfitU makes moving the ball forward much easier for a CEO.
Wallace Gillard, CEO WAT Supplies
Here are the lessons from a retrospective look at 3 of the most influential books of our time and the manufacturing companies featured in these books:
Looking back is not as beneficial as looking forward. Copycatting the success strategies of other companies is less valuable than having clear profitability goals, a culture where every employee helps achieve the goal, and close relationships with customers not just at the sales level, but at the executive level. These are timeless strategies that take time to embed but deliver consistent results.
#1 Bestselling Author, International Speaker, and Accelerator Anne C. Graham is on a mission to help business leaders and their teams double their profit per employee – or more – in less than one year, in less time per week than they’re spending on email per day. Her #1 Bestseller Profit in Plain Sight includes the 5-step proactive P.R.O.F.I+T Roadmap to do it. Connect with Anne on LinkedIn.