Sunday, July 02, 2006

Another recent read.

Strongly recommended. Excerpt taken from book website:


Consider this book a field report from the front lines of an emerging force in American business. Quietly and gradually—under the radar, as it were—a new class of great companies has been forming. These companies don’t fit comfortably into any of the three categories we normally put businesses in: big, getting big, and small. Some are tiny; others are relatively large. Most are growing, often in unconventional ways, but several have chosen not to grow at all, and a few have made conscious decisions to scale back their operations.

Size and growth rate aside, the companies in this book do have certain characteristics in common. To begin with, they are all utterly determined to be the best at what they do. Most of them have been recognized for excellence by independent bodies inside and outside their industries. Not coincidentally, they have all had the opportunity to raise a lot of capital, grow very fast, do mergers and acquisitions, expand geographically, and generally follow the well-worn route of other successful companies. Yet they have chosen not to focus on revenue growth or geographical expansion, pursuing instead other goals that they consider more important than getting as big as possible, as fast as possible. To make those trade-offs, the companies have had to remain privately owned, with the majority of the stock in the hands of one person, or a small group of like-minded individuals, or—in a couple of cases—the employees.

That’s probably why companies like these have not been identified heretofore as business phenomena in their own right. We tend not to spend much time looking at privately owned companies, especially small ones whose stock is closely held. To an extraordinary degree, our view of business—indeed, our whole concept of what business is—has been shaped by publicly owned companies, which actually make up a small percentage of the entire business population. Virtually every massmarket business best seller, from Iacocca to In Search of Excellence to Good to Great, has concentrated on the people in and the practices of large public companies, or companies that aspire to be large and public. So, too, are those companies the focus of most major business magazines and newspapers, not to mention the business shows on television and radio, or the curricula of business schools.

Along the way, we’ve come to accept as business axioms various ideas that, in fact, apply only to public companies. Consider, for example, the conventional wisdom that businesses must grow or die. That’s no doubt true for most public companies. Steady increases in sales, profits, market share, and EBITDA (earnings before interest, taxes, depreciation, and amortization) are demanded and expected by a public company’s investors, and decreases—or stagnation—send them running to the exits. But there are thousands of private companies that don’t grow much, if at all; and they don’t die either. On the contrary, they’re often quite healthy.

Then there’s the famous dictum of former General Electric CEO Jack Welch that he didn’t want to own any business unless it was first or second in market share in its niche. Some observers have questioned whether GE under Welch actually practiced what he preached. The companies owned by GE Capital certainly didn’t. Nevertheless, Welch’s celebrity and the performance of GE stock during his tenure helped turn his stated policy into a business mantra, although it’s hard to see how it makes any sense at all for the vast majority of companies that are neither large nor publicly owned.

And what about the concept of “getting to the next level”? Although people use the phrase in different ways and different contexts, it always has something to do with major increases in sales—surely no one thinks that “the next level” involves having fewer sales—and there’s usually a management component as well. That is, you get to the next level when you can handle the demands of running a much bigger company. Because it’s the next level, the phrase implies that bigger is better. That may or may not be true for public companies, but it’s demonstrably untrue for a large number of private ones.

The greatest confusion, however, comes into play around the notion of shareholder value. For public companies, it has a very specific meaning, since they are legally and morally obligated to strive to produce the best possible financial results for their shareholders. That’s the deal. If you take other people’s money, you’re supposed to give them what they want in exchange, and what buyers of publicly traded stocks want is a good return on their investments. The relationship seems so obvious, so logical that we generally assume all businesses must operate the same way. But that assumption ignores another equally obvious truth: What’s in the interest of shareholders depends on who the shareholders are.

The shareholders who own the businesses in this book have other, nonfinancial priorities in addition to their financial objectives. Not that they don’t want to earn a good return on their investment, but it’s not their only goal, or even necessarily their paramount goal. They’re also interested in being great at what they do, creating a great place to work, providing great service to customers, having great relationships with their suppliers, making great contributions to the communities they live and work in, and finding great ways to lead their lives. They’ve learned, moreover, that to excel in all those things, they have to keep ownership and control inside the company and, in many cases, place significant limits on how much and how fast they grow. The wealth they’ve created, though substantial, has been a byproduct of success in these other areas.

I call them small giants.

So how were these companies identified, and how successful have they really been? The answer depends, in part, on the yardstick you use to measure success. When Jim Collins and his colleagues selected the companies they would include in Good to Great, they had very accurate and objective yardsticks, thanks to their decision to limit their inquiry to publicly traded companies. Collins was looking for companies that had gone through a transition allowing them to deliver extraordinary financial returns to shareholders after years of generating good, but not great, returns. All of the information he needed to identify those companies— as well as the companies he would compare them to—was a matter of public record.

When Collins and Jerry Porras did their research for Built to Last, they had a somewhat less objective, but nonetheless very credible, method of choosing the companies they would study. They polled the chief executives of Fortune 500 industrial companies, Fortune 500 service companies, Inc. 500 private companies, and Inc. 100 public companies, asking each CEO to nominate up to five companies that he or she considered “highly visionary.” Not surprisingly, the eighteen companies they wound up with were all very well known, very large public companies that had been studied and written about extensively in the business media for decades.

Let me hasten to add that I do not mean to take anything away from either book. They are both classics, and deservedly so, filled with innumerable insights and lessons of immense value to people in companies of all sizes, public and private alike. But the methodologies used by Collins and his associates highlight the challenges facing anyone who chooses to focus exclusively on closely held private companies.

To begin with, there are no reliable financial yardsticks available. One of the benefits of being private is that you don’t have to share your numbers with outsiders other than tax collectors, bankers, and any investors you may have. Many owners of private companies prefer to hold their financial cards as close to the vest as possible. Only a small minority produce audited financial statements, and an even smaller minority open those financials to the general public. In addition, private companies come in more corporate forms than public ones and have more flexibility in deciding what to do with their cash. Depending on the specific form they choose, moreover, they face different tax incentives. If you pay taxes at the corporate level, as C corporations do, you’ll probably make spending decisions different from those you’d make if you had an S corporation or a partnership, whose owners pay taxes at the individual rate. As a result, it’s extremely difficult, if not impossible, to come up with financial data that’s comparable from one private company to another—even if you do have access to all the information you want.

Beyond the numbers, there’s the matter of visibility. The vast majority of private companies are not in the public eye. Even those that strive for publicity are seldom well known outside a relatively small circle of people who happen to come into contact with them. A particular company may become more visible if it wins an award, reaches a noteworthy milestone, produces some important innovation, or advertises heavily; but very seldom does any private enterprise receive the scrutiny or achieve the fame of a 3M, an American Express, a Wal-Mart, a Walt Disney Company, a McDonald’s, or any of the other large public companies whose names have become household words. And when a private company does get noticed, what attracts attention is almost always its product or its service, not the inner workings of the business. So conducting a poll to determine the most admired private companies would be a futile exercise: There are few, if any, well enough known for average observers to make informed judgments about them.

Which brings me to the companies in this book. In choosing them, I obviously couldn’t rely on the methodologies used by Collins and his associates when they chose the businesses to study for their books. I had to come up with my own selection criteria, starting only with a concept and a bunch of questions. I knew what I was looking for: extraordinary, privately owned companies that were willing to forgo revenue or geographic growth, if necessary, in order to achieve other remarkable ends. By “extraordinary,” I meant the company had a distinctive vision and mode of operation that clearly set it apart from others in its industry. I had run across a few such companies in my twenty-one years as an editor and writer at Inc. magazine, and I suspected that, if I looked hard enough, I could find others like them. But I had no idea how many there were, how difficult they would be to identify, where they would be located, which industries they would be in, or even what exactly they would have in common with one another that would distinguish them from other companies. I was going on intuition and gut instinct as much as rational analysis. I hoped that, as I went along, the people I spoke with would help me clarify what I was looking for.

I began by spreading my net as widely as possible. I asked everybody I knew to recommend companies. I searched the Internet. I looked in magazine and newspaper databases for profiles of businesses that might qualify. As the list of potential candidates grew, I did an initial screening to identify those that seemed most likely to fit my criteria. I then started interviewing with the goal of narrowing the list further and zeroing in on the qualities that made these companies unusual.

Inevitably, there was a subjective element in my decisions about which companies to include. In an attempt to minimize the subjectivity, I added some additional criteria as I went along.

1. I decided to restrict myself to companies started or owned by people who had actually been faced with a decision and made a choice. That is, they had had the opportunity to grow much faster, get much bigger, go public, or become part of a large corporation, and they’d made a conscious decision not to.

2. I decided to focus on companies that were admired and emulated in their own industries. I wanted companies that had the respect of those who might otherwise be their harshest critics, namely, their peers and their competitors.

3. I looked for companies that had been singled out for their extraordinary achievements by other independent observers. It’s always nice to have third-party corroboration that a company is, in fact, worthy of special recognition.

Then there was the question of scale. “Big” and “small” are, of course, relative and highly subjective terms. To a person with a homebased business doing $200,000 a year in sales, a company with six employees and annual sales of $2 million is huge. The mainstream media, on the other hand, tend to view any business with less than $300 million in annual sales as small. (I recall an article in BusinessWeek that referred to a $104-million company I’d written about as “itty-bitty.”) So I had to decide how to think about size. As I went along, I realized that, for my purposes, the relevant measure was not the amount of annual revenues, but rather the number of employees a company had. The companies I was looking for all operated on what you might call human scale, that is, a size at which it’s still possible for an individual to be acquainted with everyone else in the organization, still possible for the CEO to meet with new hires, still possible for employees to feel closely connected to the rest of the company. That was not accidental, either. On the contrary, scale played an important role in their approach to business.

The scale criterion obviously eliminated some private companies right off the bat—those on Forbes’s annual list of the largest ones, for example, all of which have sales of more than $1 billion per year. But I wasn’t sure about the maximum number of employees a company could have and still be considered human scale. I also had to think about whether or not some companies might be too small to be considered part of the phenomenon. In the end, I decided to include a couple of companies that tested the extremes and see what they could teach us.

Besides companies that were too big or too small, my criteria ruled out other types of enterprises that might otherwise have qualified— lifestyle businesses, for instance. By that, I mean companies whose primary purpose is to provide their owners with a comfortable lifestyle outside the business. Those companies can’t grow beyond a certain size without undermining their reason for being, which doesn’t leave much room for choice. I also passed on franchisees, whose vision comes from someone else, and franchisors, which have chosen to grow by other means. Boutique businesses that target an elite, high-end market of very picky customers didn’t make the cut either. For those companies, staying small is central to their business strategy. They have a time-tested way of building a business, but it’s not what I was looking for. I wanted companies that had defied the conventional wisdom and blazed their own path. Finally, I steered away from traditional mom-and-pop companies, that is, small businesses built around the goal of providing employment for members of a family. There are some great ones out there, but they aren’t extraordinary in the way I mean.

Yet even with those restrictions, I soon began to realize there were many more companies fitting my criteria than I could possibly do justice to in one book. The longer I searched, the more I found. They were in every corner of the country and in almost every industry. (The exceptions were industries in which companies have to achieve certain economies of scale rapidly in order to compete effectively.) There were retailers, wholesalers, manufacturers, service companies, professional service firms, and artisanal businesses. Some of the companies had achieved a modicum of fame, usually because they had a well-known consumer product. Most were famous only to those they worked with or competed against.

Given the number of companies available to choose from, I had the luxury of selecting those that I thought would give the broadest and deepest sense of the phenomenon I wanted to write about. I looked partly for diversity in terms of size, age, location, and type of business; but I also searched for companies led by people who had taken greatest advantage of the freedom they’d been given as a result of their decision to remain private and closely held and to limit growth. That’s the real payoff here. When you’re hell bent on maximizing growth, or when you bring in a lot of outside capital, or when you take your company public, you have very little freedom. As the head of a public or venture-backed company, you’re responsible to outside shareholders, whose interests you must always look out for. As the head of a very fast-growing company, you’re a slave to the business, which has tremendous needs. Either way, you’re constantly hiring, selling, training, negotiating, handholding, cajoling, mollifying, warning, pleading, coaxing, and on and on. While the experience can be exhilarating, it leaves little time for anything else, least of all thinking about what you really want to do with your business and your life. People who choose to stay private and closely held and to place other goals ahead of growth get two things back in return: control and time. The combination equals freedom—or, more precisely, the opportunity for freedom. I wanted to include those who had made the most creative use of it.

I eventually settled on fourteen businesses, including the two that I felt represented the extremes of the phenomenon. The smallest, Selima Inc., is a two-person fashion design and dressmaking firm in Miami Beach that has been in business for almost sixty years. The largest is O. C. Tanner Co., a seventy-nine-year-old Salt Lake City company with about nineteen hundred employees and annual sales of $350 million that helps customers set up employee recognition programs and makes the service awards used in them. It also produced the gold, silver, and bronze medals for the 2002 Winter Olympics. The fourteen companies are:

* Anchor Brewing, in San Francisco, the original American microbrewery;

* CitiStorage Inc., in Brooklyn, New York, the premier independent records-storage business in the United States;

* Clif Bar Inc. in Berkeley, California, a leading maker of natural and organic energy bars and other nutrition foods;

* ECCO, in Boise, Idaho, the leading manufacturer of backup alarms and amber warning lights for commercial vehicles;

* Hammerhead Productions, in Studio City, California, a supplier of computer-generated special effects to the motion picture industry;

* O. C. Tanner Co., in Salt Lake City, Utah, the preeminent employee recognition and service awards, company;

* Reell Precision Manufacturing, in St. Paul, Minnesota, a designer and manufacturer of motion-control products, such as the hinges used on the covers of laptop computers;

* Rhythm & Hues Studios, in Los Angeles, a producer of computergenerated character animation and visual effects, winner of an Academy Award for Babe;

* Righteous Babe Records, in Buffalo, New York, the celebrated record company founded by singer-songwriter Ani DiFranco;

* Selima Inc., in Miami Beach, Florida, which does fashion design and dressmaking for a select clientele;

* The Goltz Group, in Chicago, Illinois, including Artists’ Frame Service, probably the country’s best-known independently owned framing business;

* Union Square Hospitality Group, in New York, New York, the restaurant company of renowned restaurateur Danny Meyer;

* W. L. Butler Construction, Inc., in Redwood City, California, a general contracting firm specializing in major commercial projects;

* Zingerman’s Community of Businesses, in Ann Arbor, Michigan, including the world-famous Zingerman’s Delicatessen and seven other food-related companies.

The youngest of the companies is Hammerhead Productions, founded in 1994; and the oldest is O. C. Tanner, founded in 1927. All of them have been around long enough to have experienced the ups and downs of business. Nevertheless, with one exception, all have been consistently profitable—in some cases, extremely profitable. The exception is Rhythm & Hues, whose lack of profitability is partly a result of conscious decisions the company has made about how to spend its cash. (I should note that a few strong candidates for the list declined to participate. Their owners made it clear that they wanted no publicity about their business operations at all.)

As for the leaders of the fourteen companies, they turned out to be a diverse group, with widely divergent backgrounds, personalities, and temperaments; and they’d traveled very different routes before ending up in very similar places. Jay Goltz of The Goltz Group was a natural born entrepreneur who had been named a business whiz kid, or “biz kid,” by Forbes magazine when he was still in his twenties, and he’d spent most of his adult years trying to live up to the billing—eagerly pursuing growth until he decided he didn’t want that kind of life anymore.

Singer-songwriter Ani DiFranco was wooed by numerous major record labels, which saw her star potential early on, but she turned them down and built Righteous Babe instead because she did not want to be part of a giant corporation. Jim Thompson was an erstwhile accountant at Boise Cascade who bought ECCO because it seemed like a nice little manufacturing business with lots of potential—and then suffered two heart attacks that forced him to decide what to do with it. Bill Butler was living in a California commune when he started his construction company, W. L. Butler; and it was in business eighteen years before it had a listed telephone number. Dan Chuba and his three partners all came from large special effects companies and started Hammerhead Productions with the express purpose of keeping it small enough to give them time to pursue other projects on their own. John Hughes and his founding partners came out of one of Hollywood’s original motion graphics companies, Robert Abel and Associates, and started Rhythm & Hues with the goal of creating “an environment where people enjoy working and where people are treated fairly, honestly, and with respect.” Selima Stavola, an Iraqi Jew, grew up in Baghdad, emigrated to New York with her GI husband after World War II, started designing clothing to help support the family, and found herself being courted by fashion industry executives and investors who saw in her another Christian Dior or Coco Chanel. Norm Brodsky of CitiStorage watched his first company’s annual sales go from nothing to $120 million in eight years—and then from $120 million to almost nothing in eight months, as it slid into Chapter 11 and forced him to question how and why he’d become so addicted to fast growth in the first place. Dale Merrick, Bob Wahlstedt, and Lee Johnson, all 3M refugees, launched Reell Precision Manufacturing with the goal of building a business that would promote harmony between their work lives and their family lives—and wound up creating one of the most democratically run companies in the world.

Yet for all the differences in background, the founders and owners of these companies also have similarities, including clarity about and confidence in their decision to put other goals ahead of revenue or geographical growth. “I’ve made much more money by choosing the right things to say no to than by choosing things to say yes to,” said restaurateur Danny Meyer of Union Square Hospitality Group, and he could have been speaking for others. “I measure it by the money I haven’t lost and the quality I haven’t sacrificed.”

As noted above, I went into this project hoping the people I interviewed would help me figure out what it was that set the kind of company I was looking for apart from the crowd. They did, up to a point. It was obvious their companies had something special that many other businesses lacked, and they knew it. So, for that matter, did other people who came in contact with them. Norm Brodsky of CitiStorage told me about a visit he’d received from Richard Reese, chairman and CEO of Iron Mountain, the largest records-storage company in the country with annual revenues of more than $2 billion. Reese had heard Brodsky give a speech at an industry conference and complimented him on it. Brodsky had invited him to come see the company for himself. He had readily accepted.

On the appointed day, Reese arrived at the CitiStorage offices on the Brooklyn side of the East River. For the next four or five hours, Brodsky showed him around the facility and introduced him to the people who worked there. As it happened, Brodsky’s wife, Elaine, was teaching a customer-service class to employees that day. She is vice president of human resources and plays a major role in the business. Brodsky asked Reese if he’d like to watch the beginning of the class. The employees were acting out various customer-service situations, and Reese sat watching them, enthralled, until Brodsky indicated they should move on.

At the end of the day, as Reese was getting ready to leave, he said, “This is a great company you have here. I wish we could do these things.”

“What do you mean?” Brodsky said. “I mean the way you run this company,” Reese said. “It’s great. Walking around here and talking to your people, I get a feeling from them that I’d like to take back into my company, but I know we can never do that.”

“I don’t understand,” Brodsky said. “Why can’t you do it?”

“It’s just hard to do when you get big,” said Reese. “Maybe you could go around my company and duplicate the feeling, but I’m not sure it’s possible.” Brodsky took that as a high compliment, which he passed along to his staff.

I had the same reaction to all the companies on my list that Reese had to CitiStorage. There was a quality they exuded that was real and recognizable but also frustratingly difficult to define. I could sense it as I walked around the business. I could see it in the contents of the bulletin boards and on the faces of the people. I could hear it in their voices. I could feel it in the way they interacted with one another, with customers, and with total strangers. But I found the “it” awfully hard to put my finger on.

I was reminded of the feeling I’d had in the past when I’d come into contact with hot companies just as they were hitting their stride— Apple Computer, Fidelity Investments, People Express Airlines, Ben & Jerry’s, Patagonia, The Body Shop, even Inc. magazine. They had a buzz. There was excitement, anticipation, a feeling of movement, a sense of purpose and direction, of going somewhere. That happens, I think, when people find themselves totally in sync with their market, with the world around them, and with each other. Everything just seems to click. Most of the companies I knew had eventually lost that quality. Somehow the companies I was looking at now had managed to retain it.

But what was “it”? Danny Meyer of Union Square Hospitality Group talked about businesses having soul. He believed soul was what made a business great, or even worth doing at all. “A business without soul is not something I’m interested in working at,” he said. He suggested that the soul of a business grew out of the relationships a company developed as it went along. “Soul can’t exist unless you have active, meaningful dialogue with stakeholders: employees, customers, the community, suppliers, and investors. When you launch a business, your job as the entrepreneur is to say, ‘Here’s a value proposition that I believe in. Here’s where I’m coming from. This is my point of view.’ At first, it’s a monologue. Gradually it becomes a dialogue and then a real conversation. Like breaking in a baseball glove. You can’t will a baseball glove to be broken in; you have to use it. Well, you have to use a new business, too. You have to break it in. If you move on to the next thing too quickly, it will never develop its soul. Look what happens when a new restaurant opens. Everyone rushes in to see it, and it’s invariably awkward because it hasn’t yet developed soul. That takes time to emerge, and you have to work at it constantly.”

The concept of soul helped explain the process, but it was Gary Erickson of Clif Bar who I felt came closest to identifying the quality itself. He had begun thinking about it at a critical moment in the company’s history, when he was struggling to figure out what kind of company he wanted Clif Bar to be. At a trade show in the fall of 2000, he had met a well-known marketer of consumer products who had complimented him on the buzz around Clif Bar’s booth, pointing to a competitor’s booth that was dead by comparison. “They lost their mojo,” the guy had said.

The comment had stayed with Erickson following the trade show. Whatever mojo was, some smart people evidently thought that it was important, and that Clif Bar had it. In any case, it was something he needed to pay attention to. From then on, “mojo” became his watchword, and I could understand why. Having once had the honor of introducing the legendary blues man Muddy Waters at a concert—“I got my mojo working but it just won’t work on you”—I thought the word seemed just right for the mysterious quality I’d seen in Clif Bar, CitiStorage, Union Square Hospitality, and the other companies I’d looked at.

It was a quality that you could apparently lose by negligence. In his wonderfully engaging book, Raising the Bar, Erickson said he thought Clif Bar’s mojo was “something about the brand, product, and way of being in the world that was different. I realized that mojo was an elusive quality and needed to be tended carefully.” Hoping to sharpen his thinking, he’d given people at Clif Bar a homework assignment. After relating what had happened at the trade show, he had asked each of them to choose a company that had once had mojo and lost it, and then explain why they felt the company had had it and how they believed it had been lost. The assignment had evidently struck a chord with the employees, who turned in dozens of thoughtful responses. They wrote about companies losing their creativity as they grew. About losing the emotional connection with the consumer. About losing authenticity and compromising quality. About becoming “too commercial” and focusing excessively on reducing costs. About ignoring the relationship with the community and failing to retain the culture. About getting too big too fast.

Erickson followed up with other homework assignments, to which employees responded with equal enthusiasm. In particular, he asked them to write down whether they thought Clif Bar had mojo, and why, and how it might be strengthened or squandered. Eventually he collected all the responses in bound notebooks that were prominently displayed in the office. Reading through them, it was clear that

(1) most people thought they knew intuitively what mojo was; (2) they had a wide variety of ideas about where it came from; (3) they tended to define. mojo in terms of its effects, rather than its causes—or, as one employee put it, “To me mojo means, ‘You got that engine running baby and the sky is the limit!’ ”

So I was almost—but not quite—back where I had started: At least I had a name I could attach to the phenomenon. The question was, what did companies do to generate mojo? Perhaps it was a combination of factors. One way to narrow the possibilities, I decided, was to look at the common threads among the companies I’d already identified as having mojo.

First, I could see that, unlike most entrepreneurs, their founders and leaders had recognized the full range of choices they had about the type of company they could create. They hadn’t accepted the standard menu of options as a given. They had allowed themselves to question the usual definitions of success in business and to imagine possibilities other than the ones all of us are familiar with.

Second, the leaders had overcome the enormous pressures on successful companies to take paths they had not chosen and did not necessarily want to follow. The people in charge had remained in control, or had regained control, by doing a lot of soul searching, rejecting a lot of well-intentioned advice, charting their own course, and building the kind of business they wanted to live in, rather than accommodating themselves to a business shaped by outside forces.

Third, each company had an extraordinarily intimate relationship with the local city, town, or county in which it did business—a relationship that went well beyond the usual concept of “giving back.” That was part of it, to be sure, and all of these companies were model corporate citizens, but the relationship was very much a two-way street. The community helped mold the character of the business, just as the companies played an important role in the life of the community.

Fourth, they cultivated exceptionally intimate relationships with customers and suppliers, based on personal contact, one-on-one interaction, and mutual commitment to delivering on promises. The leaders themselves took the lead in this regard. They were highly accessible and absolutely committed to retaining the human dimension of the relationships. Customers responded by sending fan mail. Suppliers responded by providing extraordinary service of their own. The effect was to create a sense of community and common purpose between the companies, their suppliers, and their customers—the kind of intimacy that is difficult for large companies to achieve, if only because of their size.

Fifth, the companies also had what struck me as unusually intimate workplaces. They were, in effect, functional little societies that strove to address a broad range of their employees’ needs as human beings— creative, emotional, spiritual, and social needs as well as economic ones. Southwest Airlines’ Herb Kelleher once observed that his company’s famously vibrant culture was built around the principle of “caring for people in the totality of their lives.” That’s what the companies I was looking at were doing. They were places where employees felt cared for in the totality of their lives, where they were treated in the way that the founders and leaders thought people ought to be treated—with respect, dignity, integrity, fairness, kindness, and generosity. In that sense, the companies seemed to represent the ultimate expression of a business as a social institution.

Sixth, I was impressed by the variety of corporate structures and modes of governance that these companies had come up with. Because they were private and closely held, they had the freedom to develop their own management systems and practices, and several had done so. Zingerman’s had created its Community of Businesses, including its own training company, ZingTrain, which taught the Zingerman’s way of doing business. Hammerhead Productions had invented an accordion structure, expanding with each new project, contracting when it was finished. Reell Precision Manufacturing had the closest thing to a corporate democracy I had ever seen, complete with two CEOs—and, strangely enough, it worked. Several of the other companies had turned themselves into educational institutions, teaching their employees about finance, service, leadership, and everything else involved in building a successful company.

Finally, I noticed the passion that the leaders brought to what the company did. They loved the subject matter, whether it be music, safety lighting, food, special effects, constant torque hinges, beer, records storage, construction, dining, or fashion. Though they were consummate businesspeople, they were anything but professional managers. Indeed, they were the opposite of professional managers. They had deep emotional attachments to the business, to the people who worked in it, and to its customers and suppliers—the sort of feelings that are the bane of professional management.

This book is organized around those observations. We’ll first examine the choice that these companies’ founders and owners have made, how they made it, and how they’ve dealt with the forces pushing them to go in another direction. Then we’ll move on to the characteristics these companies share, three of which involve creating a level of intimacy— with the community, with customers and suppliers, and with employees— that is difficult, if not impossible, to achieve when a business grows too fast, gets too big, or spreads out too much geographically. We’ll also look at some of the corporate structures and practices these companies use to achieve their goals. The penultimate chapter focuses on the issue of succession and its twin, sustainability: Can these companies last beyond one generation and, if so, how? In the final chapter, we’ll consider how the founders, leaders, and owners of these companies approach business and what that says about the possibilities of business in general.

The first step, however, is the most important. It’s the one that Fritz Maytag of Anchor Brewing took back in 1992 when he suddenly recognized what nobody had told him. His company didn’t have to keep growing ever bigger and more impersonal. He had a choice.


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