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The World's Best Company

Searching for the best company in the world is really about understanding what makes a few companies truly excellent
July 4, 2014

Which is the best company in the world? Surely it has to be the Swiss foods giant Nestlé (Sw: NESN)? Its record of innovation over 150 years means that it has built – and continues to build – consumer brands with devoted customer loyalty and fearsome cash-generating capabilities; these create the sort of economies of scale that competitors can’t match. Yes, but what about General Electric? The US electronics-to-finance conglomerate has produced more outstanding chief executives over a longer period than any other world-leading company. That says much about its relentless commitment to excellence. True, but let’s not forget the UK’s very own ARM (ARM). The microchip designer is shaping up to be the ultimate ‘gross profits’ royalty business, which means – thanks to its flexible microchip templates – that it can’t fail to grow so long as its customers just seek to grow.

We could continue coming up with candidates, but you will have sussed one important point – that there is no such thing as the world’s best company. However – and probably of greater interest to investors – there is a comparatively small number of truly outstanding companies; firms that have demonstrated by the clarity of their business model, the excellence of their performance and – to a lesser extent – by the longevity of their record that they are truly the tall trees.

Their success can be measured by conventional means – growth in profits and earnings; profit margins; return on capital; cash generated. Yet arguably the clearest proof of greatness – at least for quoted companies – is the long-term returns produced by their shares. And for the very best companies it matters less when an investor bought the shares than that he or she simply bought them.

Take healthcare group Johnson & Johnson (US:JNJ), the company that gave the world Johnson’s Baby Powder and Band-Aid. An investor who bought when Johnson’s share rating peaked at almost 45 times earnings in April 1999 would have had occasion to doubt the wisdom of his move. Yet if he persevered, he would have won out. Today he would be showing a 106 per cent gain, roughly twice that produced by the S&P 500 index of US stocks over the same period. Or, more extreme, what about US financial services group American Express (US:AXP), whose shares had to cope with the fall-out from the credit crunch? Despite this, an investor who bought at the pre-crash peak rating of 33 times earnings in June 2000 would now be showing a 62 per cent gain, about twice the return that the S&P 500 has posted since then.

Obviously these are worst-case scenarios. Mostly, returns for patient investors would be far better. For example, buy shares in Johnson in September 1994 when the rating was about 22 times (what turned out to be the average rating for the past 30 years) and an investor would be running a 687 per cent gain today compared with 298 per cent from the S&P 500.

Share-price performance may be the proof of a company’s excellence, but it’s not an explanation. Yet we need to know what distinguishes the world beaters from their capable competitors; if you like, Boeing (US:BA) from Lockheed Martin (US:LMT), or Diageo (DGE) from Pernod-Ricard (FR:RI). And such explanations don’t stand still. Times change, technologies change and companies change with them. Thus, for example, Frederick Winslow Taylor’s idea of a great company no longer holds good, but it was deeply influential for decades and the effects of Taylor’s work linger.

Taylor (1856-1915) was the US engineer who became the first time-and-motion man and the original management consultant. His Principles of Scientific Management formalised the work practices of half the world’s leading industrial companies in the first 40 years of the previous century. In Taylor’s corporate world the workers were stupid doers and the managers were smart planners. Success depended on a clear plan rigorously executed. All the workers had to do was what they were told – conscientiously, repetitively and unquestioningly.

General Motors, led for decades by Alfred P Sloan, was the ultimate manifestation of Taylor’s doctrine, though it flourished after his death. For a while it probably was the greatest company on Earth. However, its preference for policies over people and structures over softer skills eventually contributed to its downfall. Peter Drucker, who took over Taylor’s mantle as the world’s most famous management consultant, made his reputation with a landmark study of General Motors, Concept of the Corporation. He concluded that, in the quantifiable terms that Sloan favoured, General Motors “succeeded admirably”; according to other metrics, however, “it has also failed abysmally”.

The importance of Drucker – he died in 2005 aged 95 – as an arbiter of corporate excellence can hardly be overstated. He analysed corporate success and failure with a rigour that was hitherto unknown and, in the course of a career that ran to 36 books on management, he both identified the way that the most successful companies were shaped and influenced the way that others should be shaped. Some of the key points that run through his work are closely associated with those companies that are most often identified as excellent today:

■ De-centralised and simple. Whatever their bosses say to the contrary, Drucker reckoned that too many companies operate on the command-and-control model favoured by Taylor. Flat lines of organisation with few levels of hierarchy and where decisions are made as close as possible to the ‘work face’ are best.

■ The need for ‘planned abandonment’. Drucker reckoned that too many once-great companies cling to yesterday’s successes, trying to resist change rather than use its disruptive forces to their advantage. Thus IBM (US:IBM) was at its worst in the early 1980s when it tried to defend its market for mainframe computers against the onslaught of personal computers. In contrast, it was at its best – and ultimately its most commercially successful – in the mid 1960s when it planned the abandonment of its existing mainframe models and the launch of its range of ‘360’ mainframe machines. The 360s were revolutionary because they were a family of machines that could be used for all manner of tasks and in all sizes of organisation, but their development costs were huge and effectively they made all of IBM’s existing models redundant.

■ Putting customers first. Today this notion is so hackneyed it’s difficult to know whether a company’s boss just says it or really means it. But Drucker reckoned that the best companies walk the walk and do understand that profit making is not a primary goal but the happy outcome of doing other things right. Eighty years ago Robert W Johnson jnr, the son of the founder of Johnson & Johnson, spelt out such enlightened self interest when he wrote that “service to customers comes first; service to employees and management second and service to stockholders last”. Even by that time the company was almost 50 years old – founded by Johnson’s father with the aim “to alleviate pain and disease” – and today it is a £170bn market-cap company with a share-price performance, discussed earlier, to prove the value of goals that might otherwise sound sententious.

■ Keeping key skills. Contracting out other tasks Drucker did not use the term ‘outsourcing’ but this is what he meant. He suggested that every company has a ‘front room’ and a ‘back room’. The front-room activities are the vital tasks that a company needs to do well to prosper; the back-room tasks have a support function and should be handed over to specialists for whom these are front-room skills. The best companies recognised this and acted upon it.

■ Respect for employees. Drucker coined the now-familiar term ‘knowledge worker’ in 1959 when he examined a conundrum of corporate life – that, increasingly in big companies, employees knew more about certain aspects of the business than their bosses did. Drucker’s insight was to suggest that this was an opportunity rather than a problem that got in the way of the boss’s best-laid plans.

If Drucker was right, this also meant that employees were an asset to be nurtured more than a cost to be controlled. Nowadays every company in the world pays lip service to this notion. The best practice it and believe it as, for example, at Toyota, which built its famed ‘Toyota Way’ of 14 principles around two core aims – continuous improvement and respect for employees. Yet even Toyota, with its obsessive attention to quality, proved fallible. Following lawsuits involving runaway Toyota cars with faulty accelerators, the company’s respect for employees via teamwork is now perceived more as a way of fostering group think than of problem solving. Maybe that’s what happens when a company lets the aim to be the world’s biggest in its field, as the Japanese auto maker did, get in the way of its values. Still, just because a great company falls from grace does not make the principle redundant.

So Drucker did much to explain corporate excellence but he did not categorise it into lists of great companies. No matter. That was soon to follow. In particular, 1982 saw the publication of an international best seller that was to stimulate a cottage industry in the study of brilliant companies, In Search of Excellence, by two McKinsey management consultants, Tom Peters and Robert Waterman. In Search of Excellence started out as a small-scale project from McKinsey’s San Francisco office and grew into a huge two-day presentation for the firm’s clients from which the book was distilled. In effect, Messrs Peters and Waterman said that excellent companies:

■ Have a bias for action; meaning they prefer experimentation to analysis, especially when they want to solve problems.

■ Are close to customers, which means they learn from them.

■ Give employees autonomy, which encourages them to bring innovation to the way they do their job.

■ Expect their employees to be productive in reducing waste and improving efficiency.

■ Are hands-on about communicating the company’s chief values.

■ Stick to their knitting; they rarely stray from the businesses they know.

■ Have a simple business structure with minimal numbers of head-office staff.

■ Have ‘simultaneous loose-tight properties’, which is an inelegant way of saying that, while bosses are happy to push autonomy down the line, they stubbornly protect and disseminate the company’s core values.

Not only did Messrs Peters and Waterman categorise excellence, they named the companies to accompany it. That produced problems because almost immediately some of these outstandingly good companies started to look outstandingly bad. In particular, there was computer games maker Atari, which almost single handedly caused the so-called video games crash of 1983. Then there was Wang Laboratories, whose word-processing computers were hugely successful but lacked the flexibility to compete with all-purpose PCs in the late 1980s.

Some of Peters’ and Waterman’s excellent companies faltered so badly – especially those in computer industries – that one author pointedly titled his book about hi-tech failures In Search of Stupidity. That said, a longer perspective treats Peters and Waterman more kindly. The table, Enduringly Excellent, shows 31 companies that featured prominently in In Search of Excellence. Some failed and filed for bankruptcy; others merged or were taken over a sufficiently long time ago to make share-price performance inaccessible. However, of 22 companies for whom there is clear share-price data, their average performance from March 1994 to the present is a 426 per cent gain. This beats the S&P 500, a broad index of US quoted companies, by almost a third even though three of the 22 suffered a total wipe-out.

Enduringly excellent

Share price
Company nameCodeJun14Mar 94% change
3MNYSE:MMM144.1024.75482
Amdahlpart of Fujitsu since 1997
Amocomerged with BP 1998
Avon ProductsNYSE:AVP14.67.06107
BoeingNYSE:BA130.9022.25488
Bristol-Myers SquibbNYSE:BMY47.7113.97242
CaterpillarNYSE:CAT108.6714.16667
Danafiled for bankruptcy 2006
Data General acquired by EMC Corp in 1999
Delta Air LinesNYSE:DALinsufficient data
Digital Equipmentacquired by Compaq Computer Corp 1998
Walt DisneyNYSE:DIS82.6714.00491
Dow ChemicalNYSE:DOW52.8322.33137
DuPontNYSE:DD67.7430.81120
Eastman KodakNYSE:KODK27.3na-100
Emerson ElectricNYSE:EMR67.9114.66363
Frito-Laypart of PepsiCo
Hewlett-PackardNYSE:HPQ34.5610.27237
IBMNYSE:IBM181.7713.661231
IntelNasdaqGS:INTC30.373.74712
Johnson & JohnsonNYSE:JNJ104.659.441009
Kmart NasdaqGS:SHLDinsufficient data
Maytag acquired by Whirlpool 2006
McDonald’sNYSE:MCD101.9215.19571
MerckNYSE:MRK58.4415.12287
National Semiconductoraquired by Texas Instruments 2011
Procter & GambleNYSE:PG79.2613.94469
SchlumbergerNYSE:SLB109.0614.34661
Texas InstrumentsNasdaqGS:TXN47.814.68922
Wal-MartStoresNYSE:WMT76.0012.94487
Wang Labsfiled for bankruptcy 1992
Average change426
S&P 5001963446340

Still, some of the companies in Peters’ and Waterman’s list would make almost any schedule of corporate greats. Indeed, eight of them make what is arguably the most influential – or, at least, the best known – list yet. That’s the one produced by James Collins and Jerry Porras in their 1994 study of outstanding US companies, Built to Last, which carried the sub-title, Successful Habits of Visionary Companies.

Messrs Collins and Porras – both of whom have a background in management sciences – asked 700 bosses of big US companies which five companies they considered “highly visionary”. They picked the 20 names – later cut to 18 – that were cited most often and examined what made those companies special. As they were writing a management book, the authors exploded corporate ‘myths’ that they themselves created while they categorised with equal amounts of hyperbole and breathless enthusiasm. Thus they found themes such as these among visionary companies:

■ Big, hairy audacious goals. Or, in the words of Jack Welch, the former boss of General Electric (US:GE): “You need an over-arching message. Something big but understandable”. GE’s simple goal was to “become number 1 or 2 in every major market we serve”. In IBM’s case, the audacious goal was to build the 360 range of computers discussed earlier. At Boeing, it was the decision in 1965 to go ahead with the 747 jumbo jet. At Sony, it was the aim to use transistors to make a pocket-sized radio. But the underlying point is that excellent companies often adopt a simple but all-embracing aim to focus and to motivate their employees.

■ Cult-like cultures. Motivated employees feel they belong. At the US retailer, Wal-Mart (US:WMT) – where employees are called ‘associates’ – they feel it sufficiently to take it seriously when the founder and ex-boss, Sam Walton, used to tell them via satellite link: “Repeat after me: from this day forward, I solemnly promise and declare that every time a customer comes within 10 feet of me, I will smile, look him in the eye and greet him. So help me, Sam.” Or at another US retailer, Nordstrom (US:JWN), the rules are pretty simple. Each new employee is handed a small card that reads: “Welcome to Nordstrom. Our number one goal is to provide outstanding customer service. Nordstrom’s rules: Rule number one – use your good judgement in all situations. There will be no additional rules.”

That was – and is – the ‘Nordstrom way’. Motivate your employees strongly with commission, set them demanding goals and give them freedom as to how they achieve them (but woe betide any sales person who annoys a customer). Employees either love the Nordie way or hate it. It’s the same at other outstanding companies: a corporate culture that does things ‘the HP way’ (that’s Hewlett-Packard) or turns its staff into ‘proctoids’ (at Procter & Gamble) or teaches them ‘IBM-speak’. These companies aren’t cults, but at their best they generate a pervasive corporate culture that enhances performance.

■ Try a lot of stuff and keep what works. Arguably this is best epitomised by 3M (US:MMM), the failed Minnesota corundum mine that had to find a use for all the grit it was digging out of the ground. Luckily it got an order for sandpaper. Then the curiosity of its general manager, William McKnight, meant it stumbled on making ‘Wetordry’ abrasive paper. From there it developed umpteen low-tech yet innovative products, the best of which became household names; for example, Scotch tape, Post-it notes and Scotchgard, which the company’s boffins discovered accidentally.

Similarly, at Johnson & Johnson, Baby Powder started commercial life as something the company gave away with its medicated plasters (until customers started asking for it separately). Perhaps most famous was the serendipitous innovation that came out of American Express – the travellers’ cheque, which was thought up when the company’s president, James Fargo, found while on holiday in Europe that his letters of credit were useless once he was off the beaten track. But the real innovation was that travellers’ cheques allowed AmEx to expand into financial services because they created a ‘float’, money deposited against cheques that had yet to be presented.

The underlying point is that the best companies capitalise on what Messrs Collins and Porras label ‘evolutionary progress’ – progress that was not planned, but was spotted and fully exploited. These are companies that truly understand words of Johnson & Johnson’s Robert Johnson jnr: “Failure is our most important product.”

■ More than profits. The authors acknowledge that many companies claim to put values other than profit-making first. So they ask: “How can we be sure that the core ideologies of highly visionary companies represent more than just a bunch of nice-sounding platitudes?” First, because, once an aim is adopted – say, Nordstrom’s emphasis on customer service, Procter & Gamble’s focus on product excellence – it’s more effective if it is openly espoused because a company’s employees are more likely to take note of it and stick by it. Second, visionary companies don’t just claim to put certain values above profits; according to Messrs Collins and Porras they put in place systems and processes that institutionalise those values.

■ Home-grown management. One such process is to appoint leaders from within. In 1991 – nine years before he retired – Jack Welch, the boss of General Electric, said: “From now on, choosing my successor is the most important decision I will make.” Still, that was the GE way. In 1974 – seven years before he handed over to Mr Welch – Reginald Jones put together a document, A Road Map for CEO Succession. This contained a list of 12 candidates to succeed him – six of whom were prime candidates (including Mr Welch) – who were continually monitored and tested over the coming years.

GE was not alone in appointing from within. Over the period from 1806 to 1992 that Messrs Collins and Porras studied their visionary companies they found just two of 18 companies who hired a chief executive from the outside. Put another way: of the 113 chief executives who ran the companies over that period just four were appointed from the outside. In contrast, at the good-but-not-quite-outstanding companies that the authors compared with the visionary companies, 13 of the 18 companies made outside appointments (31 out of 140 chief executives).

■ Good enough never is. Moore’s Law is familiar enough; named after Gordon Moore, one of the founders of chip maker Intel, it describes the relentless way that the memory capacity and processing speed of integrated circuits doubles and costs halve over every product cycle.

Yet all great companies follow a variation of Moore’s Law, and that’s called ‘continuous improvement’ – doing something tomorrow better than it was done today. Some of them institutionalise continuous improvement. For example, early in Wal-Mart’s development Sam Walton introduced his ‘Beat Yesterday’ ledgers, which compared a store department’s daily sales with the corresponding day a year earlier. Similarly, Nordstrom ranked its sales people by sales per hour. During its phase of fastest development Hewlett-Packard stuck to a ‘pay-as-you-go’ policy of expanding without recourse to debt because this helped produce a lean, cash-generating machine.

Despite these aims, great companies – even visionary companies – can and do falter. Today, some of those in Messrs Collins’ and Porras’s list look more mortal than they did 20 years ago – Citicorp, Ford, Motorola and Sony in particular.

Part of the problem is with the very process of categorising and explaining excellence. Human nature, being what it is, we give unwarranted importance to what looks great today and, with a process of pseudo-rationalisation, we endow the processes used by successful companies with more significance than they deserve.

More than that – as a leading guru of behavioural economics, Daniel Kahneman, said in his unlikely bestseller, Thinking, Fast and Slow – we underestimate the importance of luck. Writing about the Collins/Porras book, Professor Kahneman said: “The basic message of Built to Last and other similar books is that good managerial practices can be identified and that good practices will be rewarded by good results. Both messages are overstated. The comparison of firms that have been more or less successful is to a significant extent a comparison between firms that have been more or less lucky.”

Quite possibly. And yet there is little doubt that anyone making the 2014 list of great companies – especially if they are limiting their view to US companies – would pick at least six or seven from the Collins/Porras list of ’94. Besides, it may be significant that, 20 years on, every company of the 18 still has its independence (though, granted, Marriott and Philip Morris have been re-structured). That says something about their size, but also says something about their ability to cope with change. More significant still, the average share-price performance of the 18 has comfortably beaten the S&P 500 index in the intervening 20 years (see Visionary Performance table). True, the margin of outperformance may not befit the very best companies; then again, no one is pretending that these companies are anything but mature.

In short, the debate about what constitutes corporate excellence will continue for as long as investors seek shares in the very best companies. There is no end to the journey, just as there is no single company that is the best in the world. Still, in the interests of that debate, seven writers now offer their candidate for the title. We are not saying that it is right to buy their shares today. But we are saying that these are outstanding companies and understanding what makes them so special will help investors improve their craft.

Click here to read about our candidates for the best company in the world

VISIONARY PERFORMANCE
Share priceShare price% change
CompanyCodeJun-14Mar-94 
3MNYSE:MMM144.1024.75482
American ExpressNYSE:AXP95.509.25932
BoeingNYSE:BA130.9022.25488
CiticorpNYSE:C47.9058.75-18
Ford NYSE:F16.8516.800
General ElectricNYSE:GE26.728.33221
Hewlett-PackardNYSE:HPQ34.5610.27237
IBMNYSE:IBM181.7713.661231
Johnson & JohnsonNYSE:JNJ104.659.441009
Marriott*NasdaqGS:MAR63.4017.81256
MerckNYSE:MRK58.4414.88293
MotorolaNYSE:MSI67.13118.12-43
NordstromNYSE:JWN67.849.94582
Philip Morris*NYSE:PM88.9316.88427
Procter & GambleNYSE:PG79.2614.09463
SonyTSI:675817.0828.64-40
Wal-MartNYSE:WMT76.0012.94487
Walt DisneyNYSE:DIS82.6714.00491
   Average change416
S&P 5001963446340
*Marriott data since March 1998; Philip Morris data includes effect of Altria spin-off