Mckinsey has worked extensively with a number of US corporations that sustained outstanding levels of performance during the turbulently competitive period from the late 1970s to the early 1990s. Over the past several years Gil Marmol and Mike Murray have led a research project to determine whether ten of these high-performing clients (in industries ranging from energy to consumer goods to electronics) had significant similarities in the ways they managed their companies. Marmol and Murray have concluded that these kinds of high-performing companies have six management attributes in common. Here they talk about some of the highlights of these characteristics and the companies that embody them.

1. Driven by leaders

Mike Murray: This is where it all begins: leaders who have performance aspirations that are truly extraordinary.

Gil Marmol: If you don’t have a CEO who is willing to push people to perform better than anyone else in the industry, it’s all over. You can’t achieve any of the other elements of high performance.

Demanding, unreasonable CEOs

Murray: When you compare these people—not just the CEO, but the leaders right through the company—to other leaders that you know, they seem unreasonable. By standards outside their companies they are unreasonable—but not by measures within their companies.

Marmol: The energy company in our survey set a performance target of 15 percent per year earnings growth, which is totally out of line with the nature of the industry. Prices go up and down; so do the profits of the average energy company. Most will say, hold us to long-term results, but we are driven by market forces in the short term. Not the one we studied; it says, we’ll deliver each and every year. And it does.

It reengineers the entire business system—its assets, its people, its contracts—to make the best of price fluctuations. When prices move against it, it works very hard to make up the difference.

Another characteristic of these leaders is their ability to penetrate to the micro level of their businesses, without meddling or getting in the way of their subordinates.

Murray: And without destroying the value you get from the delegation of accountability, authority, and commitment to performance. What they are doing is setting a standard. It’s not that they are trying to do other people’s jobs or check up on them. No, they are testing whether people are doing their jobs with the right dedication and passion and detail.

Take the retailer in our survey. Each of its divisions has one or two billion dollars in sales. Weekly, the chairman phones or holds videoconferences with the presidents of the divisions, discussing price points by product line and product category, sell-through rates, performance comparisons between divisions, and why things aren’t going better. He is trying to learn what could be done in other divisions, and whether his leaders are paying enough attention to detail.

Fear of failure

Marmol: The final element is a productive fear of failure. This is the opposite of the complacency that pervades so many companies. When they look at deteriorating profit margins, unsuccessful products, new technologies, and lower-cost competitors, they will give you excuses, or explain there is little they can do about these trends. The result is a boneyard of American corporations writ large on the pages of our newspapers.

High-performance corporations worry about failure a lot. It makes them pay attention to what is going on in their market

The high-performance corporations are different. They worry about failure a lot. It makes them pay close attention to what is going on in their market.

A division of the consumer goods company we studied had turned in its best year ever in revenues and profits. Its people were proud of their results, they had never done so well. They were surprised when the CEO said: "It’s not good enough and I see major problems ahead. Your costs are too high and so are your prices—and you are in danger of missing a tremendous growth opportunity. It’s time to rethink your strategy."

Capturing the growth opportunity meant substantially lower prices which meant very substantial cost takeouts. This, in turn, required massive reductions in management structures, consolidation of production facilities, and redefinition of the roles of virtually everyone from the front line to senior management level—all of this while ensuring quality did not slip.

It was very difficult, but it was done and done well and the resulting growth created a new consumer product household name.

Murray: Think about the great companies of the recent past that have run into trouble. They could have solved many of their problems if they had worried about them and mulled over the simple fact that competitive advantage doesn’t last forever. Before yours runs out, you’ve got to be ready to do something different. The companies that do are the high-performance ones.

2. Pursuit of strategy

Murray: We’re all strategists; we know how important strategy is. But I think the intensity with which high-performance companies develop and pursue their strategies is distinctive. For them, strategy is not only a matter of describing what they are trying to do, it is also a way of committing managers to getting things done. And it is a path to competition. These companies enjoy competing.

Evidence suggests that productive competition improves performance. The winners in competitive industries have more finely honed functional skills, and they do things faster. Their leaders personalize competition. They refer to their competitors not by the name of the company, but by the surname of the CEO.

If you are not part of all this, it’s hard to figure out what’s going on. These leaders are committed to understanding and having their organizations understand what their customers want and need, what their competitors can do, what they can do themselves, how the industry is evolving, and how they can exploit changes to their own advantage, and to the detriment of their competitors.

How industry works, what customers want

Marmol: Look at the energy company we studied. It started off in a situation where the government dictated all arrangements, from suppliers to transporters to customers. Then the market was suddenly deregulated. Most of the industry viewed this as a major threat. But the high-performance company saw things differently; it saw an opportunity.

It spent time with suppliers, understanding their needs; it spent time with customers, understanding their needs; and it saw that when the government infrastructure was dismantled, something had to be put in its place. And it saw what was needed: price guarantees in financing arrangements with suppliers, take guarantees for suppliers and price guarantees for customers, and somebody to stand between them. So it stepped in and set up financial arrangements to replace the old regulatory structure. In effect, it rebuilt the fabric of the industry.

Many competitors still haven’t caught on. The company is now providing a family of services at enormous profit. It can do this precisely because it saw an opportunity where others saw only threats.

Murray: The regional bank in our survey is another example. Like all US banks in the early 1980s, it faced changes in industry regulation. It thought about what it was good at, what its competitors were good at, what it wanted to do, and where it ought to go. Instead of falling into the same trap as many other large banks—namely, trying to redefine wholesale banking so that it would repeat the successes of the 1960s and 1970s, or striving to join the legions of global players—it focused on its retail customers. It organized its structures, economics, and technologies to form a system that would deliver value to customers more effectively than ever before.

Marmol: At this time, it was uncommon for banks to break themselves up into major lines of business and to allocate their expenses accordingly. This bank staked everything on its vision of the future. It piled resources into its businesses, even though one could argue—wrongly, as it happens—that it would have been more economic to share these resources across lines of business.

Murray: The bank is still pursuing this strategy today, and even though the market has changed in many ways, it is fantastically successful.

Marmol: The bank and the energy company illustrate another point. For high-performance companies, there is no maturity. We hear talk that markets plateau. For these companies, they don’t.

The specialist financial services company we studied banned the word "maturity" from its halls, fearing that it influenced people’s thinking about strategy and planning. The consumer goods company has a major division with a large share of a slow-growth market, but it remains confident about its prospects. Why? Because it understands its customers and competitors so well that it knows how to create opportunities in this market.

Murray: Companies like these are not playing with words when they call mature businesses growth businesses. They are figuring out how to take advantage of their markets in ways that make sense and create opportunities. They are not kidding themselves when they set plans for double-digit growth.

3. Intense performance environment

Marmol: What is a performance-driven environment? It’s hard to describe, but the specialty financial services company we studied provides a good illustration.

The company was doing very well: market share, profitability, the lot. But the management group felt they were working too hard. So they got together, confronted the chairman and CEO, and said, we don’t need to keep up this pace. We really don’t. All the results are there; it’s time to let up. And the answer came back cold and hard: we’re not letting up, because the moment we do, our performance will deteriorate.

Good places to work—not always nice

Murray: We are not talking about mean-spirited companies, but companies that are good places to work. That doesn’t necessarily mean nice. Companies where it is a cultural value to make sure that people in important jobs can do them outstandingly well—and where any who can’t are removed from those jobs.

Marmol: It’s not about firing people. The majority of these companies do not normally fire people—not systematically, anyway.

They get people who are in jobs they can’t do out of them very quickly—a hell of a lot faster than their competitors

Murray: They get people who are in jobs they can’t do out of them very quickly—a hell of a lot faster than their competitors, which probably accounts for some of their competitive advantage.

Learning from things that work and don’t work

Marmol: This raises a question. How do you get people to take risks in a company where performance matters, and where any shortfall will have implications for your career? I think the answer lies in what is demanded of people. These companies are not just looking at the bottom line, they are looking at the top line too. They want growth, which means they need new technologies, new products, new channels, and new marketing programs.

In a sense, the real risk for these companies is not taking risks. At the end of the year, their management groups are going to look back and ask, who made a difference this year? Who got us ten steps ahead of where we were before? If you are among those who did, you’re fine. If you are not, you have a problem.

The chairman knows which people in the company are taking the big risks, and he sits at their right hand and helps them along

The chairman of the consumer goods company often talks about a major product line he introduced that flopped. It’s not that he likes to brag about his failures, but that he wants to encourage risk taking. And he goes a step further. He knows which people in the company are taking the big risks, and he sits at their right hand and helps them along. I have seen him be the last supporter of people who tried to make major changes when those changes didn’t go well. Everyone else was against them, but he stood beside them.

The biggest risk for these companies is having a year go by when they haven’t done anything. No risk, no performance

Murray: The CEO of the manufacturing company we studied has a whole layer of managers reporting to him whose main value lies in enhancing the risk-taking capability of their divisions. They act as demanding partners of the division managers for growth, for risk, for major investments, for strategy. They talk continually with the chairman about balancing the risks of growth with the risks of not growing. As you said earlier, the biggest risk for these companies is having a year go by when they haven’t done anything. No risk, no performance. Growth is as important as profitability, and they’ve got to achieve both.

Marmol: So how do you recognize a performance-driven environment? It’s pretty obvious when you walk into these companies. It’s in the water, in the air, in the eyes of the people who work there. My explanation is that people walk faster than they do in other companies.

4. Simple structures and processes

Marmol: The fourth attribute of high-performance companies takes us back to Peters and Waterman’s In Search of Excellence. But there are differences, mainly of intensity.

These organizations have plenty of opportunities to become more complex—they invariably choose to make themselves more simple

All the organizations studied are large. They have plenty of opportunities to become more complex. And yet they invariably choose to make themselves more simple. They stay simple even when they could possibly—even probably—benefit by making things more complicated: sharing services, say, or creating a matrix organization. They hold back because they value the clarity of a structure that is unencumbered by dual reporting relationships.

Straightforward accountability

Murray: Take the retailer. Each of its divisions does its own credit processing. There is no doubt that some—possibly significant—savings could come from consolidation. They think about it—but don’t do it. Why? Because it would complicate an otherwise simple structure. These guys really know the value of simplicity.

Marmol: The electronics company is another good example. Making sure that all of its 70 divisions have full control of the resources they need to guide their own destinies is this company’s religion. Time and again, people have seen reasons to bring resources together, to create a central organization, but they have invariably found that the economic benefits are far outweighed by the cost—a loss of accountability, independence, and entrepreneurialism.

Regular calendar of processes and communication

Murray: Simple structures are accompanied by simple processes. Take the manufacturer. It uses the same processes year in, year out, to drive its businesses, to train its general managers, and, above all, to form the basis of communication up and down the organization. Its CEO probably spends upwards of 65 to 75 days a year in staffing, organization, and planning reviews.

That’s a huge portion of his time. He spends this much because he wants to be sure he understands the challenges his managers face and that they understand the kind of values and standards of performance expected of them.

Marmol: If you consider just the planning benefit or the human resource process benefit, he could probably get away with spending less than half that time. Instead of a full day on a $125 million division, he could spend a third of a day. Most CEOs would.

Murray: But he’s getting something else out of it. He is setting a standard for what he expects, and learning about the kind of commitments his people are making to performance. They are learning—and teaching him about—the resources and partnering they need for the risks they are planning to take.

The employees know exactly what they are doing, and why. This creates enormous power, alignment, and commitment

This communication process is mirrored by others to get the message up and down the line. The employees in this company know exactly what they are doing, and why. This creates enormous power and alignment and commitment to getting things done.

5. World-class skills

Marmol: The point about world-class skills is that they are truly world class. We’re not talking about companies that are a little bit better at something, or that are among the best, or that are players that people respect. We’re talking about companies that set the standard nationally—sometimes internationally—for their industry.

This is true of all the high-performance companies we studied. The transport company is the best in its industry at route management. People keep visiting it, trying to find ways to copy what it does. The regional bank is superior at retail. The electronics company defines innovation; it is mentioned whenever product development is discussed. Its history of product design and market success is unparalleled. The manufacturer’s key skill is in continuously improving operations quality and cost. The information services company runs the best data-processing centers in the world.

Murray: Each of these companies has developed a skill that underpins its whole strategy. It has to be world class because that’s how competitive these companies are and intend to be—and how much they expect their strategy to reward them.

Look at the retailer. Obviously, you have to be good at merchandising in this business. You bet your company three times a year, and if you’re wrong it costs a lot of money.

It’s a massive company, with huge department stores all over the country. As a result, it has differential needs but it also has system needs. It has to figure out a merchandising system that can take advantage of the different stores, market segments, and regions. At the same time, it has to exploit its scale to gain buying power. And it has to be very quick at coming to market, recognizing opportunities, taking advantage of them, and moving the merchandise. These things show up in all kinds of ways: in its market presence, in its financials ...

Marmol: ... in its sales per square foot. With the same floor space and products that everybody else has, this retailer sells more goods for every foot it’s got, simply because its merchandising systems are superior.

An interesting question is: What do you do when you need a skill that you never needed before? Look at the high-performance global commercial bank. Like all banks, it saw the need to develop an investment banking capability. It invested in information services, deployed its operational infrastructure, and dedicated most of its executive management group to this task. Today, it is one of only a handful of commercial banks positioned to develop a top-tier investment banking presence worldwide.

This bank’s idea was far from unique. Lots of commercial banks were trying to do the same thing. But this one succeeded, largely because it recognized that its strategy needed world-class skills in investment banking and it never stopped short of that goal.

Management process

Think of management processes as a corporate skill—something valuable that a whole company gets good at

Murray: We usually consider skills as functional. But think of management processes as a corporate skill—something valuable that a whole company gets good at. These high-performing companies have these kinds of management process skills and they are so good at them they are the envy of their competitors. They are the stuff that Harvard Business Review articles are based on.

The key is a marriage of the functional skill with the management process skill

Marmol: The key is a marriage of the functional skill with the management process skill. It’s this combination that makes these companies so unbeatable.

Murray: That’s right—they really kind of get interwoven. The manufacturer’s is built around continuous improvement, the electronics company’s on innovation and speed to market, and the retailer’s around merchandising.

Marmol: And it’s probably this marriage that gives them their most enduring competitive advantage. Certainly, it is a difficult one to copy. It takes forever to build effective management processes. And these companies gain long leads over competitors as a result.

6. People systems

Murray: We’ve suggested that every characteristic of a high-performance organization is crucial. Well, this one is even more so. These companies do something amazingly important and distinctive. Their CEOs really are the Chief Personnel Officers of their companies.

Now a lot of company CEOs think they do that—they keep track of the top 100 or so people; they track their careers and review their performance; some even keep a book on it.

But there’s a tremendous difference between what the typical CEO does and what these CEOs do.

The biggest problem for many CEOs is they haven’t seen what good is, and so they don’t know what level of quality is possible

First, they are sufficiently involved in their businesses to have a well-informed and independent view of what their people two and three levels down in their business and key functions are doing. Second, they have a quality standard that is exceptionally high. They have seen what good is, and they can tell. Indeed, the biggest problem for many CEOs is they haven’t seen it, and so they don’t know what level of quality is possible. And third, they make sure the quality of the people in and around the most demanding jobs is what they need.

Marmol: This point was critical for the consumer goods company. The company manage-

ment thought they were pretty good—above average skills—on a par with the competition. What the new CEO saw was something totally different—to him the quality wasn’t there; managers who had been evaluated as good average performers were rated by him as below average and not good enough to beat competition. So he took the mission of being Chief Personnel Officer to its extreme and for about five years that’s exactly what he was.

He brought new people in. He sponsored them. He moved new and existing people around so that all could become aware of the new standard of performance and skill quality.

He succeeded in building a new generation of leaders at all levels, not just the most senior. His efforts served the company well for a full decade after he left. In effect, he had repopulated it with a whole new stream of talent that set a new quality standard and was able to renew itself.

Murray: Let’s go back to the chairman of the manufacturer who spends a lot of his time on personnel and planning. At company headquarters, there is a small room with sliding boards. Each board carries an organization chart with photos, rating, education, background, and previous experience in and outside the company for people much of the way down in each division. With this visual portrait and performance record in front of them, the top managers of the company make decisions about people and where they ought to go. And the CEO leads this process.

One of the most distinctive features is the way this company makes small movements in personnel every year to shore up the people in the most important jobs. It is absolutely clear about which jobs these are—the most difficult, the most challenging. And it constantly strives to keep the best people it can find in and around these jobs.

Say you’ve got a demanding job in a high-risk situation, and you’ve got a B+ person in it. In these companies, B+ is pretty good. But it’s not good enough for the job. Either you’ve got to shore that person up, or you’ve got to find someone else. Take that person out, give him or her a good job in another area, but get another person in there who is going to be the grade A player that you need.

Making small moves like this creates an enormous competitive advantage over time. Imagine two competitors starting in roughly the same place, with roughly the same talent pool. One makes small changes year in, year out, fitting the very best people to the most important jobs. The other is a couple of years behind. After five or six years, the competitive advantage of the first will be immense.

The tyranny of a weak bench

Marmol: You could say you are running a risk. You keep bringing in these talented people, but there won’t be room for them all. These companies look at it another way. First, they take responsibility for creating opportunities for their people, or they give them room to create opportunities for themselves. Second, they accept the fact that to some extent they will be the feeding-grounds for other organizations because they select ambitious people who are in great demand.

Many companies with a problem know they have to make a move. They look down, and they don’t have anyone who can fill the job, so they become paralyzed

But what they won’t accept is the tyranny of a weak bench. And this is a characteristic of many companies. They recognize a problem. They know they have to make a move. They look down, and they don’t have anyone who can fill the job. And so they become paralyzed, or they try to look outside.

Murray: And when they do, they’re not usually experienced in going outside, so it’s a risk—a risk they don’t want to run, but they have no choice. We can’t tell you how important this last attribute of high-performance companies is. We believe it explains why some companies lose it, sooner or later. We talked about fear of failure. When the bench gets weak, it becomes complacent.

We talked about strategy. When the bench gets weak, it loses its customer focus. Or it imagines that competitors can’t do things that they actually can. Or it misses shifts in industry structure.

What has really happened is that somewhere along the line, standards have fallen down on the people front. And it just shows up later.

Marmol: It’s very hard to rebuild.

Murray: You can fix the strategy, but why did it go off the track? People.