Learning Mechanisms That Work

To answer these questions we selected a sample of companies that had turned in an extraordinarily high performance over the past 50 years (our gold medalists outperformed the stock exchange by at least the factor of 15) and compared each with another old company, whose performance was still good but which was well behind the high performer (we call them silver medalists). Fifteen years after Collins and Porras' Built to Last, our work incorporates fresh insights from management science and provides the first non-U.S. perspective on long-range success.

Reading through corporate histories, collecting material in archives, and interviewing 34 CEOs, chairmen, and board members, we were able to develop a framework that helps companies to gain sustainable competitive advantage. One crucial element is how companies learn and share their knowledge over time and space: our Five Learning Mechanisms.

Learning Mechanism #1: Culture

Great companies use culture as a learning mechanism. While culture and values do not necessarily transmit hard knowledge in the sense of factual data, there is no mechanism that guides interaction and behavior of employees more effectively. Having a culture in place that encourages personal initiative and knowledge exchange is crucial. This is particularly obvious during times of change. Take the contrasting story of gold medalist Shell and silver medalist BP.

In the mid 1990s Shell had fallen behind its competitors with an Average Return on Capital Employed (a key performance indicator in the industry) below 7 percent. While it might have been tempting for Cor Herkstroeter, the chairman of the Committee of Managing Directors, to implement some quick fixes, he decided to build on Shell's culture of debate and engagement to develop a more solid transformation process.

Together with his fellow Board members he compiled a list of themes and subsequently spent a few months discussing them with employees from all levels of the organization. They engaged, they listened and were prepared to be more responsive. Identifying several issues around performance culture, behavioral change programs were then run for several years. Structural changes followed only in 1998 when the mindset of staff was prepared and the low oil price created an opportunity to argue for tough measures. By 2000 the Return on Average Capital Employed exceeded 19 percent. Successful change was possible due to the input of thousands of staff, empowered by a culture of knowledge sharing.

A lack of learning culture can be a major barrier to successful change as the story of BP in the early 1990s highlights. Under serious financial pressure to reform, an abrasive Robert Horton was determined to turn the company around. Unfortunately, he was confronted with what he described as a culture that was bureaucratic, distrusting, and second-guessing. The company had 80 standing committees—11 layers of management separated Horton and a first-line supervisor and stringent budget caps suffocated managers at lower levels.

To receive authorization for spending a manager typically required 12 to 13 signatures. Not exactly an atmosphere ideal for teamwork and knowledge exchange. Horton's style did not help either. In contrast to Shell's Cor Herkstroeter, he was not able to benefit from the insights of thousands of employees in an inspiring manner. Horton left after two years. His successor, David Simon held on for only one additional year.

It was under the leadership of John Browne that a true turnaround became visible. The old bureaucratic mindset was laid to rest in favor of a new "can-do" spirit. Peer groups formed around common expertise and issues. As a result knowledge exchange proliferated in a new climate of sharing. Not coincidentally, BP's financial performance improved dramatically in the later 1990s.

For consultants the insights from Shell and BP are clear. When they advise firms they need to familiarize themselves with the culture of the corporations and then help the executives to turn their culture into a learning culture.

Learning Mechanism #2: Stories

Powerful experiences often crystallize into stories that companies nurture and pass on from generation to generation. The most common stories are heroic, stories in which the company fares well. This helps to motivate people and inspires them to act in ways that produced success in the past. While some of the silver medalists are good storytellers, the gold medalists are particularly skillful at it.

Glaxo, for example, often repeats the story of Alec Nathan's successful marketing campaign for milk powder in the early 20th century. When Girolami started his breathtaking Zantac experience in the early 1980s he was able to echo Nathan's story. Girolami's successor Sir Richard Sykes was equally taken by the story. He often talked about it and even kept a picture of Nathan in his office.

At Siemens, many stories told over the past 150 years feature founder Werner von Siemens. His drive to explore and participate in all fields of electrical engineering inspired technical staff for generations. It also had lasting implications for strategic positioning as the company held on to Werner von Siemens' determination to engage in all fields touched by electricity up to the 1960s. Even today Siemens has a broader participation in the electrical industry's segments than most of its competitors.

In addition to heroic stories, companies also learn from negative experiences. This of course can be painful and some companies suppress memories of unhappy episodes in their past. With the passage of time the pain may disappear but companies may then question the continuing relevance of such stories. Still, the companies that managed to generate outstanding performance over time have gone to great lengths to pass on the knowledge they gained during times of difficulty in hopes of avoiding similar troubles in the future. A setback thus turns into an investment in learning.

Failure to learn from mistakes is a theme we largely observed in our silver medalists. AEG, for example, was hit hard in the 1930s when a period of heady expansion and aggressive risk-taking came to a crashing end. Forgetting to keep this story alive, the company resumed aggressive growth after World War II and found itself again in serious trouble in the 1960s. Siemens, the gold medalist, never found itself in such a desperate financial situation.

They took a much more conservative approach, which was evident not only from the reserves it accumulated but also the cautious way they calculated the value of their assets in the early 20th century. This does not mean that there were no painful but valuable experiences in Siemens' history though. And unlike AEG, Siemens kept such experiences alive.

One of the most memorable is related to the legendary company founder Werner von Siemens. Although AEG outperformed Siemens temporarily in the late 19th century Werner von Siemens refused to dilute the family ownership to achieve faster growth. This attitude impeded Siemens's ability to compete in the power generation business. Werner von Siemens' sons eventually changed the policy and took the company public. Even more importantly the Siemens family did not make the same mistake twice.

They learned their lesson and never again refused to dilute their shareholding when this was required to increase the firm's capital base.
Storytelling provides a great business opportunity for consultants. Companies often struggle to turn their experiences into stories. This is where seasoned advisers can be of great help. In fact, helping to develop a story for a top executive is likely to be more useful for him than the usual slide pack filled with charts and number-driven recommendations.

Learning Mechanism #3: Leadership

Leaders play an important role in creating a learning organization. It is not a coincidence that many leaders in our gold medalists were keen to learn themselves. Harry Jephcott, Austin Bide, Paul Girolami, and Richard Sykes from Glaxo were all known to spend considerable time learning from their experts. Harry Jephcott, for example, went on extensive annual trips to the various subsidiaries accompanied by his wife who kept a diary including details about the personal life of staff they met on the way. This enabled Jephcott on subsequent visits to catch up on private matters, creating a more personal relationship and therefore an atmosphere of trust which is absolutely vital to stimulate learning.

Creating personal trust as a condition to share insights was something that leaders in Lafarge also understood most intimately. L