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Small Giants: Companies That Choose to Be Great Instead of Big, 10th-Anniversary Edition

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Small Giants: Companies That Choose to Be Great Instead of Big, 10th-Anniversary Edition

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Highlights & Notes

The shareholders who owned the businesses I was looking at had other, nonfinancial priorities in addition to their financial objectives. Not that they didn’t want to earn a good return on their investment, but it wasn’t their only goal, or even necessarily their paramount goal. They were also interested in being great at what they did, creating a great place to work, providing great service to customers, having great relationships with their suppliers, making great contributions to the communities they lived and worked in, and finding great ways to lead their lives.

“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.”

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.

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.”

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.

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.

If the business survives, you will sooner or later have a choice about how far and how fast to grow.

Unfortunately, many people have to pass through a major crisis to recognize the choice they have. Some don’t see it until they’ve already gotten themselves and their companies into serious trouble.

I decided that our reason for being here was to prove you can have a healthy, sustainable company that grows by natural demand and that is profitable.”

Success means you’re going to have better problems. I’m very happy with the problems I have now.”

And what about business? He’d obviously blundered by focusing so intensely on sales, rather than profit. Wasn’t it better to have a highly profitable 100-million company that didn’t make any money? Wasn’t it better to have a business with a great reputation in its community and its industry—a company known and respected for its fabulous service, its unstinting generosity, and its happy, dedicated workforce rather than its size?

Because of their success, they find themselves faced with so many opportunities that it takes a conscious effort on their part to keep from heading off in the wrong direction.

and how fast to grow. And therein lies another lesson: If you want to have the choice, you have to fight for it. All successful businesses face enormous pressures to grow, and they come from everywhere—customers, employees, investors, suppliers, competitors—you name it.

You can’t build a small giant if you’re in an industry where your success depends on how big your company becomes.

Whatever their particular ownership structure, all of the companies guarded their equity zealously to make sure it remained in the hands of people committed to the same goals.

But, ironically, the most intense pressure often comes from two sources that both determine and define your success as a business, namely, your employees and your customers. It goes without saying that a great company needs to have great people working for it, but you can’t attract them, let alone hold on to them, unless they have room to grow.

We asked what we did well, what kind of work did we get a better return on, what did we need to improve. And then we changed everything.”

Those were the easy calls, however. In order to keep the company at the size he wanted, Butler also had to say no to good customers, the ones he wanted to continue doing business with. “To me, a good client is a good corporate citizen, honest and good to the community,” he said. “Some of these companies don’t care about the communities they do business in, and they don’t do win-win. I want to work with clients who see us as their partners. I’d rather lose money than lose a good client.”

The notion that bigger—and more—is better has so pervaded our culture that most people assume all entrepreneurs want to capitalize on every business opportunity, grow their companies as fast as they can, and build the next Google or Facebook.

“That led to a second realization: People who build giant companies from scratch are different from you. It’s not just brains; it’s composition. They have a stomach you don’t have. Then finally, it hits you, the third realization: Things are okay. You think, I can be happy. I can lead a good life, have a great business, make enough money, without going crazy. And you begin to notice all the unhappy rich people around, with unhappy families. When Donald Trump was asked whether he was a good father, he said, ‘I’m a good provider.’ That horrified me.

It is hard to imagine a small giant whose leader does not recognize his, or her, starfish. Indeed, you could argue that a small giant’s mojo comes, in part, from an active appreciation of a business’s potential to make a positive difference in the lives of the people it comes into contact with. That appreciation is a common characteristic of all the companies in our sample, and it makes possible the intimacy they are able to achieve with employees, customers, suppliers, and the community—an intimacy that is both one of the great rewards and one of the crucial generators of the mojo they exude. It’s also an intimacy you can witness firsthand if you want to. You need only visit the cities, towns, and neighborhoods where these companies are located.

When you look closely at our small giants, one characteristic immediately jumps out at you. Like Righteous Babe, they were all so intimately connected to the place where they were located that it was hard to imagine them being anywhere else.

The companies in this book were all deeply rooted in their communities, and it showed. Each had a distinctive personality that reflected the local environment, often in ways that may have seemed superficial or quirky on the surface but that actually played an important role in the business’s success.

A company has to develop its own methods of establishing intimate customer relationships, based on its particular circumstances, the nature of its business, and the types of customers it has.

Having the best products called for a whole different focus—on innovation, rather than efficiency—which meant staying several steps ahead of customers, coming up with a product they would need before they knew they needed it, and being driven more by the possibilities of technology than by the current demands of the market. Then again, if you wanted to provide the best overall solution, you took yet another course, becoming “customer intimate,” that is, developing products flexible enough to serve a wide variety of customer needs and working closely and collaboratively with customers to give them what they wanted.

Not that there’s anything wrong with anonymous commercial transactions. We wouldn’t have much of an economy without them. But somehow making these connections contributes to a company’s mojo, perhaps because it touches on emotional, not simply material, needs.

For lack of a better term, we might refer to the process as building a sense of community—that is, a sense of common cause between the company, its employees, its customers, and suppliers. That sense of community rests on three pillars. The first is integrity—the knowledge that the company is what it appears, and claims, to be. It does not project a false image to the world. The second pillar is professionalism—the company does what it says it’s going to do. It can be counted on to make good on its commitments. The third pillar is the one we’ve been discussing—the direct, human connection, the effect of which is to create an emotional bond, based on mutual caring.

And that speaks to the little secret behind the relationships that small giants have with their suppliers and customers. It’s generally not the people at the top of the organization who create the intimate bonds. It’s the managers and employees who do the work of the business day in and day out. They are the ones who convey the spirit of the company to the outside world. Accordingly, they are the company’s first priority—which, from one perspective, is ironic. For all the extraordinary service and enlightened hospitality that the small giants offer, what really sets them apart is their belief that the customer comes second.

“I’ve always thought it was more fun and satisfying to have all chiefs and no Indians,” he once said in an interview with Harvard Business Review (HBR). “That was one of my ideas—to have a small group of people, where everyone knows they’re all interrelated and where, as far as possible, everybody is in charge and nobody is looking over anyone’s shoulder and there are no time clocks.”

“That’s the way my father raised our family, from the earliest moment. Lots of responsibility. We’re counting on you. We trust you. And if you screw up, just tell us about it; don’t worry about it. We’re not encouraging you to screw up, but for heaven’s sake, if you do, don’t worry. We’re all in this together, and we don’t know what we’re doing either, so come on and join in. And I always liked the idea of a small number of people. I just don’t like what happens in large groups.”

Keeping the team small also relieved Maytag of some management chores. New people who weren’t working out didn’t have to be fired. They would leave of their own accord. They simply couldn’t last in a small group of people without the support of their peers. Conversely, those who meshed with the culture were embraced by the group and given more responsibility, with Maytag scarcely having to say a word.

That starts with making sure you have the right people on the bus, as Jim Collins put it in Good to Great, referring to the primacy of hiring decisions.

If you want a company that cares, you need people who care, and they need to be motivated by more than money. Not that there’s anything wrong with money. We all want to get paid well for what we do, but if money is the only reason people come to work, they probably belong on a different bus.

In addition to having the right people on board, you need to keep the bus in good running condition. That may seem obvious, but you’d be surprised how many companies with wonderful intentions trip themselves up by having poor internal communications, or bad coordination between departments, or inadequate follow-through on decisions, or any of a thousand other fundamental management issues that can negate all the positive initiatives those companies undertake.

It takes well-designed, appropriate, and values-driven systems and processes to support and create the kind of cultures we’re all going after.”

Perhaps most important, “all those three-step things” ensured that people throughout the company were constantly thinking about the processes of management, about how the company was supposed to work and how business should be conducted. In that environment, there was little danger that problems would be swept under the rug. When a problem developed, it quickly rose to the surface, where it could be addressed. Zingerman’s thus minimized the risk that it would trip itself up on the basics, whatever other challenges it might face.

The first imperative involves articulating, demonstrating, and imbuing the company with a higher purpose. That purpose may relate to the work that the business does, or the way that the business does it, or the good that comes from doing it, or some combination of the three, but however you frame the higher purpose, it serves the same function. It makes the work people do meaningful; it continually reminds them how their contribution matters and why they should care about giving their best effort.

What set the companies apart was the extent to which the higher purpose was woven into the fabric of the business. It had to be a constant presence, a part of the everyday life of the company, that people would never lose sight of, let alone forget about, as so often happens with mission statements.

Having a great business is one way of making a better world.

The second imperative for creating a culture of intimacy involves reminding people in unexpected ways how much the company cares about them. The crucial word there is “unexpected.” These days most companies realize how expensive it can be to replace an employee and how critical it is to retain a good one, and they use a variety of tools to let people know they’re wanted and appreciated—performance bonuses, special benefits or perks, flexible schedules, recognition awards, parties, promotions, and so on. The companies in our sample used all those tools as well, but with a difference. They went out of their way to make sure the message got through, either by doing what most companies wouldn’t dream of doing or by using one of the standard tools in an unusual way.

“It’s a game,” he told HBR. “I’ve concluded that the best approach is to pay people well and on a rational basis. And then do things like the barley harvest and the trips to Europe and the courses and the dinners and the ball games and the company van that you can borrow over the weekend if you’re moving. Those things form a package that’s a little vague but that’s clearly there for you to count on. And if your mother-in-law arrives unexpectedly, and you want to tell us that you can’t come in, that’s fine. And if you’re sick, there’s no policy about how many days you can get sick and all that sort of thing. The fewer written rules, the better.”

The point here is that such policies affect not only the way that people feel about the company but also the relationships among the employees themselves—indeed, the whole texture of life inside the business.

To be sure, every business is, to some degree, a society in microcosm with its own rules, its own hierarchies, its own standards of right and wrong, but that society is usually viewed as a by-product of something else, rather than a primary focus of the business.

In that sense, each company is its own version of Galt’s Gulch in Atlas Shrugged—a haven for people who have a common vision of the kind of society in which they want to live and work.

“Creating and nurturing a work environment that frees coworkers to grow and reach their full potential is the primary purpose of the company,” noted one Reell document.

“You know, life is unfair but merciful. You can do everything right and get a brain tumor. Business is unmerciful but usually pretty fair. People who go broke often bring it on themselves. For a company to succeed, everybody has to do their bit, and you have to insist on it. Like coming to work on time. We have a company policy. If you’re late four times in any quarter, we show mercy. The fifth time you’re suspended. The sixth time you’re out. No excuses, no exceptions. When you’re the boss, you make demands on people. We all have to decide where we want to be on the demanding scale. Jack Welch might be a 10. I don’t want to be a 10. Maybe an 8. What’s the difference? If an employee doesn’t work out, a 10 says you don’t give him severance pay. An 8 says you do. A 6 won’t do anything because he thinks he’s empowering people. Bullshit. You have a responsibility to make those calls.”

“If you have an established company and you don’t have profits, you’re doing something wrong. There’s a hole somewhere. Profits are not optional in business. If you don’t have them, you’re dangerously close to going broke. It’s not responsible to your employees. They might not have a job. As the guy in charge, it’s your duty to make sure you have a profit. We all need a little accountant inside of us, saying, ‘Hey, asshole, what are you doing?’”

And Jay doesn’t micromanage. He gives us parameters. I get to work within them the way that I want. When we make mistakes, he calls us on it, but it’s a teaching thing, not punitive. And he has all these ideas. We have meetings of the managers of the different companies, and we learn about what the others are doing, and we get pumped.

I finally figured out that managing isn’t just about learning how to motivate people. It’s also about learning how not to demotivate them.”

I had to learn the difference between a mistake, which I can live with, and haphazard conduct. Backing into a pole is a mistake. A crooked label is a sign of carelessness.”

When you are out of cash, the greatest culture in the world won’t save you.

I concluded that to be successful over the long term, the company has to have and maintain: (1) steady gross margins that it protects; (2) a healthy balance sheet, as reflected in the current, cash-to-debt, and debt-to-equity ratios, among other measures; and (3) a sound business model governing how the company delivers value to customers and earns a profit in the process.

The company had gone from coping with volume to needing volume, which had increased the pressure to make further concessions on price.

So a combination of the volume, the price pressure, the volatility, and the massive investment resulted in all of our energy going into developing the Asia business instead of finding new opportunities.”

For that matter, you can’t be a small giant without trust. Once you’ve lost it, moreover, it’s extremely difficult to get back—especially if you lack consensus about the source of the problem and alignment around a course to follow.

Bob Wahlstedt felt the same way. “If I was twenty or thirty years younger and found myself in Eric’s position, I just hope I’d have the wisdom to say, ‘I don’t belong here,’” he said. “What the company needs now is something I’m not good at, or even something I want to be good at. I don’t like structure. I hated the quarterly reporting at 3M. That’s part of the reason we got as big as we did without structure. But now the company needs it.”

“Reell does some things exceptionally well. Competing in a commodity business is not one of them.” The company needed enough gross profit to cover the cost of developing the technological innovations that were its trademark and an essential element of its business model. Commodity products have low gross profit margins by definition. The gross profit that laptop hinges were generating at that point simply wasn’t sufficient to keep Reell healthy.

In the long run, Smith wanted most of Reell’s business to be in high-margin products providing the kind of added value that customers would happily pay for. But should a source of revenue unexpectedly drop out in the middle of the year, he needed to be able to plug the hole quickly, which a laptop hinge order would allow him to do. He also had existing contracts to fulfill.

And that was the message he conveyed to the board. “I said, ‘Our revenues are going to retract for at least two years. But we are going to get healthy again. I’m going to get the balance sheet straightened out and put some cash in the bank, and then we’ll use that to fund growth. But we’re talking about a long-term thing here. If you want a one-year wonder, you probably ought to get someone else.”

they would never have survived long enough to be considered small giants. But circumstances change. Industries change. Technologies change. And what may once have been a sound business model can become unsound faster than anyone could have imagined. During the transition, moreover, the company is likely to be confronted with unpleasant choices, mainly because its culture has been built around a business model that is no longer sustainable.

In the end, it is never just one factor that brings a company down. The root cause of Rhythm & Hues’s demise was an unsound business model, but the problems with that model ultimately made it impossible for the company to protect its gross margins and its balance sheet. By the same token, Reell Precision Manufacturing’s failure to protect its gross margins undermined what had previously been a sound business model and forced the company to keep taking on debt, thereby making a shambles of its balance sheet.

Among other things, he had learned that to succeed as a small giant, he had to watch his balance sheet, protect his gross margins, and make sure he had a viable business model.

Above all, they would have fun and the freedom to do their best.

A small giant faces no greater challenge than making its mojo last. That’s hard enough to do under the best of circumstances, as history attests. We can all come up with examples of companies we know—not necessarily famous ones—that have had it and lost it through the normal processes of growth and change. But however difficult it may be for a company to hang on to its mojo as it struggles to find its way in a turbulent business environment, it is infinitely more difficult to do so while simultaneously undergoing a transfer of ownership and leadership.

Take responsibility for the enormous gift that you hope to pass on to the next generation; it’s part of the entrepreneur’s job.”

It was all part of the succession process, Erickson said. “A company has to move from being entrepreneurcentric to being visioncentric. The goal is that, by the time we’re gone, the vision will be secure.”

In any such transaction, there’s always the risk that unscrupulous owners will take advantage of the company, piling on more debt than it can handle, getting their cash out early, and leaving employees holding the bag.

Small giants must adapt to changes in the competitive environment just like every other business. Then again, they sometimes have an easier time of it, thanks to the same practices and beliefs that give them their mojo to begin with.

Everything in the company was organized around selling awards—the accounting, the computer system, the way of thinking, everything. But it was a dated value proposition.”

Everything had to change, from its definition of its business to the expectations of its employees to the capabilities of its computer system.

So how do you convince people that fundamental changes are necessary when the old ways appear to be working so well? How do you arouse people to action when they feel comfortable with the way things are? And how do you overcome the reverence people have for their beloved founder, who had died in 1993?

“He’s my hero. You step into the breach. You do what needs to be done.”

“We know that new problems and opportunities arise every day, and that our best hope is to move forward with humility and courage. We believe we will survive and prosper, but we are never sure of the next step.”

“The part of sailing that I really like is this: when people go to sea, they have a need for self-reliance and at the same time they are dependent on one another. Much of the satisfaction comes from the mutual trust that develops, particularly after coming through a bad storm… . It’s the same whether you’re sailing a ship across the Atlantic or taking your company from start-up to its destination. There are storms, there are calms, and, most important, there are people pulling together to achieve common objectives.”

“I kept thinking that the entrepreneur is like an artist, only business is the means of his expression… .” he said. “He creates [a business] from nothing, just a blank canvas. It’s amazing. Somebody goes into a garage, has nothing but an idea, and out of the garage comes a company, a living company. It’s so special what they do. They are a treasure.”

The company is cool because what’s going on inside it is good, it’s fun, it’s interesting, it’s something you want to be associated with. From that perspective, mojo is more or less the business equivalent of charisma. Leaders with charisma have a quality that makes people want to follow them. Companies with mojo have a quality that makes people want to be part of them.

If there’s one thing that every founder and leader in this book has in common with the others, it is a passion for what their companies do. They love it, and they have a burning desire to share it with other people. They thrive on the joy of contributing something great and unique to the world.

“I guess some people don’t feel that way about their business, but I don’t know how they manage. I think you need to feel in your gut that whatever you do is the most interesting, exciting, worthwhile thing you could be doing at that moment. Otherwise, how do you convince anyone else?

I don’t believe it’s possible for a company to have mojo without leaders who feel that way about what their companies do. If they don’t love the business, if they don’t feel that what the business does is important, if they don’t care deeply about being both great and unique in providing whatever product or service they offer, nobody else will either.

The difference between the small giants and everyone else lies in their refusal to let go of the passion and their success in keeping it alive.

So how do they do it? To begin with, they understand that you can’t measure the value of what a company does by looking at how big it is and how much profit it generates. A company’s record of growth and the consistency of its financial returns may tell you something about the skill of its management team, but they say little about whether or not the business is contributing anything great and unique to the world. Instead, the small giants focus on the relationships that the company has with its various constituencies—employees, customers, community, and suppliers. Why? Partly, no doubt, because the relationships are rewarding in and of themselves, but perhaps also because their strength reveals the degree to which people are inspired by the company, and its ability to inspire them is the best measure of how they perceive the value of what the company does. If they are as passionate about it as the founders and leaders, the financial results are likely to follow.

If you allow yourself to get distracted, if you stop working on whatever it is that ties you to the people you do business with, the intimacy will vanish, the trust will dissipate, and the bonds will erode. That can happen for many reasons. It usually happens, however, when a company’s leaders begin focusing on growth or financial return, not as by-products of a well-run business, but as goals to pursue for their own sake.

Traditional management may be an exercise in rationality, to use Bernie’s language, but entrepreneurial management requires “the soul of an artist,” and—for its practitioners—the business itself is an evolving work of art (as reluctant as some of them might be to use the term).

To some people, it may seem a stretch to describe what Brodsky was doing as art, but there is obviously a kind of artistry involved in creating something out of nothing based on an ability to see what everyone else is missing. That is, after all, what artists do. In business as in art, moreover, the end result is an experience, and the quality of the experience reflects the relationships between the different participants, as well as the specific medium of expression. While entrepreneurs may rely on peripheral vision rather than artistic inspiration, it’s often hard to tell the difference between the two. They are both critical components of a creative process, and it takes such a process to produce something great and unique—be it a symphony or a restaurant or a records storage company.

You could find a similar balance in all the small giants. If nothing else, they demonstrated that it was possible for the business side and the creative side to live in harmony, rather than constantly fighting each other, as tended to happen elsewhere. What made it possible were the company’s priorities. There was no doubt in anyone’s mind that the business was the means people were using to pursue their passions, and not the other way around.

Somewhere on the rocky voyage from the garage to the fully managed organization, they get it backward. They begin to view the passion as something they can use to build the business. That may well be true, of course. The problem is, if you keep heading in that direction, you’ll eventually lose whatever it was that gave the company its mojo in the early days. Contributing something great and unique to the world will become less and less of a priority.

If it’s acquired, it won’t be because the acquirer’s stockholders share the passion or believe in the mission (whatever the new management may say). They’ll want to own it only if they think it will improve their financial returns. People will work there mainly because they need a job. Customers will buy its products and services only if they offer the best value for the money. The company will be an economic mechanism and little more. Pretty much everything else will have been lost.

If businesses don’t hold themselves to a high standard, the entire society suffers.

There are no businesses that hold themselves to higher standards than do the small giants. Having more of them can’t help but make our world a better place.

Looking back, they realized that Hammerhead had been able to make this transition from VFX company to moviemaker for one reason: its size. “By staying small, we could maximize our agility,” said Dixon. And agility turned out to be the key to survival.

“I’d always thought that success was about retention rates,” he said, “but it’s not. It’s about bringing the right people in and exiting the wrong people at the right time.

Meyer blamed himself for creating the problem. “I built the company like you raise a family, and in a family nobody ever leaves. I put too high a premium on making sure that nobody left. That was great to a point. Loyalty between a company and its senior leaders is a really wonderful virtue. But businesses are not families. Successful businesses blur the line between going to work and coming home, but it’s still going to work. Sometimes if you don’t say good-bye to certain people, it is really hard to walk the talk. That has been the hardest thing I’ve had to deal with over the last couple of years.”

Meyer was saying, in effect, that growth is important because it produces change, and change creates opportunities to do better, provided you recognize them.

What he’d learned was that the real threat to the culture was not dilution but stagnation, which could be avoided by taking advantage of the opportunities created by growth to continually improve the culture.

All of them encountered challenges, as did the vast majority of businesses during the Great Recession. Most persevered and emerged stronger than ever.

By deciding to focus on greatness rather than bigness, the small giants remind us that the two are not the same, thereby posing a compelling question: What exactly is it that makes a company great?

What has inspired business leaders, I believe, is the recognition of the range of choices they have in deciding the kind of company they want to create. Nothing in business requires them to build the largest company they’re capable of handling. Not that there’s anything inherently wrong with deciding you do want to build such a company, but it’s only one of many options, and business leaders are free to choose another path. If Small Giants helps people understand that choice and leads them to be more self-conscious in making it, then the book will have served a worthwhile purpose.

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