PDF Summary:Mastering the Rockefeller Habits, by Verne Harnish

The oil tycoon John D. Rockefeller was—and still is—the richest person in history. He made his fortune by founding the Standard Oil Company and growing it into a mind-bogglingly large multinational corporation. According to entrepreneur Verne Harnish, Rockefeller grew his company using simple fundamentals of business management that any leader can use to optimize their business and maintain organizational health during chaotic periods of growth.

In this guide, you’ll learn how to build your business around the three fundamental Rockefeller Habits: Focusing on a Purpose, Tracking Progress Objectively, and Conducting Effective Meetings. In addition, you’ll learn why knowing your business’s unique value is key to beating the competition and why you should create fun themes for your quarterly goals. In our commentary, we’ll supplement Harnish’s advice with other books on business leadership, such as The 4 Disciplines of Execution and Traction. We’ll also explore alternative perspectives from books like It Doesn’t Have to Be Crazy at Work and Competing Against Luck.

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According to Harnish, studying your company’s Profitability Indicators in real time allows you to detect rapidly changing market conditions and unforeseen budget problems caused by your company’s growth. Unless you have systems in place to collect and review these Indicators regularly (which we’ll discuss later), it’s impossible to adapt your strategy quickly enough to handle these sudden problems.

Discerning which metrics to track requires some experimentation—start by gathering all data you think might accurately predict your future performance. Over time, focus on those metrics that yield the most effective predictions.

(Shortform note: In The Lean Startup, Eric Ries advises that when you’re experimenting with metrics, start by tracking those with the power to disprove the riskiest assumptions you have about your business. For example, imagine a social media platform believes that they can get 5,000 new users every week. If they need 5,000 users a week to raise enough advertising revenue to keep the business afloat, believing they can attract these users is a risky assumption. Thus, they should track the metric of “number of new users every week” as soon as possible.)

Set Minimum Benchmarks for Each Profitability Indicator

Like Harnish, Mike Michalowicz in Clockwork recommends tracking metrics that indicate your company’s overall health. To make this tool more effective, he also suggests creating a benchmark for each Profitability Indicator—a numeric value that signals failure if the metric drops below it. For example, if a social media platform chooses the Profitability Indicator of the percentage of users that use its app every day, they may set a benchmark of 50%. If their percentage of daily users dips below 50%, it indicates there’s a problem, and they need to do something to boost engagement.

Michalowicz designed this system to help entrepreneurs avoid getting burnt out. Typically, when entrepreneurs encounter sudden problems with their business—such as those caused by turbulent market conditions or sudden growth—they scramble to personally fix it. Unfortunately, no one person can solve every problem with their business themselves, so entrepreneurs often get overwhelmed and ultimately lose motivation to run the business.

In contrast, the benchmark system allows entrepreneurs to detect problems while they’re in early, preventable stages. This removes pressure and gives entrepreneurs the time they need to develop systems that allow their organization to quickly adapt its strategy on the fly. This empowers the organization to solve problems before they evolve into full-blown crises.

Type #2: Target Metrics

In addition to Profitability Indicators that measure the company’s broad financial health, Harnish recommends tracking Target Metrics that measure the company’s short-term progress toward long-term goals (which Harnish calls “Critical Numbers”). Every year, decide on a new quantifiable Target Metric that reflects significant progress toward your BHAG. Likewise, every quarter, set a smaller Target Metric that marks significant progress toward the year’s Target Metric. This ensures that everyone in the company is always unified in their top priorities.

For example, if a healthy soft drink company is trying to drive Coca-Cola out of business, their Target Metric for one year might be to sell 150% more units than the previous year, and one of their quarterly Target Metrics leading to this goal could be to invest in supply chain infrastructure to lower manufacturing cost by 30% (allowing them to lower the retail price and sell more units).

(Shortform note: On the other hand, in It Doesn’t Have to Be Crazy at Work, Jason Fried and David Heinemeier Hansson explain how they intentionally run their company 37signals (formerly Basecamp) without setting any quantitative annual or quarterly targets. They argue that such targets put unnecessary stress on employees and demoralize them by pressuring them to always do better. Instead, Fried and Hansson keep their company aligned by directing them toward the same stable, qualitative goals year after year, such as delivering a high-quality product.)

Create Fun Quarterly Themes

In addition to setting a quarterly Target Metric, Harnish recommends creating an exciting theme for every quarter that drives home the Core Values behind your quarterly target—and makes achieving it more fun. Then, when your team hits their target, give them a reward that fits the theme. The reason quarterly rewards are enticing isn’t because the reward itself is practical or valuable. Rather, they allow the team to look forward to the satisfaction of celebrating their victories.

For example, if our soft drink company is trying to streamline their supply chain this quarter, their theme could be “Pass the Ball!” with soccer-themed posters in which different players represent stages of the supply chain. This soccer imagery could also reinforce the Core Values of teamwork and camaraderie. At the end of the quarter, the team could be rewarded with a new foosball table in the break room and a celebratory foosball tournament.

(Shortform note: Daniel H. Pink argues in Drive that offering specific rewards for goals like quarterly targets will decrease workers’ intrinsic sense of motivation. If an external reward makes people feel like they’re obligated to do a task rather than choosing to do it themselves, they’ll feel less motivated. That said, Pink notes that intangible rewards like positive feedback can increase intrinsic motivation. This is potentially another reason why the reward you offer should be a party or celebration rather than something practical or materially valuable.)

The Benefits of Fun at Work

In The Power of Fun, Catherine Price offers an explanation as to why setting a fun theme for your workers may be worthwhile. When people have “True Fun,” they feel more energized, less stressed, and do more creative work. True Fun is more complex than mere pleasure. It has three components: playfulness, which is activity without a higher purpose; connection with others; and flow, or total absorption in the task at hand.

Quarterly themes incorporate all three elements of True Fun. There’s no practical reason you have to weave Core Values and quarterly targets into a soccer theme—but doing it anyway adds an element of playfulness to the workplace. Collaborative work naturally fosters connections between coworkers. And the theme provides a clear goal, which is one of the necessary conditions for workers to get into flow.

Keep Your Target Metrics Focused and Visible

Harnish recommends restricting these Target Metrics to one area of improvement at a time rather than trying to improve every aspect of your business at once. Organizations make progress much more quickly when they focus all their efforts on a narrow goal.

(Shortform note: In The One Thing, Gary Keller explains that focusing on a single narrow goal yields the most progress because accomplishing one carefully chosen goal often triggers increasing returns. For example, if you focus your business on aggressive direct sales techniques for a quarter, you can reinvest the extra revenue into hiring new staff so you can get more work done, more quickly.)

Additionally, writes Harnish, display these metrics prominently, with large visuals, in a communal space. Employees are more engaged when they can clearly see the effects of their work.

(Shortform note: In The 4 Disciplines of Execution Chris McChesney, Jim Huling, and Sean Covey argue that this kind of scoreboard isn’t just helpful because it helps employees see the effects of their work. Rather, it also conveys to employees whether they’re currently winning or losing—that is, if they’re on track to meet their targets. The desire to win games is a powerful source of motivation, and a scoreboard is the best way to turn a team’s work into a game.)

Today: Focused Daily and Weekly Meetings

The final Rockefeller Habit is Conducting Effective Meetings. While many companies see meetings as recurring drains of time and productivity, Harnish asserts that frequent meetings greatly accelerate your progress—as long as you run them the right way. Every meeting should have a predefined agenda and a strict time limit to ensure it’s not wasting anybody’s time.

(Shortform note: Research confirms that many companies view meetings unfavorably. In one survey of 182 senior managers, 72% agreed that “meetings are unproductive and inefficient.” Harnish’s solutions (a strict agenda and time limit) resolve meeting participants’ most common complaints: that meetings are unfocused and take too long. However, many leaders fail to implement these simple improvements. Why? According to research, when someone leads a meeting, they view it as significantly more productive than other participants view it. Thus, the people in charge don’t realize how important it is to gather employee feedback and optimize their agenda.)

Harnish says that most companies already run effective quarterly and annual meetings in which they brainstorm major goals and how to achieve them. However, many of those companies neglect effective daily and weekly meetings, which Harnish asserts are just as necessary to accomplish your mission.

(Shortform note: Although Harnish contends that the most effective companies should meet every day, some have found success taking the opposite approach. One study found that when companies banned meetings for three out of five days a week, their employees’ productivity rose by an average of 73%. These researchers found that banning more meetings didn’t yield further benefits. Weekly meetings were still useful for two main reasons: They gave employees the chance to coordinate their weekly schedules and maintain social connections.)

How Amazon Runs Major Strategy Meetings

In Working Backwards, Colin Bryar and Bill Carr explain how to optimally run the kind of big-picture strategy meetings that companies might conduct quarterly or yearly. These authors contend that executives create the best strategies when they can build off the ideas of executives at different management levels. Amazon demonstrates this in their twice-annual planning process: First, the top executives put forward big-picture company goals. Then, lower-level managers propose strategies and projects that would help them reach those goals. Finally, top executives select which of those strategies and projects the teams below them should prioritize.

Daily Meetings

According to Harnish, everyone in the company needs to attend a meeting every day for five to 15 minutes. They don’t have to meet with the whole organization, but they at least need to meet with their most relevant coworkers. In these meetings, they can clarify what problems need to be solved today and ensure that everyone has the information they need to solve them.

To this end, Harnish contends that daily meetings should follow a three-item agenda: First, each team member quickly sums up what they’re doing today. Giving everyone a basic awareness of what their coworkers are doing helps coordinate collaboration and clear up any conflicts.

Second, the team reviews the latest daily Profitability Indicators. As we discussed earlier, staying continuously aware of these metrics helps everyone adapt their strategies to sudden changes.

Last, anyone who has an obstacle preventing them from making progress announces it to the rest of the team. Harnish asserts that this is the most important part of the meeting because it focuses everyone’s attention on the most productive kind of work: resolving blockages that prevent people from working optimally.

Daily Meetings: Scrum vs. Kanban

Many refer to these daily alignment meetings as “stand-up” meetings because it’s easier to stick to a strict time limit of 15 minutes when participants are forced to stand up for the whole meeting rather than sit. The two most popular types of stand-ups are those used in project management methodologies called Scrum and Kanban.

Harnish’s daily meetings have more in common with Scrum stand-ups, which also involve asking each participant what they intend to get done today and what obstacles they have blocking their progress. The main reason not to call Harnish’s framework a variation of Scrum is because it doesn’t involve sprints. Teams using Scrum divide their working year into sprints that typically last two to four weeks. By the end of each sprint, they must produce a finished product of some kind. This ensures that the team is always delivering results, even if those results are incremental.

Kanban stand-ups revolve around a Kanban board, a visual display of a team’s workflow. Basic Kanban boards consist of three columns labeled “to-do,” “in progress,” and “done.” The team creates a notecard to represent each task they need to complete. Then, they move it from one column to the next as work gets done. This allows everyone to see, at a glance, the status of all the team’s tasks. In Kanban stand-ups, this removes the need for every participant to give a full report of their work. Instead, the team can use the meeting to identify and resolve issues or blockages in the workflow that the Kanban board reveals (for instance, if one column in the workflow was overloaded with task cards).

Harnish’s daily meeting agenda is unique in recommending that teams review Profitability Indicators every day. Arguably, this big-picture perspective on the company’s health makes his framework more useful for meetings in which leaders make strategic decisions, and less useful within traditionally project-centered methodologies like Scrum and Kanban.

Weekly Meetings

Next, Harnish argues that everyone in the company should meet with relevant coworkers every week for 30 to 60 minutes. As in daily meetings, weekly meetings should follow a specific agenda.

(Shortform note: In The Advantage, Patrick Lencioni recommends taking time at the beginning of every weekly meeting to collaboratively create an agenda rather than strictly following the same one every week. Every participant shares how much progress they’ve made on specific to-do items, and they create an agenda that dedicates more time to discuss areas where progress is slowest. He also recommends that these meetings last 45 to 60 minutes—perhaps because it takes extra time to assemble an agenda.)

Item #1: Celebrate

First, team members share any good news that’s happened to them recently, whether at work or in their personal lives. According to Harnish, this will boost everyone’s mood, setting the stage for a productive meeting.

(Shortform note: Positive emotions help facilitate product meetings by counteracting the effects of stress. In Leaders Eat Last, Simon Sinek contends that when workers feel stress, the neurochemical cortisol sends their body into “survival mode,” focusing their attention on potential threats and distracting them from the exploratory thinking necessary for problem-solving.)

Item #2: Review Suggestions for Improvement

Second, the team reviews suggestions from employees or customers regarding how the business could improve. Harnish suggests picking a recurring problem and assigning someone to investigate and try to solve it in the upcoming week. Even if you’re only able to solve a tiny problem each week, if your solution lasts, those improvements are cumulative. For instance, if a coding team complains that an automated email list bombards them with messages that aren’t relevant to them, you could assign someone to take their team off the company-wide email list. Fix enough little problems like this, and you’ll have radically transformed your company.

(Shortform note: In The Slight Edge, Jeff Olson contends that the main reason people fail to take the small, cumulative actions that lead to success is that they don’t seem exciting. For instance, executives get more instant gratification by announcing the grand launch of a new product line than by switching to a faster internet service provider or automating a repetitive data entry task. However, avoiding these tasks for long enough can cause significant damage to your business, and by that time, it may be too late to salvage it.)

To learn what recurring problems are hurting your business, Harnish recommends sending out surveys to every employee asking what the company could be doing better for them—and for customers. Then, set up a system that allows employees to submit feedback at any time, and encourage them to do so for every issue they encounter, no matter how small. Do the same for your customers. This way, you’ll always have feedback to review and act upon in every weekly meeting.

(Shortform note: In Raving Fans, Ken Blanchard and Sheldon Bowles concur that asking employees what the company can do better for them is vital to a business’s success. When employees are happy with their jobs, they do better work and ultimately deliver better service to your customers. To this end, Blanchard and Bowles recommend viewing employees as your internal customers: People whom you’re obligated to serve just as much as “external” customers. Additionally, the authors assert that building systems to consistently collect and respond to feedback is important because they help you build credibility. Credibility can only be built over time, so your efforts need to be based on systems, not just one-time plans.)

Item #3: Review Profitability Indicators

Next, Harnish explains that the team reviews more detailed Profitability Indicators than those you review in daily meetings. In particular, gauge how much progress you’ve made toward the company’s quarterly goals. As in daily meetings, this big-picture awareness of the company will help people set smarter strategies as they work.

(Shortform note: In Traction, Gino Wickman also recommends reviewing metrics in weekly meetings that track your progress toward quarterly goals. Wickman recommends that rather than simply allowing these numbers to add context to the team’s strategies, you should respond to them more actively. If any metrics reveal that the team isn’t on track to hit their goals, devote part of the meeting to fixing this problem using the “Issues Solving Track.” This is a three-step mini-agenda you can use to quickly resolve issues: Identify the problem, discuss potential solutions, and assign someone to solve the problem during the upcoming week.)

Item #4: Strategize About Weekly Goals

Last, Harnish advises the team to use the bulk of the meeting to discuss strategy. Specifically, identify a narrow subgoal that will help you achieve your themed quarterly target, and open the floor for suggestions on how to accomplish it. For example, if your quarterly goal is to lower your manufacturing costs by 30%, at one weekly meeting you could brainstorm ways to reduce your transportation expenses. Limit yourself to discussing a narrow subtopic like this each week to give yourself the dedicated time needed to dive deeply into the topic at hand.

(Shortform note: In Working Backwards, Colin Bryar and Bill Carr argue that strategy meetings are most effective when participants have time to think deeply before presenting their ideas and thoroughly digest the ideas of others before responding. The authors recommend that rather than asking people to generate strategies in open discussion, you should require one presenter to research the topic at hand (for instance, a chosen subgoal) before the meeting and write a comprehensive document in which they argue in favor of a strategy. Then, for several minutes at the beginning of the meeting, all participants read copies of this document and think it over. This ensures that everyone has thought deeply about the topic before an open discussion.)