Book notes: Good to Great by Jim Collins

Some quick notes on some of my main takeaways (not necessarily the full set of key points, rather the ones that spoke to me) from Jim Collins’ great book – Good to Great. But seriously? You should just get the book and read it yourself. The writing style is totally accessible and the content is exhaustively researched and positively inspiring. Don’t settle for my secondhand renderings!

He (a professor at Stanford University’s Graduate School of Business) and his research team embarked on a multi-year project in order to understand whether a good company could become great or if, instead, that characteristic needed to be in the organization’s DNA from inception.

Table of contents

Selecting the companies to study

They looked for companies with the following pattern (as gleaned from the companies’ financial reports), which defined the transition from good to sustaining great:

  • [So-so company] Cumulative stock returns <= the general market for 15 years
  • [Becoming great] Followed by a transition period
  • [Staying great] Followed by cumulative stock returns >= 3 times the general market for 15 years

They also imposed some additional criteria in order to ensure that the resulting companies were not merely beneficiaries of good fortune (e.g. a rapidly growing industry) but rather possessed intrinsic characteristics which would result in greatness independent of industry. Namely: If the entire industry in which a G2G company operated demonstrated the above pattern then the company was dropped from consideration.

Then they chose a comparison company for each G2G company. The comparison company had to be in the same industry and have the same opportunities and resources as the G2G company had at the time of its transition. So there were 11 comparison companies. Additionally the team chose 6 companies that had made the transition (a short-term shift from ok-ness to greatness) but were unable to sustain that success. This group is referred to as the “unsustained comparisons.”

Research approach

The team collected all articles published on these companies and coded each such into categories such as: technology, strategy, leadership. They also interviewed executives during the time of transition. And they performed targeted analyses for the companies on their acquisitions, executive compensation, business strategy, corporate culture, layoffs, leadership style, financial ratios, management turnover, etc. Finally they took special care to identify “dogs that didn’t bark” — namely, certain phenomena that they expected to see demonstrated but which were not in fact born out by the research.

Some dogs that didn’t bark

  1. The idea of larger-than-life celebrity leaders. Often (91% of the time), G2G CEOs came from inside the company and did not fit the big-personality-CEO model.
  2. There were no systematic differences in executive compensation – between G2G and comparison companies.
  3. There were no major differences in strategy between G2G and comparison companies — all had some strategy which was reasonable.
  4. The G2G companies focused on what TO do as well as what NOT TO do. Comparison companies only focused on the former.
  5. The use or application of technology by a G2G company never caused a transition but instead was merely an accelerator. Moreover, no comparison company got blown away by a competitor’s use of technology. In all cases, the judicious or non-judicious use of technology either accelerated or decelerated (respectively) progress but wasn’t of itself the reason for the transformation.
  6. Similarly, no company became great as a consequence of M&A activity.
  7. G2G companies paid noticeably little attention to things like: managing change, motivating people, creating alignment. Under the right conditions, these problems go away (resolve themselves).
  8. The transition times for G2G companies were NOT marked by a specific campaign or initiative or effort on the part of the G2G company.
  9. G2G companies were not in great industries. Greatness, it turns out, is “largely a matter of conscious choice.”

So what leads to sustained greatness?

Below we will walk through the “primary concepts” that differentiated G2G companies from their less successful comparison companies. Each of the 6 primary concepts showed up in 100% of G2G companies and only 30% of comparison companies. For this reason, the authors argue that the identified concepts are key differentiators between OK-ness and sustained greatness. Moreover, the authors claim that these concepts are causative – that is, these concepts do not merely occur in great companies but actually lead to greatness. The concepts are:

  • Disciplined people
    • Level 5 leadership: leaders are self-effacing, quiet, shy, reserved. They demonstrate personal humility and professional will.
    • First Who Then What: first get the following thenfigure out what you’re going
      • The right people ON the bus
      • The wrong people OFF of the bus
      • The right people in the right seats
  • Disciplined thought
    • Confront the brutal facts (yet never lose faith)
    • The Hedgehog Concept – defining what is our one big thing; who are we; what are we about
      • Transcend the curse of competence
      • Just because X is your core business and you’ve been doing X for years… does NOT mean that you can be the best in the world at X. And if you cannot be the best in the world at your core business then your core business absolutely CANNOT form the basis of a great company…
  • Disciplined action
    • A Culture of Discipline
    • Technology accelerators: pioneer the application of selected technology

Chapter 2: Level 5 Leadership

Traits of a Level 5 leader:

  • Extreme personal humility combined with professional will
  • Self-effacing, quiet, shy, reserved, understated, humble, modest
  • Fierce resolve to do whatever is necessary to make the company great
  • Fanatically driven, incurable need to produce results
  • Ambitious for the enterprise, not for themselves
  • Set successors up for success
  • L5 leaders look out the window when apportioning credit and in the mirror when doling out blame

Examples of L5 leaders:

  • Kimberly Clark – Darwin Smith. Made decision in 1971 to sell the company’s paper mills and get out of its til-then core business of coated paper.
    • From 1951 to 1971, Kimberly Clark’s stock is 1/3 lower than its competitors’
    • From 1971 to 1991, Darwin Smith takes over and KC becomes leading paper-based consumer products company. Its stock returns are 4.1 times the market’s. It beats rivals Scott and Procter & Gamble.
  • Fannie Mae – David Maxwell led 9-year transformation. FM was losing $1MM/day when he started in 1981. Nine years later the company was earning $1MM/day.
  • Abbott Labs – George Cain. At time he became CEO, Abbott was in bottom 1/4 of pharmaceutical industry. He could not stand mediocrity in any form and was utterly intolerant of anyone who would accept the idea that “good is good enough.” Cain destroyed a key source of mediocrity – nepotism – even though he himself was an 18-year veteran (and hence had many long-time colleagues who were let go) and the son of a previous president of Abbott. From 1974 to 2000, shareholder returns beat the market 4.5 to 1.
  • Walgreens – Cork Walgreen. Took Walgreens out of the food service biz, which had been its core business, and focused Walgreens’ resources where it could be the best in the world. He was known for having stoic resolve, being quiet, dogged, simple, and for his sheer workmanlike diligence.

Note that bringing in a high profile “change agent” from the outside is negatively correlated with sustained transformation. 10 of 11 G2G CEOs came from INSIDE the company.

Chapter 3: First Who Then What

Expected to find that taking a company from good to great entailed first set a new direction then get people committed and aligned behind that new direction. Instead, it was the other way around. The G2G companies first got the right people on the bus then figured out where to go. Why would the latter recipe be the right one?

  1. If you begin with WHO, rather than WHAT, you can more easily adapt to a changing world. OTOH, if people jump on the bus because of where it’s going, what happens when you get down the road and need to change direction? Will you lose those people?
  2. If you have the right people on the bus the question of how to motivate and manage them goes away. They are self-motivated by an inner drive to produce the best results and be part of something great.
  3. If you have the wrong people, it won’t matter if you have the best strategy ever, you still won’t have a great company.
  4. At best, the model of “genius with a thousand helpers” lasts only as long as the genius is around (and sometimes not even that long) and hence is not a recipe for sustained greatness.

Examples of the above principles at work:

  • Wells Fargo CEO in 1970s – bank deregulation coming and massive change to the industry likely to follow. He didn’t know the right way to respond to all of this and so focused on hiring the best people he could find whenever and wherever they found them. B of A by contrast applied a “weak generals, strong lieutenants” model (ironically enough as an approach to retain top talent) which had the effect of indecisiveness and authoritarian rule. Single autocratic dictator who made all of the decisions (and hence the bank did not derive the benefit of the other minds in management).
    • The G2G companies cultivated talented executive teams and effective processes for deriving the full benefit of that amassed intelligence (namely, habits of group dialogue, debate, shared insights, …).
  • Fannie Mae’s David Maxwell refused to develop a strategy at FM until he got the right people on the bus – in spite of the fact that FM was losing a million dollars a day at that point.
  • Nucor – steel maker – put mills in farming towns in order to take advantage of local populations who had the farmers’ work ethic. Moreover, at Nucor, 50% of a worker’s compensation was tied to his team’s performance. They created an environment in which hard workers thrive. In hiring, Nucor placed greater emphasis on character attributes than on specific relevant experience – by asking questions such as: Who are you? Why did you make certain decisions in life?
  • Circuit City – Alan Wurtzel spent bulk of time getting the right people on the bus whereas his competitor (Cooper at Silo) focused on finding the right stores to buy.
  • Counter-examples: Jack Eckerd (genius for picking the right stores to buy, not focused on picking the right people to hire, like Cork Walgreen was), Singleton at Teledyne (achieved dream of becoming a great businessman, failed at building a great company), …

Other learnings:

  • No systematic pattern (relative to comparison companies) linking executive compensation to process of going from Good to Great. Observation: the right execs will do everything in their power to build a great company because they cannot imagine settling for less. Their moral code requires them to build excellence for its own sake.
  • These were rigorous cultures rather than ruthless ones. In G2G companies, they constantly applied exacting standards all up and down the hierarchy. The best people were made secure in the knowledge that they didn’t have to worry about their positions but instead could focus fully on their work.
  • The only way to deliver TO people who are achieving is NOT TO burden them with people who ARE NOT achieving.

How to be rigorous in hiring decisions?

  1. When in doubt, don’t hire. Keep looking.
    • The biggest throttle on growth for any great company is the ability to get and keep enough of the right people.
  2. When you know that you need to make a people change, ACT.
    • The best people don’t need to be managed. When you spend time/energy/attention thinking about how to improve a situation with the wrong person, you are taking away from focusing on making progress.
    • Hanging onto the wrong people demotivates the right ones. “Strong performers are intrinsically motivated by performance and when they see their efforts being impeded by carrying extra weight, they become frustrated.”
    • G2G companies churned people more quickly: people get off the bus in a hurry or stay a long time.
    • Questions when on the borderline with a hiring decision
      • Would you hire this person again?
      • If this person came to you and said he was leaving, would you feel terribly burdened or secretly relieved?
  3. Put your best people on your biggest opportunities (not on your biggest problems).
    • Managing problems: path to goodness
    • Building on opportunities: path to greatness

In closing: “But if we spend the vast majority of our time with people we love and respect – people we really enjoy being on the bus with and who will never disappoint us – then we will almost certainly have a great life…

Chapter 4: Confront the Brutal Facts

Kroger and A&P history

  • 1950s: A&P is largest retailer in the world; Kroger is an unspectacular grocery chain, about 1/2 the size of A&P
  • 1960s A&P falters; Kroger laying the foundations for transition
  • 1959 – 1973: Both chains lagging the market
  • 1974 – 2000: Kroger stock market returns were 10 times the market and 80 times Kroger’s

Both Kroger and A&P had all of their assets in traditional grocery stores in the 1950s. The difference was that, in response to lagging returns, Kroger attempted to find a path to improved returns and then heeded what it found, despite the fact that this required enormous capital investment and a “letting go” of its prior business model/approach. In particular, the findings (that both A&P and Kroger obtained) were that the American consumer was changing and the existing base of Kroger (and A&P) stores would not be able to satisfy that customer. While Kroger was confronting the brutal facts and their implications as well as making a plan for responding to those facts, A&P focused on preserving cash dividends and honoring the glorious memories of its past leaders (i.e. fiddling while Rome burned). Rather than take a disciplined approach, A&P lurched from one faddish strategy to the next, while Kroger deliberately made bold, sweeping changes in line with what customer research had found, which was that the old grocery store was going to become extinct; supercombo stores (where customers could get groceries plus) were the future; also, must be #1 or #2 in any given market or exit.

Learnings on disciplined thought:

  • Infuse the process with the brutal facts of reality. “When you start with an honest and diligent effort to determine the truth of the situation, the right decisions often become self evident.” Continually refine the path to greatness with the brutal facts of reality.
  • Must create a climate where the truth is heard and brutal facts are confronted.
    • Note also that if a leader is too charismatic, other employees focus on him rather than on the marketplace etc. The liabilities of a strong personality. Churchill took extra steps to make sure that he was always provided with the brutal facts of reality in spite of the fact that people might be intimidated by him. “Facts are better than dreams…” he said.
  • Holding out false hopes rather than confronting and embracing reality is demotivational.

How to create a climate where the truth is heard?

  1. Lead with questions, not answers. Ask questions of top team… debates, pushing, probing questions. They used to call Wurtzel (of Circuit City) “the prosecutor” because he would home in on a question and wouldn’t let go til he understood it.
  2. Engage in dialogue and debate, not coercion
  3. Conduct autopsies without blame. Bring up debacles, discuss openly, try to understand mistakes. Should be like a heated scientific debate where people are engaged to search for the best answers.
  4. Build red-flag mechanisms – things which enable disagreement with power. Used to ensure that information which should not be ignored bubbles up.
    • A good example of this is what Woolpert instituted at Granite Park – basically a system wherein the customers paid (for whatever service/product) what they felt was right. In this way, poor service/product/experience would directly and immediately hit the bottom line, which would ensure it got noticed. “Short pay acts as an early warning system…”

The Stockdale Paradox: Unwavering faith amid the brutal facts

  • “In confronting the brutal facts, G2G companies left selves stronger and more resilient. There is a sense of exhilaration that comes in facing head on the hard times…”
  • Hardiness research: of the people who suffered serious adversity…
    • Some became permanently dispirited
    • Some got their lives back to normal
    • Some used the experience as a defining event that made them stronger
  • Fannie Mae: the brutal fact is that the interest rate spread (between the rates that FM issues for its loans AND the rates that FM itself has to pay on the capital it has borrowed) was such that FM was earning a 9% return but having to pay a 15% return. FM looked hard at this truth and concluded that it needed to become the best in the world at managing mortgage interest risk. Thus, FM created a new business or revenue model such that it was less dependent on the vagaries of the Fed (i.e. fluctuations in interest rates).
  • Stockdale: highest ranking military officer at Hanoi Hilton. “I never doubted that not only would I get out bu also that I would prevail in the end…” Do not entertain false optimism (e.g. “We are getting out by Christmas!”), it only demoralizes when it is shown to be BS. Rather be relentlessly disciplined at confronting the most brutal facts of their current reality.

Chapter 5: The Hedgehog Concept

Name comes from old fable whose moral is that the fox knows many little things, the hedgehog knows one big thing, the latter is better. The fox pursues many ends at the same time, sees the world in all of its complexity but fails to integrate its thinking into one overall concept or unifying vision. The hedgehog by contrast simplifies a complex world into a single organizing idea, a basic principle or concept that unifies everything. Anything that does not relate to the hedgehog’s vision is not relevant.

  • How this relates to business? G2G companies develop their hedgehog concept and implement it with fanatical consistency. They develop a simple concept (comprised of three parts, discussed below) and use that as a frame of reference for all decisions.
    • Note that defining your hedgehog concept is not so much a CREATIVE process as a DISCOVERING process. That is, you’re not creating some vision to aspire to or some self you want to be. Rather, you are uncovering what actually makes you tick, what you’re actually very talented at, etc.
    • Hedgehog concept: the UNDERSTANDING of what you can be best at
  • What we get from this is that it’s equally important to know what you are as it is to know what you’re not.
    • There is a humility in seeing yourself for who you are and what you can do and letting go of who you’re not and what’s beyond you… Maturity; honesty
    • Letting go of your history/experience/competencies in order to embrace your destiny
    • “Just because something is your core business – just because you have been doing it for years or perhaps even decades – does not necessarily mean that you can be the best in the world at it.” And it should not be your core business if you cannot be the best in the world at it.
    • The curse of competence
    • “Focusing solely on what you can potentially do better than any other organization is the only path to greatness.”
  • Risks when do not have a well developed hedgehog concept
    • Setting goals based on bravado vs rooted in deep self understanding
    • Mindless focus on growth for growth’s sake
  • Prehedgehog state: going through the fog

G2G examples

  • For Walgreens, this was “profit per customer visit”. They could use this unifying vision to guide decisions about how to allocate resources (which stores to buy) and how to make progress. If you don’t have a clear vision of which variables you are optimizing for, you can fall into the trap of optimizing for too many different things and failing to fully optimize for any of them (i.e. scattering your efforts/energies).
    • Stuck to cities where could implement this concept. (Contrast: Eckerd which acquired any and all stores that were being offered at good value, regardless of location, and without any particular unifying concept.)
  • For Wells Fargo, they determined that their simple unifying concept was all about “running a bank like a business” and focusing on the Western US. This enabled WF to make decisions such as pulling the plug on international operations (allowing CitiGroup to be the best at global banking).
  • By 1964, Abbott had lost the opportunity to be the best pharmaceutical company. Merck had a far superior research engine and too much of a head start. So Abbott acknowledged that it could not be the best at developing new pharmaceuticals. The company determined that they could be the best at creating products that contribute to cost-effective health care.

How do you discover your hedgehog concept? By answering these 3 questions…

  1. What can you be the best in the world at? “To figure out with egoless clarity what they can be the best at…”
  2. What drives your economic engine?
    • How can you effectively generate sustained and robust cash flow and profitability?
  3. What are you deeply passionate about? This must be *discovered*, rather than imposed or aspired to. It’s a heart and soul and guts question. What do you care about even if you’re not only not rewarded for it but also actually punished for it. What would still matter to you despite this cost?

Developing insight into your economic engine

If you could pick 1 ratio to increase over time… what X would have the greatest and most sustained impact? E.g. Walgreens switched focus from “profit per store” to “profit per customer visit”. This enabled Walgreens to focus on a strategy of convenience for the customer – which meant that they might have a high density of Walgreens stores within a small radius. The effect of which is that the profit of each of those individual stores might be lower (than if there were only 1 of them in that region) however they could still maximize profit per customer visit. For Fannie Mae, it was profit per mortgage risk level, not per mortgage.

How to develop your (organization’s) hedgehog concept?

Developing the hedgehog concept is inherently iterative. For G2G companies, it took 4 years on average. The majority of G2G companies pre-transition were not the best at anything and showed no prospects of becoming so.

Get the right people engaged in vigorous dialogue and debate. Have a Council (5-12 people, representing a range of perspectives, where each has deep experience in some aspect of your business or its climate) repeatedly ask and discuss and refine answers to the 3 basic questions.

Chapter 6: A Culture of Discipline

A culture of discipline with an ethic of entrepreneurship.

  • Set your objectives for the year – never change what you measure yourself against.
  • Use rigor and discipline to enable creativity and entrepreneurship. Financial discipline as a way to provide resources for the really creative work.
    • Abbott’s Responsibility Accounting – in which every item of cost/income is identified with a single individual who is responsible for that item.
  • Discipline in terms of focus on and adherence to the hedgehog concept. Say “no” to opportunities that fall outside of your 3 circles (from the hedgehog concept). Disciplined diversification (anything that falls outside of our hedgehog concept, we will not do). Freedom and responsibility within a framework for a consistent system.
    • “The fact that something is a ‘once-in-a-lifetime opportunity’ is irrelevant if it doesn’t fit within the three circles.”
  • Discipline todo what it takes to be the best then continually seek improvement.
    • Dave Scott (triathlete) rinsing his cottage cheese: one small step to make him better.
  • Difference between a culture of discipline and a single leader at the helm who personally enforced discipline throughout the organization.

Comparison companies lacked the discipline to understand their 3 circles OR lacked the discipline to stay within them. Bethlehem Steel failed because it was a culture wherein people focused their efforts on negotiating the nuances of an intricate social hierarchy, not on customers, competitors, or changes in the external world.

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