Good to Great by Jim Collins
READ: January 4, 2016
Good to Great is a macro analysis of differentiating factors identified in companies that made the "good-to-great" leap (defined as a period of fifteen-year cumulative stock returns at or below the general stock market, punctuated by a transition point, then cumulative returns at least three times the market over the next fifteen years), wrapped in a useful framework that any organization can apply.
While the authors clearly made a strong effort to make the research process scientific, at times I felt like the book veered too far from facts and into the concepts invented by the authors to support their framework. Like a typical HBR article, this book sometimes suffers from too much labeling and framework-itization of simple facts. For example, the "Hedgehog Concept" and "Stockade Paradox" were catchy terms named after analogies the authors used to tie together fairly simple business concepts, and potentially took away from the core facts and concepts themselves.
Regardless, the concepts in the book are highly valuable and the fact that they're supported by extensive research (rather than a single person's account of experiences, as many business books are) is powerful.
Here were the concepts that were most helpful to me:
- Level 5 Leadership - CEO's of great companies were not the loud, larger-than-life, wand-waving figures you might imagine. On the contrary, they were quiet, humble, and intensely driven.
- Hedgehog Concept - Great companies figured out 1) what they could be the best in the world at, 2) what they were passionate about, and 3) what their key profit driver was, and then focused on only things that fit into all three areas.
- Technology - Great companies were very discriminate in their application of technology to accelerate momentum, not create breakthroughs. If technology fits directly with your hedgehog concept, you need to become a pioneer in the application of that technology. If not, all you need is parity or none at all.
- Letting people go - "The moment you feel the need to tightly manage someone, you've made a hiring mistake."
- Stop doing lists - We typically try to build momentum by doing more. Great companies equally focused on what they should stop doing, whether it was eliminating title-creep or not channeling resources into things that fell outside their "Hedgehog Concept".
- Budgeting - Great companies use budgeting as a process to determine which areas should be fully funded and which should not be funded at all (versus spreading budget around to too many activities and not fully funding key areas).
- Acquisitions - Great companies used acquisitions as an accelerator of momentum, not a creator of it. Comparison companies frequently tried to create breakthroughs with large, misguided acquisitions.
"Good-to-great companies" = companies which had fifteen-year cumulative stock returns at or below the general stock market, punctuated by a transition point, then cumulative returns at least three times the market over the next fifteen years (and distinguished from the industry as a whole).
Every concept in the "good-to-great" framework showed up as a change variable in 100 percent of the good-to-great companies and in less than 30 percent of the comparison companies.
Good-to-great companies were not necessarily in great industries. Some were in terrible industries.
Level 5 Leadership
Level 5 leader = an individual who blends extreme personally humility with intense professional will
Every good-to-great company had Level 5 leadership during pivotal transition years.
Level 5 leaders are ordinary people who quietly produce extraordinary results:
- Modest and understated (eg. don't land on magazine covers), whereas comparison companies had leaders with gargantuan egos that contributed to the demise or continued mediocrity of their companies.
- Fanatically driven, infected with an incurable need to produce results. Willing to do whatever it takes to make the company great.
- Cannot stand mediocrity in any form and was intolerant of anyone who would accept the idea that good is good enough.
- Apportion credit to factors outside themselves when things go well. Take responsibility themselves when things go poorly.
One of the most damaging trends in recent history is the tendency (especially by boards) to select dazzling, celebrity leaders. Going for a high-profile outside change agent is negatively correlated with a sustained transformation from good to great
To find Level 5 leaders, look for situations where extraordinary results exist but where no individual steps forth to claim exes credit.
First who... then what
At the beginning of the research they expected that the first step in taking a company from good to great would be to set a new direction, and then to get people committed and aligned. What they found was the opposite.
Good-to-great leaders first get the right people on the bus (and the wrong people off the bus) *before8 you figure out where to drive it.
This strategy is based on three truths:
- If you begin with the "who" rather than "what", you can more easily adapt to change. If people join the bus primary because of where it is going, what happens if you need to change direction? But if people are on the bus because of who else is on the bus, then it's much easier to change direction.
- If you have the right people on the bus, the problem of how to motivate and manage people largely goes away. The right people don't need to be tightly managed or fired up; they will be self-motivated by the inner drive to produce the best results and to be part of creating something great.
- If you have the wrong people, you won't have a great company no matter what.
Comparison companies often had a "genius with a thousand helpers" model where a visionary CEO sets the vision then enlists a crew of highly capable helpers to make the vision happen. This model fails when the genius departs.
"First who" is a simple idea, but very difficult idea to execute well. The key point is not just the idea of getting the right people on the team. The key point isn that "who" questions come before "what" decisions-before vision, strategy, etc.
For example, Fannie Mae's CEO David Maxwell held off on developing a strategy until he got the right people in place while the company was losing $1 million every single business day. He interviewed all of the officers and said "Look, this is going to be a very hard challenge... If you don't think you're going to like it, that's fine." Maxwell made it clear that there would only be seats for A players who were going to put forth an A+ effort, and if you weren't up for it, you had better get off the bus now.
"First who" is hard when there is a shortage of outstanding people. Don't compromise at the top levels of your organization. Putting the wrong people in key positions is the single most harmful step you can take in a journey from good to great. For lower levels of your organization, widen your definition of "right people" to focus more on the character attributes and less on specialized knowledge.
Rigor in people decisions
To be rigorous means consistently applying exacting standards at all times and at all levels, especially in upper management. Here are three good practices:
When in doubt, don't hire – keep looking
Corollary: A company should limi t its growth based on its ability to attract enough of the right people.
"Packard's Law" - No company can grow revenues consistently faster than its ability to get enough of the right people to implement that growth and still become a great company.
When you know you ned to make a people change, act
Corollary: First be sure you don't simply have someone in the wrong seat.
The moment you feel the need to tightly manage someone, you've made a hiring mistake. We've all experienced the scenario where we have a wrong person on the bus and we know it. Yes we wait, we delay, we try alternatives, we give a third and fourth chance, we hope that the situation will improve, we invest time in trying to properly manage the person, we build little systems to compensate for his shortcomings, and so forth. But the situation doesn't improve. When we go home, we find our energy diverted by thinking about that person. We continue to stumble along until the person leaves on his own (to our great sense of relief) or we finally act (also to our great sense of relief). Meanwhile, our best people wonder, "What took you so long?".
I've been here!
If we're honest with ourselves, the reason we wait too long often has less to do with concern for that person and more to do with our own convenience.
Good-to-great companies did not have more or less management churn than comparison companies. But good-to-great companies did exhibit a bipolar pattern of churn – people either stayed on the bus for a long time or got off the bus in a hurry.
Good-to-great leaders invested substantial effort in determining whether that had someone in the wrong seat or whether they had the worn person on the bus entirely.
Instead of firing honest and able people who are not performing well, it is important to try to move them once or even two or three times to other positions where they might blossom.
Use two key questions to know if someone should get off the bus:
- If it were a hiring decision, would you hire the person again?
- If the person came to tell you that he or she is leaving to pursue an exciting new opportunity, would you feel terribly disappointed or secretly relieved?
Somewhat similar to Deloitte's performance review survey: https://hbr.org/2015/04/reinventing-performance-management
Put your best people on your biggest opportunities, not your biggest problems
Corollary: If you sell off your problems (eg. a business unit gets shut down), don't sell off your best people.
Managing problems can only make you good, whereas building your opportunities is the only way to become great.
Members of good-to-great teams argued and debated, sometimes violently, in pursuit of the best answers, yet, on the other hand, unified fully behind decisions. They tended to become and remain friends for life.
Research found no pattern linking executive compensation to the process of going from good to great. The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place and to keep them there.
Confront the Brutal Facts (yet never lose faith)
Good-to-great companies continually refine their path to greatness 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. It is impossible to make good decisions without infusing the entire process with an honest confrontation of the brutal facts.
Strong, charismatic leaders can all too easily become the de facto reality driving a company. The moment a leader allows himself to become the primary reality people worry about, rather than reality being the primary reality, you have a recipe for mediocrity, or worse.
Leadership must create a climate where the truth is heard and the brutal facts confronted. Below are four basic practices:
- Lead with questions, not answers. "So, what's on your mind?", "What should we be worried about?", "Can you help me understand?"
- Engage in dialogue and debate, not coercion. All good-to-great companies had a penchant for intense dialogue to find the best answers. Phrases like "loud debate", "heated discussions", and "healthy conflict" peppered the interview transcripts from all the companies.
- Conduct autopsies, without blame, when things wrong.
- Build red flag mechanisms that turn information into information that cannot be ignored.
Stockale Paradox: Retain absolute faith that you can and will prevail in the end, regardless of the difficulties, AND, at the same time confront the most brutal facts of your current reality, whatever they might be.
One of the primary ways to de-motivate people is to ignore the brutal facts of reality.
The Hedgehog Concept
In his famous essay, "The Hedgehog and the Fox", Isaiah Berlin divides people into two basic groups: foxes and hedgehogs. Foxes pursue many ends at the same time and see the world in all its complexity. They are "scattered or diffused, moving on many levels," never integrating their thinking into one overall concept or unifying vision. Hedgehogs simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything.
Good-to-great companies are more like hedgehogs–simple, dowdy creatures that know "one big thing" and stick to it. The comparison companies are more like foxes–crafty, cunning creatures that know may things yet lack consistency.
Good-to-great companies founded their strategies on deep understanding along three key dimensions, and translated this understanding into a simple concept (Hedgehog Concept) that guided all of their efforts.
A Hedgehog Concept is a simple concept that flows from deep understanding about the intersection of the following three circles:
- What you can be the best in the world at .
- What drives your economic engine.
- What you are deeply passionate about.
You can't just go off-site for two days and come up with a Hedgehog Concept. It took about four years on average for the good-to-great companies to clarify their Hedgehog Concepts. It's an iterative process.
Understanding what you can be the best in the world at
Wells Fargo: "We just took a hard-nosed look at what we were doing and decided to focus entirely on those few things we know we could do better than anyone else, not getting distracted into arenas that would feed our egos and at which we could not be the best."
A Hedgehog Concept is not a goal or strategy to be the best. It is an understanding. Just because something is your core business does not necessarily mean that you can be the best in the world at it.
Every good to great company gained deep understanding of this principle and pinned their futures on allocating resources to those few arenas where they could potentially be the best (examples on pg. 101). In contrast, comparison companies stuck to businesses at which they were good but could never the best, or worse, launched off in pursuit of easy growth and profits in arenas where they had no hope of being the best.
Insight into your economic engine – your denominator
If you could pick one and only one ratio–profit per x–to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?
- Fannie Mae - profit per mortgage risk level
- Wells Fargo - profit per employee
- Gillette - profit per customer
- Walgreens - profit per customer visit
Understanding your passion
You can't manufacturer passion, you can only discover what ignites your passion and the passions of those around you.
You don't have to be passionate about the mechanics of the business. eg. Fannie Mae people weren't passionate about the mechanics of packing mortgages into market securities, but they were terrifically motivated by the idea of helping people of all classes, backgrounds, and races realize the American dream of owning their home.
For the comparison companies, the exact same world that had become so simple and clear to the good-to-great companies remained complex and shrouded in mist. Why? First, the comparison companies never asked the right questions to develop their Hedgehog Concept. Second, they set their goals and strategies more from bravado than from understanding.
eg. over two thirds of the comparison companies displayed an obsession with growth without the benefit of a Hedgehog Concept.
A Culture of Discipline
Bureaucratic cultures arise to compensate for incompetence and lack of discipline, which arise from having the wrong people on the bus in the first place. If you get the right people on the bus, you don't need stultifying bureaucracy.
A culture of discipline requires disciplined people who engage in disciplined thought and who then take disciplined action.
The single most important form of discipline for sustained results is fanatical adherence to the Hedgehog Concept and the willingness to shun opportunities that fall outside the three circles, even "once-in-a-lifetime" opportunities.
A great company is much more likely to die of indigestion from too much opportunity than starvation from too little.
I can relate to this...
"Stop doing" lists
We have ever-expanding "to do" lists, trying to build momentum by doing more. And it rarely works. Those who built good-to-great companies made as much use of "stop doing" lists as "to do" lists. They displayed a remarkable discipline to unplug all sorts of extraneous junk.
Example: Darwin Smith of Kimberly-Clark unplugged titles because he saw "title creep" as a sign of class-consciousness and bureaucracy. He saw increasing layers as the natural result of empire building so he unplugged them with a policy that if you couldn't justify the need for at least fifteen people reporting to you, then you would have zero people reporting to you.
Good-to-great companies institutionalized the discipline of "stop doing" through budgeting by making it a discipline to decide which arenas should be fully funded and which should not be funded at all. In other words, the budget process is not about figuring out how much each activity gets, but determining which activities best support the Hedgehog Concept and should be fully strengthened and which should be eliminated entirely.
Good-to-great companies displayed remarkable courage to channel their resources into only one or a few arenas.
The most effective investment strategy is a highly un-diversified portfolio when you are right. For a company, "being right" means getting the Hedgehog Concept"; "highly undiversified" means investing fully in those things that fit within the three circles and getting rid of everything else.
During 2001 Internet bubble it looked as though Drugstore.com would threaten Walgreens. Despite all the buzz, Walgreens took its time ("We're a crawl, walk, run company") and eventually launched online features that would accelerate their momentum. Their stock nearly doubled that year, while Drugstore.com continued to accumulate massive losses.
Walgreens didn't just adopt technology for the sake of technology or in the fearful reaction to falling behind. No, it used technology as a tool to accelerate momentum after hitting breakthrough and tied technology directly to its Hedgehog Concept of convenient drugstores increasing profit per customer. Walgreens remained resolutely clear: its Hedgehog Concept would drive its use of technology, not the other way around.
When used right, technology is an essential driver in accelerating momentum. The good-to-great never began their transition with pioneering technology, for the simple reason that you cannot make good use of technology until you know which technologies are relevant. 80 percent of the good-tog-erat executives interviewed didn't even mention technology as one of the top five factors in the transition.
Good-to-great companies avoid technology fads and bandwagons, yet become pioneers in the application of carefully selected technologies. How do good-to-great organizations think differently about technology? They asked the question:
Does technology fit directly with your Hedgehog Concept? If yes, then you need to become a pioneer in the application of technology. If no, then ask, do you need this technology at all? If yes, then all you need is parity. If no, then the technology is irrelevant, and you can ignore it.
If a technology didn't fit squarely within their three circles, they ignore the hype and fear and just go about business with equanimity. However, once they understand which technologies are relevant, they become fanatical and creative in the application of those technologies.
How a company reacts to technological change is a good indicator of its inner drive for greatness versus mediocrity. Good-to-great companies rarely talked about "competitive strategy" or defining their strategies in response to what others were doing. They talked in terms of what they were trying to create and how they were trying to improve relative to an absolute standard of excellence. Great companies respond with thoughtfulness and creativity, driven by a compulsion to turn unrealized potential into results; mediocre companies react and lurch about, motivated by fear of being left behind.
The Flywheel and the Doom Loop
Despite what the media portrays, good to great comes about by a cumulative process–step by step, action by action, decision by decision, turn by turn–that adds up to sustained and spectacular results. Good-to-great companies had no singular event or defining moment during their transformations. Those inside good-to-great companies were often unaware of the magnitude of their transformation until after the fact.
See quotes about this on pg. 170
Instead of trying to use words to "create alignment", "motivate the troops", or "manage change", use small, tangible accomplishments as a way of motivating and aligning people.
Comparison companies sought after one single defining action after another, failing to build sustained momentum.
Misguided use of acquisitions
Peter Drucker once observed that the drive for M&A comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend your day than doing actual work.
Good-to-great companies used acquisitions as an accelerator of momentum, not a creator of it. Comparison companies frequently tried to create breakthroughs with large, misguided acquisitions.
Bad BHAGS are set with bravado; good BHAGS are set with understanding.