Key Points
- “Level 5 Leaders” - leaders who have both “personal humility” and “professional will”. These are not rock-star leaders whose companies go into decline when they move on. They are diligent and hard working - more bite than bark. Celebrity leaders often work for a time, but appear to be damaging in the long run, because they don’t create sustained results.
- Get the right people on the bus - that has to happen before the “what” decisions are taken. That can change if you have the right people, but the wrong people will certainly make the enterprise fail. You may just have the right people but in the wrong positions!
- You must always be willing to “confront the brutal facts”. Don’t ignore reality in favour of what your hopes reflect it to become. Only by having accurate information can you achieve success.
- The “Hedgehog Concept” means having a simple, extremely clear concept (BHAG) of what the business is. That business is something they can:
- Make money,
- People are passionate about, and
- We can be the best in the world at
These are also
known as “The Three Circles”
- A culture of self-discipline is critical, because it creates an environment where people work within a defined system, and yet, because the confines of the system are known, gives them more freedom to act within that system.
- Technology is an accelerator, not an agent of change. Good companies use it to execute better, but it won’t save a mediocre company.
- “The Flywheel” refers to the idea of momentum - keep pushing in one direction and you’ll build up a lot of it that will help you to overcome obstacles. Momentum is built a little bit at a time - it’s not a dramatic,
- revolutionary change, but constant, diligent work.
Summary
The idea that sparked this book was to answer questions
about how good companies might become great companies, and how they went about
doing so.
Methodology
The study looks at companies from 1965 to 1995, looking for
those that, for 15 years, either tracked or underperformed the stock market,
followed by a transition, and subsequently returning at least 3 times the stock
market for at least 15 years. The goal was to eliminate “flash in the pan”
success from the results. Further filtering was performed in order to ensure
that companies also outperformed their industries, so as not to include
spurious results showing entire industries that grew by leaps and bounds in a
given period. Eleven companies were located that matched these criteria, and
were studied in depth, and compared to competitors in their fields.
The companies studied were:
- Abbot Laboratories
- Circuit City
- Fannie Mae
- Gillette
- Kimberly-Clark
- Kroger
- Nucor
- Philip Morris
- Pitney Bowes
- Walgreens
- Wells Fargo
Level 5 Leaders
All the companies studied had what Collins describes as
“Level 5 Leaders”. Despite sounding like something from a space-alien
worshiping cult, what the term refers to is an individual who is very humble on
a personal level, but who possesses a great deal of drive and desire to
succeed, where “success” is not personal, but defined by creating something
great that will outlast their time at the helm. These are people with an
unwavering will and commitment to do what is necessary to drive their
organization to the top. Most of the good to great executives discussed luck as
an important factor in their success. Level
5 leaders, are, in any case, the kind of people who do not point to themselves
as the cause for an organization’s success. The chapter closes with a
discussion of whether Level 5 Leaders are born, or made, with the conclusion
that many people probably have the kernel of abilities and attitude necessary
to attain that status.
First Who … Then What
During the transformation from good to great, rather than
concern themselves first with the “what” - products, direction, strategy - the
companies studied ensured they had the right people “on the bus” before
anything else. By having a strong team, these companies avoided the pitfall of
the “lone genius” CEO. For example, think what would happen to Apple’s share
price were something to happen to Steve Jobs. “Great” companies are those that
have a very solid foundation, and don’t depend on the brilliance of any one
person.
The research indicated that compensation did not correlate
at all with the “good to great” process. No particular compensation scheme
appeared to be advantageous.
Also important was that, while the companies were “tough”
places to work, they were because of the general high quality and hard-working
mindset, not because of ruthless management. Some practical tips for how to be
rigorous:
- Don’t hire someone unless you’re %100 sure that they’re the right person. It’s better to wait and get someone that you know is a good fit.
- Once you realize you need to fire someone, don’t put it off. Do it quickly and fairly, but do it and be done with it, rather than put it off.
- Give good people good opportunities, rather than the biggest problems. Fixing problems makes you good, but taking advantage of the right opportunities can make you great.
Good to great teams were mostly composed of people who had
a good sense of balance with the rest of their lives - family, church, and so
on. Of course, they had a deep commitment to their companies, but not one that
blinded them to the other important things in their lives.
Confront the Brutal Facts
One of the key factors in the success of the great
companies was a series of good decisions. The good decisions flowed from the
fact that they all made a consistent and thorough effort to confront reality,
internalizing the facts relevant to their market. Having lofty goals can be
good, but you can never lose sight of what the reality is on the ground, no
matter how much you will it to be different.
In a large organization, where it’s impossible to
personally poke your nose in all corners of the company every day, it is
crucial to create a climate where honesty is valued and honoured. If people
aren’t telling it like it is, those at the top may not realize the truth until
too late. Some tips to create this kind of climate:
- It’s often better to ask questions rather than dispense “answers”.
- Encourage healthy debate. It has to be real debate, not a show put on to make people feel included. It should also not just be argument for the sake of argument - reach a conclusion and move on.
- When things go wrong, investigate to avoid repeating the mistake, instead of assigning blame. If people are too worried about protecting themselves, it becomes difficult to honestly analyse and learn from failures.
- Create mechanisms, “red flags” that allow people to communicate problems instantly and without repercussions, and in a way that cannot be ignored.
Amidst these “brutal facts” that must be faced, you must
also have faith in your final goal. By maintaining this vision, and keeping
your ear to the ground, it won’t be necessary to motivate people - if you’ve
got the right people, they’ll be motivated of their own accord.
The Hedgehog Concept
The “hedgehog concept” refers to a parable of a hedgehog and
a fox [Isiah Berlin], where the fox knows many things, but the
hedgehog knows one big thing. The good to great companies were by and large
built by “hedgehogs” - this doesn’t mean stupid - au contraire - it just means
that they were able to focus on one big important thing that made their
companies great. Sometimes it takes real genius to see through all the clutter
and grab the one, simple, unique thing that gives you the advantage.
The “three circles” is an idea regarding how to find your
“hedgehog concept”: think of three interlocking circles, representing 1) what
you are passionate about, 2) what you can make money at, and 3) what can you be
the best at. At the intersection of these three things lies the winning target.
If you can bring all three things to bear, you have found a way to excel. Learn
to realize, as well, what you will never be the best at - those are things you
must avoid, if possible.
The economics of various industries varied widely, but
the good great companies were winners, even within industries that weren’t
rising stars. One consistent rule of thumb is to identify a ratio, profit per
X, (where X could be customer, web site user, per unit sold, per employee etc…)
and focus on that. Sometimes it may not be obvious.
Passion, on the other hand, does not come from executive
rah-rah sessions with employees, but by doing things that make people
passionate on their own. Passion isn’t something that can be forced on people,
it has to come from a mission that they truly believe in, that’s more than just
a paycheck.
Another practical suggestion is to create a “Council”, of
between 5 to 12 people, to discuss and gain insights into the organization. It
should meet regularly, not a one-time group. Its members should bring to the table
a deep understanding of some portion of the firm. They need to freedom to speak
their minds, and always have the respect of the other Council members. The
Council exists to help the chief executive, not reach a consensus. It is an
informal group, in the sense that it is not spelled out in official documents
or org charts.
Culture of Discipline
Great companies have both an entrepreneurial spirit and a
sense of discipline. They are both necessary - without the drive to try new
things, and some degree of independence, a company becomes a rigid, stifling
hierarchy. Without some sense of discipline, things begin to break down as the
company grows. The best companies have both latitude for individual action, as
well as a culture of disciplined behaviour. This begins, once again, with the
right people. It’s useless trying to create rules to force the wrong people to
behave correctly - it simply won’t work. Instead, you need to find people who
have an innate sense of self-discipline that doesn’t come from above. There is
a big difference between having a “tyrant” that enforces a culture of
discipline by fear, and finding people who naturally adhere to a disciplined
approach. The former will disintegrate when the leader moves on, the latter
creates a lasting system.
One helpful approach to discipline is to have a “stop
doing” list. Stop doing the things that aren’t central to your business. Stop
doing the things that are just clutter, but even more importantly, stop doing
even things that might be seen as important, if they are not in your “three
circles”.
Technology
“Great companies adapt and endure” - technology is not a
differentiator in and of itself, but rather something that enhances great
companies. They use it to further increase their leverage, in a conscious,
directed way, rather than rushing to embrace it for the sake of its newness.
Technology won’t light a fire where there is none, but where there is already
good momentum, judicious use of technology can help accelerate it. Technology
is an enabler of change, not the cause of it - but the “people factors” must be
in place before application of technology will do any good. Technology as a reaction
- to the latest fashion, to the competition - was not what was found in great
companies. These companies possess a drive all their own that pushes them to be
the best in their chosen field, and picking the right technology is a natural
part of that.
The “Flywheel” and “Doom Loop”
These two concepts represent positive and negative
momentum. A flywheel is a heavy wheel that takes a lot of energy to set in
motion - to do so usually requires constant, steady work, rather than a quick
acceleration. Great companies’ transformations were like this as well. There
was no magic recipe or no ‘aha’ moment when everything changed. Rather, with
everything in place, lots of hard work slowly but steadily got the great
companies going faster and faster, with a lot of momentum. Once it’s in motion,
all that stored energy tends to keep it moving in the right direction.
Conversely, the “doom loop” is the vicious circle that
unsuccessful companies fall into, rushing first in one direction, then another,
in the hope of creating a sudden, sharp break with the past that will propel
them to success. Some attempt to do this through acquisitions, others through
bringing in a new leader who decides to change direction completely, in a
direction incompatible with the company. The results are never good. The
difference between the two approaches is characterized by the slow, steady,
methodical preparation inherent in the flywheel, as compared to the abrupt,
radical, and often revolutionary, rather than evolutionary changes within the
company.
Built to Last
The results from this book were obtained without regards to
Collins’ earlier work, Built to Last,
but when all was said and done, Good to Great is what has to happen before a
company becomes Built to Last. Much of what is present in Good to Great was
present during the creation by their founders of the Built to Last firms.
Companies that have endured have a raison d’être beyond simply making money -
they have distinguishing and unique characteristics, goals and ways of
operating that go beyond a simple desire to make money. These core values are
preserved, while tactics change continuously to deal with an restless,
tumultuous world that never stops.
The “Big Hairy Audacious Goal”, a concept introduced in Built
to Last can be either good (as motivation, something to pursue), or bad (if
it’s impossible or a bad fit). Good BHAGs are those formulated from a deep
understanding, whereas bad ones come from brash recklessness without regard for
the actual values and capabilities of the company.
Why greatness?
Because it’s not really that much harder to be great than
good, and if you’re not motivated to greatness, perhaps you should consider
doing something else where you are.
Notes
Interestingly, CEO salaries don’t seem to be a major factor
in terms of their correlation with “good to great” companies.
