Good to Great: Why Some Companies Make the Leap... and Others Don't

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 must always be willing to “confront the brutal facts”. Don’t ignore reality in favor 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 of what their business is. That business is something they can

    1. Make money at
    2. Be passionate about, and
    3. 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.

     

     

     

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Good to Great: Why Some Companies Make the Leap... and Others Don't
 

Author: Jim Collins
HarperBusiness, 2001 

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:

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 [and perhaps cynical readers of The Black Swan will agree with that assessment more than the factors Collins cites - davidw]. 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 knowis 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 honored. 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 analyze 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, 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 behavior. 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 preperation 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.

Links

http://www.jimcollins.com/

Detailed criticism of the book: Why “Good to Great” Isn’t Very Good


Comments (11)

Milton
Said this on 2-4-2012 At 10:42 am

I couldn’t help but feel that this book is a bit overrated. Perhaps it’s the faddish sounding terminology, or something else. I can’t quite put my finger on it, but it all sounds a bit phoney.

- milton

Bryan
Said this on 2-10-2012 At 12:23 pm

Milton, I agree with you, I think hyperbole sums it up. But I think that is the status quo in any book on business, most buisness authors are attempting to brand themselves and establish there semantics as industry standard. While that is true I have been blown away by the true priciples that seem to be common amongst all the great companies. A few years back I was involved in a startup that went from $30k a month to $500k a month almost overnight, 3 years later the the company was bankrupt. This book nails exactly why the company I worked for failed. Inversly I started my own company 7 years ago and have done much better but there is much room for imporvement. Good to Great principles are not new but seeing them applied collectively in great companies really helps me see what I need to do better. Additionally it seemed to confirm beliefs I have always had but have never validated. I think if you are a business owner this is a necessary read.

jaxsonsmith
Said this on 2-4-2012 At 10:43 am

I would have to agree, but there was a lot of good information. It only confirmed to me more that I need to what I love, not what will make the most money.

davidw
Said this on 2-4-2012 At 10:44 am

What information did you like specifically? I found it a nice read, but found the book to be very “summarizeable”, in the sense that there wasn’t that much information for the volume, and I was, I felt, able to capture a lot of it fairly easily for this summary.

A few of his conclusions are interesting, and maybe a little bit counterintuitive, such as leaders who created success that outlasted their tenure (I’m very curious to see what will become of Apple once Steve Jobs leaves for whatever reason), but by and large I didn’t find this to be a particularly enlightening read.

jaxsonsmith
Said this on 2-4-2012 At 10:45 am

I enjoyed mostly the fact that it talks more about do what you are passionate about, not just what pays the most. I think a lot of people are stuck in crappy jobs because it pays well. As opposed to doing something that makes them happy.

The steve jobs point is interesting, as you know steve jobs was a founder. And apple was doing really well. Then he left apple and all of the sudden microsoft and pc’s impacted the market heavily. Now that steve jobs is back, mac is the new computer to buy. Almost contrary to the book about legacies.

Jaxson Smith

davidw
Said this on 2-4-2012 At 10:46 am

It seems as if Fannie Mae wasn’t quite as “great” as it was made out to be, what with the US government close to bailing it out.

rich
Said this on 2-4-2012 At 10:46 am

I have to agree with Jaxson, doing what you love is probably the most important concept I have learned in my life.

mgolden
Said this on 2-4-2012 At 10:47 am

Seems like Circuit City wasn’t such a great outcome either.

Struck me as a pile of simplistic generalizations. Getting the right people on the bus is way more difficult to actually do in real organizations than he makes it sound. I could think of as many exceptions and well as confirmations in the realm of “great businesses”: The old IBM, the old AT&T, 3M, Polaroid, Kodak, DEC,half of the banking industry, etc.

david
Said this on 2-4-2012 At 10:47 am

http://blog.asmartbear.com/blog/business-advice-plagued-by-survivor-bias.html

Nice article explaining some of the problems with this book.

wayne
Said this on 2-4-2012 At 10:47 am

An interesting article in the Apr 09 HBR on a study titled - Are “Great” Companies Just Lucky? It argues that most great firms were lucky because of systemic variations alone.

david
Said this on 2-4-2012 At 10:48 am

Looks like this article:

http://hbr.harvardbusiness.org/2009/04/are-great-companies-just-lucky/ar/1

Which seems to examine a lot more data than ‘Good to Great’.

I actually enjoyed In Search of Stupidity more than good to great: his point is that the survivors are those that limited their huge mistakes, and learned from them, not that they followed some magic recipe.

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