Our Business 101 series continues with highlights from Good to Great: Why Some Companies Make the Leap... and Others Don't, also by Jim Collins, the author of Built to Last (but written many years later). Again, all of these books are available through the SLO library, should you want to read/learn more.
Collins starts with the premise, "Good is the enemy of great." A colleague tells him that Built to Last is a good but useless book because all of those (and many other) great companies were great to begin with. What does one do if they have a good company that they want to bring to greatness? That is what this book sets out to do.
Again very heavily research-based, the parameters for the companies Collins focuses on in this study are based on a sudden leap from good to great and sustained success for at least fifteen years (versus companies that remained good/never became great and companies that leapt from from good to great but couldn't sustain it). The researchers then sifted through reams of data to see what the good-to-great companies had in common.
Here's what they found:
Level 5 Leadership
"We were surprised, shocked really, to discover the type of leadership required for turning a good company into a great one. Compared to high-profile leaders with big personalities who make headlines and become celebrities, the good-to-great leaders seem to have come fromMars. Self-effacing, quiet, reserved, even shy-- these leaders are a paradoxical blend of personal humility and professional will. They are more like Lincoln and Socrates than Patton or Caesar."
The five levels the book refers to:
Level 1: Highly Capable Individual
Makes contributions through talent, knowledge, skills, and good work habits.
Level 2: Contributing Team Member
Contributes individual capabilities to the achievement of group objectives and works effectively with others in a group setting.
Level 3: Competent Manager
Organizes people and resources toward the effective and efficient pursuit of predetermined objectives.
Level 4: Effective Leader
Catalyzes commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards.
Level 5: Level 5 Executive
Builds enduring greatness through a paradoxical blend of personal humility and professional will.
"Level 5 leaders set up their successors for even greater success in the next generation, whereas egocentric Level 4 leaders often set up their successors for failure."
"Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. It's not that Level 5 leaders have no ego or self-interest. Indeed, they are incredibly ambitious-- but their ambition is first and foremost for the institution, not themselves."
"Ten out of eleven good-to-great CEOs came from inside the company, three of them by family inheritance. The comparison companies turned to outsiders with six times greater frequency-- yet they failed to produce sustained great results."
"Level 5 leaders look out the window to apportion credit to factors outside themselves when things go well (and if they cannot find a specific person or event to give credit to, they credit good luck). At the same time, they look in the mirror to apportion responsibility, never blaming bad luck when things go poorly."
"The great irony is that the animus and personal ambition that often drive people to positions of power stand at odds with the humility required for Level 5 leadership. When you combine that irony with the fact that boards of directors frequently operate under the false belief that they need to hire a larger-than-life, egocentric leader to make an organization great, you can quickly see why Level 5 leaders rarely appear at the top of our institutions."
First Who... Then What
"We expected that good-to-great leaders would begin by setting a new vision and strategy. We found instead that they first got the right people on the bus, the wrong people off the bus, and the right people in the right seats-- and then they figured out where to drive it. The old adage 'People are your most important asset' turns out to be wrong. People are not your most important asset. The right people are."
"The comparison companies frequently followed the 'genius with a thousand helpers' model-- a genius leader who sets a vision and then enlists a crew of highly capable 'helpers' to make the vision happen. This model fails when the genius departs."
"To be clear, the main point of this chapter is not just about assembling the right team-- that's nothing new. The main point is to first get the right people on the bus (and the wrong people off the bus) before you figure out where to drive it. The second key point is the degree of sheer rigor needed in people decisions in order to take a company from good to great."
How to be rigorous:
1. When in doubt, don't hire-- keep looking. (Corollary: A company should limit its growth based on its ability to attract enough of the right people.)
2. When you know you need to make a people change, act. (Corollary: First be sure you don't simply have someone in the wrong seat.)
3. Put your best people on your biggest opportunities, not your biggest problems. (Corollary: If you sell off your problems, don't sell off your best people.)
"Indeed, one of the crucial elements in taking a company from good to great is somewhat paradoxical. You need executives, on the one hand, who argue and debate-- sometimes violently-- in the pursuit of the best answers, yet, on the other hand, who unify fully behind a decision, regardless of parochial interests."
"Whether someone is the 'right person' has more to do with character traits and innate capabilities than with specific knowledge, background or skills."
Confront the Brutal Facts (Yet Never Lose Faith)
"We learned that a former prisoner of war had more to teach us about what it takes to find a path to greatness than most books on corporate strategy. Every good-to-great company embraced what we came to call the Stockdale Paradox: You must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, AND at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be."
"When you start with an honest and diligent effort to determine the truth of your 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."
"The good-to-great companies faced just as much adversity as the comparison companies, but responded to that adversity differently. They hit the realities of their situation head-on. As a result, they emerged from their adversity even stronger."
"Leading from good to great does not mean coming up with the answers and then motivating everyone to follow your messianic vision. It means having the humility to grasp the fact that you do not yet understand enough to have the answers and then to ask the questions that will lead to the best possible insights."
To create a climate where the truth is heard:
1. Lead with questions, not answers.
2. Engage in dialogue and debate, not coercion.
3. Conduct autopsies, without blame.
4. Build "red flag" mechanisms.
(An example of a "red flag" mechanism: Graniterock allows "short pay," where a customer simply circles the offending item on the invoice and deducts it from the total pay. Bruce Woolpert explained, "You can get a lot of information from customer surveys, but there are always ways of explaining away the data. With short pay, you absolutely have to pay attention to the data. You often don't know a customer is upset until you lose the customer entirely. Short pay acts as an early warning system that forces us to adjust quickly, long before we would lose that customer.)
"Spending time and energy trying to 'motivate' people is a waste of effort. The real question is not, 'How do we motivate our people?' If you have the right people, they wil be self-motivated. The key is to not de-motivate them. One of the primary ways to de-motivate people is to ignore the brutal facts of reality."
The Stockdale Paradox:
Admiral Jim Stockdale was the highest-ranking U.S. military officer in the "Hanoi Hilton" prisoner-of-war camp during the height of the Vietnam War. Tortured over twenty times during his eight year imprisonment from 1965 to 1973, Stockdale lived out the war without any prisoner's rights, no set release date, and no certainty as to whether he would even survive to see his family again. He shouldered the burden of command, doing everything he could to create conditions that would increase the number of prisoners who would survive unbroken, while fighting an internal war against his captors and their attempts to use the prisoners for propaganda. At one point, he beat himself with a stool and cut himself with a razor, deliberately disfiguring himself, so that he could not be put on videotape as an example of a "well-treated prisoner." He exchanged secret intelligence information with his wife through their letters, knowing that discovery would mean more torture and perhaps death. He instituted rules that would help people to deal with torture (no one can resist torture indefinitely, so he created a step-wise system-- after x minutes, you can say certain things-- that gave the men milestones to survive toward). He instituted an elaborate internal communications system to reduce the sense of isolation that their captors tried to create, which used a five-by-five matrix of tap codes for alpha characters. (Tap-tap equals the letter a, tap-pause-tap-tap equals the letter b, tap-tap-pause-tap equals the letter f, and so forth, for twenty-five letters, c doubling for k.) At one point, during an imposed silence, the prisoners mopped and swept the central yard using the code, swish-swashing out "We love you" to Stockdale, on the third anniversary of his being shot down. After his release, Stockdale became the first three-star officer in the history of the navy to wear both aviator wings and the Congressional Medal of Honor.
When Collins met with Stockdale, he asked how he could have survived such depressing conditions, not knowing whether he'd even make it out, and Stockdale said, "I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade."
When Collins asked who didn't make it out, Stockdale said, "Oh, that's easy. The optimists."
"The optimists? I don't understand."
"The optimists. Oh, they were the ones who said, 'We're going to be out by Christmas.' And Christmas would come, and Christmas would go. Then, they'd say, 'We're going to be out by Easter.' And Easter would come, and Easter would go. And then Thanksgiving, and then it would be Christmas again. And they died of a broken heart." Stockdale stopped, turned to Collins and continued. "This is a very important lesson. You must never confuse faith that you will prevail in the end-- which you can never afford to lose-- with the discipline to confront the most brutal facts of your current reality, whatever they might be."
The Hedgehog Concept (Simplicity within the Three Circles)
"To go from good to great requires transcending the curse of competence. Just because something is your core business-- just because you've been doing it for years or perhaps even decades-- does not necessarily mean you can be the best in the world at it. 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. It must be replaced with a simple concept that reflects deep understanding of three intersecting circles."
The three circles seen in Venn Diagram formation are:
- What you are deeply passionate about
- What you can be the best in the world at
- What drives your economic engine
"The good-to-great companies did not say 'Okay, folks, let's get passionate about what we do.' Sensibly, they went the other way entirely: We should only do those things that we can get passionate about."
"This doesn't mean, however, that you have to be passionate about the mechanics of the business per se (although you might be). The passion circle can be focused equally on what the company stands for."
On the economic engine:
Each good-to-great company attained a deep understanding of the key drivers in its economic engine and built its system in accordance with this understanding: the "economic denominator." Think about it in terms of the following question: 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?
Walgreens switched its focus from profit per store to profit per customer visit. Convenient locations are expensive, but by increasing profit per customer visit, Walgreens was able to increase convenience (nine stores in a mile!) and simultaneously increase profitability across its entire system. The standard metric of profit per store would have run contrary to the convenience concept. (The quickest way to increase profit per store is the decrease the number of stores and put them in less expensive locations. This would have destroyed the convenience concept.)
Or consider Wells Fargo. When the Wells team confronted the brutal fact that deregulation would transform banking into a commodity, they realized that standard baker metrics, like profit per loan and profit per deposit, would no longer be the key drivers. Instead, they grasped a new denominator: profit per employee. Following this logic, Wells Fargo became one of the first banks to change its distribution system to rely primarily on stripped-down branches and ATMs.
The key is to understand what your organization can be the best in the world at (and equally important what it cannot be the best at), not what it wants to be the best at. The Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial.
- The 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 many things but lack consistency.
- It took four years on average for the good-to-great companies to get a Hedgehog Concept.
- Strategy per se did not separate the good-to-great companies from the comparison companies. Both sets had strategies, and there is no evidence that the good-to-great companies spent more time on strategic planning than the comparison companies.
- You absolutely do not need to be in a great industry to produce sustained great results. No matter how bad the industry, every good-to-great company figured out how to produce truly superior economic returns.
A Culture of Discipline
"All companies have a culture, some companies have discipline, but few companies have a culture of discipline. When you have disciplined people, you don't need hierarchy. When you have disciplined thought, you don't need bureaucracy. When you have disciplined action, you don't need excessive controls. When you combine a culture of discipline with an ethic of entrepreneurship, you get the magical alchemy of great performance."
"The good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-disciplined people who didn't need to be managed, and then managed the system, not the people."
"Good-to-great companies think differently about the role of technology. They never use technology as the primary means of igniting a transformation. Yet, paradoxically, they are pioneers in the application of carefully selected technologies. We learned that technology by itself is never a primary, root cause of either greatness or decline."
The Flywheel and the Doom Loop
"Those who launch revolutions, dramatic change programs, and wrenching restructurings will almost certainly fail to make the leap from good to great. No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. Rather, the process resembled relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum until a point of breakthrough and beyond."
"When you let the flywheel do the talking, you don't need to fervently communicate your goals. People can just extrapolate from the momentum of the flywheel for themselves: 'Hey, if we just keep doing this, look at where we can go!' As people decide among themselves to turn the fact of potential into the fact of results, the goal almost sets itself."
"The comparison companies followed a different pattern, the doom loop. Rather than accumulating momentum-- turn by turn of the flywheel-- they tried to skip buildup and jump immediately to breakthrough. Then, with disappointing results, they'd lurch back and forth, failing to maintain a consistent direction."
From Good to Great to Built to Last
"In an ironic twist, I now see Good to Great not as a sequel to Built to Last, but more as a prequel. This book is about how to turn a good organization into one that produces sustained great results. Built to Last is about how you take a company with great results and turn it into an enduring great company of iconic stature. To make that final shift requires core values and a purpose beyond just making money combined with the key dynamic of preserve the core/stimulate progress."
Good to Great Concepts --> Sustained Great Results + Built to Last Concepts --> Enduring Great Company
"Enduring great companies preserve their core values and purpose while their business strategies and operating practices endlessly adapt to a changing world. This is the magical combination of 'preserve the core and stimulate progress.'"
"Enduring great companies don't exist merely to deliver returns to shareholders. Indeed, in a truly great company, profits and cash flow become like blood and water to a healthy body: They are absolutely essential for life, but they are not the very point of life."
"Indeed, the point of this entire book is not that we should 'add' these findings to what we are already doing and make ourselves even more overworked. No, the point is to realize that much of what we're doing is at best a waste of energy. If we organized the majority of our work time around applying these principles, and pretty much ignored or stopped doing everything else, our lives would be simpler and our results vastly improved."
Okay, I know this was long, but I hope you've gained some insight from it.