What sets great companies from the rest? Read on and get the answers with our summary of Good to Great by Jim Collins.
According to the law of least resistance, people are lazy and naturally choose easier paths. Of course, easy choices and decisions can bring good results - but you see, those results will never be great. Maybe our schools, hospitals, and relationships are not great only because we’re okay with them being just good? And can things that are just good become something more, or is it incurable?
Jim Collins, a teacher at Stanford University Graduate School of Business and a business management consultant, got very curious and tried to find the answers to these questions.
Gathering a research team, he analyzed how good companies can become great – and why some companies stay mediocre at best. The research findings transformed into a book where Collins structured the collected empirical data – “Good to Great: Why Some Companies Make the Leap And Others Don’t.”
Here’s our summary of “Good to Great” by Collins chapter by chapter where we briefly describe the main points of the book.
Few people attain great lives, in large part because it is just so easy to settle for a good life. The vast majority of companies never become great, precisely because the vast majority become quite good - and that is their main problem.
Good is the enemy of great, says Collins, but what does it take to go through the transformation from average to excellent?
Assembling a group of 25 people, Collins started a 5-year research project, trying to understand how it works. Analyzing 1,143 companies, the team looked for cases that demonstrated a leap from average to great results. This way, they picked 11 good-to-great companies and thoroughly studied each case, reading articles and interview scripts in search of the secret to success.
To be considered good-to-great, the companies had to fit in the following pattern: cumulative return at least three times the market (because that exceeds the performance of widely acknowledged successful companies) over the next 15 years (because that excludes the chance of luck – 15 years is a long time) after a transition point before which stock returns were below the general stock market.
The results were pretty unexpected.
Based on the data collected in five years the researchers created a framework of concepts, which they called “a flywheel”. What’s really valuable about this framework is that every concept was a variable in 100 percent of the good-to-great companies, and in only 30 percent of the comparison companies, which proves that the framework objectively illustrates the true state of things.
So what are these concepts?
Level 5 leaders channel their ego needs away from themselves and into the larger goal of building the company… they are incredibly ambitious – but their ambition is first and foremost for the institution, not themselves.
Collins views leadership as a five-level hierarchy of executive capabilities. Level 5 is at the top, and it can be simply defined as a mix of humility and will.
The modesty good-to-great leaders demonstrate isn’t false. The words their subordinates use to describe good-to-great leaders are “quiet”, “well-mannered”, “reserved”, “shy,” and so on. They never talk about their contributions; they talk about the company and truly care for its well-being.
As for the will, good-to-great leaders have a huge determination to do what needs to be done. They are focused on results, and if they have to fire their relative for the company’s sake, they will do it.
The research also denied a popular belief that a leader who comes from “outside” (from another company) can change everything with his fresh ideas: on the contrary, almost all of the good-to-great leaders (10 out of 11) that brought their companies to a new level had worked there before.
In addition to that, 5 level leaders have a specific attitude to luck. To explain it, Collins uses “the window and the mirror” metaphor. While 5 level leaders look out of the window to give credit to factors outside themselves (and to good luck), and look in the mirror to take responsibility (never blaming bad luck), the comparison leaders do exactly the opposite: they blame outside factors for poor results and take credit for the good ones.
So can anyone become a leader 5? Not necessarily, says Collins. In his opinion, there are 2 categories of people. Category one consists of those who have no ambition of building something that would last longer than themselves; for them, work is just work. People belonging to category two have the potential which they can develop under certain circumstances. Collins believes the second group is a larger one.
Those who build great companies understand that the ultimate throttle on growth for any great company is not markets, or technology, or competition, or products. It is one thing above all others: the ability to get and keep enough of the right people.
We typically think that to make a company successful, you need to have a vision and a strategy, and then find people who would be committed. Figuratively speaking, first, you set a direction for the bus, and then you get the people to take it there. However, Collins says good-to-great leaders do the opposite: they get the right people on the bus and then set a direction.
A great example to illustrate this is Wells Fargo. Dick Cooley, the company’s CEO back in the 1970-s, could foresee the change in the banking industry, even though he didn’t know what exactly would happen. So he started hiring great people wherever he could find them, often even without any specific job in mind. When the changes came, no company handled them better than Well Fargo.
Unlike good-to-great companies, comparison companies follow the “genius with a thousand helpers” model. In this model, there is one strong, extraordinary individual leading the company, and other people who help him implement his ideas. The problem is, when the genius leaves (or dies), those helpers are left alone, often without a clue what they’re supposed to do.
A curious finding was that the compensation in the good-to-great companies was not to get the right behavior of the wrong people, but to keep the right people on the bus. Nucor, a steel product company, paid its workers more than any other company in the world, but over 50 percent of the compensation was tied to the productivity of the team a worker was on. As a result, people would come to work 30 minutes earlier; and in one extreme case, teammates chased a lazy colleague out of the plant with an angle iron.
As Collins points out, good-to-great companies are a rough place to be – if you don’t do what you have to, you get fired. But in fact, their cultures are not ruthless – they’re rigorous. While a ruthless leader fires people without consideration, a rigorous one lets the best people not worry about their positions. There is a difference.
Collins mentions three disciplines of how to be a rigorous leader:
The idea of “first who” is not something that works only in business, says Collins. Think about your private life: no matter what you achieve, if you don’t have the right people around you, you won’t have a great life.
When… you start with an honest and diligent effort to determine the truth of the situation, the right decisions often become self-evident… And even if all decisions do not become self-evident, one thing is certain: you absolutely cannot make a series of good decisions without first confronting the brutal facts.
During the Second World War, when nearly all of Europe and North Africa were under the Nazi control, and everyone expected Britain to surrender, Churchill, however, was not going to lay down his arms. He had a bold vision – to keep fighting, in the air, by sea, and by land.
He didn’t fail to face the truth, though. Churchill knew his people could be scared to tell him bad news, so he created a whole special department outside his chain of command – the Statistical Office, whose main function was to provide Churchill with unfiltered facts. Did it work? We all know it did.
The thing is, you cannot motivate people with brutal facts – the real task here is to know how to not demotivate them. So how can a leader tell the truth without demotivating his people?
Collins suggests the following techniques to let people feel safe providing and hearing “brutal facts”:
To go from good to great requires transcending the curse of competence… The good-to-great companies understood that doing what you’re good at will only make you good; focusing solely on what you can potentially do better than any other organization is the only path to greatness.
The fox is a cunning creature who can devise a million strategies on how to attack the hedgehog. But every time the fox tries to use them, it fails – because every time, sensing danger, the hedgehog rolls up in a ball covered with sharp spikes. The hedgehog has one strategy – but that strategy always works.
On the basis of the ancient Greek parable about the fox and the hedgehog, philosopher Isaiah Berlin divided all people into two groups. The foxes see the world in its complexity, while the hedgehogs “simplify a complex world into a single organizing idea.”
Does it mean hedgehogs are stupid? Not at all. Freud and the unconscious, Marx and the class struggle, Einstein and relativity – these are simplified organizing ideas of the world. E=MC2 is so simple to understand, isn’t it?
Hedgehogs have the ability to see the underlying patterns, and to see them through complexity. And according to Collins, this has everything to do with good-to-greatness.
Collins provides this example: by 2000, Walgreens, an American pharmacy company, exceeded the market by over 15 times. When Collins asked Cork Walgreen how they did it, the answer was simple: once we understood the concept, it all became clear. The concept was the convenient drugstores with high profit per customer visit.
Walgreens replaced all inconvenient locations with convenient ones, and clustered their stores tighter together so that people didn’t have to walk too far away from store to store. More convenience led to more visits and more profit per visit.
According to Collins, a Hedgehog concept comes from the interaction of the three circles:
These three circles complete each other: you can make a lot of money but if you’re not the best, you won’t be great; you can be the best at something, but if you’re not passionate about it, it won’t last; if you’re passionate about what you do but it doesn’t make economic sense or you’re not best at it, the results, again, won’t be great.
Together, these circles form the Hedgehog concept which, as you can see, is not about pursuing a goal –it’s about understanding what you need to become great.
Few companies have the discipline to discover their Hedgehog Concept, much less the discipline to build consistently within it. They fail to grasp a simple paradox: The more an organization has the discipline to stay within its three circles, the more it will have attractive opportunities.
If you’ve got the wrong people on the bus, your instrument for managing them is bureaucracy. With the right people, you don’t need bureaucracy. You can just create a culture of discipline.
To create a culture of discipline, Collins recommends following four things:
1. Focus on the idea of freedom and responsibility. Create a system of clear constraints but trust your people.
2. Hire self-disciplined people whom can operate effectively with a high degree of autonomy. The culture of discipline, says Collins, begins with self-disciplined people, then disciplined thought, and finally, disciplined action – and the order is important.
In good-to-great companies, people are unusually responsible, sometimes to an extreme extent. The researchers called this factor “rinsing your cottage cheese”, referring to a world-class athlete Dave Scott, who, sitting on a diet, would also rinse his cottage cheese to get off the extra fat. The metaphor is clear: people in good-to-great companies do everything they need, plus something more, seeking improvement.
3. A culture of discipline is not a tyrannical disciplinarian. An organization cannot be disciplined through sheer force. Tyrannical leaders can bring brilliant results, but after they leave - and eventually they will - the company will be left without a culture. Ray MacDonald, the leader of Burroughs in 1964, had a strong personality and would put pressure on people. Yes, he produced returns 6.6 times better than the general market. But after he retired, his people were left “with an inability to do anything.”
4. Adhere to the Hedgehog Concept with consistency. It means you will stick to your three circles – and say no to great, once-in-a-lifetime opportunities if they do not fit in your pattern.
When used right, technology becomes an accelerator of momentum, not a creator of it. The good-to-great companies never began their transitions with pioneering technology, for the simple reason you cannot make good use of technology until you know what technologies are relevant.
No doubt, technology is important – but it is never the main cause of either greatness or decline. Becoming good-to-great doesn’t require creating some technology but rather adapting to it, or picking one and using it appropriately.
Studying good-to-great companies, the researchers figured that what those companies did was becoming a pioneer in application of specific, carefully selected technologies:
Wells Fargo pioneered in electronic banking, it was an early leader in 24-hour banking by phone and an early adopter of ATMs.
Phillip Morris pioneered in using packaging (flip-top boxes) and manufacturing technology.
Gillette pioneered in application of manufacturing technology for making high-tolerance products at low cost.
In other words, a deep understanding of how the technology linked to their concept helped these companies succeed.
In contrast to good-to-great companies, comparison ones use technology for technology’s sake. Motivated by the fear of being left behind, they lack the understanding of the situation, and as a result, lack concept. Without a concept, it’s hard to achieve anything.
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… Good to great comes about by a cumulative process – step by step.
Imagine you’re trying to rotate a huge flywheel. At first you have to make a tremendous effort to get the wheel just an inch forward. But if you keep pushing, the wheel will move faster, until its weight starts to work for you.
There is no single magic move that changes the situation – and the same happens in the world of business.
Reading stories of success, we often see them as dramatic breakthroughs. But this is a bias of the outside observer. From the inside, the transitions from good to great are never revolutionary – they take a lot of time and effort.
Consider Circuit City. You can find around 100 articles about the company, written in a decade after the transition, and almost none about the decade leading to the transition – as if the company didn’t exist before that. We simply don’t know about the problems the company had to go through – and it had, because when Alan Wurtzel became the CEO, the company was close to bankruptcy. Its further success was the result of a build-up, and not some extraordinary circumstances.
The comparison companies get involved in what the researchers called “a doom loop”. They don’t accumulate efforts consistently. They push the flywheel, then change its direction, then stop, and do it all over again. They’re looking for a magic factor that would change everything, launching new programs, and yet failing to produce results.
I like to think of Good to Great as providing the core ideas for getting a flywheel turning… while Built to Last outlines the core ideas for keeping a flywheel accelerating long into the future.
“Built to Last”, a project based on a six-year research conducted at Stanford Business school by Jim Collins and his mentor Jerry I. Porras, concerned the problem of building an enduring company - not a problem of just becoming a successful company, like in the “Good to Great” project. The researches were different, however, comparing “Built to Last” to “Good to Great”, the team noticed an interesting thing.
Each of the Good-to-Great findings is applicable to the four key ideas from good “Built to Last”. These ideas are as follows: clock building, not time telling; genius of And; core ideology; and preserve the core / stimulate progress. So how are they correlated? Here are some examples:
As we can see, the connection between the rules of becoming great and staying great is pretty obvious.
Is it really necessary to become great? Isn’t being just successful enough? You should answer for yourself. But keep in mind that greatness is about meaning.
Creating something you believe in, you create greatness - and vice versa. That adds value to your life. And, what’s really nice, it’s not much more difficult than building something that is just good.
What habits do visionary companies share to achieve success? Find out in our chapter-by-chapter summary of Built to Last by Jim Collins.
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