Good To Great: Why Some Companies Make The Leap and Others Don’t — Book Notes

Jim Collins

Published: 2000

Great company is defined as “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.”

Good-to-great companies studied:

  • Abbott
  • Circuit City
  • Fannie Mae
  • Gillette
  • Kimberly-Clark
  • Kroger
  • Nucor
  • Philip Morris
  • Pitney Bowes
  • Walgreens
  • Wells Fargo

Concept #1: Level 5 Leadership

“You can accomplish anything in life, provided that you do not mind who gets the credit.” — Harry S. Truman

  • A Level 5 leader: an individual who blends extreme personal humility with intense professional will. Self-effacing individuals who displayed the fierce resolve to do whatever needed to be done to make the company great.
  • Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. They are ambitious — but their ambition is first and foremost for the institution, not themselves.
  • They are a study in duality: modest and wilful, humble and fearless.
  • Level 5 leaders are comfortable with the idea that most people won’t even know the roots of the success trace back to their efforts.
  • One of the most damaging trends in recent history is the tendency to select dazzling, celebrity leaders and de-select potential Level 5 ones.

Concept #2: First Who… Then What

  • The executives who ignited the transformations from good-to-great did not first figure out where to drive the bus and then get people to take it there. They first got the right people on the bus (and the wrong people off it) and then figured out where to drive it.
  • If you begin with “who”, rather than “what”, you can more easily adapt to a changing world.
  • 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, it doesn’t matter whether you discover the right direction; you still won’t have a great company. Great vision without great people is irrelevant.
  • An example — Wells Fargo hired outstanding people whenever and wherever they found them, often without any specific job in mind.
  • Side Note: There was no systematic pattern found linking executive compensation to the process of going from good to great.
  • The right people will do the right things and deliver the best results they’re capable of, regardless of the incentive system.
  • The purpose of a compensation system should not be to get the right behaviours from the wrong people, but to get the right people on the bus in the first place, and to keep them there.
  • Create an environment where hardworking people would thrive and lazy workers would either jump or get thrown off the bus.
  • Good-to-great companies placed greater weight on character attributes than on specific educational background, practical skills, specialized knowledge, or work experience.
  • The only way to deliver to the people who are achieving is to not burden them with the people who are not achieving.

How to be rigorous

  • When in doubt, don’t hire — keep looking
  • When you know you need to make a people change, act. Invest substantial effort in determining whether you had someone on the wrong seat before you conclude if they are the wrong person on the bus.
  • Put your best people on your biggest opportunities, not your biggest problems

Concept #3: Confront The Brutal Facts (Yet Never Lose Faith)

“There is no worse mistake in public leadership than to hold out false hopes soon to be swept away.” — Winston Churchill

  • Breakthrough results come about by a series of good decisions, diligently executed and accumulated one on top of another.
  • You cannot make a series of good decisions without first confronting the brutal facts.
  • Pitney Bowes’ first management meeting of the year typically consisted of about fifteen minutes discussing the previous year, and two hours talking about the “scary squiggly things” that might impede future results.
  • A primary task in taking a company from good to great is to create a culture wherein people have a tremendous opportunity to be heard and, ultimately, for the truth to be heard.

How do you create a climate where truth is hard and facts are confronted?

  1. Lead with questions, not answers. Use questions not as a form of manipulation, but as a way to gain understanding.
  • The good-to-great leaders made particularly good use of informal meetings where they’d meet with groups of managers and employees with no script, agenda or set of action items to discuss. Instead, they would start with questions like “So, what’s on your mind?”, “Can you tell me about that?”, “Can you help me understand?”, “What should we be worried about?”.

2. Engage in dialogue and debate, not coercion.

3. Conduct autopsies, without blame.

4. Build “red flag” mechanisms.

The Stockdale Paradox

  • The stoic acceptance of brutal facts of reality while maintaining an unwavering faith in the endgame, and a commitment to prevail as a great company despite the brutal facts.

Concept #4: The Hedgehog Concept

  • Hedgehogs simplify a complex world into a single, organizing idea, a basic principle or concept that unifies and guides everything.
  • The essence of profound insight is simplicity.
  • Hedgehogs see what is essential, and ignore the rest.

The Hedgehog Concept

  • A simple, crystalline concept that flows from deep understanding about the intersection of three circles:
  • What you can be the best in the world at, and what you cannot be the best in the world at
  • What drives your economic engine
  • What you are deeply passionate about
  • A hedgehog concept is not a goal to be the best, nor a strategy, nor an intention. It is an understanding of what you can be the best at.
  • You have to have the discipline to stick to it.
  • If you cannot be the best in the world at your core business, then your core business cannot form the basis of your Hedgehog Concept.
  • There is one particularly provocative form of economic insight that every good-to-great company has obtained, the notion of a single “economic denominator”.
  • Think about it in the form of this question: “If you could pick one and only one ratio — profit per x/cash flow per x — to systemically increase over time, what x would have the greatest and most sustainable impact on your economic engine?
  • E.g Wells Fargo went with “profit per employee”, Walgreens switched to “profit per customer visit”
  • This question serves as a mechanism to force deeper understanding of the key drivers in your economic engine.
  • The only way to remain great is to keep applying the fundamental principles that made you great.
  • Good-to-great companies weren’t obsessively focused on growth. Yet, they created sustained, profitable growth far greater than comparison companies that made growth their mantra.
  • The Hedgehog concept is a iterative process, not an event.

Concept #5: A Culture of Discipline

  • Most companies build their bureaucratic rules to manage the small percentage of wrong people on the bus, which in turn drives away the right people on the bus, which then increases the percentage of wrong people on the bus and increases the need for more bureaucracy.
  • Avoid bureaucracy and hierarchy and create a culture of discipline.
  • George Rathmann: “What I got from Abbott was the idea that when you set your objectives for the year, you record them in concrete. You can change your plans through the year, but you never change what you measure yourself against. You are rigorous at the end of the year, adhering exactly to what you said was going to happen. You don’t get a chance to editorialize. You don’t get a chance to adjust and finagle, and decide that you really didn’t intend to do that anyway, and readjust your objectives to make yourself look better. You never just focus on what you’ve accomplished for the year; you focus on what you’ve accomplished relative to exactly what you said you were going to accomplish — no matter how tough the measure.”
  • Build a culture full of people who take disciplined action within the three circles, fanatically consistent within the Hedgehog concept.
  • Don’t confuse a culture of discipline with tyrannical disciplinarian.
  • This book is about discipline: disciplined people, disciplined thought, disciplined action.
  • The answer for the “good-to-great” question is in the discipline to do whatever it takes to become the best within carefully selected arenas and then to seek continual improvement from there.
  • Start a “Stop Doing” list. Most of us have ever-expanding to-do lists, trying to build momentum by doing more. Good-to-great companies displayed remarkable discipline in a “stop doing” list and unplugging all sorts of extraneous junk.
  • The most effective investment strategy is a highly undiversified portfolio when you are right.

Concept #6: Technology Accelerators

  • It’s not technology per se, but the pioneering application of carefully selected technologies.
  • Does the technology fit directly with your Hedgehog concept? If yes, then you need to become a pioneer in the application of that technology. If no, then ask, do you need this technology at all?
  • Technology is an accelerator of momentum, not the creator of it.

Concept #7: The Flywheel

  • There is no single tactic, strategy or concept that leads from good-to-great. It was all of them added together in an overall accumulation of effort applied in a consistent direction.
  • There is no “Aha” moment, or the “one big thing”. It was a whole bunch of interlocking pieces that built one upon another.
  • The best way to get people lined up behind a bold new vision is to turn the flywheel consistent with that vision. People want to be part of a winning team.
  • Use acquisitions as a accelerator of momentum, not the creator of it.

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