Good to Great
What makes a company great? This is the very question Jim Collins and a dedicated group of researchers set out to answer.
Contributed by Gaurav Dhume
If that question seems daunting, imaging creating the shortlist. To start, the team gathered companies who exhibited incredible stock growth. After 10.5 people years of thorough analysis, 2000 pages worth of interview transcripts with company executives, and weeks of rigorous debates within the team, the list was narrowed down to 11 companies: Abbott, Fannie Mae, Circuit City, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.
Few people attain greatness because it is so easy to settle for ‘good’.
So what secret sauce did these companies contain that drove their stock to be 6.9 times higher than than the general market? They even eventually found that each transformation can be attributed to a process of buildup followed by breakthrough broken into three broad segments: disciplined people, disciplined thought, and disciplined action. Within each of these are 2 key concepts, as shown in Figure 2 below.
Disciplined People:
Level 5 Leadership
Collins’ research found that the leaders of great companies shared one particular characteristic — the duality of extreme personal humility with intense professional will. Although many were never featured on a magazine, their ability to channel ambition into creating an institution with lasting success instead of using it to further personal egoistic goals is rare among business leaders, but was recognized in all the CEO’s of the 11 great companies identified in Collins’ research.
As the graph explains, Levels 1–4 exhibit many of the same qualities, while level 5 leaders embody all characteristics in the hierarchy. The primary difference between level 4 and level 5 leaders is the uncanny ability to attribute success to any factor besides themselves, while simultaneously taking full responsibility for any failures.
First Who… Then What
Through his research Collins’ found that all the CEO’s of the great companies knew the importance of beginning with ‘Who’ rather than ‘What’ when it came to igniting a transformation for their respective firms. By getting the right people on the bus and getting the wrong people off the bus, the executives were able to figure out how to drive it in the right direction. Knowing the importance of assembling an exemplary team is nothing new, but realizing the importance of doing it before coming up with a strategy is the crux of this section.
As Wells Fargo CEO Dick Cooley put it, “Injecting an endless stream of talent into the firm is how you build the future. If I’m not smart enough to see the changes that are coming, they will. And they’ll be flexible enough to deal with them.” This ideology is what enabled Wells Fargo to thrive during the deregulation of the 80’s while Bank of America struggled.
Disciplined Thought
Confront the Brutal Facts
In the 1970’s Kroger recognized consumers’ direction towards the superstore concept. Their competitor, A&P, chose to ignore the trends and lost sorely. The ability tackle harsh realities head on while maintaining absolute faith that one would emerge stronger at the end is called the Stockdale paradox, and is a vital component of success.
Collins’ advice to CEO’s is to tackle change with a four pronged approach:
1) Lead with questions, not answers: Exhibit the humility to listen more than you preach, in severe pursuit of the truth.
2) Engage in dialogue and debate, not coercion: Heated debate among the right people is healthy and often necessary.
3) Conduct autopsies without blame: Admittance and understanding of failure is key to success.
4) Build red-flag mechanisms: Turn information into information that cannot be ignored.
The Hedgehog Concept (Simplicity Within three Circles)
English philosopher Isaiah Berlin divided people into two categories: foxes and hedgehogs. Foxes pursue many objectives simultaneously, fail to create one unifying vision, and are thus often scattered and diffused. Hedgehogs on the other hand simplify every complexity into one unifying idea, and render everything unrelated, irrelevant. Collins extrapolates that the great businesses had hedgehog personalities — the an uncanny ability to focus on a singular overarching goal.
Through their research the team found that the companies based their strategies upon the intersection of the three ‘circles’:
1) What can you be the best in the world at?
2) What drives your economic engine?
3) What are you deeply passionate about?
Disciplined Action
Culture of Discipline
Now that the right people are on the bus, led by a Level 5 leader, it’s time to dig deep into disciplined action. Collins puts it this way:
Build a culture full of people who take disciplined action within the three circles, fanatically consistent with the Hedgehog Concept.
Collins stresses that discipline doesn’t mean tyranny in the office. It means that each person is dedicated to cutting away extra activities and driving ceaselessly towards to overall goal of the company. It’s time to buckle down.
Technology Accelerators
Technology is often as much of a curse as it is a boon for the growth of a company, as evidenced by the dot-com bubble at the turn of the millennium. Companies began selling shares to the public at sky- high valuations based on the premise that their technology would change everything, regardless of its ability to generate revenue. Many of these companies subsequently failed, and American markets suffered.
Those that were able to make the transition from good to great approached technological change very differently. They thought long and hard about how the technology could further their hedgehog concept, and only after reaching a consensus did they act. Walk, crawl, then run.
A classic example is Walgreens, a company that many investors believed to be a slow-moving giant in respect to the technological shift at the end of the millennium, a sentiment they expressed by sending the stock price tumbling down 40%. Unperturbed, executives debated about how the Internet would tie in to their convenience concept and how it could increase their primary economic indicator; cash flow per customer visit. After much deliberation they began to walk, creating a website and testing online prescription delivery, then they crawled, testing different strategies to enhance customer experience and perfect their delivery model, and then they finally ran, investing heavily in a sophisticated satellite system to link all of their stores together. By successfully harnessing technology the company was able to pioneer a new convenience store model and the stock price subsequently doubled within a year.
A link to the full book can be found here. The views expressed are, unless expressly stated, the views of the author or the brief writer, not Titans Of Investing as an organization.
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