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

By: Jim Collins

Reviewed By: Bob Ruffolo

When people think of business, they think of great companies. If you're in business, chances are you either want to work for a great company or you want to build one yourself.

No one hopes and dreams that maybe someday they'll be a part of a mediocre company.

Yet, despite this desire, most companies that reach the level of good rarely make the leap to GREAT.

In Jim Collins' bestselling book, Built to Last, he analyzed companies that have stood the test of time to figure out what sets them apart. Good to Great is the perfect follow-up (or a prequel as the author describes it) because truly great companies are built to last.

However, this isn't just a re-hashing of old ideas.

What Makes a Company Great?

Jim Collins defines companies as "great" using a number of metrics, but the most significant are sustained growth and success over a long period of time. More specifically, each great company had to meet the following criteria:

  1. They had to have experienced 15-year cumulative stock returns that were at or below the general stock market, followed by a notable turning point where cumulative returns over the next 15 years were three times the general market.
  2. They had to demonstrate this pattern independent of their industry.
  3. They had to show a pattern of results.

Each company was then compared to a similar company that either never made the good-to-great leap, or they did but couldn't sustain it. This is how Collins discovered the factors that allowed great companies to set themselves apart.

The 3 Disciplines

According to Collins, the most significant factors determining a company's success are determined by 3 things:

  • disciplined people
  • disciplined thought, and 
  • disciplined action.

The companies analyzed in the book are:

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

Disciplined People: Level 5 Leadership

Collins set out to determine the exact qualities of leadership in great companies and describes this style of leadership as Level 5 Leadership. What I found particularly interesting was that he observed the same basic set of qualities in leadership across different companies in completely different industries.

One of these qualities was their proactive thinking. They did whatever they could to prepare their successor for success in the future, not just the present. 

Sadly, it's not uncommon to see a CEO attempt to sabotage their successor in order to make themselves look better.

Level 5 leaders, however, prioritize the company's success over their own ego by playing an active role in finding the best candidate for the job and personally helping them to prepare for it.

With that in mind, it should come as no surprise that Level 5 leaders are also extremely humble. Collins noted that CEOs of good-to-great companies were very quick to direct credit away from themselves and onto certain individuals or the company as a whole. They also have no desire to be placed on a pedestal or to be idolized figures in business and are more willing to accept blame for the organization's shortcomings or failures. 

Level 5 leaders are relentless in their pursuit of making their company great and showed "unwavering resolve" according to Collins. There was absolutely no question that the modesty of these leaders had anything to do with laziness or lack of results on their part.

Finding the Right People

Something that really stood out to me -- which is something I've aimed to implement at IMPACT -- is that Level 5 leaders focus on who before focusing on what.

Level 5 leaders prefer to build a valuable team first and then focus on where the company is going second. On the other hand, most companies are completely focused on their goals and worry about building the team along the way.

A notable story from Good to Great is about how Dick Cooley, then-CEO of Wells Fargo, prepared the company for major industry changes by focusing on building up his pool of talent.

It became clear to Cooley in the early 1970s that the finance industry was going to see significant changes in regulations, but no one knew exactly what changes would occur.

Cooley believed that by hiring as many exceptional people as he could find, even when he didn't have a clearly defined role for them, that they would be prepared to adjust to anything.

He proved to be right over a decade later when the banking industry fell to 59%of the general stock market and Wells Fargo was tripling the stock market performance.

Collins outlines three simple truths:

  1. If you begin with who, rather than what, you can more easily adapt to a changing world.
  2. If you have the right people on your team, the problem of how to motivate and manage people largely goes away.
  3. If you have the wrong people and still move in the right direction, you won't have a great company.

What does this mean for you when building your team?

According to Collins, you should move on to the next candidate if you are having doubts about hiring someone. You company's revenue growth can't outpace its growth of employees -- at least, it's not sustainable.

Collins also says that employees at great companies don't need tight management. Once an employee requires strict management, it's already too late for them and you are best to act swiftly in replacing them with someone better.

Another suggestion from the book -- and this is one I love -- is to assign your best people to the best opportunities, not to the worst problems. Focusing your best talent on fixing problems will only make your company good, but giving opportunities to great employees is what helps companies make the leap to great.

Disciplined Thoughts: Confront the Brutal Facts

Good-to-great companies are brutally honest with themselves about their strengths, weaknesses, and when they simply don't know the answer.

Collins notes how most companies feel obligated to come up with answers when they honestly don't have all of the facts. Good-to-great companies are focused on finding the truth by any means necessary, even if that means admitting to employees that they don't yet have an answer.

Collins suggests leading with questions, not answers, to involve employees in the decision-making process.

All good-to-great companies engage in debate and spirited discussion, with finding the best solution as the end-goal. There is no coercion or predetermined outcomes for these debates like you often see at the executive level of large companies.

In order to find the truth, while maintaining a positive culture, good-to-great companies conduct autopsies without placing blame. Rather than looking for a scapegoat to shoulder the punishment, these companies focus on being truthful about their downfalls and working towards solutions.

The Hedgehog Concept

The Hedgehog Concept is based on a famous essay by Isaiah Berlin called "The Hedgehog and the Fox" which describes the differences between the two natural enemies.

Foxes focus on multiple tasks at once and bounce around from one thing to the next, while admiring the great complexity of the world. On the other hand, hedgehogs prefer a simplified view of the world and focus completely on one task at a time. When conflict arises between the two animals, the hedgehog always wins.

According to Collins, good-to-great companies are all hedgehogs in some form or another, because they are focused on being the best in the world at only one thing.

There are three key dimensions to the Hedgehog Concept, as illustrated below:

The Hedgehog Concept is not supposed to be seen as a literal strategy to becoming the best at something. The goal is to understand what you can be the best at and what you can't. Answer the following questions for your company to discover where your focus should be.

1. What can you be the best in the world at?

What is your company better at than most? This must go beyond basic competence or barely above-average proficiency.

2. What drives your economic engine?

What's the one area of your business that generates the most revenue per x unit? If you had to pick only one area of your business to grow, assuming that it would make the biggest impact, which area would that be?

3. What are you deeply passionate about?

Rather than trying to force themselves to become passionate about a profitable business idea, good-to-great companies build around their existing passion. What ignites the passion of you and your team, without the need for external motivators?

Disciplined Action: A Culture of Discipline

Sustaining great results over a long period of time requires a team full of self-disciplined people. According to Collins, good-to-great companies have a disciplined culture that is "fanatically consistent with the three circles of the Hedgehog Concept."

How do you create a culture of discipline?

  1. Freedom within a framework: Build a brand around the idea of freedom and responsibility, within a framework. Good-to-great companies hire self-disciplined employees and set clear restraints, that way they can focus their energy on managing the system and not the people.
  2. Fill your company with self-disciplined people who are willing to go to extreme lengths to fulfill their responsibilities. One of the common characteristics of good-to-great companies is that they have a culture of employees that are fanatic in their pursuit of greatness.
  3. Don't create a culture of discipline through tyranny and abuse. Good-to-great companies build their cultures around self-disciplined people and Level 5 leadership -- not brute force.
  4. Strictly adhere to the Hedgehog Concept to a point of near cult-like obsession. Good-to-great companies do not worry about diversification and only pursue ventures that align with their Hedgehog Concept.

Something that's interesting to note -- and that you probably don't agree with -- is that good-to-great companies never began their transition with pioneering technology. Instead, they focused on finding the most relevant technology available and became pioneers in the use of that technology.

Another interesting fact is that good-to-great companies never overreact to new technology. In fact, it is mediocre companies who make the most drastic changes in the face of new trends in technology.

Good-to-great companies remain true to their fundamentals.