Reading is key to personal growth, but it is harder to dedicate the time needed in an ever-busier world. In the CEO Book Club, we regularly read a selection of business books and provide an executive summary of the lessons and ideas contained within them. Those nuggets can not only give you some immediate insight but also help you decide if the full book is worth reading and relevant to you.
“Good to Great” by Jim Collins
“Good to Great” is a fascinating concept and it’s unlike most business books that are autobiographical or biographical in nature. Instead of “here is how X did what they did”, this book aims to look at what makes great businesses and great executives, from a scientific perspective. Collins looks to identify the key traits via data only.
Firstly, he identified the great companies – for this study they are US companies only, for reasons he explains at the end of the book. The key criteria for selection were that the company had to have exceeded the general stock market by at least three times over 15 years, and it had to be a leap independent of its market industry. He and his research team identified 11 companies that averaged returns 6.9 times greater than the market. They were across industries and included Abbott Laboratories, Nucor, Kimberley Clark, Philip Morris and Wells Fargo. It is important to point out this research was done in October 2001 before technology companies truly took hold. However, he covers in a chapter of the later versions that when analysing against the great technology companies, the trends he identifies are still very relevant.
Here, in no particular order are my notes of some of the key learnings I picked up from “Good to Great”.
Great leaders need to be rigorous, not ruthless.
Collins talks at length about his concept of “Level 5 leaders” and “Getting the right people on the bus”. These concepts are too long to explain fully in a summary. However, there are a few key elements that really struck home.
Firstly, he says that in the companies that sustainably transitioned from good to great, the leaders were rigorous, not ruthless. That is they rigorously stick to their principles rather than ruthlessly undertake activities such as mass lay-offs. The best example here was Wells Fargo after a significant take-over. With certain synergies, it was clear headcount had to be reduced but they appraised all staff in both businesses and didn’t just let go the staff from the acquired business. They rigorously appraised all staff and kept those that were strongest, regardless of their history.
Next, he makes a couple of great points on hiring. The first is that if in doubt, don’t hire. It is better to leave a role open much longer than hire the wrong person. Also, always be recruiting. You can’t time finding the right person to when you have a role but if you keep recruiting, even if you aren’t in a position to hire, you are building a Rolodex of potential future candidates. On the flip side with existing employees, when you know you need to make a change, act. As soon as you have to manage someone tightly, you have made a bad hire. Good people don’t need micromanaging. He raises the question on how do you judge when it is time to move somebody on. He suggests asking two questions – a) if hiring this person from scratch, would you hire them? b) if they gave notice tomorrow to explore a new opportunity, would you be upset? His final cute point on people is he says the research showed that these organisations put their best people on the biggest opportunities, not the biggest problem, or necessarily the biggest historical strength.
The Stockdale Paradox
One of the most fascinating stories he tells in the book is around a navy officer called James Stockdale who spent 7 years as a PoW in the Hanoi Hilton during the Vietnam War. The key learning from his discussions on how Stockdale managed to survive mentally from such an ordeal is what he termed the “Stockdale Paradox”. At its most basic, this paradox is that you must maintain unwavering faith that you can and will prevail in the end, regardless of your difficulties, and at the same time, have the discipline to confront the most brutal facts of your current reality, whatever they might be. Stockdale had to keep the faith he would eventually escape, whilst not failing to recognise the horrendous nature of his situation.
Be a Hedgehog
Probably the central topic that significant parts of the book are dedicated to is Collins explaining how in the great businesses, they ensured they were a Hedgehog rather than a Fox. What he means by being a hedgehog is that they had a focus on their core competence. You find the core competence of being a hedgehog by ensuring that you only are in markets where you are at the intersection of it being something you are a) passionate about b) the best at or could realistically become the best at c) makes economic sense. Don’t overextend, be the best at 1-2 things, not ok at 5-6 things. Hedgehog-ing is not a strategy, you can’t force yourself to be passionate about something. It’s an understanding of the intrinsic position. As Collins neatly says, it is the triumph of understanding over bravado. He also has a neat insight from the research, that you should never obsess over growth but rather focusing in on being a Hedgehog. The research also showed that it took the great businesses on average 4 years to achieve hedgehog status. It wasn’t done by a two day offsite. It was done by continual iteration and review. The great companies had specialist groups of 10-20 team members that met to focus on the three circles of the hedgehog, even if they didn’t call it a hedgehog – often it was called things like “Long-range planning committee”, or the “Strategic thinking group”. They discussed, iterated, executed and autopsied.
One important point is that the Hedgehog concept doesn’t mean that you have to stay in your box and can’t look at new markets. This is so long as you know you can meet the criteria of being a Hedgehog. The example he uses is Boeing. In the 50’s they saw the opportunity to move from military jets to commercial jets. It was a “bet the company” decision, but they knew they could be a hedgehog in this market, and they were right.
Have a Single Economic Denominator
The great organisations had a profound insight into their own economics. Their economic engine and systems were fully aligned. Throughout the business, there was a single economic denominator, a ratio that was monitored and shared throughout the business. Every decision and piece of analysis ties back to that. It isn’t just “growth” either. For Fannie Mae, it was Profit per Mortgage Risk Level. So not just per mortgage, it brings in risk. For Nucor, it was Profit per tonne of finished steel – a metric that aligns margin and manufacturing efficiency. Collins cautions, though; there aren’t any catchall, predetermined metrics; you have to develop the right one for your company.
When setting goals, he has some wise advice. Most big goals are set with bravado. Make sure yours are set with understanding.
Greatness is not a function of circumstance. It’s a function of conscious choice and discipline. Having said that, discipline does not mean bureaucracy. Bureaucracy is there to compensate for the lack of discipline and competence. It is there when you can’t trust your employees to stick to the optimised process. An example Collins gives is around objective setting. He says the best organisations avoid bureaucracy by always fixing their objectives in concrete at the start of the year. Your tactics may change but always measure against those objectives, no matter how tough the measure. In addition to that, within these objectives, don’t just have what you want to do. Also, have a don’t do list. Things you know don’t work or are harmful, and make sure you don’t do those things.
He uses a great comparison here in terms of pilots and how they provide a great role model for how your team should be set up. Suppose you think of the discipline of a pilot. They have checklists; they have rigorous, life and death processes they have to stick to. However, the pilot still has the ultimate responsibility within that framework – the crucial decisions are theirs.
Great businesses give staff freedom and responsibility within the framework of a highly developed system. Hire great, disciplined people who don’t need to be managed and then manage the SYSTEM rather than the people. It’s a disciplined culture, not a tyranny. Similarly, try and remove layers of management; as an example, Nucor was a $2.3bn company with only five layers of management. Kimberley Clark had a rule that “if you can’t justify managing 15 people, you will manage zero.”
Technology is an accelerator of business performance
The use of Technology was a natural area of focus for Collins, given that organisations so often point to technology as a competitive advantage. However, Collins is clear that technology can’t, by itself, make you great. Your hedgehog concept drives the technology rather than the other way around. Walgreens, for example, were at their innovative best when they had a pharmacist as their CTO rather than a technology veteran. Collins says that technology is an accelerator of business performance, not a creator. The pioneering use of technology tends to come later, not at the start of the transformation. Technology itself cannot be the differentiator. Collins states that of the executives interviewed from the good to great companies, 80% didn’t mention technology at all as one of the top 5 factors, and for those that did, the median position was 4. Only two out of the 84 interviewed rated it as 1. This wasn’t because they ignored it or were technophobes, or even that it wasn’t essential to their operation, but it was an enabler, not a catalyst.
One neat idea that occurred to me from this point in terms of identifying where processes need to be improved and, therefore, technology can be an enabler is to run exercises throughout the business to determine where paper exists. Where a document exists (either in writing or digitally) it involves human interaction and therefore cost. Map these out and then look at what can be enhanced and streamlined.
Evolution not revolution
Collins is clear, good to great was evolution, not revolution. He uses the concept of the flywheel. It must be continually turned day in day out. Consistency and coherence are key. Focus on successes, not words and keep turning the flywheel. If your direction and expectations are clear, getting people aligned with hoopla is not a problem. Don’t proclaim big goals and new codewords all the time; just keep turning the wheel. It takes time. Think of Sir Alex Ferguson at Manchester United. In his autobiography, think of Ray Kroc saying that when McDonald’s became huge that “after 26 years of hard work, he was finally an overnight success”.
The opposite to the flywheel is something Collins calls the “Doom Loop”. The Doom Loop is when businesses are reactionary and constantly changing even the company’s core values. You are clock building, not time telling. Collins says that you should embrace the Genius of AND over the tyranny of OR in your operating processes.
Finally, about the Flywheel, Collins talks about the role of mergers and acquisitions as many organisations look to use acquisition as a generation of momentum. However, Collins is clear that M&A is an accelerator of the flywheel, not the catalyst. He quotes Peter Drucker that most M&As are done down to them being exciting rather than logical.
Bringing it up to date
Collins finishes the latest edition of the book by running through a Q&A on questions that have been raised in the 20 years since the book was published. I have included a number of these points as we have gone along. There are a few points, though, that I think help close off.
He says it is much easier to become great than stay great.
It is a journey of resiliency, not perfection. Just remember the Stockdale Paradox.
There are ups and downs; it isn’t a linear journey. Think of IBM. A rocket ship in the ’60s, 70’s and ’80s. Then somewhat of a fall in the ‘90s, but since the book was published in 2001, they have returned to almost the levels of their golden years.
Success is about the standard and integrity of decisions. It’s about doing the right thing, even on the unseen work. Just think of Steve Jobs with how he demanded Apple products were designed. They had to be as beautiful inside as they were outside. Even if no one sees it, he knows what it looks like, and that’s all that matters.