Susan's Business Book Reports

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Good to Great
Good to Great

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`Good to Great by Jim Collins`⁠
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Book Summary, October 2020, Susan Alban

Susan Voiceover

Things I like

I love that this book has a credible research methodology, which the author clearly explains in the introduction of the book and references.

I also appreciate the clear perspective on what matters, and also on what does not matter. Many of those takeaways (e.g., celebrity leadership, exec comp, branded turnaround effort, etc) resonate with me.

Lastly, this book packs a lot of rich takeaways and thing to consider in a relatively short number of pages (<250 of actual text body). It’s 💯 a worthwhile read when thinking about a business in the long term.

Things I struggle with

Dated?

It feels dated. Companies that emerge as good-to-great companies are Abbott Laboratories, Circuit City, Fannie Mae, Gillette Co., Kimberly-Clark Corp., the Kroger Co., Nucor Corp., Philip Morris Cos. Inc., Pitney Bowes Inc., Walgreens, and Wells Fargo. Clearly, 20 years later many of these companies are no longer “great” or no longer exist altogether. It doesn’t mean the work was wrong when it was done, but it leaves the reader wondering if the takeaways still hold.

Do takeaways hold for non-white male leaders?

All the CEOs are men. I didn’t research race, but I assumed they are all older white men. Which leads me to wonder if the “Level 5 Leadership” holds for female leaders and people of color, both women and men. And I also wonder how that type of leadership is perceived when it comes from a woman or a person of color, rather than an age 50+ white man.

What about the rise of tech?

And then, as of October 2020 when writing this post, the tech/media/telecom sector accounted for 35% of US stock market cap, up from 14% in 1995. How does the rise of tech, big and small, change or adjust the takeaways? I would be first on the preorder list if Jim Collins did a similar analysis in 2021!

Book Methodology

Deep primary research - looked at S&P500 for companies that had middling (market-tracking) performance for a long time, followed by break-out performance for 15+ years. Identified 11 companies that experienced this; also looked at comparison companies in the same industry that did not have breakout performance. Looked for patterns in what they did and didn’t do, that contrasted with the comparison companies.

Lots of things DON’T MATTER

External celebrity leaders (10 of 11 of the companies had internal CEOs; comparison companies had external CEOs at 6x the rate)

Exec comp - no systematic patterns in specific exec comp driving specific behaviors. It’s only good for ensuring you get the right people on the bus. (Pulled salary, stock, bonus incentives, long-term comp data from proxy statements and performed 112 different analyses looking for patterns and correlations, comparing directly to comparison companies.)

Strategy and planning - no patterns in longer planning cycles

Focus only on what to do (also need to focus on what NOT to do)

Tech… (🚩: this book was published in 2001)

M&A

Paying a lot of attention to managing change, alignment, motivating people

No tag line/name/launch for the change.

Industry

Level 5 Leadership

Definition: humility and incredible drive that is in service of the institution, not themselves.

Plan for succession - in 75%+ of comparison companies, leader chose weak successor or set up successor for failure.

Window and Mirror - look out the window for credit when things are going well; look in the mirror for blame when things are going poorly (often attribute great personal successes to luck)

First WHO (then What)

Get the right people on the bus (and in the right seats) before deciding where you’re going to go

If you pick people to join the bus because of where it is going, then what happens if you need to change direction? If people are on the bus because of who else is on the bus, then they’ll be more okay with a change in direction.

Avoid “genius with a thousand helpers” - if you pick the what first, and then recruit people to execute on that vision, you will have this scenario, which will not endure after you move on (or stumble)

Rigorous people processes (not ruthless, layoff-driven culture)

When in doubt, don’t hire. Rule - you cannot grow revenues faster than your ability to hire enough exceptional talent; if revenues continue to outpace, you will not build a great company.

When you know you need to make a people change, act now. Be sure to try another seat on the bus before exiting, but don’t wait.

Churn at management level is polarized - people either leave very quickly or stay for a long time.

Put your best people on your biggest opportunities, not your biggest problems. (If you sell a problem, make sure to keep the best people)

Debate vigorously and then unify and execute as a team.

Taking this approach will ensure you live a good life because you will have surrounded yourself with great people.

Confront the brutal facts (Yet Never Lose Faith)

Infuse decision-making process with “the brutal facts of reality” -

Kroger v A&P example; Kroger execs understood the new reality that Americans didn’t want small dingy stores, but wanted multi-purpose mega stores with lots of parking. This meant shuttering or changing virtually all of their stores. They accepted this reality and A&P did not, but relied on a “what-would-the-original-founder-do” mentality.

Pitney-Bowles cultural value / behavior of “looking under rocks for yucky things” and then dealing with those yucky things.

Having a strong, charismatic personality can be a liability not an asset. People filter brutal facts from you and you can become the "primary reality people worry about, rather than reality being the primary reality"

Lead with vision AND by creating a culture where the truth is heard

Lead with questions not answers —> keep asking questions until you get to the insight. (Focus the questions on the three circles in the hedgehog concept below)

Engage in dialogue/debate, not coercion. —> Good-to-great companies had heated debate in search of the best answers.

Conduct autopsies without blame —> leader can take responsibility to make it safe to learn the truth

Build “red flag” mechanisms —> short pay enables customers to circle items on an invoice and not pay the bill. They don’t have to return the item. This red flag gives an advanced warning that there is something wrong before churn.

Stockdale Paradox - Admiral Stockdale was a POW who survived 8 years by both accepting the reality of the facts and designing ways to survive the brutality AND by believing that he would get out in the end. Those who died quickly were the blind optimists.

You don’t need to spend time motivating great people. BUT having a culture where the truth isn’t heard will de-motivate great people.

The Hedgehog Concept

The fox is wily and has many ways to outsmart their prey, but without clear vision. The hedgehog “knows one big thing”; he can roll up into a spiky ball any time the fox tries to get him. He can simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything… all challenges and dilemmas are distilled to a simple idea.

The idea is the intersection of three circles: what you are passionate about, what you can be the best in the world at, and what drives your economic engine.

Deciding you can be the best in the world at something isn’t driven by bravado; it’s driven by facts. Just a natural outflow from a series of analysis, debate, etc.

Hedgehog concept is not a goal/strategy/intention to be the best. It is an understanding of what you can be the best at.

Hedgehog concept is not necessarily your core business - just because you’ve been doing something for years/decades doesn’t mean you can be the best in the world at it.

Must also define what you cannot be the best at.

Took average of FOUR YEARS for good to great companies to clarify their hedgehog concept. —> very iterative process. Need to have the right people engaged, asking the right questions, debating, making decisions, and doing autopsies/analysis driven by the three circles. Can have a leadership counsel to do this.

Interesting finding - many of the companies were in middling to bad industries and didn’t have an obvious victory (or hedgehog idea), but just muddled through several years of pain with the faith that they would find a way and the diligence to accept the facts as they were, until they found their hedgehog idea. (Stockdale Paradox)

One ratio/metric - understanding what your key profit ratio is, is critical to understanding the economic engine that will drive your Hedgehog (p104) —> this is typically $profit/X. Examples:

Wells Fargo understood that deregulation was making banking a commodity and so it was $profit/employee and focused on barebones branches with ATMs.

Nucor understood that it needed to rely on both great culture/people and on tech and so it picked profit/ton of finished steel; that was the right hybrid

Walgreens understood that density of stores created a virtuous cycle and chose $profit/customer visit (rather than $/store which would have gone down with the higher number of stores they were opening)

Contrasts directly to blind pursuit of growth

A Culture of Discipline

Good to great companies were HIGH on entrepreneurship and HIGH on discipline. Duality to have both clear framework/expectations, and a lot of liberty within those constraints.

Bureaucratic cultures arise to compensate for incompetence and lack of discipline, which arise from having the wrong people on the bus.

Start with self-disciplined people —> disciplined thought (brutal facts of reality) —> disciplined action.

Disciplined, rigorous, dogged, determined, diligent, precise, fastidious, systematic, methodical, workmanlike, demanding, consistent, focused, accountable, responsible —> that was the language used in good-to-great companies and barely at all in comparison companies.

Need to create the culture in the org, not just lead as a disciplinarian

If you do the latter, you will have change but it won’t be sustained.

Budgeting - decide what area is fully funded and what area is not funded at all.

Key discipline - stay in the three circles and remain true to the hedgehog.

Technology accelerants

All good to great companies used tech, but were very choosy in which tech. It was tech that they needed to stay in their hedgehog. E.g., “intranet” that linked all Walgreens pharmacies; barcoding technology for Kroger that lowered inventory needs and freed up cash to invest in new super store concept; Gillette’s manufacturing processes.

But tech accelerated existing momentum; it did not create momentum from tech.

If the technology fits directly into your Hedgehog Concept, then you must become a pioneer in that tech. If it is outside Hedgehog and you need it, go for parity; otherwise, skip it completely.

It is a subset of the discipline finding —> stay in the Hedgehog.

Being more inward focused on creating a great company, and less competition focused, will help limit poor tech decisions / investments.

Flywheel (Doom Loop) & Breakthrough

Many of these companies appeared to be an “overnight success” if you look at the news - e.g., Circuit City had no articles from 1972-82 and 97 from 1983-92, right when it was taking off; however, the team had been slowly working on transforming its business for the preceding decade or so. Same with Nucor.

From the outside, the change looks like a fast revolutionary breakthrough; from the inside, it felt more like an organic and iterative process. (e.g., egg hatching example). But there was no miracle moment.

None of the executives or companies had any kind of tag-line or fanfare around the work they were doing.

Coping with pressure from Wall Street - all these companies were public at the time and had the same pressures.

They communicated a lot to Wall Street about what they were doing and why.

Abbott would set an internal growth goal higher than the goal it set to the street and then reinvest the delta in various entrepreneurial projects.

Managing internal comms

Good to great companies didn’t work on that… they just let results speak for themselves and then people got on board organically.

Alignment follows results and momentum; not the other way around

The Doom Loop

Reaction: changing vision quickly, frequently, and without deep insight/understanding about Hedgehog —> new direction, leader(s), acquisition, etc —> no buildup or momentum —> disappointing results —> reaction

Acquisitions

Bad acquisitions: Peter Drucker - “the drive for m&a comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend your day than doing actual work"

Good acquisitions: happen *after* you’ve found your Hedgehog; is an accelerator of momentum, not a creator.

Thoughts from Built to Last

Clock building not time telling - must endure and adapt across leaders and product cycles - ie, build a clock (versus revolving around a single leader or idea - ie, tell the time)

Genius of AND - embrace both extremes and try to do both instead of choosing

Core ideology - Must have a core beyond shareholder returns.

Preserve the core/stimulate progress - To endure, must preserve the core values and purpose and adapt business strategies and operating practices to the changing world.

A key way to stimulate progress is through a BHAG (big hairy audacious goal) —> bad BHAG is from bravado; good BHAG is from understanding (BHAG must be at the center of three circles)

Jim’s Last thoughts

Best question to ask yourself is not “why greatness?” But rather “what work makes you feel compelled to try greatness?”… If you have to ask the question “why greatness?”, you’re probably in the wrong line of work.

Even for companies that are already great, it’s important to understand why this is the case - “the single biggest danger in business and life, other than outright failure, is to be successful without being resolutely clear about why you are successful in the first place” - Robert Burgelman, Stanford GSB.

Takeaways from the Knowledge Project podcast

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Shane Parrish with Jim Collins podcast⁠

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The 20 mile march - setting a goal that you will hit every (year, quarter, etc) for 20+ years. E.g., be profitable every quarter (Southwest), double processing capacity of a chip every 18 months (Intel/Moore’s Law).

Works because it forces leaders to not just prioritize for hitting this quarter’s goals, but also the next and the next and the next. Means that you will always need to be investing in the future.

Analogous to a person who is going to walk across the country 20 miles every day regardless of the weather or conditions (versus someone who is going to see what conditions are like and then walk more or less accordingly). Also lowers standard deviation of performance.

Good to Great by Jim Collins