Do you have the right people on the bus, in the right seat? Is your organization founded on a culture of discipline or tyranny? Are the true leaders the ones in the positions of power? Do you have a mission that takes into account competence, economics, and passion? Good to Great follows 11 publicly traded companies from mediocrity to enduring greatness, and distinguishes the characteristics that led these companies to growth that lasted. These principles can be applied to any company at any stage to maximize the chances of success.
Good is the enemy of great
– We don’t have great schools, government, lives, or companies because we have good versions
– Truly great companies have, normally, always been great
– But, is there a possibility that good companies can become great?
GE outperformed the market 2.8x 1985-2000 (best period)
– In their research, great companies beat the market 6.8x on average
Walgreen’s beat many larger companies, even though it spent the longest time being totally normal or even behind the competition
– Walgreen’s vs Eckerd
Almost any organization can become great
The research for Good to Great (G2G) was done by a 21-person team, usually in small groups
– They were looking for companies that showed 15 years at or below the market, then 15 years exceeding the market by at least 3x
– Found 11 examples
– Showed patterns that beat the industry
Abbott Labs: 3.98x
Circuit City: 18.5x
Fannie Mae: 7.5x
Philip Morris: 7.1x
Pitney Bowes: 7.2x
Wells Fargo: 4x
11 G2G companies, 11 direct comparisons, 6 unsustained comparisons
10 of 11 good to Great CEOs came from inside
Compensation did not affect performance
Great companies focued on what not to do as much as what to do
Neither technology not M&A cannot be a fundamental spark for a great company
– Two big mediocraties do not make a great company
Most employees were not aware of the magnitude of transformation at the time. Changes were not instituted by a revolutionary process
None were in great industries. G2G was not a function of circumstance
Ideas were tested in a lean manner
Dogs that did not bark: companies with potential to be great but that did not happen
Transformation: buildup followed by breakthrough
– Disciplined people
– Disciplined thought
– Disciplined action
Flywheel: gestalt of entire G2G process
– Get great momentum in the flywheel by pushing turn on turn
G2G leaders: self-effacing, quiet, reserved, shy – humility and personal will
– Got the right people on the bus, the wrong people off, and figured out where to drive it
Transcending the curse of competence
– If you can’t be the best at your core business, you can’t build a great company. Even if you’ve been doing it for a long time doesn’t mean you’re the best in the world
Two primary facets of G2G companies
– Building a culture of discipline
– Technology is applied carefully
Building greatness to last: this book is a prequel to Built to Last
The principles presented here are timeless: every economy is a new economy
The best leaders have adhered to some basic principles with severe discipline
Public companies are ideal for this study:
– Agreed-upon results
– Plethora of data
Good as the enemy of great is a human problem
Application of these ideas is different in the social and business sectors
Level 5 Leadership
“You can accomplish anything in life provided that you do not mind who gets the credit” – Truman
Darwin E Smith: became Kimberly-Clark CEO despite not having all qualifications.
– 20 year run, perfect example of taking a good company and making it great
– Quiet, shy. Never sought to be a celebrity
– Was a poor farm boy, lost finger at his International Harvester job
– Earned admission to Harvard Law
– Had nose and throat cancer, held fully to his work schedule during the treatment. Beat the cancer and lived 25 more years
– Made the dramatic decision to sell the paper mills
– “If you have cancer in your arm, you have to have the guts to cut the arm off”
– Despite criticism, the stock eventually soared. They even acquired their competitor Scott paper
Level 5 leaders channel their egos away from themselves. Ambition is for the company, not themselves
Hierarchy of Leadership: (top to bottom)
5. Has extra dimension of humility and will
4. Effective leadership. Commitment to a clear and compelling vision
3. Competent manager
2. Contributing team member
1. Highly capable
Perspective of ‘leadership is the answer to everything’ is like ‘God is the answer to everything’ in the middle ages.
Leadership matters, but we need to have a better understanding about what makes great companies tick
Comparison companies had Level 4 leaders, G2G companies had level 5 leaders
Lincoln was one of the few Level 5 presidents
Colman Mocker Jr.: Gillette CEO, fought hard against takeover by Revlon.
– Made everything he touched the best it could possibly be
– After finally coming into the spotlight after years of hard work, he had heart attack and died
David Maxwell, became CEO of Fannie Mae in 1981. Retired while still at the top of his game, turned over to equal successor Jim Johnson
– Because company was under government charter, Maxwell told Johnson to support social programs instead of pay his compensation package
In 3/4 of comparison companies, the leader set up his successor for failure
Rubbermaid: grew quickly but then disintegrated. Stanley Gault came through as stark leader of the company, with a huge ego
– Did not leave behind a company that would be great without him
– Gault was a tremendous Level 4 leader, but not Level 5
G2G leaders would talk about the company, not themselves. They were very humble
Ken Iverson: Nucor
– Was incredibly modest
They found fewer articles about transition in G2G companies than in comparisons by a factor of 2
Lee Iacocca performed a major turnaround for Chrysler, but then he indulged himself in his ego and autobiography. Chrysler then declined.
Level 5 leaders will do anything to drive results
George Cain had inspired standards. Could not stand mediocrity. Killed Abbott Labs’ nepotism, getting rid of family members who did not share his vision.
– Family members ended up pleased with their huge stock returns
Smith, Mockler, and Cain came from inside the company. Comparison leaders came from outside.
Charles R. “Cork” Walgreen III: Walgreen’s
– Cork took them out of the restaurant business and only into drug stores in 5 years
– Never wavered, doubted, second-guessed
Alan Wurtzel: Circuit City
– Was more of a plow horse than a show horse
– He attributed most of Circuit City’s success to luck
Comparison execs blamed problems on bad luck, where G2G saw these as opportunities and good luck
Window vs. mirror:
– Level 5 leaders attribute luck to success, never looking outside themselves when things go poorly
– Level 4 leaders blame others for problems, credit self for success
It is possible to develop into a Level 5 leader
Our problem is not an absence of Level 5 in society. Our problem is a lack of wisdom to put those with Level 5 skills in positions of power
There have been charismatic Level 5 leaders, e.g. Sam Walton of Wal-Mart
First who, then what:
1. If you begin with who, not what, you can more easily adapt to a changing world
2. The problem of motivating and managing people largely goes away
3. If you don’t have the right people, it doesn’t matter what the vision is. You won’t have a great company
Wells Fargo outperformed the market >3x when the rest of the sector was down 59%
Most of the Wells Fargo leadership team went on to become CEOs of other companies
Bank of America: Weak generals, strong luitenants: If you pick strong generals, competitors will leave. If you pick weak generals, strong lieutenants will stick around
– As opposed to recruiting good people from the start
Two key differentiators between good and great:
1. Get the right people on the bus and the wrong people off
2. Degree of sheer rigor in people decisions
Genius with a thousand helpers: great if the genius sticks around. Often don’t need much management. Problematic if the right executive team isn’t assembled
The amount and structure of compensation does not matter in taking companies from G2G
G2G execs received less than their counterparts
The right people will perform regardless of compensation
More about attraction and retention
Rigorous, not ruthless
Comparisons had 5x more layoffs overall, even if G2G companies had more layoffs during transitions
Letting the wrong people hang around is unfair to the right people. And to the wrong people for not giving them an early out.
Before you ask if you have a bus problem ask if you have a seat problem
How to tell if someone is on the wrong seat or on the wrong bus
1. If you were hiring this person, would you?
2. If this person said he was leaving for an exciting opportunity, would you feel relieved or disappointed?
3. Put your best people on your biggest opportunities, not your biggest problems
When you decide to sell off your problems, don’t sell off your best people
Level 5 leaders are strong in their own right. Not acquiescent.
Core Disciplines for people decisions:
1. When in doubt, don’t hire. Keep looking.
– A company should limit growth based on the ability to attract the right people
2. When you know you need to make a people change, act.
– Be sure you don’t simply have someone on the wrong seat.
3. Put the best people on biggest opportunities, not problems.
– If you sell off problems don’t sell off the best people.
Confront the brutal facts yet never lose faith.
There is nothing wrong with working toward a vision, but G2G companies continually refined based on reality.
Less charismatic leaders often produce better long-term results than their more charismatic counterparts
Charisma can be as much a liability as an asset.
Single most demotivating occurrence: holding out false hopes soon to be swept away by events of reality.
G2G leaders were better at listening and asking questions, instead of holding agenda meetings.
The climate in G2G companies is argument and debate.
Conduct autopsies without blame
Build red flag mechanisms
G2G companies did not have access to better information, but they had mechanisms that turned basic information into information that cannot be ignored
People who had suffered adversity fell into 3 categories:
1. Permanently dispirited
2. Got lives back to normal
3. Used the experience as a defining event that made them stronger
G2G companies were like the 3rd category
All G2G companies faced adversity along the way
Creating a climate where the truth is heard:
1. Lead with questions, not answers
2. Engage in dialog and debate, not coercion and manipulation
3. Conduct autopsies without blame
4. Build red flag mechanisms that turn information into information that cannot be ignored
The Hedgehog Concept
– The hedgehog knows many things but the fox knows one: how to attack the hedgehog, at least until the hedgehog balls up and the fox retreats
– Foxes see the world in all its complexity and opportunity. Scattered and moving on many levels, never unifying into a consistent vision
– Hedgehogs reduce all challenges into simple ideas
Walgreen’s: Best, most convenient drug stores with high profit per visit. That’s the simple concept, the Hedgehog Concept.
Meanwhile, Eckerd pursued things like home video because drug stores were “boring”. Later went away.
Hedgehog Concept distinctions
1. G2G companies founded their understanding on 3 key distinctions
2. G2G translated that into a simple concept
3 circles of understanding:
1. What you can and can’t be the best at
2. What drives your economic engine
3. What you are deeply passionate about
You need all 3 circles to build a true Hedgehog Concept
Wells Fargo’s Hedgehog Concept: Running the bank like a business that would focus on the western U.S.
Not only focusing on your core concept but what you can be the very best at
All comes through understanding
Only one of the G2G companies was in a great industry
Single question that results in a profound insight into an organization’s economics:
What X would have the greatest and most sustainable impact on your economic engine?
Pushing for a single denominator clarifies the business mission
Hasbro’s Hedgehog Concept: Profit per classic brand.
If you successfully apply these ideas, you must keep applying the fundamental concepts that made you great to stay ahead
The Hedgehog Concept is is an interactive process
Avoid bureaucracy and hierarchy and instead build a culture of discipline
Responsibility accounting: every individual is held responsible
Build a culture with the right people who take disciplined action within the 3 circles:
1. Build the culture around freedom and responsibility within a framework
2. Fill that culture with self-disciplined people who are willing to go to extreme lengths to fulfill their responsibilities
3. Don’t confuse a culture of discipline with a tyrannical disciplinarian
4. Adhere with great consistency to the hedgehog concept and create a stop doing list
The most effective investment strategy is a highly undiversified portfolio when you are right
A great company will have many once in a lifetime opportunities
A savior CEO with big bravado will not make a company great
Technology alone cannot be used to create sustained great results, but can be applied within the Hedgehog Concept to achieve great results
Technology can be used to accelerate, but is only complementary to the business’s Hedgehog Concept
Mediocrity is foremost a management failure, not a failure of technology
Those who create great companies are motivated by a deep creative urge and sheer desire to create excellence for its own sake
G2G companies had 3x fewer news articles in the decade leading up to the transition than the decade after
From the inside, these transitions are an interactive process, not a dramatic breakthrough
There was no miracle moment in G2G
The process followed by G2G companies was buildup – breakthrough – flywheel
Harness the flywheel to manage short-term pressures
The Flywheel Effect: as results begin to accumulate, enthusiasm among investors and internal constituents is huge
G2G companies did get commitment and alignment, but it was a transparent process
When you let the flywheel do the talking, you don’t need to fervently communicate the goal
Comparison companies frequently launched new motivation programs, only to frequently fail: the Doom Loop
While specific permutations of the Doom Loop differed, there were 2 common themes:
1. Misguided use of acquisitions
2. Selection of leaders who undid the work of previous generations
For G2G companies, acquisitions generally occurred after the Hedgehog Concept was in place and the flywheel was going. Not the same for comparison companies.
You can but your way to growth, but not greatness
– Two big mediocrities joined together do not make a great company
– Maximum results only come from consistency and coherence over time
Faith in the endgame helps you live through months or years of buildup
With the flywheel, you’ll be able to go from good to great, then enduring great
Alignment comes from results and momentum, not the other way around
From G2G to Built to Last (BTL)
How do the two works relate?
1. BTL early leaders did follow the G2G framework, but as entrepreneurs getting the companies off the ground
2. G2G is a prequel to BTL. Apply G2G to create sustained great results, then apply BTL for sustained great results
3. To shift from sustained great results to an enduring great company of iconic stature, apply the central concept from BTL – the core ideology – and combine it with: preserve the core, stimulate progress
4. Both studies enrich and support each other
There are no specific right core values for becoming a great company
Four BTL key ideas:
1. Clock building not time telling
2. Genius of the AND
3. Core ideology
4. Preserve the core and stimulate progress
Building greatness can radically simplify our lives, involving less suffering and perhaps less work, while increasing our effectiveness
The G2G concepts can be applied in areas beyond business: in our families, communities, and organizations
The recent decline in performance in certain G2G companies (Circuit City and Fannie Mae) is irrelevant to the argument of this book
– 1. Ability to come back even stronger than before. Resiliency, not perfection
– 2. Even if the companies were to fall and never retain greatness, this would not disprove the study
Why did only 11 companies make the cut?
– The problem was not the statistical odds
– The problem was that people squander their efforts on the wrong thing
When choosing people:
1. Do not hire until you find the right people
2. Focus more on character attributes than specialized knowledge
3. Take advantage of difficult economic times to hire great people
Your responsibility is to build a pocket of greatness on your minibus