Good to Great
Why Some Companies Make the Leap and Others Don't
The Central Theme
"Good to Great" outlines the findings of a five-year research project conducted by author Jim Collins and his team. The book is based on an analysis of 1,435 Fortune 500 companies, and the study resulted in identifying just 11 companies that were able to make the journey from good to great. The companies that made the final cut into the study attained extraordinary results, averaging cumulative stock returns 6.9 times the general market in the fifteen years following their transition points, which include Wells Fargo, Gillette, and Walgreens.
The book is structured around the key concepts that emerged from the research, including the importance of having a Level 5 leader, a culture of disciplined people and disciplined thought, and the use of technology as an accelerator, not a driver of change. If you're interested in learning more about how these companies were able to transform themselves into sustained market leaders, "Good to Great" is definitely worth a read!
The Good to Great companies
Abbott (Upjohn) – Health Care
Circuit City (Silo) – Retail
Fannie Mae (Great Western) – Financial Services
Gillette (Warner-Lambert) – Consumer Goods
Kroger (A&P) – Retail
Nucor (Bethlehem Steel) – Steel
Philip Morris (R. J. Reynolds) – Tobacco
Pitney Bowes (Addressograph) – Business Services
Walgreens (Eckerd) – Pharmacy
Wells Fargo (Bank of America) – Banking/Financial Services
The Good to Worst (companies to contrast the great companies)
Burroughs – Business Services
Chrysler – Automotive
Harris – Aerospace and Defense (previously Business Services)
Hasbro – Toys/Entertainment
Rubbermaid – Manufacturing
Teledyne – Conglomerate (Electronics, Aerospace and Defense)
Clear difference showed up when comparing the good to great and good to worst companies, here are the difference:
Outsider leaders aren't the key to success: 10 out of 11 great CEOs were internal hires.
Executive compensation isn't a driving force behind corporate performance, according to data.
Successful companies don't just focus on what to do to become great, but also what not to do.
Technology can't ignite a transformation from good to great, but it can accelerate it.
Mergers and acquisitions don't make a great company.
Good-to-great companies prioritize creating the right conditions to melt away problems of commitment, alignment, motivation, and change.
Transformations don't need fancy names or launch events; greatness is a conscious choice.
Greatness isn't limited to great industries; it's a matter of choice.
Circumstances don't determine greatness; it's a conscious choice.
The framework
During this project, I will walk you through all chapters of ‘Good to Great‘ and share the central concepts and ideas I learned through studying the materal
Level 5 Leadership
First Who...Then What
Confront the Brutal Facts (Yet Never Lose Faith)
The Hedgehog Concept (Simplicity within the Three Circles)
A Culture of Discipline
Technology Accelerators
The Flywheel and the Doom Loop
From Good to Great to Built to Last
Level 5 Leadership
This concept emphasizes that the leaders who turn good companies into great ones are a paradoxical blend of personal humility and professional will. They are not high-profile leaders with big personalities, but rather self-effacing, quiet, reserved, and even shy. They focus on achieving results rather than personal ambition and ego. These leaders are more like Lincoln and Socrates than Patton or Caesar.
Their core motivation comes from excellency, they care about long term growth past their leadership, the company success is more important than theirs. This is often reflected through taking the blame when things go wrong but never taking the praise if something goes right.
The legacy plays a key role, they think for the longer term and putting all pieces together to make sure the company remains a long term leader. (see AMZN, COST..)
Cultivating Level 5 Leadership
“I believe what you say about the good-to-great leaders. But I’m disturbed because when I look in the mirror, I know that I’m not Level 5, not yet anyway. Part of the reason I got this job is because of my ego drives. Are you telling me that I can’t make this a great company if I’m not Level 5?”
“I will simply point back to the data: Of 1,435 companies that appeared on the Fortune 500 in our initial candidate list, only eleven made the very tough cut into our study. In those eleven, all of them had Level 5 leadership in key positions, including the CEO, at the pivotal time of transition.”
First Who...Then What
This concept highlights the importance of getting the right people on the bus and in the right seats before deciding on a company's vision and strategy. The right people are more important than the vision and strategy because they can help create a great company. The wrong people should be removed, and the right people should be identified and placed in positions where they can make the greatest contribution.
Compensation
‘compensation and incentives are important, but for very different reasons in good-to-great companies. The purpose of a compensation system should not be to get the right behaviors from the wrong people, but to get the right people on the bus in the first place, and to keep them there.’
Example Nucor
Nucor, a successful steel company, built its system around the idea that work ethic is an innate quality that cannot be taught. To attract and keep the best workers, Nucor paid its steelworkers more than any other steel company in the world, but also had a high-pressure team-bonus mechanism. The company aimed to create an environment where hardworking people would thrive and lazy workers would either jump or get thrown right off the bus.
In the pursuit of greatness, companies that have achieved the status of "good-to-great" have prioritized character attributes over specific educational background, practical skills, specialized knowledge, or work experience when selecting the right people for the job.
While they acknowledge the importance of specific knowledge or skills, they believe that traits like work ethic, dedication to fulfilling commitments, basic intelligence, and values are more deeply ingrained and therefore more difficult to teach.
This underscores the importance of building a company culture that values and rewards these character attributes, as they are essential in creating a workforce that is committed to excellence and success.
Whether someone is the “right person” has more to do with character traits and innate capabilities than with specific knowledge, background, or skills.
Rigorous, Not Ruthless
Rigorous and not ruthless are two terms that are often used in the context of work or academic environments to describe approaches to achieving goals or standards.
Rigorous refers to a meticulous and thorough approach to achieving a goal, often characterized by attention to detail, consistency, and a commitment to high standards. A rigorous approach involves careful planning, attention to detail, and a willingness to put in the time and effort required to achieve the desired outcome. A rigorous approach can lead to high-quality work, increased efficiency, and improved results.
On the other hand, not ruthless means being compassionate and empathetic towards others while still maintaining high standards. It is important to note that not ruthless does not mean being lax or lenient when it comes to achieving goals. Rather, it means recognizing the humanity of those around us and treating them with respect and compassion, even in high-pressure or competitive situations. Being not ruthless involves balancing the needs of the organization or team with the needs of the individuals involved, and being willing to make compromises and accommodations when necessary to ensure that everyone is treated fairly and with dignity.
Result:
By combining a rigorous approach with a not ruthless approach, individuals can achieve high-quality results while also maintaining a supportive and collaborative work environment, but how can you achieve it?
How to be rigorous rather than ruthless
When in doubt, don’t hire—keep looking.
Those who build great companies understand that the ultimate throttle on growth for any great company is not markets, or technology, or competition, or products. It is one thing above all others: the ability to get and keep enough of the right people.
When you know you need to make a people change, act.
‘The good-to-great companies showed the following bipolar pattern at the top management level: People either stayed on the bus for a long time or got off the bus in a hurry. In other words, the good-to-great companies did not churn more, they churned better.’ (p.66)
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. This is one of those little secrets of change. If you create a place where the best people always have a seat on the bus, they’re more likely to support changes in direction.’
In conclusion
First Who ... Then What is about the approach of good-to-great leaders in transforming their companies. They prioritize getting the right people on the team before deciding on the vision, strategy, structure, and tactics. This approach is consistently applied as a rigorous discipline. In contrast, comparison companies follow the "genius with a thousand helpers" model, which relies on a visionary leader and highly capable assistants to make the vision happen. However, this model fails when the genius leader departs. Good-to-great leaders were also rigorous in their people decisions, avoiding the use of layoffs and restructuring as a primary strategy for improving performance.
Confront the Brutal Facts (Yet Never Lose Faith)
This concept teaches that to achieve greatness, companies must maintain unwavering faith that they will prevail in the end, regardless of the difficulties, while also confronting the most brutal facts of their current reality. This approach is called the Stockdale Paradox, named after Admiral James Stockdale, who was a prisoner of war in Vietnam.
Kroger vs A&P
Between 1973 and 1998, Kroger stock would have turned $1 into $198, while A&P from 1959 to 1973 would have turned $1 into a maximum $2 ending the period at its beginning value.
Kroger was able to transition into a successful company by embracing change and adapting to the demands of customers, while A&P failed to do so. A&P, once a great company with a successful model, could not keep up with the changing needs of customers, who desired bigger and better stores with more choices.
A&P mounted an increasingly spirited defense against the facts about its failing model, lurching from one strategy to another in search of a solution to its problems. It held pep rallies, launched programs, grabbed fads, fired CEOs, hired CEOs, and fired them yet again, without ever addressing the fact that customers wanted different stores, not just lower prices.
Kroger changed their entire stores into supercombination stores while A&P held on to an ancient model and died off.
The point? To achieve long-term success, a company must confront brutal facts and be willing to change its entire system in response.
‘There is nothing wrong with pursuing a vision for greatness. After all, the good-to-great companies also set out to create greatness. But, unlike the comparison companies, the good-to-great companies continually refined the path to greatness with the brutal facts of reality’’(p81)
Charisma and radical honesty
Effective leadership involves creating an environment where people can speak truthfully and openly. This goes beyond simply allowing people to express their opinions; it means creating a culture where the truth is actively sought and confronted, even if it is difficult to hear.
Leaders who can create such an environment give their teams the opportunity to be heard and ultimately arrive at the truth. This was a key trait of the leaders studied in the book "Good to Great."
A concept that the greatest leaders like Ray Dalio at Bridgewater have adopted.
‘If you have the right people on the bus, you should almost never need to assign blame but need only to search for understanding and learning.(p.87)
As discussed in the level 5 leadership, the best leaders stay clear of hubris and praise their teams for the great work. This trait has another clear repercussion, it creates the opportunity of finding the truth and being able to talk about issues and solutions. It allows for a company to be nimble no matter the size and stay relevant.
‘Those of you with a strong, charismatic personality, it is worthwhile to consider the idea that charisma can be as much a liability as an asset. Your strength of personality can sow the seeds of problems, when people filter the brutal facts from you. You can overcome the liabilities of having charisma, but it does require conscious attention.’
The Red Flag Mechanism
In the information age, having more and better information does not necessarily give an advantage to companies. Many organizations fail not because they lacked information but because they failed to turn information into something that cannot be ignored.
Red flag mechanisms can help accomplish this by forcing individuals or organizations to confront the truth in a way that cannot be dismissed or ignored.
An example of this is when the author issued a bright red sheet of paper to each MBA student at Stanford Business School, allowing them to use it as a flag to stop the class to raise an observation, challenge a professor, or share a personal experience. This allowed the author to confront the brutal fact that his own questioning style was impeding people's learning.
The red flag mechanism was inspired by short pay, a device used at Graniterock, which gives customers the discretion to decide how much to pay on an invoice based on their satisfaction with the product or service.
Red flag mechanisms give leaders a practical and useful tool for creating a climate where the truth is heard and acted upon.
Once again, a model used by Ray Dalio during all meetings and at the core of his radical transparency approach.
I believe in radical truth and radical transparency, all I mean is we take things that ordinarily people would hide, and we put them on the table, particularly mistakes, problems, and weaknesses. We put those on the table, and we look at them together. We don't hide them.
Ray Dalio
All in all, the good-to-great companies started by confronting the brutal facts of their current reality, creating a culture where truth is heard is important in taking a company from good to great.
The four practices to create such a culture are leading with questions, engaging in dialogue and debate, conducting autopsies without blame, and building red flag mechanisms.
The good-to-great companies faced adversity and responded differently, hitting the realities of their situation head-on, resulting in emerging stronger.
The Stockdale Paradox:
Retain faith that you will prevail in the end, regardless of the difficulties AND at the same time Confront the most brutal facts of your current reality, whatever they might be.
The unexpected findings show that charisma can be a liability, leadership begins with getting people to confront the brutal facts, and motivating people is a waste of effort; instead, the key is to not de-motivate them!
The Hedgehog Concept (Simplicity within the Three Circles)
This concept teaches that to achieve greatness, a company must have a simple, clear understanding of what:
It can be the best in the world at
drives its economic engine
it is deeply passionate about.
These three circles overlap, and the intersection is the Hedgehog Concept.
The hedgehog represents a great company that has a clear vision and focus on what it does best, while the fox represents a good company that lacks a clear strategy and tries to do many things at once. The fox is always trying to find new ways to attack the hedgehog, but the hedgehog's simple and effective defense of rolling up into a ball with sharp spikes always prevails. In the same way, great companies focus on what they do best and stick to it, while good companies lack the discipline to do so and try to do too many things at once, ultimately failing to achieve greatness.
Walgreens ($1 into $56 within 25y) vs Eckerd
Like the hedgehog, Walgreens had a simple concept of providing convenient drugstores to its customers and implemented it with consistency and fanatical attention to detail. Walgreens opened its stores in convenient locations and pioneered the concept of drive-through pharmacies, leading to local economies of scale, higher profits per customer visit, and more customer visits. Walgreens became more and more of a hedgehog with this incredibly simple idea, leading to sustained success and becoming the best in the world at convenient drugstores.
In contrast, like the fox, Eckerd was not as focused and latched onto growth for growth's sake. While Walgreens stuck only to cities where it could implement the convenience/clustering concept, there was no evidence of a similarly coherent concept for growth at Eckerd. Eckerd executives lurched after growth for growth’s sake, compulsively acquiring clumps of stores with no obvious unifying theme.
In the precise year of Eckerd’s American Home Video acquisition, Walgreens and Eckerd had virtually identical revenues. Still, ten years later, Walgreens had grown to over twice the revenues of Eckerd, accumulating net profits $1 billion greater than Eckerd over the decade. Twenty years later, Walgreens was going strong, while Eckerd ceased to exist as an independent company.
Having a clear and simple concept, implementing it with consistency and fanatical attention to detail, and focusing on profitable growth through economies of scale is crucial to sustained success. Walgreens followed this strategy and became the best in the world at convenient drugstores, while Eckerd failed to see the benefits of such a strategy and lost to a more focused competitor.
What you can be the best in the world at?
The first key factor to consider when striving for greatness is to identify what you can excel in beyond just your core competencies. It's important to recognize that possessing a core competency does not necessarily mean that you can be the best in the world at it. It's equally essential to understand that what you could potentially be the best at might not even be something that you are currently engaged in.
What drives your economic engine?
Successful companies have a deep understanding of how to generate sustained and robust cash flow and profitability. They also discover the single denominator, such as profit per x, that has the most significant impact on their economics. For organizations in the social sector, this would translate to understanding cash flow per x.
What you are deeply passionate about?
Discovering what you are deeply passionate about is crucial for attaining greatness. Successful companies focus on activities that ignite their passion. It's important to note that the idea is not to stimulate passion but to identify what makes you passionate. By discovering your passions, you can direct your energy towards activities that bring you the most joy and fulfillment.
A Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial.
Before achieving the Hedgehog Concept, the organization is comparable to groping through fog. While progressing on a long journey, the lack of clarity in vision results in a slow and deliberate crawl at every turn.
At each juncture, only a limited perspective is visible, and advancement requires careful consideration. Once the Hedgehog Concept is attained, however, the organization breaks through into a clearing where the fog lifts, and a clear view for miles ahead is presented.
Subsequently, at each juncture, less deliberation is needed, and the pace of advancement can shift from a crawl to a walk, and ultimately to a run.
The 11 core companies
Companies that were already best in the world at the start of their transition:
Abbott Laboratories: Already best by offering a low-cost portfolio of health care.
Circuit City: Already best at implementing “4-S” model.
Fannie Mae: Already best as the player in capital market pertaining to mortgages.
Companies that were already best in the world at the start of their transition:
Gillette: Already best at offering premier global brands of daily needs.
Kimberly-Clark: Already best at providing best paper-based consumer products.
Kroger: Already best by building innovative super-combo stores.
Nucor: Already best at producing low-cost steel.
Philip Morris: Already best at building brand loyalty in cigarettes and other consumables.
Companies that were already best in the world at the start of their transition:
Pitney Bowes: Already best at providing sophisticated back office equipment.
Walgreens: Already best at the convenient drug store.
Wells Fargo: Already best at operating a bank like a business.
What Is Your Denominator?
The best businesses have a key denominator to gain understanding and insight into their respective economic model.
A few examples:
Abbott: Shifted focus to profit per employee Key insight: Contributing to cost-effective health care by shifting from profit per product line to profit per employee.
Circuit City: Shifted focus to profit per geographic region Key insight: Reflected local economies of scale by shifting from profit per single store to profit per region. This allowed them to drive economics beyond individual stores.
Fannie Mae: Shifted focus to profit per mortgage risk level Key insight: Reduced dependence on the direction of interest rates by shifting from profit per mortgage to profit per mortgage risk level. Managing interest risk became a fundamental way to control and reduce risk.
Gillette: Shifted focus to profit per customer Key insight: Leverage the power of repeatable purchases by shifting from profit per division to profit per customer. They recognized the economic power of repeatable purchases like razor cartridges times high profit per purchase.
Key Points
To summarize, The Hedgehog Concept is a key factor for companies to go from good to great. It involves understanding what the company can be the best in the world at and what it cannot be the best at.
Good-to-great companies focus on this understanding and set their goals and strategies based on it, while comparison companies focus on bravado. The concept is not a goal, strategy, or intention but an iterative process that can take years.
The good-to-great companies are more like hedgehogs, knowing "one big thing" and sticking to it, while the comparison companies are more like foxes, knowing many things but lacking consistency. The industry does not determine a company's ability to produce sustained great results.
A Culture of Discipline
This concept emphasizes that companies should have a culture of discipline, which involves disciplined people, disciplined thought, and disciplined action. When a company has disciplined people, it does not need a hierarchical structure. When it has disciplined thought, it does not need bureaucracy, and when it has disciplined action, it does not need excessive controls. When a culture of discipline is combined with an ethic of entrepreneurship, it can produce great performance.
Establish a culture centered on the principles of freedom and responsibility, but within a defined framework.
Populate the culture with self-disciplined individuals who are committed to fulfilling their duties and are willing to take extreme measures to do so, even if it means doing mundane tasks with dedication.
Avoid mistaking a disciplined culture for an oppressive one that exerts control through fear and intimidation.
Consistently follow the Hedgehog Concept with a fervent focus on the intersection of the three circles. Simultaneously, create a "stop doing list" and methodically disconnect anything that is not essential.
‘The good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-disciplined people who didn’t need to be managed, and then managed the system, not the people.’(p139)
Whereas the good-to-great companies had Level 5 leaders who built an enduring culture of discipline, where as the failing businesses had Level 4 leaders who personally disciplined the organization through sheer force.
The top-performing good-to-great companies had a straightforward approach:
"We will only engage in activities that align with our Hedgehog Concept. We won't venture into unrelated businesses, acquisitions, or joint ventures. If it doesn't fit, we won't do it, period."
It takes discipline to say “No, thank you” to big opportunities. The fact that something is a “once-in-a-lifetime opportunity” is irrelevant if it doesn’t fit within the three circles.(p149)
Start a “Stop Doing” List
The best businesses are the best at knowing what not to do while maximizing what works. For example, a budgeting process is best done through determining what to support fully and what to eliminate.
Key Lessons:
Building a culture of self-discipline is essential for sustained great results
Bureaucratic cultures arise from having the wrong people on the bus, not from a lack of rules
A culture of discipline requires adherence to a consistent system while allowing freedom and responsibility within that system
The good-to-great companies appear boring from the outside, but are full of disciplined and intense people
Disciplined thought is as important as disciplined action
A culture of discipline is different from a tyrant who disciplines
Fanatical adherence to the Hedgehog Concept is the most important form of discipline
Staying within the three circles creates more opportunities for growth
Once-in-a-lifetime opportunities are irrelevant if they don't fit within the three circles
Budgeting is about funding activities that fit within the Hedgehog Concept and not funding those that don't
"Stop doing" lists are more important than "to do" lists.
Technology Accelerators
This concept teaches that technology should not be the primary means of igniting a transformation in a company. Instead, companies should focus on carefully selecting technologies that can accelerate their progress towards achieving their goals. Technology alone is not the root cause of greatness or decline.
‘When used right, technology becomes an accelerator of momentum, not a creator of it. The good-to-great companies never began their transitions with pioneering technology, for the simple reason that you cannot make good use of technology until you know which technologies are relevant. And which are those? Those—and only those that link directly to the three intersecting circles of the Hedgehog Concept.’
Our companies:
Abbott:
Pioneered application of computer technology to increase economic denominator of profit per employee
Not a leader in pharmaceutical R&D, leaving that to Merck, Pfizer, and others that had a different Hedgehog Concept.
Wells Fargo:
Pioneered application of technologies that would increase economic denominator of profit per employee
Early leader in twenty-four-hour banking by phone
Early adopter of ATMs
First to allow people to buy and sell mutual funds at an ATM
Pioneer in Internet and electronic banking
Pioneered sophisticated mathematics to conduct better risk assessment in lending.
Walgreens:
Pioneered application of satellite communications and computer network technology
Linked to its concept of convenient corner drugstores, tailored to the unique needs of specific demographics and locations
A "swallow your tonsils" big investment on a satellite system that links all stores together
Led the rest of the industry by at least a decade.
Gillette:
Pioneered application of sophisticated manufacturing technology for making billions of high-tolerance products at low cost with fantastic consistency
Protects manufacturing technology secrets with the same fanaticism that Coca-Cola protects its formula.
the rest can be found page 164 of the book.
80 percent of the companies did not consider technology as one of the top five factors in the transition. In the few cases where technology was mentioned, it was ranked fourth on average, and only two out of 84 executives ranked it as the most important factor. Most of the companies simply focus on their competitive advantage while the rest worries about the rest.
‘Those who turn good into great are motivated by a deep creative urge and an inner compulsion for sheer unadulterated excellence for its own sake. Those who build and perpetuate mediocrity, in contrast, are motivated more by the fear of being left behind.’ (p173)
What did we learn?
Good-to-great organizations have a different approach to technology and technological change than mediocre ones.
Good-to-great organizations avoid technology fads and bandwagons but become pioneers in the application of carefully selected technologies that fit with their Hedgehog Concept.
Good-to-great companies use technology as an accelerator of momentum, not a creator of it. They all became pioneers in the application of technology once they grasped how it fit with their three circles and after they hit breakthrough.
Technological change is not the principal cause of decline or greatness in companies, but how a company reacts to it can be a good indicator of its inner drive for greatness versus mediocrity.
The "crawl, walk, run" approach can be effective even during times of rapid and radical technological change.
The Flywheel and the Doom Loop
This concept highlights that good-to-great transformations do not happen in one fell swoop, but rather, they are the result of relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum until a point of breakthrough, and beyond. In contrast, the doom loop occurs when a company makes hasty decisions, launches revolutions, or implements dramatic changes that ultimately lead to decline.
Overall, this chapter describes the compounding effect of good decisions over time.
Build Up and Breakthrough
Circuit City example
Forbes magazine published the first-ever national profile on Circuit City on August 27, 1984. The article was only two pages and questioned whether the company's recent growth could be sustained. Despite this, it was the first public recognition of Circuit City's success, making it appear like an overnight success story.
The Circuit City success story was actually over a decade in the making. In 1973, Alan Wurtzel took over the CEO position when the company was near bankruptcy. He rebuilt his team and experimented with a warehouse showroom retail format, which eventually led to the creation of the first-ever Circuit City store in 1977. Over the next five years, Circuit City generated high returns and became the subject of media attention. This pattern of fewer articles before the transition and more after is a common one.
Our perception of transitions has been influenced by how they appear from the outside, leading us to assume that they must feel the same for those experiencing them on the inside. However, while transitions may seem like dramatic breakthroughs from the outside, they actually feel more like an organic development process from the inside.
‘The good-to-great companies had no name for their transformations. There was no launch event, no tag line, no programmatic feel whatsoever. Some executives said that they weren’t even aware that a major transformation was under way until they were well into it. It was often more obvious to them after the fact than at the time.’(p182)
This compounding effect of good decisions is a common thought almost all companies had in common:
Abbott:
“It wasn’t a blinding flash or sudden revelation from above.” “Our change was a major change, and yet in many respects simply a series of incremental changes—this is what made that change successful. We did this in a nice stepwise way and there were always a lot of common denominators between what we had already mastered and what we were embarking on.”
Circuit City:
“The transition to focus on the superstore didn’t happen overnight. We first considered the concept in 1974, but we didn’t convert fully to Circuit City superstores until about ten years later, after we’d refined the concept and built enough momentum to bet our whole future on it.”
Gillette:
“We didn’t really make a big conscious decision or launch a big program to initiate a major change or transition. Individually and collectively we were coming to conclusions about what we could do to dramatically improve our performance.”
Kroger:
“It wasn’t a flash from the blue. We had all been watching experimental superstores develop, and we were pretty well persuaded that the industry would go that way. The major thing that Lyle did was to say that we’re going to change beginning now, on a very deliberate basis.”
Aquisitions
It is the lack of clear direction and focused work that leads to a continuous circle of disappointment and bleed as other successful companies continue to grow and solidify their competitive advantage.
Why did the good-to-great companies have a substantially higher success rate with acquisitions, especially major acquisitions?
The key to their success was that their big acquisitions generally took place after development of the Hedgehog Concept and after the flywheel had built significant momentum.
They used acquisitions as an accelerator of flywheel momentum, not a creator of it!
the Flywheel and the Doom Loop.
The Flywheel is characterized by an organic process of buildup that leads to a breakthrough. This is achieved by taking consistent steps, one after another, with the goal of building momentum. To achieve this, companies in the Flywheel follow a pattern of disciplined people, disciplined thought, and disciplined action.
They confront the brutal facts, develop a clear Hedgehog Concept, and harness appropriate technologies to accelerate their momentum. Major acquisitions are made after the breakthrough to further accelerate progress. The Flywheel's momentum is infectious and maintains consistency over time, with each generation building on the work of previous ones.
On the other hand, the Doom Loop is characterized by a lack of buildup and jumping straight to a breakthrough. Companies in the Doom Loop embrace fads and engage in management hoopla, rather than facing the brutal facts. They demonstrate chronic inconsistency, always lurching back and forth and straying far outside their three circles.
They jump right into action without disciplined thought and without first getting the right people on the bus. Fearful of being left behind, they run around like Chicken Little in reaction to technological change.
Major acquisitions are made before the breakthrough in a doomed attempt to create momentum. They spend a lot of energy trying to align and motivate people and sell the future to compensate for a lack of results. Inconsistency over time is common in the Doom Loop, with each new leader bringing a radical new path. This results in the Flywheel grinding to a halt, and the Doom Loop begins anew.
Summary
Overall the good-to-great transformation process is a gradual, organic and cumulative process, despite appearing dramatic and revolutionary to outsiders. Sustainable transformations involve consistent effort in a single direction over a long period of time, like pushing a flywheel to build momentum.
In contrast, comparison companies attempted to skip buildup and make dramatic changes without consistent direction, resulting in the doom loop. Good-to-great companies mostly used major acquisitions after breakthrough to accelerate momentum, while comparison companies used them to create a breakthrough. Good-to-great leaders didn't spend much time trying to create alignment or motivate employees because results and momentum primarily drove alignment. Finally, the short-term pressures of Wall Street weren't in conflict with the flywheel effect, but rather aligned with it
From Good to Great to Built to Last
This concept is about how to turn a good organization into one that produces sustained great results. It is a prequel to Built to Last, which is about how to take a company with great results and turn it into an enduring great company of iconic stature.
Ultimately, the team decided to conduct the Good to Great research as if Built to Last didn't exist, in order to minimize bias and clearly identify the key factors in transforming a good company into a great one. They planned to later assess the relationship between the two studies.
The four conclusions:
Enduring great companies from Built to Last followed the good-to-great framework in their early stages, but as entrepreneurs of small, early-stage enterprises.
Good to Great should be seen as a prequel to Built to Last, where its findings should be applied to create sustained great results, and then Built to Last should be applied to go from great results to an enduring great company.
To shift from sustained great results to an enduring great company, combine the central concept of Built to Last, which is discovering core values and purpose beyond just making money, with the dynamic of preserve the core/stimulate progress.
Good to Great answers a fundamental question raised in Built to Last regarding the difference between a "good" BHAG and a "bad" BHAG, and the ideas from each study enrich and inform the ideas in the other.
Core Ideology: the Extra Dimension of Enduring Greatness
Hewlett and Packard's success in building an enduring great company was due in part to their adherence to a guiding philosophy or "core ideology." This ideology consisted of core values and a core purpose beyond just making money, similar to the principles in the Declaration of Independence. This guiding philosophy is a key "extra dimension" that helped elevate their company to elite status.
In truly great companies, profits and cash flow are like blood and water to a healthy body: absolutely essential for life, but not the very point of life. Enduring great companies don't exist solely to deliver returns to shareholders.
Enduring great companies preserve their core values and purpose while their business strategies and operating practices endlessly adapt to a changing world. This is the magical combination of “preserve the core and stimulate progress.”(p209)
Example Disney from 1920 to 1990
PRESERVE:
Fanatic attention to detail, Passion for creative imagination, The "Disney Magic", Abhorrence of cynicism, Bring happiness to millions!
CHANGE:
1920s: Cartoons
1930s: Full-length feature animation
1950s: Television, Mickey Mouse Club
1960s: Theme parks
1980s: International
1990s: Cruise Line
Closing thoughts
As you can see from the sheer volume of this blog, this book was packed with great information and calls to action. Becoming a level 5 leader and applying the mindset, be it from the relationships throughout the company, hires, leaders, decision making, acquisitions, mental fortitude and much more requires the upmost focus on the long term and core values/principles.
I see an enormous amount of parallels between these lessons and what is needed to be a successful trader and investor in itself. I will periodically revisit this blog in order to keep myself in check and see if I am behaving as a level 5 leader as I hope you will too.
If you liked this blog, please make sure to share it around and let me know what concrete steps you are taking to become top-tier yourself in the comments!
More Books:
"Scaling Up: How a Few Companies Make It...and Why the Rest Don't"
by Verne Harnish
→This book provides practical advice for growing and scaling a business, with a focus on developing effective systems and processes.
"Zero to One: Notes on Startups, or How to Build the Future"
by Peter Thiel and Blake Masters
→This book provides practical advice for entrepreneurs looking to build successful startups by focusing on innovation and developing a unique competitive advantage.
"Leaders Eat Last: Why Some Teams Pull Together and Others Don't"
by Simon Sinek
→This book explores the importance of leadership in building successful teams and organizations, based on insights from a range of industries and disciplines.
Thanks for the hard work and creative insights. You nailed this! Since publication (2001) what has happened to these companies? Kinda like the football player that does not want to endure the curse of being the cover athlete for Madden football. Really appreciate your hard work, it/you are a valuable gift to the community!
I have read every single Substack post of yours. I am truly a huge fan. I have genuinely learned a lot from you. Just wanted to make this comment to let you know the impact of your good work that it has on people like me. Truly, Thank You!!