The follow-up to Built to Last, Jim Collins’s influential study of 18 of America’s enduringly great companies, Good to Great leverages a 20-person research team, dozens of interviews, and thousands of pages of documents to answer two questions: Can a good company become a great one? And, if it can, how?
To identify clear examples of good-to-great transitions, Collins and his team searched for companies with 15-year returns equal to or below the general market that, after a distinct transition point, recorded 15-year returns at least three times the general market. They found 11 companies that met this criteria.
Collins and his team then identified a “comparison company” for each good-to-great company. The criteria for comparison companies was that (1) they were similarly resourced and situated as their relative good-to-great companies and (2) their returns remained at or below the general market return after the transition point.
The researchers also examined six “unsustained comparisons”—companies that beat the market after the transition point but failed to sustain those results across the full 15-year threshold.
The 11 companies are listed below. Comparison companies are in parentheses, followed by the companies’ industries.
Unsustained comparisons:
The great companies followed six essential steps:
Good-to-great companies have what Collins et al. call “Level 5” leaders. Level 5 leaders are personally humble, almost shy, but highly driven professionally—more like Lincoln than Patton.
They avoid the limelight and tend to credit exterior forces or colleagues for their companies’ successes. Although they’re often personally likable and inspiring, they’re not usually “charismatic.”
Their lack of ego enables them to concentrate on one thing and one thing only: the company’s success.
How to achieve it: Collins admits that Level 5 characteristics are likely a product of both nature and nurture and so are difficult to create out of whole cloth; he also doesn’t have hard data to back up any suggestions he might make. His best advice for aspiring Level 5 leaders is to follow the other precepts he outlines. That way, even if you aren’t a Level 5 leader, you’ll at least be acting like one.
Good-to-great companies retain the right people before embarking on any specific program.
A good-to-great team is composed of people who care deeply about the company and will argue passionately for the decisions they believe are right (but will come together to support whatever decision is eventually reached).
Avoid at all costs the “genius with a thousand helpers” model; management teams should be composed of independent and critical thinkers, not “yes people.”
How to achieve it: (1) Don’t hire until you’re sure you have the right person; (2) recognize when you need to make a change (whether by shifting a role or letting someone go) and act swiftly; and (3) assign your best people to your biggest opportunities rather than your biggest problems.
Good-to-great companies are evangelical about recognizing market realities and reacting in kind.
That said, no matter how dire the facts, they never lose faith that, eventually, they’ll prevail.
The key is to be stoic yet hopeful, realistic without turning cynical.
How to achieve it: With the right management team—one comprising sharp, critical thinkers—the facts should never be in short supply. Leaders can encourage truth-telling by: (1) Beginning meetings with questions, not answers; (2) cultivating, rather than stifling, debate among the team; and (3) conducting clear-eyed analyses of mistakes without assignation of blame.
“Foxes” know many things and see the world in all its complexity, whereas “Hedgehogs” know one big thing and order the world according to that thing.
A good-to-great company thinks like a hedgehog by developing a “Hedgehog Concept”—an elegant, easy-to-understand guiding philosophy based on facts—that it adheres to fanatically.
How to achieve it: A company’s “Hedgehog Concept” is derived from the answer(s) to three questions: (1) At what can I be the best in the world? (2) What is my financial engine? And (3) What am I profoundly passionate about?
Good-to-great companies make the jump because they constantly refer to and consistently realize their Hedgehog Concepts. Rigorous adherence to a Hedgehog Concept saves companies from panic acquisitions or misguided projects.
Good-to-great companies also lack the administrative and managerial burdens of other companies—with the right people in place and an easy-to-understand Hedgehog Concept, the need for tight management or layers of bureaucracy withers away. Discipline does not mean a tyranny presided over by the executive.
How to achieve it: (1) Allow individuals freedom within a clear framework of responsibility; (2) retain self-disciplined people who are driven to produce results; (3) recognize that a disciplined culture is different from a culture led by a tyrant or disciplinarian; and (4) adhere fanatically to hedgehog thinking. A key technique for staying true to your Hedgehog Concept? Create a “stop doing” list.
For good-to-great companies, technology isn’t the creator of great results but their accelerant.
Rather than follow technological fads and adopt new technology for its own sake, good-to-great companies pioneer particular uses of new technology.
How to achieve it: When evaluating a new technology, the key question to ask is: How does this technology impact my Hedgehog Concept? If it doesn’t, you can safely ignore it and/or accept parity in its use; if it does, you must figure out how you can lead in the application of that technology.
Each step on the road to great takes time—there is no bolt from the blue or miracle moment.
Collins likens the process of going from good to great to the turning of a heavy flywheel. To get the flywheel moving takes continuous effort and dedication, but once it’s spinning, its momentum keeps it going. Greatness is the result of the steady, disciplined adherence to the six steps described above.
Unfortunately, many leaders are under the impression that massive success can happen overnight—by dint of a splashy initiative, big-ticket acquisition, or cutting-edge technology. These moves all too often fail and lead to further drastic measures—restructurings, layoffs—which lead to further declines and on and on. This painful cycle is the “doom loop,” and it can be avoided by the diligent observance of Collins’s six steps.
In Good to Great, renowned consultant and business-school professor Jim Collins and a team of research assistants set out to learn (1) whether good companies can become great companies and (2) if they can, how.
Collins’s answers to those questions, which are detailed in the following chapters, have made Good to Great a touchstone text for managers and consultants alike. (It helps, too, that the book’s findings are empirically based and its concepts straightforward.)
It’s important to note, however, that the book was published nearly 20 years ago, and Collins and his team performed their research in the five years before that.
What this means for a contemporary, moderately informed reader is that some of Collins’s case studies may seem odd, given that they failed to sustain greatness.
For example, among the companies Collins lauds are:
Circuit City
Fannie Mae
Wells Fargo
Was fined $185 million by the U.S. Consumer Financial Protection Bureau in 2016 for the creation of millions of fraudulent accounts
Paid a $1 billion penalty in 2018 to federal regulators as part of a settlement for abuses in its auto- and home-loan programs
Paid a $2.09 billion civil penalty in 2018 as part of a settlement for abuses in its home-loan program that contributed to the 2008 financial crisis
We at Shortform won’t be entering into the debate about whether these examples undermine Collins’s findings. According to his criteria at the time of his writing, the companies Collins dubs “good-to-great” were indeed great, and he remains an in-demand authority on management techniques.
It’s also possible that a follow-up study to Good to Great would find that Circuit City and the other troubled good-to-greats abandoned the principles that made them great in the first place. For example, as it lost ground to Best Buy in 2007–2008, Circuit City laid off its most talented (and well-paid) workers for a quick cash boost. A move like this contradicts Step #2 of Collins’s program, which emphasizes the hiring and retention of good people.
We also believe Collins’s ideas are useful outside of the business realm, and the fate of a Circuit City or Fannie Mae doesn’t disqualify people from using Collins’s precepts in their daily lives.
At a dinner Collins was attending in 1996, a McKinsey managing director pointed out a flaw in Built to Last, Collins’s 1994 bestseller that explained how long-lasting companies achieved their success. The flaw was that the companies Collins studied were, for the most part, always unique—they never had to make the leap from just good to great.
Thus the idea for Good to Great was born: to study whether good companies can indeed become great companies and, if so, how they can.
Over five years, Collins’s team of 21 researchers reviewed close to 6,000 articles and generated over 2,000 pages of interview transcripts to determine whether and how companies can go from good to great.
Collins’s criteria for a good-to-great company was as follows:
A fifteen-year stock return at or below the general market return; followed by
A transition point; resulting in
Fifteen-year cumulative returns at least 3x the general market return.
The team chose fifteen years as the default scale for two reasons:
1. It’s long enough to rule out lucky breaks or one-offs; and
2. It exceeds the average CEO’s tenure, thereby mitigating the singular effects of a particular leader.
Meanwhile, the team chose the 3x stock-return metric because it exceeded the returns posted by companies commonly thought of as great (Intel, Boeing, Walt Disney, etc.).
Collins and his team found 11 companies that satisfied the criteria. The answer was yes: companies could go from good to great. But how did these companies make the jump?
To determine what set these 11 companies apart from their competition, Collins and his team compiled a list of “comparison companies.” Each comparison company
Competed in the same industry as its relative good-to-great company;
Possessed similar resources and opportunities as its good-to-great company; and
Featured a fifteen-year stock return at or below the general market return that remained at that level after the good-to-great company’s transition point.
The 11 companies are listed below. Comparison companies are in parentheses, followed by the companies’ industries.
In addition to direct comparisons with statically good companies, Collins and his team compared the good-to-great companies with companies that showed great results but couldn’t sustain them over the fifteen-year window (“Unsustained Comparisons”). Those companies are:
Once Collins and his team had determined the good-to-great companies and their comparisons, they compiled and coded material related to each company’s strategy, technology, leadership, culture, compensation structure, and management turnover. They also conducted interviews with the executives who presided over the various companies at the transition point.
In the process of analyzing and coding the various facets of the good-to-great companies and their comparisons, Collins and his team were clued into key concepts by a number of surprising differences.
High-profile, celebrity CEOs brought in from the outside to whip a company into shape actually hurt a company’s ability to transition from good to great.
“Strategy”—that is, the formulation of a long-term plan of any kind—didn’t correlate with good-to-great. Both the good-to-great companies and the comparison companies had long-term strategies in place.
Technology was insignificant as far as starting a transition from good-to-great. It helps hasten a transformation, but isn’t required for a transformation to begin.
Mergers and acquisitions were not a cause of greatness.
Good-to-great transformations weren’t highlighted by a press release, announcement, rollout, or anything at all. Rather, they were the result of steady, dogged work that, to observers inside the company and out, seemed perfectly ordinary—even boring.
The particular industry wasn’t important: Some good-to-great companies specialized in unglamorous areas yet were able nevertheless to produce great results.
So how did the good-to-great companies do it? Collins provides a tidy chronological diagram that details the companies’ unique traits.
Buildup Phase
Breakthrough Phase
To head off the notion that these features can be implemented or cultivated overnight, Collins and his team came up with the “flywheel” analogy. A heavy flywheel takes an enormous amount of energy to get going—but once it’s spinning, it only takes a small amount of energy to keep it turning or to increase its speed. Good-to-great companies achieve their key strengths steadily and doggedly; they stay patient in the confidence that, with the right cogs in place, the breakthrough will come.
The opposite of the flywheel is the “doom loop.” A company that tries to revolutionize its strategy, culture, product, or process in one fell swoop is fated to fail.
All of these concepts will be explored in the coming chapters.
Good-to-great leaders exhibit “Level 5 Leadership”: Personal humility coupled with professional drive. Comparison company leaders, by contrast, were often egotistical, charismatic, and eager to credit themselves and blame others.
Despite Level 5 leaders’ personal modesty, they do whatever it takes to get results.
Level 5 leaders groom successors so that their companies stay successful after they depart. The leaders of the comparison companies, however, because they believed themselves to be geniuses or felt threatened by other managers’ rise, devoted no time to educating successors or preparing the company for their inevitable departure.
Level 5 leaders tend to emerge from within the company, rather than get brought in from the outside.
Instead of “looking in the mirror” to give credit for their company’s success, good-to-great leaders will “look out the window,” apportioning credit to external factors (e.g., luck) or their colleagues.
If we’re asked to name a successful CEO, we’re liable to think of celebrity executives like Tim Cook and Elon Musk, figures who have a larger-than-life presence and appear frequently in the media.
(Shortform example: We’re less likely to think of someone like Rodney McMullen, current CEO of Kroger. McMullen was raised on a farm in Kentucky, was the first in his family to go to college, and began his career at Kroger as a part-time stock clerk. He has no Twitter feed, and his hobby is collecting books. Yet he runs the largest supermarket chain (by revenue) and the second-largest general retailer in the U.S.)
Through their research, Collins and his team discovered that all of the good-to-great companies had leaders like McMullen: personally humble but intensely driven and disciplined professionals.
Collins and his team dubbed these unique executives “Level 5 Leaders.” Level 5 leaders check their egos at the door and sacrifice personal glory for the institutional good. A Level 5 leader’s primary concern is company success, not his or her own.
To distinguish Level 5 leaders from more ordinary managers, here are all 5 levels of contributors:
Level 5 Leaders tend to avoid the public eye, have a reserve demeanor, and even tend to shyness. But while not ambitious for themselves, they are ambitious for the company - they never back down from taking responsibility or making a difficult decision.
For example, Darwin E. Smith, CEO of Kimberly-Clark from the 70s through the 90s, was no darling of reporters: He wore unfashionable suits, was uncomfortable in interviews, and preferred the company of manual laborers to that of fellow executives. Rather than take flashy vacations to exotic locales, Smith spent his time off on his property in rural Wisconsin, performing hard labor himself.
Smith’s “aw shucks” demeanor, however, belied a rigorous and gutsy businessman. Shortly after he became CEO in 1971, Smith and his team determined that coated paper, which constituted the core of Kimberley-Clark’s business, featured both little opportunity for growth and poor competition. He made a momentous decision: to sell the company’s paper mills and go all in on consumer paper goods, where growth potential was significant and competition fierce.
The decision was panned by industry analysts, but it paid off: During Smith’s 20-year tenure as CEO, Kimberly-Clark produced cumulative stock returns 4.1x the general market return.
Because Level 5 leaders subsume their egos to a single objective—making their companies successful—they are compelled to groom successors to ensure their companies’ continued success.
David Maxwell, CEO of Fannie Mae in the 80s, for example, took over a company losing $1 million a day and transformed it into one earning $4 million a day in profit. Rather than cling to the job, Maxwell retired at the height of his powers in 1990, leaving the company in the able hands of his chosen successor, Jim Johnson.
Maxwell’s “company-first” mentality continued even into his retirement. When his generous retirement package came under fire in the U.S. Congress, Maxwell told Johnson to redirect the amount still to be paid—about $5.5 million—to the Fannie Mae foundation so that it could help low-income Americans secure mortgages. For Maxwell, the company’s reputation was more important than his personal gain.
Good to Great leaders were often promoted to chief executive rather than hired from outside.
Good-to-great executives Darwin Smith (Kimberly-Clark), Colman Mockler (Gillette), and George Cain (Abbott Laboratories) all emerged from within the ranks of their respective companies, whereas comparison CEOs like Al Dunlap (Scott Paper) and Lee Iacocca (Chrysler) were brought in.
In Collins’s interviews, good-to-great CEOs credited their colleagues—or just dumb luck—for their companies’ successes, whereas comparison leaders were quick to blame outside factors or others for their companies’ failures.
Good-to-great leaders will “look out the window” when assigning credit for their successes, whereas lesser leaders will “look in the mirror.”
A prime example is Joseph F. Cullman, CEO of Philip Morris in the 60s and 70s, who watched Marlboro become the most popular cigarette brand in America. Despite leading the company to returns 7x the general market, Cullman staunchly refused to take credit for the company’s success, instead pointing to predecessors, contemporaries, successors—and luck. In fact, at the request of his admiring colleagues, Cullman wrote a book originally intended for their enjoyment only. The title? I’m a Lucky Guy.
The leaders of Collins’s comparison companies, unlike their good-to-great peers, were egotistical or braggadocious; brought in from outside the company hierarchy; reluctant to groom successors; and eager to take credit and deflect blame.
The flaws of the comparison company leaders all stemmed from their egocentrism. They didn’t groom successors because (1) they wanted to be the “lead dog” and (2) if the company failed after they left, it would be a testament to their personal impact. They took credit and deflected blame because, in their minds, they were the smartest people in the room and couldn’t be wrong.
Level 5 Leadership (comparison): Lee Iacocca (Chrysler)
Lured away from Ford to Chrysler in the late 70s, Iacocca deserves credit for leading one of the most impressive turnarounds in business history—he took a company on the brink of bankruptcy to 3x returns on the general market by the midpoint of his tenure.
But shortly thereafter, he began to concentrate more on growing his personal brand than Chrysler: He frequently appeared on talk shows and wrote an autobiography touting his business genius. He even contemplated running for president!
The second half of his tenure reflected his priorities: Chrysler stock fell 31% behind the general market return.
And despite the company’s diminishing performance, Iacocca refused to pass the torch. He postponed his retirement so many times, employees joked that his last name stood for “I Am Chairman of Chrysler Corporation Always.” This ensured a weaker leadership when he inevitably left the company, one way or another.
After he finally left in the early 90s, Chrysler returned briefly to glory, but the gaps in its next generation of leadership quickly became clear. The company eventually had to be bought out by Daimler-Benz.
Collins admits that the traits that epitomize a Level 5 leader, like humility and ambition for the group, may be difficult to cultivate, as they’re a product of a particular person’s upbringing, life and work experience, and personality.
Also, because his research focused on what it takes for a good company to become a great one—rather than what life experiences result in a Level 5 leader—he lacks the hard data to back up any suggestions he might make.
His best advice, if you suspect that your personal ambition might prevent you from qualifying as a Level 5, is to mimic the actions of Level 5 leaders as described in the remainder of the book. Level 5 leadership and the disciplines covered later are strongly correlated, so it stands to reason that, by adhering to those disciplines, one might achieve Level 5 status (or something approximating it).
Answer the following questions to learn what kind of leader you are.
Think of a recent success, whether at your job or in your personal life. Describe the success below.
Now explore your reaction to that success. Were you quick to take credit or deflect it? Did you boast about your success or take it in stride?
Now think of a recent setback, and describe that setback below.
Explore your reaction to the setback. Were you quick to take blame or deflect it? What have you learned, either about your work or yourself, from the setback?
Good-to-great companies recruit and secure top talent before embarking on any transformative changes.
In the good-to-great companies, the management team was cast as a group of equals pushing toward a common goal. Comparison companies, meanwhile, typically followed the “genius with a thousand helpers” model—when a visionary leader surrounds him- or herself with people who can help realize that specific vision.
Good-to-great executives will perform regardless of the specifics of the compensation system, as long as compensation is reasonable.
Leaders of the good-to-great companies were disciplined in hiring and firing decisions, but they weren’t ruthless—they made people changes according to a rigorous standard and relied far less than their comparison-company peers on layoffs and restructurings.
Good-to-great teams boast a comradeship that lasts well beyond their tenure with the company.
Contrary to their expectations, Collins et al. discovered that good-to-great leaders assembled talented management teams before implementing any revolutionary reforms or setting off in a new direction.
The good-to-great executives concentrated on people first for three reasons:
1. When good people come on board before a new direction is unveiled, they’re coming on board because of who else is on board. This means, if the company has to change direction down the road, these folks will stick with you—because it was never about the direction in the first place.
2. With the right people, the need for motivation and management diminishes significantly—you’ve already determined your team is there for the right reasons and can handle whatever challenges arise.
3. Great vision without great people is a nonstarter—even the most innovative executive needs a diversely talented team to help realize his or her goals.
The Right Team: Wells Fargo
Wells Fargo’s rapid rise began in 1983, but the groundwork for its triumph was laid a decade earlier, when then-CEO Dick Cooley put together one of the most talented management teams in banking (the most talented, according to Warren Buffett).
Cooley predicted that banking would undergo massive changes in the coming decades, but he was also humble enough to know he couldn’t predict what those changes would be. So he instead decided to attract and retain as much talent as he could, even if positions had to be created for the new hires.
The strategy paid off when the major change—banking deregulation—came. While Wells Fargo’s sector as a whole trailed the general stock market by 59%, Wells Fargo boasted returns 3x the market.
Wells’s eye for talent was confirmed in the years after its triumph. Many of the executives that oversaw the bank’s navigation of banking deregulation went on to become CEOs of other major companies, including U.S. Bancorp, Household Finance, and Bank of America.
The Right Team: Pitney Bowes
Dave Nassef, an executive at Pitney Bowes, spent time in the Marine Corps, and he and his managers look more for character and discipline than technical skills when they make hires.
The idea is that job-specific skills can be taught, whereas work ethic, moral rectitude, and dedication are much harder to instill in someone who lacks them.
What makes a great team great? Collins et al. found that the executive team at good-to-great companies (1) comprised leaders at or near Level 5 and (2) debated with each other vigorously over decisions.
Collins’s evidence suggests that a “team of rivals” approach—in which a leadership group is encouraged to argue enthusiastically with each other—is vital for taking a company from good to great.
The key, however, is making sure the team eventually falls in line behind the final decision. The management team may disagree vehemently on almost everything in the runup to making a decision, but they must always come together to support whatever decision is reached.
The comparison companies, meanwhile, tended to subscribe to the “genius with a thousand helpers” principle. Rather than assemble a team of Level 5 executives with leeway to disagree, the comparison companies opted to enlist a bold leader who then cultivated a group of “good soldiers”—individuals whose capabilities were limited to helping the leader realize his or her vision instead of challenging and molding that vision.
The Right Team (comparison): Eckerd
Jack Eckerd, the brilliant and charismatic CEO of Eckerd Corporation, turned two pharmacies in Delaware into a thousand-store empire.
He was the initiator and executor of his company’s strategy; he neither developed an effective executive team nor groomed a successor.
His boundless personal energy eventually attracted him to politics, and he left Eckerd Corp. in the 70s to run for office and serve in the Ford Administration.
Shortly after his departure, the vacuum of talent in the management ranks became clear: Eckerd’s fortunes took a turn for the worse, and they were eventually acquired by J.C. Penney.
One might expect good-to-great companies to employ executive compensation schemes that favor stock options—how else are you going to incentivize executive performance?
But Collins found no correlation between compensation systems and performance: Some good-to-great CEOs were compensated with stock, others with cash. Collins also found a wide range among the good-to-great executives in terms of salary amounts and bonus incentives.
The only consistent finding Collins turned up was that good-to-great executives tended to be paid less than their comparison counterparts ten years after the transition point.
It all points back to assembling a great team first. As long as the compensation package makes sense, the right executives will work tirelessly to make a company great. Level 5 leaders are driven not by financial incentives but personal principle.
Although data was less readily available for compensation for nonexecutive employees, what Collins et al. did find conforms with their topline finding—that getting the right people on the bus first mitigates the need to incentivize performance.
Getting the right people on board sometimes means cutting workers, but indiscriminate layoffs can result in good people being jettisoned.
Good-to-great companies operate according to rigorous standards for performance. If a manager or employee isn’t meeting the standard, then that person either needs to shape up or be cut loose. Mass layoffs to preserve capital or restructure the business, however, are rarely found in good-to-great companies.
Despite good-to-great companies’ rigorous expectations, these companies relied far less on head-count layoffs than the comparison companies. Of the 11 good-to-great companies Collins studied, 6 initiated no layoffs at all from ten years before the transition point to 1998, and four others recorded only one or two. Among the comparison companies, layoffs were 5x more common.
The Right Team: Wells Fargo
Wells Fargo acquired Crocker Bank in 1986 and, shortly thereafter, laid off 1,600 managers, including most of Crocker’s top executives, on one day.
At first glance, this seems like a classic case of one company buying another for scrap. But in reality, Wells Fargo was adhering to their exacting standard for their managers.
Crocker’s management was old school, enjoying a lavish executive dining room with expensive China and a gourmet chef. Wells Fargo’s management, on the contrary, conducted itself much more humbly, eating food prepared by a service that typically fed college students, for example.
Wells’s management knew the majority of Crocker managers wouldn’t fall in line with Wells’s culture, and so they made the move. And not only: Wells retained some Crocker managers that met their standard and fired their own managers, thereby proving that ability and performance, rather than tenure or position, was king.
1. When in doubt, don’t hesitate to pass.
Good-to-great companies don’t compromise on whom they hire—they always want the best fit for an opening, and they’re willing to be patient until they find it. Don’t hire sub-par people for the sake of growing quickly.
2. Know when a personnel change is essential, and act swiftly.
A failsafe sign that the wrong person is on the bus is when you have to start managing that person tightly.
Keeping that person on board just delays the inevitable; it frustrates that person’s team (because they have to pick up the slack), it frustrates you (because you’re constantly having to educate) and, in fact, it frustrates the person (because he or she might be able to flourish elsewhere if terminated).
One alternative to letting the person go is to find a different role for the person. If the person is willing and able, you might end up saving yourself the hassle of filling a hole. But if the person doesn’t rise to the occasion, the only solution might be to part ways. The key is to act, before the problem ramifies.
3. Save your best opportunities for your best people.
It’s common sense to put your best people on your biggest problems, because they’re the most likely to fix the problem. But to be great, you have to put your best people on your biggest opportunities, not your biggest problems.
For example, Philip Morris’s Joe Cullman transferred one of his most able managers from the company’s booming domestic division to its miniscule international business. The manager ran with it, turning Marlboro into the best-selling cigarette internationally three years before it took top honors in the U.S.
Beyond the material benefits of getting the right people on the bus, there are interpersonal benefits as well: Good-to-great managers love what they do, love the companies for which they do it, and love the people with whom they get to do it.
Collins found that good-to-great leaders described their executive tenures as love affairs or the high points of their lives. They relished coming into work and sharing their careers—and lives—with their colleagues.
Philip Morris’s good-to-great executive team, for example, kept offices at the company even after their retirement, and, despite their disagreements, continued to come into work just to see each other.
1. True or False: I should hire the best person available for an open position, even if I have reservations about that person.
5. True or False: When presented with talent, you should retain it, even if there’s no current need for that talent.
Answers:
Good-to-great leaders exhibit a psychological duality that Collins dubs the “Stockdale Paradox”—a stoic acceptance of business realities coupled with an unwavering faith in eventual triumph.
In the same way that good-to-great leaders maintain discipline in their hiring and firing decisions, they stay disciplined in terms of market realities. If the facts are clear, good-to-great leaders will respond to those facts without hesitation.
Of course, in order to respond to facts, leaders must cultivate a culture in which facts can be discovered and expressed—without fear of reprisal or blame.
Although good-to-great leaders are always checking themselves against reality, they don’t respond to every change in the economic weather: Once the facts have dictated a course of action, good-to-great leaders will pursue that course doggedly and diligently.
Admiral Jim Stockdale was the highest-ranking U.S. prisoner at the infamous North Vietnamese POW camp dubbed the “Hanoi Hilton.” Over the course of his eight-year imprisonment, he was tortured more than 20 times and suffered unimaginable physical and psychic pain.
When Collins asked him which prisoners didn’t make it, he replied, “the optimists.” The optimists were the ones who thought they would be rescued well before they actually were. With each optimistic prediction—“We’ll be out in a month”; “We’ll be out by the end of the season”—that didn’t come to fruition, these soldiers lost more and more of their will to survive. They died of “broken hearts.”
Stockdale endured because he was able to confront and manage the brutal reality of his day-to-day life in the camp—interrogations, torture—without losing hope that one day he would be freed.
Leading Like Stockdale
Each good-to-great company faced adversity on its path to great, whether in the form of crushing debt (in the case of Fannie Mae) or a massive product recall (in the case of Abbott Laboratories).
Good-to-great leaders approach these challenges in the same way Stockdale did his imprisonment: They accept and address the brute facts of reality while never losing faith that the company will emerge victorious.
Facts Over Fantasy: A&P and Kroger
At the beginning of the 1970s, two well-established grocery companies—A&P and Kroger—were similarly positioned to take advantage of new consumer demand for a one-stop shopping experience: Both companies had almost all their assets invested in grocery stores, and both were strongest in slower-growth areas of the U.S.
But whereas Kroger saw the demand for “superstores”—establishments that sold everything from conventional groceries to prepared foods to nutritional supplements and medicines—and met it by overhauling 100% of their stores, A&P stayed the course—and got buried. From 1973 to 1998, Kroger generated returns 10x the general market and 80x that of A&P.
A&P’s failure wasn’t due to lack of information. In fact, A&P executives rolled out an experimental store, called The Golden Key, that was completely separate from the A&P brand and provided the supercombination store experience. The store was a success, but A&P’s management simply didn’t want to accept the results: The CEO, Ralph Burger, was more concerned with honoring the company’s founding principles than adjusting to a changing marketplace.
A&P’s fate was sealed when they embarked on a steep price-cutting strategy to grab market share, which, when the customers still didn’t materialize, resulted in a vicious cycle of cost-cutting and further decline.
The executives who led Kroger’s transformation, when reminiscing about the decision to change strategy, expressed a kind of hardiness. That is, they were going to go where the facts led them, critics and competitors be damned.
It should come as no surprise that good-to-great leaders make good decisions, but the key is how those decisions are determined. They’re determined by the unvarnished pursuit of facts and good-faith attempts to address those facts.
But how does a leader cultivate a culture where truths can be sought and aired? Collins suggests four guiding principles:
1. Question first, then offer answers
Good-to-great leaders tend to conduct meetings socratically, pumping their team for information and insight and asking tough questions to unearth assumptions.
The purpose of the questioning is not to elicit consent (“...don’t you agree with me?”) but rather to increase understanding.
Alan Wurtzel, for example, the leader of Circuit City during its rapid rise, earned the nickname “the prosecutor” for his persistent questioning of his colleagues.
2. Debate for stakes, not for show
All too often an executive will solicit input from the management team just to give them a sense of being heard, then pursue the direction he or she already had in mind.
Good-to-great executives, however, cultivated atmospheres where heated dissent and debate had real implications for company strategy.
For example, in 1965, Ken Iverson was promoted from division head to CEO of Nucor, taking the reins of a nuclear-energy corporation that was hovering near bankruptcy. He fostered a series of debates among his team, some of which escalated into screaming matches, to determine where to take the company next. Each of Iverson’s major decisions emerged from these debates. Thirty years after Iverson ascended to CEO, Nucor had transformed itself from a middling nuclear-energy company into the most profitable steelmaker in the U.S.
3. When a move goes wrong, analyze without blame
Sub-Level 5 leaders will often attempt to bury bad news or shift blame to subordinates when a decision goes awry.
Good-to-great leaders, however, don’t shy away from looking mistakes in the face; in fact, they conduct detailed autopsies, without ascribing fault, to ensure the same bad decision doesn’t get made twice.
Joe Cullman, for example, for all his success at Philip Morris, made a terrible bet on the Seven-Up Company, selling it at a loss seven years after acquiring it. Philip Morris managers talked openly to Collins about the lessons learned from the acquisition gone awry, and Cullman himself took sole blame for it.
4. Implement “alarm bell” systems
Comparison companies like Bethlehem Steel, Upjohn, and Bank of America had all the same information as the good-to-great companies, yet they failed either to capitalize on opportunities or change course to respond to the facts of reality.
One reason for these failures was ineffective “alarm bell” mechanisms, which are procedures that enable members of the management team to call a total halt to particular programs or strategies and raise concerns. Alarm bell mechanisms allow pressing facts to reach the executive in quick and unvarnished fashion.
Upjohn, for example, had an idea that its new products would be problematic, yet it ignored the unfavorable data indicating the problems. An effective “alarm bell” mechanism would have (1) prevented those products from reaching market and (2) saved Upjohn money and market share.
We’re accustomed to treating “charisma”—a person’s ability to rouse and inspire others—as a plus in a leader.
It’s true that charisma in an executive can be a great advantage; but it can also, without the CEO’s knowing it, stifle truth.
This is because a charismatic leader, through force of personality, can create his or her own reality: Colleagues may be too timid or intimidated to raise vital objections or deliver bad news. A less charismatic leader, by contrast, is less likely to cause others to censor themselves.
Charismatic leaders must stay vigilant to make sure they’re getting the straight facts from their subordinates.
Facts Over Fantasy: Winston Churchill
During WWII, Churchill was highly aware of his own charisma. He knew that because of his bold leadership and stirring speeches, his subordinates and military commanders might be inclined to give him sugar-coated reports from the field so as not to disappoint him.
To head off any fluff that could result in disaster, Churchill created a department called the Statistical Office whose sole purpose was the compilation of facts. Churchill frequently consulted this Office when making decisions, saying, “Facts are better than dreams.”
(Shortform note: The following chapter inaugurates the “Breakthrough” phase of a good-to-great company’s timeline, when a good company takes its first definitive step toward becoming great. But it’s important to note that this step won’t pay off unless the proper leadership, people, and climate—the subjects of the first three chapters—are in place.)
People can be divided into foxes and hedgehogs: Foxes know many things and engage with a complex world on its own terms; hedgehogs know one big thing and subsume the world’s complexity to a single, simple, unifying idea.
Good-to-great leaders are hedgehogs—they develop a simple concept in response to the facts of reality and pursue that concept vigorously and with singular focus.
Collins et al. determined that “hedgehog concepts” emerge from a Venn diagram consisting of three key questions: What can I do better than anyone else in the world? What is my financial engine? And: What am I profoundly passionate about?
Hedgehog Concepts don’t strike like lightning bolts, but rather develop through an iterative process of debate, decision, and analysis.
Consider the thinkers with the most long-lasting influence: Adam Smith, Darwin, Marx, Freud, Einstein—each took the seeming chaos of the world and boiled it down to a single, easy-to-understand concept.
Like these thinkers, good-to-great leaders look at a complex world and produce simple, elegant concepts to filter out noise and provide a steady guide for their companies.
Hedgehog Thinking: Walgreens
From 1975 to 2000, Walgreens delivered stock returns 15x the general market return, dwarfing the performance of Eckerd, its comparison company.
Walgreens’s resurgence was fueled by an utterly simple concept: to build the most convenient drugstores with the highest profit per customer visit in the industry.
Once the concept had been determined, it was just a matter of doing whatever it took to serve the concept: building stores on corners rather than midblock, clustering stores in high-traffic areas, providing drive-through pharmacy services, and adding highly profitable services like one-hour photo development.
Eckerd, meanwhile, had no unifying concept for growth. It made sporadic deals to acquire stores in discrete areas, and even tried getting into the home-video industry by purchasing American Home Video Corporation (a move that resulted in a $31 million loss). Twenty years after that ill-starred purchase, Walgreens was sustaining its stellar performance—and Eckerd no longer existed as an independent company.
At a glance, a Hedgehog Concept might just seem like sound strategy or sharp business sense.
But Collins et al. discovered that good-to-great companies’ guiding concepts were driven by research and understanding along three axes.
Imagine a Venn diagram composed of three circles:
Rather than focus on “core competencies,” good-to-great companies homed in on an area of their business they led (or could lead) the world in.
For example, by the 1960s, Abbott Labs hadn’t invested enough in R&D to compete with major pharma companies like Merck. So, even though Abbott had focused on pharmaceuticals for its entire existence, CEO George Cain decided to move the company into the areas of hospital nutritional products and diagnostic devices, areas with which the company had flirted and in which opportunity was significant. Abbott eventually became a leading company in both these areas.
The takeaway is this: If you can’t be the best in the world in a particular area, even if it’s your core business, then it can’t be part of your Hedgehog Concept. It’s equally useful to define what you cannot be the best in the world at, and to avoid that sector.
Upjohn, Abbott’s comparison company, illustrates how the lack of a Hedgehog Concept can lead to ruin. First, Upjohn attempted to take on Merck, not realizing that it could never be the best pharmaceutical manufacturer in the world. When it fell further behind the industry leaders, it tried to diversify into areas it would be impossible to conquer. Later, it returned to pharmaceuticals, focusing on “ethical drugs,” but the market was already well beyond them. They were acquired in 1995.
It might be tempting to assume that the good-to-great companies happened to be operating in booming industries at the transition point—but, in fact, only one of the good-to-great companies was in a high-return industry. (Collins et al. ranked each of the good-to-great companies’ industries by averaging returns for the top companies within those industries.)
The reason the good-to-great companies were able to excel regardless of industry was their sharp insight into the fundamental economics of what aspect of their business would drive profits. They formulated a single “economic denominator,” defined as a ratio such as “profit per X,” and aligned their strategy around that ratio. The challenge was to define the correct X to produce the correct strategy.
For example, a common-sense economic denominator for a pharmacy—or any retail company—is profit per store. This thinking would lead to a strategy of cutting stores and lowering costs per store, at the expense of customer experience.
Walgreens, however, knowing that it wanted to maximize convenience, also knew that profit per store would likely diminish (because more convenience = more stores in a smaller area = less profit per store). So they transformed their thinking: They optimized their stores for profit per customer visit, thereby aligning their economic denominator with what they could do better than anyone else in the world—build convenient drugstores.
Likewise, banks used to focus on the economic denominator of profit per loan. But in the era of deregulation, banking services became a commodity - profit per loan would be competed down to zero. In response, Wells Fargo focused on a new denominator: profit per employee. This encouraged the development of low-overhead branches and adoption of ATMs.
In contrast, the comparison companies didn’t discover a key economic denominator, and thus did not develop an insight into what would make for successful economics.
(Shortform note: Collins notes that each industry has its own economic forces, so there are no standard correct denominators. The point is that identifying the key denominator that best illustrates successful economics is important.)
Although good-to-great companies certainly wanted to maximize profits, they weren’t simply looking for golden opportunities. Rather, they pursued courses of action that inspired their people. They only chose opportunities that their team could get passionate about.
For example, while its competitors ran a race to the bottom by manufacturing ever-cheaper disposable razors, Gillette went in the opposite direction, designing and producing sophisticated shaving systems that its technicians and executives could get excited about.
Comparison companies, by contrast, evidenced no personal investment in their decisions. R. J. Reynolds, unlike good-to-great Philip Morris, saw the tobacco industry simply as a way to make money. When smoking’s terrible health effects came to light, R. J. Reynolds diversified into industries it also didn’t care about, eventually yielding to a leveraged buyout. Philip Morris, meanwhile, staffed by devoted smokers, stuck with tobacco and prevailed. (Shortform note: Collins acknowledges the ethical complexity of praising a cigarette manufacturer.)
In the intersection of the three circles lies your Hedgehog Concept. This is a deep understanding of where you can play, win, and make a profit.
When trying to figure out your Hedgehog Concept, you might be disheartened by the realization that you’re not the best at anything. That’s OK. Most good-to-great companies were not the best in the world at anything, nor did they show potential to become the best. But they were doggedly determined that such a thing existed and that they would find it, and they eventually succeeded.
(Shortform note: The three circles are a helpful tool for personal growth as well. If you’re at a standstill in your career or looking for a change, you might use them to determine your true calling.)
In contrast to good-to-great companies, comparison companies tended to avoid the deep understanding of developing the Hedgehog Concept. Instead, they moved with bravado, focusing on growth for its own sake and seeking to get bigger without an understanding of why this was helpful.
Given the simplicity and elegance of the three-circle Venn diagram, it stands to reason that identifying your Hedgehog Concept would be equally straightforward. But Collins et al. discovered that good-to-great companies took an average of four years to land on their Hedgehog Concept.
Developing the insight to fill out the Venn diagram factually and produce a Hedgehog Concept takes time and effort.
One way to speed up the process is to empanel a “council”—a group of decision-makers and stakeholders well-placed to consider and debate the three questions of the diagram. The council should feature the following:
A robust mandate to drive understanding about the organization and its mission
Five to twelve members, led by the chief executive and drawn from any job level in the company
Spirited debate without fear of retaliation
Mutual respect among members
Permanent existence, punctuated by regular meetings (anywhere from weekly to quarterly)
A nonofficial character (it shouldn’t appear on any organizational charts)
Default company hierarchy (i.e., any final decision rests with the chief executive, not consensus among council members)
Once the council is created, its path toward unearthing a Hedgehog Concept is cyclical and regular:
1. Debate the three questions of the Venn diagram.
2. Make decisions based on the results of those debates.
3. Analyze results or produce autopsies.
4. Repeat.
Use this exercise to home in on your own Hedgehog Concept, whether in work or life.
Answer the question, “What can I do better than anyone else in the world?” Brainstorm some answers and write them below.
Answer the questions, “What is my financial engine? What is my economic denominator?” (Reminder: this is a ratio like “profit per X” that best reflects the economics of your business.)
Answer the question, “What am I profoundly passionate about?” Brainstorm some answers and write them below.
Review your answers to the three questions. Are there overlaps between your answers to the different questions? Is there a Hedgehog Concept among your answers that can fit in the space where all three circles insect?
Good-to-great companies foster cultures of discipline—in which every person gauges his or her actions according to the three circles and the company’s Hedgehog Concept.
Good-to-great companies get the right people—i.e., disciplined people—on the bus first, and so there’s little need for tight management. Good-to-great companies don’t need to retain micromanaging, disciplinarian executives for the same reason.
A counter-intuitive technique for maintaining an organization’s discipline is to create a “stop doing” list (rather than a “to do” list).
Discipline from Top to Bottom
With a Level 5 leader, the right people, and a Hedgehog Concept in place, creating a culture of discipline becomes a matter of nudges rather than shoves.
As a general definition, discipline in an organization means a fanatical devotion to hedgehog thinking—the use of the three circles for any action and constant referral to the Hedgehog Concept.
In practice, a disciplined culture features four attributes:
A balance of freedom and responsibility for individual managers
Self-disciplined people intensely focused on achieving the organization’s goals
A rigorous executive, not a tyrannical one
A quasi-religious adherence to the Hedgehog Concept, supplemented by a robust “stop doing” list
Good-to-great companies, consistent with their Hedgehog Concept, build frameworks within which individual managers have the liberty to innovate and experiment.
That freedom, however, doesn’t preclude accountability—managers must continue to perform at the level demanded by the company framework.
A financial officer for Abbott Laboratories, for example, initiated a sea change in the company’s culture by instituting a system of “Responsibility Accounting.” In this system, each cost, income, and investment was pegged to the specific individual responsible for that item. Managers were allowed to be creative in how they realized their ROI, but, by the same token, they were tasked individually for realizing that ROI.
The system worked: Abbott simultaneously reduced administrative costs (to the lowest number in the industry as a percentage of sales) and drove innovation (earning a majority of its revenue from new products).
In a good-to-great company, managers at every level employ the three circles and refer repeatedly to the Hedgehog Concept.
Their understanding of and devotion to the company mission means they’ll police themselves, cutting waste and making sound decisions.
Wells Fargo’s utilitarian ethos, for example, was present from the executive suite on down. Its CEO, Carl Reichardt, knew that banking deregulation would necessitate the elimination of waste. So he got rid of the corporate jets and the executives-only elevator; and he even scolded people for using fancy binders for reports.
Bank of America’s executives, on the other hand, preserved the perks—corner offices, oriental rugs, dedicated elevators, a corporate jet—despite the exigencies of banking deregulation. Even as the company lost over $1.5 billion over three years, executives refused to sell the corporate jet.
Good-to-great leaders like Wells Fargo’s Carl Reichardt create disciplined cultures that permeate the whole organization. The culture is based on each individual’s understanding of the three circles and their Hedgehog Concept, and so it persists even when the Level 5 leader leaves.
In contrast, when comparison companies had disciplined cultures, that discipline was imposed from the top-down with the executive serving as disciplinarian, rather than through a general culture permeating the whole organization. When the executive left, the discipline left with him.
Ray MacDonald, for example, who led Burroughs to returns 6.6x the market in the 60s and 70s, was a talented but polarizing leader—he frequently criticized those he deemed less smart than he and got results by putting intense pressure on his people.
Once MacDonald retired, however, Burroughs’s management was plagued with indecision. Whereas in the past they could rely on Burroughs’s personal discipline, they now lacked the culture of discipline to make decisions on their own. By 2000, 23 years after MacDonald’s retirement, Burroughs’s returns had fallen 93% below the market.
A culture of discipline is one in which hedgehog thinking—the use of the three circles and adherence to the Hedgehog Concept—is dogma.
Hedgehog thinking prevents companies from diversifying recklessly or adopting the latest fad simply because it's new. Remember: A “once-in-a-lifetime opportunity” is bound to be a mistake if it doesn’t pass the three-circle test.
Both Pitney Bowes and R. J. Reynolds, for example, were strongly affected by governmental reform. Only one—Pitney Bowes—reacted with hedgehog thinking (but not without some hiccups).
Disciplined Culture: Pitney Bowes
Up until the 1960s, Pitney Bowes held a monopoly on postage-meter machines in the United States. Their 100% market capture produced profit margins in excess of 80%.
During the 1960s, however, the company was forced by a consent decree to license its patents to competitors for free, ending its monopoly and setting off a steep decline punctuated by silly acquisitions and ill-advised joint ventures. (One such misstep resulted in a $70 million loss and a 54% hit to stockholder equity.)
The slide seemed unstoppable—until a Level 5 executive named Fred Allen took over the company.
Allen instituted a program of “disciplined diversification” based on the Hedgehog Concept that Pitney Bowes’s future lay in back-office products rather than postage meters. Rather than make acquisitions indiscriminately and out of desperation, Allen placed careful bets on cutting-edge office technologies and products that fit with the company’s new Hedgehog Concept.
Through disciplined hedgehog thinking, Pitney Bowes not only clawed its way back to profitability but exceeded expectations. From its 1973 nadir to 2000, the company bested many of the most famous companies in the world, including Coca-Cola, Motorola, and Hewlett-Packard.
Disciplined Culture: R.J. Reynolds (comparison)
Like Pitney Bowes, R.J. Reynolds’s business was shaken by federal action—in this case, a 1964 Surgeon General report that linked smoking to cancer.
But unlike Pitney Bowes (or Philip Morris), R.J. Reynolds strayed from their Hedgehog Concept—to be the best tobacco company in the United States—and acquired a shipping company and an oil company, thinking they would ship their own oil.
After sinking $2 billion into their fledgling shipping business—an industry about which they knew nothing—they finally saw the light and sold the shipping company.
The Beauty of the “Stop Doing” List
Companies as well as individuals are inclined to create “to-do” lists—tasks and goals they hope to accomplish in the future.
Good-to-great companies make “to-do” lists as well, to be sure, but they also make “stop doing” lists.
Faithful and rigorous use of the three circles and the fanatic pursuit of the resultant Hedgehog Concept mean that some actions of the company—those that lie outside the three circles—will become obsolete.
Hence budgeting becomes a question not of allocating funds to all existing departments and initiatives, but rather deciding which functions of the company contribute to the Hedgehog Concept and which don’t. If an activity doesn’t serve your Hedgehog Concept, you should stop doing it.
Darwin Smith, CEO of Kimberly-Clark, for example, had a revolutionary “stop doing” list. He quit releasing annual earnings forecasts, because he saw them as detrimental to his long-term vision. He did away with job titles (except in cases where the outside world demanded them), because he perceived that managers were sapping resources based on title rather than need. And, most important, he stopped producing paper, switching the company’s core business over to consumer goods in accordance with his Hedgehog Concept.
It's important to focus. Use the prompts below to draft your own “stop doing” list.
Revisit the previous exercise, where you explored your own Hedgehog Concept (or, simply, a concept that intrigued you). Now, in the space below, list what you need to stop doing in order to realize that concept. Feel free to list several items, and for each item, describe how your stopping it fits with your Hedgehog Concept.
Look at your “stop doing” list and brainstorm some strategies you might use to stop yourself or your company from doing these things. What are those strategies?
Good-to-great companies engage with groundbreaking technologies in a very specific way: Rather than bet the house on the technology itself, they think deeply about how the technology can serve the company’s Hedgehog Concept.
In other words, good-to-great companies don’t use technology to create growth but to accelerate it. Their breakthroughs are born of the yeoman’s work of developing a Hedgehog Concept, not diving headlong into the latest fad technology.
Mediocre companies fear being left behind, driving them to adopt new technology as a reflex without methodical thought. But research suggests technology is usually not the root cause of rise or decline - it’s merely an accelerant on what the company is already doing.
A good rule of thumb is “crawl, walk, run”—slow down and think about how a technology can help you realize your Hedgehog Concept, then move carefully toward a strategy. Once the strategy is in place and chugging along, however, don’t be afraid to step on the gas.
Collins and his team found, to their surprise, that 80% of the good-to-great leaders they interviewed didn’t list “technology” as a top-five reason for their companies’ success; and only two out of 84 executives listed “technology” as the number-one factor in their transition.
This is because the good-to-great companies were more concerned with the other elements of greatness: Retaining the right people, developing a Hedgehog Concept, cultivating a disciplined culture, etc.
That said, good-to-great companies that recognized when a new technology fit with their Hedgehog Concept made sure they were pioneers in the use of that technology.
Tech Done Right: Walgreens
When drugstore.com had its IPO in July of 1999, its stock price quickly rose threefold to $69 a share, resulting in a $3.5 billion valuation.
Walgreens, meanwhile, seen as a stodgy brick-and-mortar pharmacy company destined for the dustbin of history, lost nearly $15 billion in market value as investors raced to capitalize on the ease and quickness of online shopping.
Rather than panic, Walgreens took stock. They analyzed how the Internet could support their Hedgehog Concept of providing the most convenient shopping experience and maximizing profit per customer visit. They hit upon the idea of enabling customers to order medicines online and then pick them up at any Walgreens they chose, whether in-store or via Walgreens’s drive-through windows.
Once Walgreens’s plan was in place, they went big, rolling out a sophisticated website with impressive functionality and reliability.
Within a year, Walgreens’s stock price had doubled—and drugstore.com had foundered, needing to lay off 10% of its workforce to conserve cash and shedding nearly all of its initial value.
In terms of technology, what separates good-to-great from simply good is the presence of the other good-to-great factors. If you had given Nucor and Bethlehem Steel the same technology at the same time, Nucor still would’ve prevailed: because it already had the other good-to-great factors in place.
Tech Done Right: Nucor v. Bethlehem Steel
A classic case study in business-school curricula, Nucor adopted a number of trailblazing techniques of steel manufacture, including mini-mills, continuous thin-slab casting, and electric arc furnaces, that helped it outperform traditional steelmakers like Bethlehem Steel.
But in his interviews with Collins and his team, Nucor CEO Ken Iverson neglected to include “technology” in the top-five factors for his company’s success. From his point of view, the primary factors of Nucor’s success were the horizontalization of the company’s hierarchy and employees’ commitment to the company’s philosophy. The company’s technological innovation, though certainly important, would have been wasted without the culture Iverson incubated.
The timeline of Bethlehem Steel’s decline bears Iverson out. Bethlehem was hampered by poor management, a situation epitomized by tense labor relations that went back decades. By 1986, the year Nucor saw its breakthrough in continuous thin-slab casting, Bethlehem was already down 80% relative to the market. That is, its demise was hastened by a technological deficit, not caused by it.
Early adopters of new technologies rarely come out on top. For example, who’s heard of VisiCalc? (VisiCalc, believe it or not, was the first major computer spreadsheet program. It lost out to Lotus 1-2-3, which, in turn, lost out to the current undisputed king, Excel.)
The lack of proof that first-mover advantage works suggests that technology itself is rarely the cause of greatness or decline. Second, third, or fourth followers often win over the first mover.
What drives many mediocre companies to adopt a new technology is the fear of being left behind. In contrast, good-to-great companies were pushed by an internal urge to become excellent, with technology merely facilitating that goal.
Rather than race to incorporate a new technology to relieve the fear of being left behind, you might avail yourself of a “crawl, walk, run” approach:
Crawl: Experiment with the new technology internally and facilitate a robust debate on its potential fit with your Hedgehog Concept.
Walk: Begin to integrate the technology with your preexisting systems and priorities. Ask yourself continually whether the technology is serving your Concept or distracting you from it.
Run: If the new technology provides clear advantages in your pursuit of your Concept, don’t hesitate to bet big and make a splash.
The “Flywheel Effect” captures the overall feeling of being inside a good-to-great company. To start a heavy flywheel spinning takes an immense amount of hard effort, but once momentum kicks in, it looks unstoppable.
Even though the results are dramatic, flywheels do not result overnight from one concerted action or one flashy launch or one lucky break. They are the result of a long period of discipline and dedication to a Hedgehog Concept.
A common excuse of mediocre companies is that Wall Street stifles long-term strategy through its insistence on short-term results. Great companies face the same pressures, but they persist with building their flywheel. The results speak for themselves, earning the grace of Wall Street investors.
Whereas the good-to-great companies employed a “buildup phase” that eventually yielded a “breakthrough phase,” the comparison companies attempted to skip the slow work of the buildup with ill-advised acquisitions or other risky moves. With each misguided decision came disappointing results, which further increased the pressure to make bold moves, which resulted in further disappointment—the “doom loop.”
Media accounts of good-to-great success stories are by necessity incomplete—they latch onto the result of a yearslong process rather than the process itself.
For the good-to-great companies themselves, the breakthroughs are far less shocking, because, by dint of the Stockdale Paradox (confronting the facts while keeping faith) and a culture of discipline, those “breakthroughs” seem like the organic outcomes of a transparently obvious strategy. The breakthrough is just the moment when the flywheel starts spinning of its own accord.
Flywheels vs. Doom Loops: Circuit City and Nucor
Alan Wurtzel, Circuit City’s Level 5 leader, inherited the CEO position from his father in 1973, but the company didn’t receive national recognition until 1984, when Forbes published a feature on its swift rise, portraying it like an overnight success story.
In fact, Wurtzel had inherited a nearly bankrupt company in 1973, and it took every bit of those eleven years for Circuit City to work its way to breakthrough. From rebuilding the executive team to exploring a warehouse-showroom model of retail to favoring consumer electronics over appliances, Wurtzel pursued a fact-driven and carefully paced transition.
Nucor’s buildup, too, was largely ignored by the media. Ken Iverson and his team started revamping Nucor in 1965, and by 1975, the company had built three mini-mills and reimagined its culture. But it wasn’t until 1978 that Business Week published the first major article on the company.
The transformations that turn good companies into great companies don’t have a name or a brand or a tagline—in fact, they’re barely discernible as discrete processes at all. There is no miracle moment. There is, rather, the culmination of the dogged, disciplined pursuit of excellence.
That said, to ensure that everyone in their organizations buys into their initiatives, good-to-great leaders make sure they’re communicating each turn of the flywheel—each incremental advance—to their people.
Kroger CEO Jim Herring, for example, when he was leading the supermarket chain’s transformation, created alignment across the 50,000-person company by presenting tangible results to his employees, even if those results were humble. The upshot was that people extrapolated from the smaller accomplishments and got excited about where the company was headed.
Given analysts’ and traders’ affinity for the quick return, there’s constant pressure on companies to make an impact now rather than later.
But good-to-great companies, featuring disciplined cultures and a stubborn adherence to their Hedgehog Concepts, recognize that greater benefits are to be had from persistent, consistent effort than short-term acquisitions or restructurings that might make a splash in the markets.
Thus good-to-great companies develop mechanisms for managing the short-term pressures from Wall Street. For David Maxwell of Fannie Mae, that mechanism was educating analysts on what the company was doing (i.e., explaining its Hedgehog Concept). He admits that not everyone believed Maxwell’s plan would save Fannie Mae, but as the small triumphs mounted and the results became obvious, Wall Street eventually got on board.
For Abbott Laboratories, the mechanism was a clever deflection tactic built around its long-term objectives.
Flywheels vs. Doom Loops: Abbott Laboratories
To mitigate the pressures of the stock market, Abbott would offer middle-of-the-road growth projections to Wall Street, then set internal goals for much higher growth. At the same time, it would maintain a ranked list of new ventures that it had yet to fund, dubbed the “Blue Plans.”
At the end of the year, having exceeded Wall Street’s expectations by reaching or nearly reaching its internal goal, Abbott would release to Wall Street a growth number between the original projected number and the actual one. Abbott would then take the remaining growth funds and channel them into the Blue Plans, thereby simultaneously keeping Wall Street happy and priming the pump for long-term results.
Rather than hashing out a Hedgehog Concept, evaluating every decision according to it, and advancing their organizations stoically and faithfully, the comparison companies tended to launch flashy new programs in a desperate attempt to build motivation and momentum. They did so reactively and impulsively, without deliberately understanding the key market fundamentals that would increase the likelihood of success.
These programs, because they attempted to skip over the buildup phase and proceed directly to breakthrough, invariably failed: They lacked the necessary foundations to produce sustained results. The failing programs were then replaced by further flashy programs, which met the same fate for the same reason, and the cycle began all over again. Thus: the Doom Loop.
Flywheels vs. Doom Loops: Warner-Lambert (comparison)
Between 1979 and 1998, Warner-Lambert, the direct comparison to Gillette, was led by three CEOs, each of whom instituted drastic changes in direction and philosophy: from consumer products to healthcare and back again and forth again.
These moves were driven by CEO ego—each wanted to make his mark on the company and make big new flashy changes—rather than the diligent use of the three circles.
In the same period, the company underwent three restructurings, laying off 20,000 workers in the process, and its stock returns bottomed out.
Two years later, Warner-Lambert was acquired by Pfizer and ceased to exist as an independent company.
Acquisitions and leadership changes aren’t intrinsically dangerous—the good-to-great companies featured both in the course of their transformations. But it was the way they used them that spared them the doom loop.
The good-to-great companies executed acquisitions at rates more or less equal to the comparison companies. The good-to-great companies, however, went shopping only after seeing success with their Hedgehog Concept—to turbocharge a flywheel that was already spinning—whereas the comparison companies executed acquisitions to create momentum.
As with technology, great companies use acquisitions as accelerant, not as a hail-mary pass to save the company.
Good-to-great companies also saw leadership changes during their transformations—but, due to Level 5 leaders’ tendency to groom successors (see Chapter 2) and create cultures of discipline (see Chapter 6), transitions from one leader to another were seamless. New leaders at great companies continued to turn the flywheel and accelerated momentum built from the past.
New leaders of the comparison companies, by contrast, had a habit of stopping an already spinning flywheel.
Harris Corporation, for example, recorded great results under two CEOs whose Hedgehog Concept had the company focusing on printing and communications technology. A third CEO, however, moved the company headquarters from its longtime base in Cleveland to Florida (where he had a house) and, shortly thereafter, abandoned the printing business for office automation, giving up one of the most profitable parts of the company for a pipe dream.
Good money flew after bad, and soon enough a company that had been beating the market by more than 5x ended up 70% behind.
Contrary to Collins’s expectations, Good to Great isn’t a sequel to his bestseller Built to Last—it’s a prequel.
Enduringly great companies adhere to good-to-great concepts in their infancy. It’s only when they’ve achieved greatness that they begin to adopt the qualities Collins outlined in Built to Last.
Why the fixation on greatness? Collins believes that a desire to be great—rather than simply good or successful—is a natural byproduct of doing something we love. If we’re content with being just decent or average at what we do, then we’re probably in the wrong line of work.
In his previous bestseller Built to Last, Collins and his coauthor identified 18 lastingly great companies and studied how they constructed a durably great company from scratch. Using a similar methodology to Good to Great, the authors compared the lastingly great companies with competitor companies.
The enduringly great companies from Built to Last, it turns out, adhered to many of the principles Collins discovered in Good to Great.
Great to Lastingly Great: Hewlett-Packard
Bill Hewlett and David Packard were best friends in graduate school, and their company was simply an extension of their friendship—they wanted to work with each other as well as people that shared their values and passions.
They took the team-first principle to an extreme: The minutes of their first meeting, which took place in 1937, state that the company would compete in the field of electrical engineering by designing and manufacturing products. The minutes also show that discussion of what they would actually manufacture was tabled until a later meeting.
After WWII, with revenues shrinking, Hewlett-Packard still retained talent, even if there wasn’t anything particular for those workers to do. The thinking was, Fabulous people will do fabulous things, so why not have them do those things for us?
Even after HP had become one of the most successful and admired companies in business history, Hewlett and Packard retained their (Level 5) humility. Packard, in fact, though a billionaire, lived in the small house he and his wife built in 1957 until he died. A eulogy pamphlet created by his family featured a picture of him on a tractor and the caption “David Packard, 1912–1996, Rancher, etc.”—no mention of his massive success as an industrial engineer and entrepreneur.
The four key ideas of Built to Last are as follows:
Collins found that all of the Good to Great principles supported the four Built to Last ideas.
One of the more surprising discoveries Collins and his coauthor made in Built to Last was that, while a core ideology is essential, a specific kind of core ideology isn’t.
That is to say, a core ideology can be anything you want, as long as you believe in it and refer back to it as you embark on the adaptations demanded by the facts of reality.
For example, Walt Disney represents both the adaptability needed to survive and thrive in a forever-changing marketplace and the power of a core ideology. Although the company has diversified from animated features to television to theme parks and cruises, it has never strayed from its core ideology: Bringing joy to children through creativity, the refusal of cynicism, and obsessive attention to detail.
Another concept Built to Last explores is the BHAG (pronounced bee-hag)—Big Hairy Audacious Goal. BHAGs are the huge, seemingly impossible objectives that can inspire outsiders and stakeholders alike.
But there are good BHAGs and bad BHAGs:
A good BHAG is one determined by the deep understanding derived from hedgehog thinking—the application of the three circles and the creation of a Hedgehog Concept.
Boeing, for example, began as a military contractor exclusively. When a level 5 CEO took over the company in 1952, he realized that the company’s knowledge of jet propulsion and manufacturing large airplanes could apply to the design and production of large-scale commercial aircraft.
The BHAG—to become the leading commercial aircraft maker in the world—was certainly bold, but it checks out when analyzed using the three circles: (1) The company’s technology and knowhow meant it could be the best commercial aircraft manufacturer in the world; (2) commercial aircraft satisfied its economic variable (profit per aircraft model); and (3) the company’s managers were passionate about the move.
A bad BHAG is one determined by hubris, without the steady and disciplined development of a Hedgehog Concept.
Before the transition point, both the good-to-great companies and their comparisons were either tracking or slightly bettering the general market return. But this didn’t feel enough.
Why try to build something great?
Collins has two answers:
Although fewer companies reach greatness overall, the actual procedures necessary to achieve greatness—hiring the right people, developing a Hedgehog Concept, maintaining discipline—aren’t prohibitively painful.
Think about the “stop doing” list: Many of the reforms necessary to achieve greatness actually involve reducing energy output and waste.
The Level 5 executives Collins interviewed strived for greatness not for accolades or material rewards but rather for the sake of greatness itself.
They believed deeply in their mission and the mission of their companies, and because they felt like what they did had profound meaning, they wanted to do it as best they could. It would never occur to them to settle for “just OK.”
If, at your job or in another area of your life, you find yourself content to float in the middle of the pack, it stands to reason that that part of your life doesn’t excite your imagination and passion. Remember hedgehog thinking: Greatness requires great enthusiasm. If you’re doing something you love, you can’t help but want to be great at it.
And once you start doing meaningful work, you will find yourself on the path to having a meaningful life and feeling like you made a contribution. Collins ends the book on a reflective note, saying that the greatest satisfaction is knowing that your short time alive meant something.
Use these exercises to explore your core ideology and Big Hairy Audacious Idea.
In the space below, write down your core purpose and three core values. (These can be the core purpose/values of your business, your position at your job, or yourself a person.)
Now, using the area of your life you used in the question above, write down the BHAG you’d like to achieve in that area.
If you’ve completed the Hedgehog Concept exercises, examine your BHAG in relation to your Hedgehog Concept. Are the two in alignment, or do they contradict one another? Why? And how might you change your BHAG to match your Hedgehog Concept?
Use this exercise to reflect on Good to Great as a whole.
Which of Collins’s steps did you find most useful and why?
Which of Collins’s steps did you find least useful and why?
Given your own life and work experience, how would you change Collins’s program? Would you reorder the steps in any way? Would you remove a step entirely?
Review your answer to the previous question and, using Collins’s steps as a loose guide, take a stab at designing your own six-step good-to-great program. You’re welcome to think in terms of your personal life, your job life, or both!