Good to Great might be the most celebrated business book of the twenty-first century – perhaps even of all time. The catchy title and idea of greatness certainly helps; but the five year analytical study behind the findings is perhaps what provides its enduring appeal. It feels like a roadmap for greatness has been discovered and laid down for everybody to see. It’s not without criticism – which I’ve looked at separately here – but for this post, let’s summarize what the book is about, and what it tells us.
21 researchers, digging through data on hundreds of companies, over a five year period, in search of an answer to a simple question: what makes a company go from being just good, to great? Collins’ team produced a criterion for what it meant to be considered great in their research:
- Produce cumulative returns which beat the general stock market by three times, over a fifteen year period.
Fifteen years is long enough to exceed the average tenure of a CEO, and a long enough duration to prove it wasn’t just a fluke. Three times the general market was significant enough to put it ahead of the leading ‘marquis’ companies out there, including: 3M, Boeing, Coca-Cola, GE, HP, Intel, J&J, Merck, Pepsi, P&G, Wal-Mart, and Disney. The companies they found had a truly astonishing record over those fifteen years, and they are:
- Abbott – 3.98 x the market
- Circuit City – 18.5 x the market
- Fannie Mae – 7.56 x the market
- Gillette – 7.49 x the market
- Kimberly-Clark – 3.42 x the market
- Kroger – 4.17 x the market
- Nucor – 5.16 x the market
- Philip Morris – 7.06 x the market
- Pitney Bowes – 7.16 x the market
- Walgreens – 7.34 x the market
- Wells Fargo – 3.99 x the market
For perspective, GE – often considered the best run company in America in the twentieth century – outperformed the market by 2.8 times between 1985 and 2000. Every one of those companies above beat that in a similar timeframe.
Another 11 comparison companies were chosen to contrast the rise of the good-to-great companies. Those comparison companies were in the same business, facing the same market forces, and in some cases were in a better position to propel to greatness, yet they failed to make the leap. These companies act as a way to judge the merit of the decisions and actions taken by the good-to-great companies. The comparisons are:
- Great Western
- Scott Paper
- Bethlehem Steel
- R. J. Reynolds
- Bank of America
Good is the enemy of great
We have plenty of good: good schools, good government, good customer service. Good is often sufficient, and that’s why we don’t frequently see great schools, great government, great service. Most companies become quite good at what they do, and they are happy to settle for that. But some keep going; they push on to be even better, to join the elite ranks of the greatest in the world. But why? The inner-workings of those companies are explored in detail, and a collection of core lessons emerged. Let’s look at six of those core lessons (I’ve left out one, Technology Accelerators, for both brevity and that I feel it is the weakest of all the chapters).
Level 5 Leadership
Darwin E. Smith became CEO of Kimberly-Clark in 1971, he was previously the in-house lawyer. You won’t find much about him on the internet, he didn’t appear in feature articles or TV interviews as Lee Iacocca or Jack Welch did – he wasn’t interesting enough. Smith was a humble man, who grew up in Indiana as a farm-boy, working day shifts at International Harvester, while putting himself through college in the evening. He went on to earn admission to Harvard Law School.
Smith was a quiet man – more comfortable around plumbers and electricians – perhaps not your typical Fortune 500 CEO, but he was fiercely determined. When he became CEO, Kimberly-Clark was 36 percent behind the general market, with the organization being seen as a ‘stodgy old paper company’. After just two months in the job, Smith was diagnosed with throat cancer, and given less than a year to live. But he lived on for quarter of a century.
Under Smith’s leadership, Kimberly-Clark accelerated, beating the market by 4.1 times, and beating rivals Scott Paper and P&G, and outperformed Coca-Cola, HP, 3M, and GE. Smith took the huge decision to sell the paper mills – the historic roots of the company – and move the business into consumer paper goods. The move put Kimberly-Clark in direct competition with market giants P&G. The media called the move stupid, the stock was downgraded. But Smith never blinked – he kept on pushing forward piece by piece. After 25 years, Kimberly-Clark owned Scott Paper, and beat P&G in 6 of the 8 product categories they competed in.
Darwin E. Smith is a typical example of a Level 5 leader. So too is George Cain, Alan Wurtzel, David Maxwell, Colman Mockler, Jim Herring, Lyle Everingham, Joe Cullman, Fred Allen, Cork Walgreen, and Carl Reichardt. How many of those names have you heard of? They are not well known CEOs, yet they are all Level 5 leaders responsible for taking their companies from good to great.
Level 5 leadership can be seen as the pinnacle of management capability:
Level 5 leaders tend to put the needs of the company before their own. Wealth and personal greed are absent, instead they tend to be humble, simple living, and have a fanatical drive for their work. They will sell the mills, or fire a family member from the board, if that is what is required to make progress. When things go well, they tend to regard the success as luck and hard work, and certainly not due to the brilliance or individual contributions they personally made:
Level 5 leaders look out the window to apportion credit to factors outside themselves when things go well (and if they cannot find a specific person or event to give credit to, they credit good luck). At the same time, they look in the mirror to apportion responsibility, never blaming bad luck when things go poorly.
Frequently, the Level 5 CEOs tended to come from within the company – promoted after years of experience, deeply understanding how the company works. But for the comparison companies, this was not the case – they tended to hire ‘rockstar’ CEOs, which often proved unsuccessful, or disastrous.
In over two thirds of the comparison cases, we noted the presence of a gargantuan personal ego that contributed to the demise or continued mediocrity of the company.
It begs the question of whether you can learn to become a Level 5 leader. In some cases, a life changing experience helped to shape their leadership characteristics, such as Darwin Smith (his battle with throat cancer), or Joe Cullman of Philip Morris (last-minute change of orders that took him off a doomed ship in World War II). But in others there was no evidence of this. A mix of humility and incredible force of will are the key ingredients:
Level 5 leaders are a study in duality: modest and willful, humble and fearless. To quickly grasp this concept, think of United States President Abraham Lincoln (of the few Level 5 presidents in United States history), who never let his ego get in the way of his primary ambition for the larger cause of an enduring great nation.
Key Points about Level 5 leadership
- They have a paradoxical mix of humility and professional will.
- They set up their successors for even greater success, whereas egocentric leaders often set up their successors for failure.
- Display modesty, and self-effacing and understated.
- Fanatically driven, relentless pursuit of sustained results and improvement.
- A workmanlike diligence, like a plow horse, not a show horse.
- Look out the window to attribute success, but when things go badly, take full responsibility.
- Tend to attribute success to good luck.
- A damaging trend in recent history is the tendency to hire rockstar CEOs, or celebrity leaders, and not sourcing out potential Level 5 leaders from within.
First Who … Then What
‘Getting the right people on the bus’ is a classic phrase you’ll hear in every boardroom. But to actually do it right is still rare. Most managers prefer to hire weaker individuals than themselves, for many reasons, including fear of being shown up, risk of losing power, lack of ability to control better individuals, and so on. The principle remains strong though: hire outstanding people, and the rest is far easier.
If you begin with “who”, rather than “what”, you can more readily adapt to changes in the business environment. If you hire people specifically for the conditions today, what happens when you have to change course? Will those people be able to adapt, and even be willing to adapt? If you hire the right people, you won’t have to motivate them – they will be highly self-motivated individuals, because of the inner drive to produce the best results, and the desire to build something great. Moreover, even if you do discover a winning strategy and direction, if you don’t have the right people on the bus, you still won’t have a great company – great companies require great people, regardless of the strategy.
The good-to-great companies understood a simple truth: The right people will do the right things and deliver the best results they’re capable of, regardless of the incentive system.
Nucor became the number one American Steel company, but it started from a lowly position. To build the right kind of culture, they decided to find farmers instead of experienced steel workers, on the premise that you can teach a farmer how to make steel, but you can’t teach a farmers work ethic to people who don’t have it in the first place. They set up their mills outside of the typical steel producing locations, and instead went for cities full of farmers: Crawfordsville, Indiana, Norfolk, Nebraska, and Plymouth, Utah:
places full of real farmers who go to bed early, rise at dawn, and get right to work without fanfare. “Gotta milk the cows” and “Gonna plow the north forty before noon” translated easily into “Gotta roll some sheet steel” and “Gonna cast forty tons before lunch.”
Nucor would remove workers who didn’t share this work ethic – in the first year of a new steel plant, turnover could be up to 50 percent, but afterwards it was very low, once the right people were on board. Nucor also paid its workers more than any other steel company in the world.
Wells Fargo had a similar passion for having the right people on board. In 1983 Dick Cooley, CEO, saw that a huge change was coming in banking and finance, and began a search for the most talented managers he could find. Cooley did not pretend to know how to deal with the big changes coming, so did not even set a strategy; instead he decided to bring in a constant stream of talent, confident that whatever the future throws at them, they would have the people to deal with it.
They hired outstanding people whenever and wherever they found them, often without any specific job in mind. “That’s how you build the future,” chairman Ernie Arbuckle said. “If I’m not smart enough to see the changes that are coming, they will. And they’ll be flexible enough to deal with them.”
The comparison companies often relied upon a single genius. The problem is that geniuses don’t build great teams, mainly because they don’t need, or want, a team around them – rather they want a thousand helpers to execute their vision. Eckerd suffered from this problem. CEO Jack Eckerd was a man with enormous energy (campaigning for governor of Florida while running the company), and a gift for picking the right strategy. By the late 1970s, Eckerd was rivalling Walgreens for revenue, but then Jack left to pursue his career in politics full time, and a long slow decline began for Eckerd, who were eventually acquired by J. C. Penney.
The good-to-great companies were more rigorous than ruthless, and treated their employees extremely well. Three principles emerged about this rigorous nature:
1. When in doubt, don’t hire – keep looking
Vice president at Circuit City, Walter Bruckart, was asked to name the top five factors that led to the transition to a great company, he responded: “One would be people. Two would be people. Three would be people. Four would be people. And five would be people. A huge part of our transition can be attributed to our discipline in picking the right people.”
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.
2. When you know you need to make a people change, act
That moment you feel the need to tightly manage someone, you know you’ve made a hiring mistake.
Every manager has had the experience of a having the wrong person on the bus, but you wait, try alternatives, give second, third, chances, and even build systems in to compensate for their shortcomings. You end up putting too much focus on dealing with the wrong people, rather than putting all your energy on the right people. Finally, you make the change, and everybody around you wonders “what took you so long?”. It can be hard to know when a person is simply in the wrong seat on the bus, or if they need to get off entirely. Two questions you need to ask yourself:
- If it were a decision to hire this person, rather than a decision about taking them off the bus, would you hire them again?
- If the person told you they are leaving for a new opportunity, would you feel disappointed or relieved?
They key is to make those conclusions quickly, and move on. Otherwise you are having a negative impact on everybody else in the team.
3. Put your best people on your biggest opportunities, not your biggest problems
J. Reynolds’ approach to international business was quite different to Philip Morris’. Reynolds thought that if somebody outside of America wanted to do business with them, well, let them call us. Joe Cullman of Philip Morris however, decided to look a little deeper. Although only 1% of their revenue came from overseas, he saw growth opportunities. His next move was not a “what” strategy, but a “who” strategy. He took his number one executive, George Weissman, off of domestic business, and put him onto international.
Weissman thought he was being punished – colleagues wondered what he had done wrong. One day running 99% of the company, the next day 1% or less. However, it proved to be a stroke of genius, as international quickly became the largest and fastest-growing part of the business. Marlboro became the best-selling cigarette in the world three years before it did in the US.
The good-to-great companies made a habit of putting their best people on their best opportunities, not their biggest problems. The comparison companies had a penchant for doing just the opposite, failing to grasp the fact that managing your problems can only make you good, whereas building your opportunities is the only way to become great.
Confront the Brutal Facts
In 1973 Addressograph and Pitney Bowes had similar revenues, profits, number of employees, and stock charts. But by 2000, Pitney Bowes had over 30,000 employees, revenues above $4 billion, but Addressograph had less than $100 million, and only 670 employees. One of the key differences was in their decision making.
Roy Ash, CEO of Addressograph, was a visionary leader, but he had one key weakness: a failure to confront mounting evidence that his plans were doomed to failure. He was eventually thrown out of office, and Addressograph filed for bankruptcy. Pitney on the other hand, was almost neurotic against complacency:
“We have an itch that what we just accomplished, no matter how great, is never going to be good enough to sustain us.”
They created a long-standing tradition of forums where anybody could stand up and question senior executives – telling them what they needed to pay attention to. They also never communicated or held out false hopes, knowing that it can be the single most demotivating action you can take. Confronting the reality of their situation was paramount. And to do so, you need a culture that allows anybody to raise their hand and be heard.
Yes, leadership is about vision. But leadership is equally about creating a climate where the truth is heard and the brutal facts confronted. There’s a huge difference between the opportunity to “have your say” and the opportunity to be heard. The good-to-great leaders understood this distinction, creating a culture wherein people had a tremendous opportunity to be heard and, ultimately, for the truth to be heard.
Collins offers four best practices for creating a culture where the truth can be heard:
- Lead with questions, not answers
Alan Wurtzel took over Circuit City (originally named Wards) in 1973, as it stood on the brink of bankruptcy. He admitted that he had no idea where to take the company, and resisted the urge to come in with a strategy. Instead he focused on getting the right people on the bus, and then began asking questions:
“They used to call me the prosecutor, because I would home in on a question, like a bulldog, I wouldn’t let go until I understood. Why, why, why?”
The good-to-great companies tended to use questions for one purpose only: to gain understanding. Rather than using questions as a form of manipulation, or as a way to to blame others. Most of the time in management meetings was instead spent simply trying to understand.
- Engage in dialogue and debate, not coercion
Nucor was hardly a good company to start with, they only had one division that made money, and had no proud culture, nor clear direction, and was about to go out of business. It was also originally a nuclear energy based company, not a steel one. At the start of its transition to a great company in 1965, it didn’t make any steel – but by thirty years later, it was the fourth largest steelmaker in the world, and made greater profits than any other in America.
Level 5 leader Ken Iverson first got an extraordinary group of people on the bus, then he set about mediating between them in ferocious meetings.
“We established an ongoing series of meetings … they were chaos. We would stay there for hours, ironing out the issues, until we came to something … At times, the meetings would get so violent that people almost went across the table at each other … People yelled. They waved their arms around and pounded on the tables.”
But they would emerge with a conclusion; the strategy would evolve through ‘agonising’ debates. A similar pattern of intense debate was found across all the good-to-great companies. People were engaged in a search for the best answers.
- Conduct autopsies, without blame
Philip Morris made a mistake when it bought Seven-Up, but they also admitted this openly, with CEO Joe Cullman taking full responsibility. Cullman wishes that he’d listened better to others around him who challenged the idea, and he even goes as far as to name individuals who told him not to do it. In the environment today, we often see leaders going to great lengths to preserve their image, keen to claim credit where they can, and avoid blame where possible.
When you conduct autopsies without blame, you go a long way toward creating a climate where the truth is heard. 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.
- Build “red flag” mechanisms
The comparison companies which failed knew what was happening to their market – Bethlehem Steel, Bank of America, Upjohn, Halcion all had the information available to them. But they did not handle it in real time, there was no way for somebody to raise a red flag, tell everybody to stop, and assess the situation properly.
Collins, while teaching at Stanford, built a red flag mechanism into his class. Once a quarter every student had one red card they could raise, and the entire class would stop and listen to what they had to say. It didn’t matter if a visiting CEO was speaking, or if Collins was lecturing – you have the power to stop and ask anything. One day a student raised their card to Collins, and said his method of constant questioning was leading them too much, stifling their independent inquiry. A student survey at the end of the quarter might have said the same thing, but with the red flag, he was confronted with the brutal facts in real time, and could listen, adjust, and improve.
If you are not yet a Level 5 leader, or if you suffer the liability of charisma, red flag mechanisms give you a practical and useful tool for turning information into information that cannot be ignored and for creating a culture where the truth is heard.
The Hedgehog Concept (simplicity within the three circles)
“The fox knows many things, but the hedgehog knows one big thing.” … “despite the greater cunning of the fox, the hedgehog always wins.”
Isaiah Berlin, from the essay The Hedgehog and the Fox
Those who make the biggest impact are the ones who narrow in on a single concept. Einstein and relativity, Darwin and natural selection, Marx and class struggle, Freud and the unconscious, Smith and the division of labour. These individuals were like hedgehogs, they knew one very big thing. Unlike the fox, who is wily and cunning, and knows many ways to attack the hedgehog, but fails every time, because the hedgehog simply curls up into a ball, with its spikes protecting it, whenever it is attacked. The fox loses every time.
The good-to-great companies all had a simple concept which they worked tirelessly on. This concept derives from an understanding of three things:
- What you are deeply passionate about
- What you can be the best in the world at
- What drives your economic engine
At the center of these three intersecting aspects, lies your hedgehog concept.
Nucor created a culture unheard of in large organizations at the time; they removed management layers wherever possible – it grew into a $3.5 billion Fortune 500 company with only four layers of management. Its corporate headquarters had fewer than twenty-five people, that includes everybody from executive management to secretarial, to financial. They were crammed into a rented office the size of a small dental practice, and would host visitors at Phil’s Diner, a strip mall sandwich shop across the street. They had an attitude of treating their employees extremely well, and removing management facades.
All workers (but not executives) were eligible to receive $2,000 per year for each child for up to four years of post-high school education. In one incident, a man came to Marvin Pohlman and said, “I have nine kids. Are you telling me that you’ll pay for four years of school – college, trade school, whatever – for every single one of my kids?” Pohlman acknowledged that, yes, that’s exactly what would happen. “The man just sat there and cried,” said Pohlman. “I’ll never forget it. It just captures in one moment so much of what we were trying to do.”
This fanatical culture was their passion: eliminating class distinctions and creating an egalitarian meritocracy, which aligned management with labour, and both with the same financial interests.
Understanding what you can be the best at in the world is far harder than it first sounds. It’s not a vision or a strategy, set with bravado: we will be the best in the world! Rather, it is a cold-hearted look, without ego, at what you can be the best at. It’s an understanding, and a rational conclusion based on that understanding.
Every company would like to be the best at something, but few actually understand – with piercing insight and egoless clarity – what they actually have the potential to be the best at and, just as important, what they cannot be the best at. And it is this distinction that stands as one of the primary contrasts between the good-to-great companies and the comparison companies.
To understand your economic engine, you need to be able to choose one ratio which you wish to systematically increase over time – such as profit per x, or cash flow per x. What x would have the greatest and most sustainable impact on your economic engine?
None of the good-to-great companies focused obsessively on growth, rather they found their one ratio to push, and growth became a consequence of that. Wells Fargo knew that banking would become a commodity as deregulation set in – traditional ratios like profit per loan, or profit per deposit, would no longer be key drivers. They became one of the first banks to follow a profit per employee ratio, and changed its distribution system to rely primarily on lean branches and ATMs.
A company does not need to be in a great industry to become a great company. Each good-to-great company built a fabulous economic engine, regardless of the industry. They were able to to do this because they attained profound insights into their economics.
Good-to-great companies set their goals and plans based on a pure and egoless understanding of the situation – whereas comparison companies set theirs on bravado and hoopla.
A Culture of Discipline
Bureaucracies emerge because of a lack of discipline. A small percentage of wrong people on the bus means rules are required to manage them effectively. These rules (which start to form bureaucracy) then in turn drive away the right people, which increases the volume of wrong people left on the bus. More bureaucracy is required to compensate, and you end up with an inability to escape the spiral of decline.
Creating a culture of discipline is therefore dependant upon hiring the right people in the first place. Great people are self-disciplined, and don’t require levels of bureaucracy to keep them in order. A culture of discipline involves a duality, on the one hand people need to follow a system, but on the other they need freedom. The three circles of the hedgehog concept are the framework for within which people have freedom and responsibility, while sticking to the resolute focus of the company.
When deregulation set in, Wells Fargo CEO Carl Reichardt knew that he had to change the discipline of the organization for it to be successful.
He saw that the key to becoming a great company rested not with brilliant new strategies but with the sheer determination to rip a hundred years of banker mentality out of the system. “There’s too much waste in banking … getting rid of it takes tenacity, not brilliance.”
He started at the top first, freezing executive salaries for two years – even though at the time Well Fargo was enjoying some of the most profitable years in its history. He closed the executive dining room, replacing it with college dorm caterers. He sold private jets, closed the executive elevator, removed Christmas trees for management, and removed free coffee from the executive suite. If somebody submitted a report in a fancy binder, he would throw it back and say, “would you spend your own money on this binder? What does it add to anything?”
At the same time rivals Bank of America didn’t demonstrate this level of discipline, and continued to live with executive perks, and rejecting ideas such as to sell the corporate jets. After losing $1.8 billion over three years, and hiring ex-Wells executives, they finally started to make some changes.
The good-to-great companies at their best followed a simple mantra: “Anything that does not fit with our Hedgehog Concept, we will not do.”
As Philip Morris and R. J. Reynolds both battled with the need to diversify from tobacco, their reactions were quite different. Reynolds wandered outside its three circles, and spent nearly a third of total corporate assets on a shipping container company, and an oil company. After years of trying to make it work, channeling billions of dollars into the shipping company, Reynolds admitted defeat and sold the business. All of Reynolds eventually disappeared from trading when a leveraged buyout happened in 1989.
Philip Morris however, took a look at their three circles, and found close areas of interest to expand into, such as beer, coffee, chocolate, processed cheese. The overarching idea being not-so-healthy consumer goods.
Nucor CEO Ken Iverson, stated that nearly 100 percent of their success came from the ability to translate its simple concept of business into disciplined action consistent with that concept. Nucor went to great lengths to ensure its egalitarian ethos was embedded throughout the company – for example, with every site employee, except safety supervisors, wearing the same coloured hard hats. This was not a minor step; the colour of the hard hat typically signifies status and importance, with hats being placed on the back of cars or trucks to make a visible statement. There was an initial backlash, to which Nucor arranged a series of forums, to explain that authority comes from leadership, not the colour of your hard hat, and if you feel you need a class distinction, then you’re at the wrong company.
Bethlehem Steel was the opposite, perpetuating this class divide, and spending lavishly on the executive rooms and perks at headquarters. The fanatical discipline of building their culture at Nucor, led to superior results: Nucor was less than a third the size of Bethlehem Steel just a decade before it surpassed them in total revenues. For investors, $1 invested in Nucor beat $1 in Bethlehem Steel by over 200 times.
The Flywheel and the Doom Loop
Success for the good-to-great companies did not come overnight, and the media did not pick up on their transformations until well after the fact. While the attention was off them, they were quietly making step by step progress, what Collins calls pushing the flywheel. The first turn of a heavy flywheel feels incredibly hard, so does the second, third, and fourth. Eventually those turns start to gain momentum, and all those turns add up to something powerful; suddenly the flywheel is moving at a fast pace, and the effort required to make another push becomes less and less.
At Kroger, CEO Jim Herring made sure to avoid any kind of hoopla about what they were doing. The best thing to do was simply show tangible evidence every time a success was gained, which aligned with their plan and vision. Herring could then show people that the plan was working. As he kept pushing the flywheel, he could say “See what we’re doing, and how well it is working? Extrapolate from that, and that’s where we’re going.”
Nucor discovered that it had a skill in making steel better and cheaper than anyone else. So they invested in another mini mill, then another, then more. They kept gaining customers, and eventually it accelerated at full speed:
The flywheel built momentum, turn by turn, month by month, year by year. Then, around 1975, it dawned on the Nucor people that if they just kept pushing on the flywheel, they could become the number one, most profitable steel company in America.
For the comparison companies, they instead wanted to find the single silver bullet, the killer innovation, which would allow them to skip the hard work of building up a flywheel. They would instead push the flywheel one way, then stop, change direction and start pushing again. Year after year, this constant changing of direction took its toll, and they failed to build a sustained pattern of momentum – falling into a doom loop.
While the specific permutations of the doom loop varied from company to company, there were some highly prevalent patterns, two of which deserve particular note: the misguided use of acquisitions and the selection of leaders who undid the work of previous generations.
Although this is a fairly long summary of the book, I’ve missed out quite a bit (The Stockdale Paradox, Technology Accelerators, Rinsing Your Cottage Cheese, are just some examples). It’s a book open to wide interpretation, and so many of the ideas can be taken as ‘essential’ or ‘brilliant’ by one person, yet completely ignored by another. Regardless of how much you value the ideas, one of the attractive aspects of Good to Great is that every idea is backed-up with a story from one of the companies in the study. It is partly a biography of the great companies and their failed comparisons, and partly a collection of core ideas from those stories. This mix makes for a compelling read, even despite what has happened in intervening years since publication, and the decline of those once ‘Great’ organisations.