good togreat chap 1 3

Good to Good to GreatGreatJim Collins

(c) 2001

Good to Great

First sentence of chapter 1:

“Good is the enemy of great.”

• Why is that true?

Companies Studied (15-year return compared to general stock market)

• Abbott (3.98)• Circuit City (18.5)• Fannie Mae (7.56)• Gillette (7.39)• Kimberly-Clark (3.42)• Kroger (4.17)• Nucor (5.16)• Philip Morris (7.06)• Pitney Bowes (7.16)• Walgreens (7.34)• Wells Fargo (3.99)

UpjohnUpjohn SiloSilo Great WesternGreat Western Warner-LambertWarner-Lambert Scott PaperScott Paper A&PA&P Bethlehem SteelBethlehem Steel R.J. ReynoldsR.J. Reynolds AddressographAddressograph EckerdEckerd Bank of AmericaBank of America

Unsustained: Burroughs, Chrysler, Harris, Hasbro, Rubbermaid, Teledyne (Kirk Wakefield)

Overview

• While presenting his first book, Bill Meehan, the managing director of the San Francisco office of McKinsey & Company, told Jim Collins,– “You know, Jim, we love Built to Last around here.

You and your coauthor did a very fine job on the research and writing. Unfortunately, it’s useless.”

• This was the spark of curiosity that began five years of research and resulted in Good to Great.

Overview

• The five-year research effort yielded many insights, but one conclusion stands out above the others – Most any organization can substantially

improve its stature and performance, perhaps even become great, if it conscientiously applies the framework of ideas we’ve uncovered

Phase 1: The Search

• First task was to find companies that showed the good-to-great pattern (Table 1)

• Launched a six-month “death march of financial analysis,” looking for companies that showed the following basic pattern:– Fifteen-year cumulative stock returns at or below

the general stock market, punctuated by a transition point, then cumulative returns at least three times the market over the next fifteen years

Phase 1: The SearchCompany Results from Transition

Point to 15 Years beyond Transition Point*

T Year to T Year + 15

Abbot 3.98 times the market 1974 – 1989

Circuit City 18.50 times the market 1982 – 1997

Fannie Mae 7.56 times the market 1984 - 1999

Gillette 7.39 times the market 1980 - 1995

Kimberly-Clark 3.42 times the market 1972 – 1987

Kroger 4.17 times the market 1973 – 1988

Nucor 5.16 times the market 1975 – 1990

Philip Morris 7.06 times the market 1964 – 1979

Pitney Bowes 7.16 times the market 1973 – 1988

Walgreens 7.34 times the market 1975 – 1990

Wells Fargo 3.99 times the market 1983 – 1998

*Ratio of cumulative stock returns relative to the general stock market

Phase 1: The Search

• Criteria for Selection as a Good-to-Great Company– Company shows a pattern of “good” performance

punctuated by a transition point, after which it shifts to “great” performance

– Good-to-great shift must be a company shift, not an industry event

– At the transition point, the company must have been an established, ongoing company, not a start-up

Phase 1: The Search

• Criteria for Selection as a Good-to-Great Company, continued – The transition point had to occur before 1985 so

that there would be enough data to assess the sustainability of the transition

– Whatever the year of transition, the company still had to be a significant, ongoing, stand-alone company at the time of selection

– At the time of selection, the company should still

show an upward trend

Phase 1: The Search

• The Good-to-Great Screening and Selection Process– Cut 1: From the Universe of Companies to 1,435

Companies • Selected from the Fortune 500, 1965 – 1995

– Cut 2: From 1,435 Companies to 126 Companies• Selected into full CRSP data pattern analysis

– Cut 3: From 126 Companies to 19 Companies • Selected into Industry Analysis

– Cut 4: From 19 Companies to 11 Good-to-Great Companies

• Selected into Good-to-Great Set

Phase 2: Compared to What?

• Two types of comparison companies– Direct comparisons

• Companies that were in the same industry as the good-to-great opportunities and similar resources at the time of transition, but showed no leap from good to great

– Unsustained comparisons• Companies that made a short-term shift from good to

great but failed to maintain the trajectory• Intended to address the question of sustainability• Comparisons are displayed in Appendix 1.C, page 234

Phase 2: Compared to What,

• Direct Comparisons – Purpose of direct comparison analysis is to create

as close to a “historical controlled experiment” as possible

– Helped in identifying distinguishing variables that account for the transition from good to great

– Performed a systematic and methodical collection and scoring of all obvious comparison candidates for each good-to-great company

Phase 2: Compared to What?,

• Direct Comparison Criteria– Business Fit

• At the time of transition, the comparison candidate had similar products and services as the good-to-great company

– Size Fit • At the time of transition, the comparison candidate was

the same basic size as the good-to-great company – Age Fit

• The comparison candidate was founded in the same era as the good-to-great company

Phase 2: Compared to What?, • Direct Comparison Criteria, continued

– Stock Chart Fit• The cumulative stock returns to market chart of the

comparison candidate roughly tracks the pattern of the good-to-great company until the point of transition

– Conservative Test• At the time of transition, the comparison candidate was more

successful than the good-to-great company – Face Validity

• Takes into account two factors– Comparison candidate is in a similar line of business at the time of

selection– Comparison candidate is less successful than the good-to-great

company at the time of selection

Phase 2: Compared to What?,

• Direct Comparison Scoring – Scored each comparison candidate on each of

the six criteria on a scale of 1 to 4: • 4 = comparison candidate fits the criteria extremely

well—there are no issues or qualifiers• 3 = comparison candidate fits the criteria reasonably

well—there are minor issues or qualifiers• 2 = comparison candidate fits the criteria poorly—

there are major issues and concerns• 1 = comparison candidate fails the criteria

Phase 2: Compared to What?, The Entire Study Set

Good-to-Great Companies

Comparison Companies

Abbot Upjohn

Circuit City Silo

Fannie Mae Great Western

Gillette Warner-Lambert

Kimberly-Clark Scott Paper

Kroger A&P

Nucor Bethlehem Steel

Philip Morris R.J. Reynolds

Pitney Bowes Addressograph

Walgreens Eckerd

Wells Fargo Bank of America

Unsustained Companies

Burroughs

Chrysler

Harris

Hasbro

Rubbermaid

Teledyne

Phase 3: Inside the Black Box

• Research Phase– Systematically coded all materials into

categories, conducted interviews, and initiated a wide range of analyses

• Project began with the goal of building a theory from the ground up

Phase 3: Inside the Black Box,

• In the study, what they didn’t find turned out to be some of the best clues to the inner workings of good to great

Good Results

What’s Inside the BLACK BOX?

What’s Inside the BLACK BOX?

Great Results

Phase 3: Inside the Black Box, • Company Coding Documents Collected

– All major articles published on the company over its entire history

– Materials obtained directly from companies – Books written about the industry, company, and/or

its leaders – Business school case studies and industry analyses – Business and industry reference materials – Annual reports, proxy statements, analyst reports,

and any other materials available on the company, especially during the transition era


• Coding System Categories– Category 1: Organizing Arrangements– Category 2: Social Factors– Category 3: Business Strategy, Strategic

Processes– Category 4: Markets, Competitors, and

Environment– Category 5: Leadership – Category 6: Products and Services

Phase 3: Inside the Black Box, • Coding System Categories, continued

– Category 7: Physical Setting and Location – Category 8: Use of Technology– Category 9: Vision: Core Values, Purpose, and

BHAGs– Category 10

• A: Change/Transition Activities during Transition Era of Corresponding Good-to-Great Company (Direct Comparisons Only)

• B: Attempted Transition Era (Unsustained Comparisons Only)

– Category 11: Posttransition Decline (Unsustained Comparisons Only)

Phase 3: Inside the Black Box, • Other Research Elements

– Financial Spreadsheet Analysis • Examined all financial variables for 980 combined

years of data (35 years on average per company)• Comprised gathering raw income and balance sheet data

and examining variables in both the pre- and posttransition decades

– Executive Interviews• Conducted interviews of senior management and board

members, focusing on those in office during the transition era

Phase 3: Inside the Black Box,• Special Analysis Units

– Acquisitions and Divestitures • Sought to understand the role of acquisitions and divestments

in the transition from good to great

– Industry Performance Analysis • Looked at the performance of the companies versus the

performance of the industries

– Executive Churn Analysis • Looked at the extent to which the executive teams changed

during the crucial points in companies’ histories

– CEO Analysis• Performed a qualitative examination of each set of CEOs

during the transition eras in all three sets of companies

Phase 3: Inside the Black Box, • Special Analysis Units, continued

– Executive Compensation • Examined across the twenty-eight companies studied, from ten

years before the transition point to 1998

– Role of Layoffs• Sought to examine all companies for evidence of layoffs as a

conscious tactic to improve company performance

– Corporate Ownership Analysis• Aimed to determine if there were any significant differences

between companies

– Media Hype Analysis • Looked at the degree of “media hype” surrounding the companies

– Technology Analysis • Examined the role of technology, drawing largely upon executive

interviews and written source materials


• Comparative Analysis Frameworks – Performed throughout the research effort– While less detailed than the other portions of

the research effort, all were derived directly from research evidence

– Included topics such as • The use of bold corporate moves• Executive class versus egalitarianism • Three-circle analysis and fit with core values and

purpose

Phase 4: Chaos to Concept

• Every primary concept in the final framework showed up as a change variable in 100 percent of the good-to-great companies and in less than 30 percent of the comparison companies during the pivotal years

• The Flywheel captures the gestalt of the entire process of going from good to great

Phase 4: Chaos to Concept,

DISCIPLINED PEOPLE

DISCIPLINED PEOPLE

DISCIPLINED THOUGHT

DISCIPLINED THOUGHT

DISCIPLINED ACTION

DISCIPLINED ACTION

FIRST WHO.. THEN WHAT

LEVEL 5 LEADERSHIP

TECHNOLOGY ACCELERATOR

S

HEDGEHOG

CONCEPT

BUILDUP…

BREAKTHROU

GH!

FLYWHEEL

CULTURE OF

DISCIPLINE

CONFRONT THE BRUTAL FACTS

Phase 4: Chaos to Concept,

• The Flywheel—Disciplined People – Level 5 Leadership

• Good-to-great leaders are self-effacing, reserved, even shy—a paradoxical blend of personal humility and professional will

– First Who…Then What• Good-to-great leaders first got the right people on the

bus, the wrong people off the bus, and the right people in the right seats

• Then they figured out where to drive it • People are not your most important asset. The right

people are.

Phase 4: Chaos to Concept, (cont.)• The Flywheel—Disciplined Thought

– Confront the Brutal Facts (Yet Never Lose Faith)• Every good-to-great company embraced what came to be

called the Stockdale Paradox– Must maintain unwavering faith that you can and will prevail in

the end, regardless of the difficulties, AND at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be

– The Hedgehog Concept (Simplicity within the Three Circles)

• To go from good to great requires transcending the curse of competence

• If you cannot be the best in the world at your core business, then your core business absolutely cannot form the basis of a great company

– It must be replaced with a simple concept that reflects deep understanding of three intersecting circles

Phase 4: Chaos to Concept, (cont.)

• The Flywheel—Disciplined Action– A Culture of Discipline

• When you have disciplined people, you don’t need hierarchy

• When you have disciplined thought, you don’t need bureaucracy

• When you have disciplined action, you don’t need excessive controls

• When you combine a culture of discipline with an ethic of entrepreneurship, you get the alchemy of great performance


• The Flywheel—Disciplined Action, Continued– Technology Accelerators

• Good-to-great companies think differently about the role of technology

– They never use technology as the primary means of igniting a transformation

• Paradoxically, they are pioneers in the application of carefully selected technologies

• Technology by itself is never a primary, root cause of either greatness or decline


• The Flywheel and the Doom Loop– Those who launch revolutions, dramatic change

programs, and wrenching restructurings will almost certainly fail to make the leap from good to great

• Good-to-great transformations never happened in one fell swoop

– Rather, the process resembled relentlessly pushing a giant heavy flywheel in one direction, building momentum until a point of breakthrough


• From Good to Great to Built to Last– Built to Last is about how you take a company

with great results and turn it into an enduring great company of iconic stature

• To make that shift requires core values and a purpose beyond just making money combined with the key dynamic of preserve the core / stimulate progressGood to

Great Concepts

Sustained Great Results

Built to Last Concepts

Enduring Great Company

The Timeless “Physics” of Good to Great

• This book is ultimately about one thing:– The timeless principles of good to great

• It’s about how you take a good organization of any type and turn it into one that produces sustained great results, using whatever definition of results best applies to your organization

• That good is the enemy of great is not just a business problem—it is a human problem – If we have cracked the code on the question of

good to great, we should have something of value to any type of organization

Lesson #1: Leadership

• Humility + Will = Level 5 leadership• Modest, willful, humble, fearless• Ego-driven, genius-types, may produce short-term

positive results, but cannot sustain results• 1=highly capable; 2= contributing team member,

3= competent manager, 4= effective leader, 5=executive that builds enduring greatness thru personal humility & professional

LeadershipProfessional Will• Creates superb results, a clear

catalyst in the transition from good to great

• Demonstrates an unwavering resolve to do whatever must be done to produce the best long-term results, no matter how difficult

• Sets the standard of building an enduring great company; will settle for nothing less

• Looks in the mirror, not out the window, to apportion responsibility for poor results, never blaming other people, external factors, or bad luck

Personal Humility Demonstrates a compelling

modesty, shunning public adulation; never boastful

Acts with quiet, calm determination; relies principally on inspired standards, not inspiring charisma to motivate

Channels ambition into the company, not the self; sets up successors for even greater success in the next generation

Looks out the window, not in the mirror, to apportion credit for the success of the company—to other people, external factors, and good luck

Level 5Leadership

First Who…Then What

Confront theBrutal Facts

HedgehogConcept

Culture ofDiscipline

TechnologyAccelerators

Disciplined People Disciplined Thought Disciplined Action

BuildupBreakthrough

Good to Great

Level 5Leadership



HedgehogConcept




BuildupBreakthrough

Level 5Leadership

Good to Great

Level 5 Leadership

5–Level 5 Executive

4–Effective Leader

3–Competent Manager

2–Contributing Team Member

1–Highly Capable Individual

Level 5 Leadership

Leaders who employ a paradoxical mix of personal humility and professional will

Set up successors for even greater success

Compelling modesty, self-effacing, understated






Fanatically driven to produce sustainable results

More plow horse than show horse

Level 5 Leadership






Look in mirror and take full responsibility for poor decisions

Many people have the potential to evolve into Level 5

Attribute success to other than themselves

Level 5Leadership



HedgehogConcept




BuildupBreakthrough


Good to Great

First Who . . . Then What

Leaders began the transformation by first getting the right people on the bus (and the wrong people off the bus).

“Who” questions came before “what” decisions - before vision, strategy, organization structure, and tactics.


Three practical disciplines for being rigorous:When in doubt, don’t hireWhen you know you need to make a

people decision, act

Put your best people on your best opportunities, not biggest problems

Leaders were rigorous, not ruthless in people decisions.


Management teams debate vigorously to find best answers, yet unify behind decisions.

“Right” person has more to do with character traits and innate capabilities than with knowledge, background, or skills.