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Good to great: Why some companies make the leap and others don't

Bookcover

by Jim Collins, Random House, 2001.

A copy of this book can be ordered online via the Ashridge e-bookshop.

Abstract

The power which enables companies to endure was highlighted in Built to Last. This volume goes beyond that, even saying that the good can become the enemy of the great if it makes them satisfied with the status quo. Continuous improvement is advocated rather than perpetual revolution.

(Summarised by Edgar Wille in October 2004)

(These book summaries aim to represent some of the key aspects of what the author has written. They do not necessarily represent the views of Ashridge or the summariser. Equally the author of the book summarised must not be held responsible for any misperceptions of the summariser. A summary does not have space for all the illustrative cases which provide the richness of a book and there is no substitute for reading the whole book. There is an element of simplification in a summary so that the message may seem more obvious than it necessarily is, though the most powerful ideas are often simple and obvious in their essence.)

When "good" is not good enough

This book links with the earlier work, Built to Last, co-authored by Jim Collins with Jerry Porras, in 1996. This was based on research into companies which had not only been great, but had endured through time. The current book considers how great companies moved from being merely good to great. The earlier book is concerned with how such great companies ENDURE. In a sense it might be an idea to read the earlier book after this one.

Good to Great begins with a challenge. The first chapter is entitled Good is the enemy of Great. The idea is that if we feel that an organisation is good - a good school, a good company, a good government or personally - a good life, then we tend to settle for good. Good is good enough, when it might have become great, but for our complacency. Which would you rather have? - a good life or a great life, working for a great company, where you could employ your talents developing a great future, not just a good one.

Maybe the idea is a matter of words - a bit rhetorical, but it makes a point. It gets you thinking, and the rest of the book enters into dialogue with you about just this simple, but profound point.

Research criteria

If you are going to research something, you have to have some definitions which will stand up to rigorous investigation. Though there are many deeper marks of greatness, two significant ones were chosen, with a pattern which could be clearly identified. They looked for fifteen years, 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. Those selected companies had cumulative returns relative to the general stock market ranging from 3.42 to 18.50 times the market.

On any count that was a tough basis for the research. The team picked fifteen years because that would rule out one hit wonders and lucky breaks, and would also exceed the normal tenure of any particular CEO. They picked three times the market because this exceeded the performance of the most highly regarded companies, such as GE, Hewlett-Packard, Wal-mart and others. The criteria picked were results oriented and were based on consistency of outcomes.

Other important criteria such as impact on society and employee welfare, were excluded, because these were less easy to measure. The companies which matched the specification, of which they discovered only 11, were then examined in detail to see what common factors might account for their greatness. The great companies were compared with similar companies, who shared a level playing field, but who had not attained greatness, as defined. The aim was to seek reasons for their non achievement of greatness. This clarified even further what makes the good become great.

One other criterion was that any company whose industry tended to exhibit similar results was dropped. The research was looking at companies, not industries.

Having selected the companies and their direct comparisons, the work of research was essentially inductive and qualitative. It involved reading and coding 6000 articles about the companies and interviewing CEOs and senior managers, which created 2000 pages of interview transcript. 384 million bytes of computer data were created. Details of how the methodology was applied can be checked in the appendices to the book.

Even in this summary it has been necessary to set out what exactly the researchers were doing. Otherwise one might legitimately be sceptical.

The transition from good to great was then considered under eight headings, illustrated by stories about the 11 companies and their opposite number comparison companies. It is a matter for regret that there is not room in a summary for many of these stories. But then it is a summary and as we always say there is no substitute for reading the book. I will organise the summary under these headings, each section representing a chapter of the book, except that the Hedgehog Concept is so central that there are five sections devoted to it.

Level 5 leadership

It is the tendency of many popular management books to place the emphasis for success in companies upon a charismatic, dynamic leader, often flamboyant, emphatic and the visible heart of all decisions. The actual research of the chosen companies gave a very different picture.

The phrase "Level 5" was selected because there was no one word which would describe the characteristics of their leaders. The research team developed a hierarchy of five, which moved up from the highly capable individual, to the contributing team member, to the competent manager, to the effective leader, about all of whose characteristics many books have been written. However the leaders seen in the "great" companies were on a level beyond these four, in a way not easily defined in a snappy heading. Hence Level 5.

Then came the surprise. The actual leaders interviewed or discussed, turned out to be different from the egocentric, hard hitting, authoritarian leaders, full of self belief and not particularly modest about their undoubted achievements. The Level 5 leaders were all found to be modest, not claiming the credit for all the great things that were happening; often attributing them to luck, being at the right place at the right time. And they did not blame others, or outside circumstances, for any failures or mistakes that occurred. They channelled their ego needs away from themselves into the larger goal of building a great company.

Nevertheless they were extremely ambitious, but the ambition was for the institution, not for themselves. Their modesty could be deceptive. Underneath was an iron, professional will, the courage to take risks, and to change direction away from the traditional strengths of the company into something which met the potential needs of future customers, which might look to the casual observer to be an unlikely area for success. Decisions like this they would make without a great flurry of activity or trumpet blowing, with quiet conviction and unwavering resolve to do what must be done.

These characteristics are summed up as "humility and will = Level 5". In the general business hall of fame these leaders have not become household names. George Cain of Abbott's Laboratories - Alan Wurzel of Circuit City - David Mazwell of Fanny Mae - Colman Mockler of Gillette - Darwin Smith of Kimberly-Clark - Fred Everingham and Jim Herring of Kroger - Ken Iverson of Nucor - Joe Cullman of Philip Morris - Fred Allen of Pitney Bowes - Cork Walgreen of Walgreens - Carl Reichhardt of Wells Fargo. How many of them have you heard of? But they led their companies to greatness, regarding themselves in the words of Wurzel as "plow horses" rather than "show horses", in businesses including banks, finance houses, superstores, small drugstore chains, razors, copy machines, cigarettes, paper, steel, pharmaceuticals, retail chains.

Three of them talked of luck when offered the opportunity to boast of their achievements. All of them gave credit to the people by whom they were surrounded in their companies.

Yet among them are leaders who shut down paper mills and turned to consumer needs for paper; shut a chain of restaurants to set up drugstores at multitudes of street corners; fought takeover bids at personal immediate loss, to ensure long term, rather than short term, shareholder value, and engaged in many similar exploits.

On the other hand, from among the comparison companies Collins picks out larger than life celebrities, leaders who rode in from the outside, with sensational immediate results, but did not achieve an enduring move to greatness, because they did not lay foundations that would outlast their own involvement.

In response to the question whether you can learn to be a Level 5 leader, Collins believes that many have the potential to be such leaders, but only if they subjugate their egoistic needs to the greater ambition of building something larger and more lasting than themselves. People who are in it, first and foremost, for what they can get - fame, fortune, adulation, power or whatever - who are not concerned, primarily, about what they build, create and contribute - these will not lead organisations from good to great, to be companies which will endure when they are forgotten.

Collins declines to give a recipe for becoming a Level 5 leader, but suggests that you just get on with it as something worthy to aspire to. Whether we make it or not it is worth the effort. "For like all basic truths about what is best in human beings, when we catch a glimpse of the Truth, we know that our own lives and all that we touch will be the better for the effort."

First WHO......then what

The rest of the book is more concerned with what leaders who took enterprises from good to great actually did in order to achieve their goals.

And, perhaps to our surprise, we find that they did not start with a clear strategy of exactly what they were going to do in order to advance the organisation. They did not even first set a new direction, and a new vision, then get people committed and aligned behind that new direction. That was not the order in which they worked.

What they have invariably done is to first concentrate on getting "the right people on the bus (and the wrong people off the bus) and THEN figure out where to drive it".

They said things that added up to this: "Look, I don’t really know where we should take the bus. But I know this much: if we get the right people on board, the right people in the right seats, and the wrong people off the bus, then we’ll figure out how to take it some place great". Collins makes three points:

  1. If you begin with "who" rather than "what" you can more easily adapt to the changing world. If people join because they like the avowed direction and then ten miles down the road you have to change direction, then they may become disaffected, or will be incapable of bearing their part in the adaptation. Whereas if they join because they feel attracted to the team that is being built up, then they will be in the mood to adapt according to the needs, along with the rest of the team. They are there for whatever comes, not just for what they expect to happen.
  2. If you have the right people on the bus, then you will not have to motivate or manage them; they will largely manage themselves and motivation will be no problem.
  3. If you have the right direction and you have the wrong people on board, then you will never become a great company while they are there.

Dick Cooley of Wells Fargo spoke of how they hired outstanding people whenever and wherever they found them, often without a specific job in mind. Cooley commented that this was how you built the future. "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." On the other hand, a comparison bank picked "weak generals and strong lieutenants", to give hope to the latter so that they did not leave! This policy produced a weak team which was trained to submit to the dictates of a domineering CEO, who as a result had no opposition or constructive argument from which he might have learnt.

Eventually the bank did recruit strong generals and got them from Wells Fargo! Wells Fargo did not change their policy because of this. It was most important to be constantly developing people and if some left for bigger jobs elsewhere, then that was a compliment to the process.

David Maxwell of Fannie Mae put it :"I don’t know where we should take this company, but I do know that if I start with the right people, ask them the right questions, and engage them in vigorous debate, we will find a way to make this company great."

The chapter goes on to give examples of the alternative model of a "genius with a thousand helpers". Singleton of Teledyne followed this model and thus his company is not in the chosen 11. "I define my job as having the freedom to do what seems to me in the best interests of the company at any time." Forbes, in a feature, commented that he would win no awards for humility, but that he had an impressive record. But when he finally went, the halcyon days of the company ended too. He had failed to build a great company.

Financial and related rewards did not seem to be significant in the staffing of the great companies. Of course they mattered, but they were not at the top of the priorities for getting the right people in the right places.

Nucor the steel company moved out of town into farming areas, on the ground that people there were used to the discipline farming required. You could teach them the techniques and knowledge that they needed, but they had something that could not be taught, an attitude to work and life, which would work through to results.

The great companies were not ruthless, but they were rigorous. Instead of hacking and cutting when times were hard, they consistently applied exacting standards throughout, especially in upper management; and part of this consistency was that people knew where they stood and did not have to languish in uncertainty for years. The general picture of their approach meant that there were fewer lay-offs in the great companies. They didn’t get rid of people because they were in the wrong seat on the bus, but they made every effort to find the right seat for them.

Other principles referred to are:

  • When in doubt don’t hire. Keep looking.
  • When you have to act to change people, don’t hang about; act fast.
  • Put your best people on your biggest opportunities, not on your biggest problems. The example is given of how one executive in Philip Morris, running a large part of the company found himself running only 1% of it, out of which came the best selling cigarette in the world. (I quote the example, not in support of cigarettes, but because what they were doing, they were doing well).

Confront the brutal facts - yet never lose faith

This chapter is about holding to a vision for greatness, but constantly refining the path to greatness with the brutal facts of reality. Visions must not drift into sweet dreams without foundation. Examples are given. A reputable firm clung to its illustrious past and its families ties, and did not face realities about changing consumer tastes in the grocery store business. An ambitious CEO thought to beat IBM, Kodak and Xerox in the emerging field of office automation. When it became obvious that it could not be done, he refused to face the facts, with disastrous effects for his firm. His intentions were good, but he was bemused by them.

A warning is given about strong charismatic personalities. Charisma can be a liability, if your staff filter the bad news out of what they have to tell you. As Churchill said, "I had no need for cheering dreams. Facts are better than dreams". And the facts at that time were grim.

What is needed is a climate where truth is heard. And great companies had this capacity. They found it better to share unpalatable facts with staff and be trusted, than to create insubstantial dreams which cease to motivate anyone when the truth comes out. It is better for a CEO to admit that he doesn’t know than to appear all knowing, only to be found out later. CEOs who help to create great firms, don’t walk in with the magic answers, but ask questions which get everyone involved in the search for answers. Executive boards in this kind of company spend their time "trying to understand" the facts and the connections, not the CEO’s mind. The CEO engages in dialogue and debate, not coercion, and is happy about the heated discussions which yield ultimate progress.

Sometimes these great companies had to conduct autopsies when things went wrong. The objective was learning, not fixing blame. Philip Morris under Cullman failed with 7 UP. He took responsibility and openly admitted he should have listened to advice more intently. If you have the right people on the bus, says Collins, you should never need to allocate blame.

Another feature of this "facing the facts" philosophy was not that the great companies had better information, but simply that they allowed it to alert them to potential problems, instead of allowing blind optimism to cause an ignoring of the red flag.

Perhaps the greatest factor when facing up to brutal facts, is the capacity that great companies have to maintain their faith in the face of major problems. They become more resilient, not dispirited. They regard it as impossible that they should ever go under and they rack their brains for every new model which might save the situation, certain that they will find one, while at the same time avoiding a lot of clutter and focusing on the things that would make the greatest impact.

It is easy to talk about this Churchillian approach; there is no recipe for engendering it. You just have the right people on the bus - people who will cooperate with unremitting persistence "if it takes a hundred years" said one of them. A distinction is made between this attitude and mere optimism. Optimism can bring bitter disappointment, but active, resilient, persistence is a different characteristic - the kind of spirit which kept Terry Waite sane in four years of solitary confinement in Lebanon. Collins doesn’t mention this illustration, but for me that is the kind of thing he is talking about.

The practical way for a CEO to ensure that he is surrounded by these kind of people, is to elicit the mettle of the people who want to come on the bus, when the talent is being assembled. This could introduce a new perspective into selection interviews and related activity.

The Hedgehog Concept introduced

The subtitle of this chapter is "simplicity within the three circles". It is based on the Greek fable about a clever fox who had a myriad approaches to catch and eat this dowdy ‘slow moving creature’. The hedgehog knew only a few things. He was not wily like the fox, but when the fox leapt, he just rolled up into a spiky ball.

Sir Isaiah Berlin said that the world was divided into foxes and hedgehogs. Foxes pursue many ends at the same time and see the world in all its complexity. They are "scattered or diffuse, moving on many levels; "says Berlin, never integrating their thinking into one overall concept or unifying vision. "Hedgehogs, on the other hand, simplify a complex world into a single organising idea", a basic principle which unifies and guides everything. All the greatest ideas of scientists, philosophers, reformers were a matter of simplifying complexity into a single understandable concept.

So Walgreens went from good to great on the basis of a simple idea - the best, most convenient drug stores, with highest profit per customer visit. Comparison companies went in for complex deals and a variety of approaches and didn’t become great. Kimberly-Clark had the simple idea of getting rid of the paper manufacturing mills and instead selling paper products to consumers.

When the Collins research team analysed the Hedgehog Concept in terms of management they came up with three intersecting circles. Understanding the intersection was the key to deep understanding. The three circles were:

  1. What can you be the best in the world at (and equally important, what you cannot be the best in the world at)? This goes beyond your core competence; and what you can be the best at might be something you are not currently doing.
  2. What drives your economic engine? How most effectively can you generate and sustain cash flow and profitability. Profit per x is your simple denominator.
  3. What are you passionate about? This was not a matter of stimulating passion, but of discovering what does make you passionate.

In personal terms this would be:

  1. What do you have a talent for and feel you are or could be one of the best in the world at? "I was born to be doing this."
  2. You are well paid for doing it ("And I get paid for doing it. Am I dreaming?")
  3. You love doing it. You look forward to coming to work and believe in what you are doing.

Whether personal or corporate you need all three of the hedgehog circles. However, each of them is worth looking at separately.

The Hedgehog Concept: Circle no.1 - being the best at something

Several examples are given of companies that determined what they could be best at. Wells Fargo realise that they would never be a global Citicorp, but they could be the best performing bank by concentrating on running a bank like a business and focusing on the Western United States. The first point is not saying that you should have a strategy, plan or intention to be the best. It is an understanding of what you CAN be the best at.

The illustration is given of Abbott’s laboratories, who had no way of being a top pharmaceutical company, given the head start that others had. So they actively searched for an understanding of what they could be best at and rapidly moved ahead in the field of creating products that would make health care more cost effective. To do this they moved out of their core pharmaceutical business and found another core, with diagnostic devices to speed up diagnosis and nutritional products to help patients regain their strength after surgery.

Great companies had learnt that doing what you are "good at" will only make you good; focusing solely on what potentially you can do better than any other organisation is the path to greatness.

The Hedgehog Concept: Circle No.2 - understanding your economic engine

Great companies were not necessarily in great industries, looked at from the market perspective. Of the eleven studied specially, only one was in an industry which consistently performed in the top 10%; the rest were equally divided between reasonably good industries and the bad to terrible. Yet they all performed as the best.

To a large extent this was due to the fact that they operated on the basis of a single economic denominator. This is explained as the answer to a simple question: "If you could pick one and only one ratio - profit per x - to increase systematically over time, what x would have the greatest and most sustainable impact on your economic engine?"

This could be crucial. Walgreens switched from profit per store to profit per customer visit, by placing temptation in the way of customers with nine stores in a mile! Changes in the regulatory basis in the banking industry caused Wells Fargo to change from profit per loan, or profit per deposit, to profit per employee. Fannie Mae changed from the criterion of mortgage as such, to risk per mortgage. Nucor came to manage on the basis of profit per ton of finished steel, rather than per employee or per fixed cost, both of which were subsumed under the new basis. Kimberly-Clark shifted from profit per fixed asset, ie mills, to profit per consumer brand. The steps taken by all eleven are tabulated and might with benefit be studied by any company.

The Hedgehog Concept: Circle No.3 - understanding your passion

It isn’t as soft and fuzzy to talk about passion as you might think. Of course you don’t reach a strategic decision to get passionate about the business. These great companies tackled it from the other end. "We should do only those things that we can get passionate about."

The leaders of Philip Morris "loved cigarettes" and their CEO felt that the company was the love of his life, second only to his wife. Lack of passion for something that, despite its pleasure giving capacity, is a killer, would keep many from working for a tobacco firm. The passionate, however, would take the view that folly, "sin" and danger make life worth living.

Gillette executives couldn’t get excited about cheap, low margin, disposable razors, but building sophisticated, relatively expensive shaving systems - well, that was something else!.

There is a story about a beauty product firm where a well educated graduate didn’t get a job with the firm because she didn’t show enough passion for deodorants. How do you get passionate about deodorants, cigarettes, shaving equipment, grocery stores etc? Well, the plain fact is that people do get passionate about what they are doing and the success of the firm, and that is what counts. An employee of Fannie Mae said that when she drove through estates of low cost houses, purchased with the company’s unique mortgage plans, she felt a lift at having achieved something worthwhile, and went back to work re-energised.

The Hedgehog Concept - the triumph of understanding over bravado

Why did the followers of the hedgehog - three circles - approach succeed? They asked the right questions and clarity replaced fog. They set their goals on the basis of understanding, rather than on bravado, however heroic the latter might sound. The comparison companies didn’t seem to break the old traditions of obsession with growth, whereas the good to great companies studied did not focus obsessively on growth. "Yet they created sustainable, profitable growth far greater then the comparison companies who made growth their mantra".

Where Fannie Mae stuck to the simple understanding that it could be the best capital markets player in anything relating to mortgages, many other companies tried to be good, and indeed were good, but not great, in a whole range of financial areas, from leasing to insurance, using a whole range of inducements. Fannie May built a powerful economic machine by reframing its business model on risk management, rather than on mortgage selling.

It took many of the good to great companies four years to clarify the answers to their hedgehog questions. Some experienced the initial conclusion that they were not the best at anything and never had been. But here was the exciting challenge: "There must be something we can be best at and we will find it". Brutal facts had to be confronted; delusions of grandeur rejected, till at last they found the something they could be best at. The process of finding this was part of the recipe for success.

A culture of discipline

This chapter begins with the concept of the life cycle of companies. A lively entrepreneurial company is full of energy and creativity, but is rather chaotic and begins to trip over its own success. It becomes unwieldy. The fun has gone out of it. So the Board decides that it is time to introduce some professional management. Chains of command, with clear reporting relationships are set up. A bureaucracy grows. Forms and official meetings multiply and it becomes just another company. The old spark has gone.

There is another way. If you have the right people on board then hierarchy and bureaucracy are less necessary. There will be self discipline, side by side with freedom to invent and innovate. Bureaucracy is largely created because the wrong people who have been let on to the bus have to be controlled. Abbott Laboratories developed a rigorous system of objectives and responsibility, which however left the responsible individuals plenty of scope to plan the implementation in a creative way. There was financial discipline AND the divergent thinking of creative work. The people had freedom - but it was freedom within a disciplined framework.

A culture of discipline is not to be confused with tyrannical discipline. A culture is a way of life, not an unwelcome imposition. The culture of discipline flows from the three hedgehog circles - what are we best at, what measure drives us economically, and what are we passionate about.

Threes are popular in management books and church sermons. So we are presented with three phases in the culture of discipline:

  • Disciplined people.
  • Disciplined thought.
  • Disciplined action.

The first is getting the right people on the bus. The second is the will to face the brutal facts, yet with the conviction that you will find a way through even the worst of them. The third follows thought with a clear path of action where there is no jumping all over the place. "Disciplined action without disciplined people is impossible to sustain and disciplined action without disciplined thought is a recipe for disaster."

As the research team studied the "great" companies and compared them with others, they kept coming across words like dogged, determined, diligent, workmanlike, demanding, consistent, focused, responsible - words which convey a mood, not a mere imposition of unwelcome discipline.

Reichardt of Wells Fargo said, "There’s too much waste in banking. Getting rid of it takes tenacity, not brilliance". The inspiration for this culture of discipline in the "great" companies came from Level 5 leaders. They built an enduring culture of discipline which was rooted in everyone on board. The comparison companies which could not sustain the path to greatness tended to have leaders who tried to impose discipline, whereas Level 5 leaders nourished what was potentially there from the moment people were invited on to the bus. On the other hand, when Level 4 leaders left, the imposed discipline did not outlast them.

Equally important to a culture of discipline is to have a "stop doing" list and even a list of "don’t ever be tempted into" list. The latter is a matter of "Anything that does not fit with our hedgehog concept, we will not do". Such companies would not launch unrelated businesses, would not make unrelated acquisitions, nor go in for unrelated joint ventures. "If it doesn’t fit we won’t do it."

Such companies don’t fall for the proverbial "once in a lifetime opportunity" which does not fit. Pitney Bowes, for example, had a monopoly of postage meter machines in the back office of all firms. The government ended the monopoly. Disaster stared the company in the face. Following their three circles of the Hedgehog Concept, they defined themselves as the back office support of businesses in the broad concept of messaging. So they moved over to sophisticated back office products, such as high-end faxes and specialised copiers, which yielded high profit per customer as per their economic engine choice and built off the existing extensive sales and service network.

The "great" companies can be illustrated by their attitude to budgets. They did not see them as mere apportionment of funds and costs to each activity. Budgeting was seen as a discipline to decide which areas should be fully funded and which should not be funded at all. Budgeting was seen as being about determining which activities best supported the Hedgehog Concept.

The real question in the culture of discipline is "once you know the right thing, do you have the discipline to do the right thing, and equally important, to stop doing the wrong things?"

Technology accelerators

The dotcom factor worried many businesses who like Walgreens saw their stock plunge as stockholders were deluded by the opportunity as they thought of a quick buck. "The Internet technology is the way of the future. Be an early investor and you will really make some money." Behind all this talk, companies were being set up that wouldn’t make any money for years, but so long as people would believe in them they could operate, even if they had nothing more than a website and a business plan.

This was a threat to Walgreens. But with the Hedgehog Concept, they decided to pause and reflect and not hurtle into reflex action. Their leader said "We’re a crawl, walk, run company." So they had an intense internal dialogue. Would going into the Internet go against their convenience theme; would it tie in with the idea of cash flow per customer visit? Can we still feel passionate about what we are doing if we go on to the Internet? Can we face the brutal facts about the Internet?

So while others were deriding them as old and stodgy, they were using their brains. They ultimately developed a website which offered an inventory and distribution model, so that people could drive through the local convenience store and pick up their prescription, having indicated their needs and paid through the Internet. So they stuck to their principles and concepts and used technology in support of them, instead of being tempted to deviate from them. They didn’t allow the tail of technology to wag the dog, but took time to work out how they could harness it to fit their three circles.

Great companies don’t follow technology, per se, but rather pioneer the application of carefully selected technologies. All eleven of the chosen "great" companies are tabulated and each of them had followed this approach in relation to technology. They were determined not to be seduced by the glitter of technology, but to take a little time to use it to support their key concepts; not as an opportunity to move into unfamiliar territory under the rubric of "diversification".

They saw technology as an accelerator, not as a creator of momentum. Fannie Mae harnessed technology to enable them to enhance their position as speedy authorisers of mortgages in the finance world, helping ordinary people to own their homes. They used the technology to reduce loan approval time from 30 days to thirty minutes and lowered the associated costs to buyers by $1000 per loan. Great companies know that you cannot make good use of technologies until you know which are relevant and match the corporate Hedgehog philosophy.

Technology was therefore a support, rather than a basis of their policy. Most of the leaders of these "great" companies hardly mentioned technology; it was so subservient to their real purposes. You can’t remain a laggard and be great, but it is not your starting point or primary cause of greatness.

The chapter succinctly summarises the true urge of the great. "Those who turn good into great are motivated by a deep creative urge and an inner compulsion for sheer unadulterated excellence for its own sake. Those who build and perpetuate mediocrity, in contrast, are motivated by the fear of being left behind."

"No technology can make you Level 5. No technology can turn the wrong people into the right people. No technology can instil the discipline to confront the brutal facts of reality, not can it instil unwavering faith. No technology can supplant the need for deep understanding of the three circles and the translation of that understanding into a simple Hedgehog Concept. No technology can create a culture of discipline. No technology can instil the simple inner belief that leaving unrealised potential upon the table - letting something remain good when it can become great - is secular sin."

The flywheel and the doom loop

Collins’ penchant for metaphor now finds another for the steady build up that leads to breakthrough and transformation. He asks us to imagine a 30 foot diameter, 2 foot thick flywheel, weighing 5000 pounds. We have to get it rotating on its axle as fast as possible for as long as possible.

We push and after great effort it inches forward, and after several hours’ effort it completes a whole rotation. We keep pushing in a consistent direction. It speeds up ever so slightly and then begins to make rotations more regularly...and so it goes on and we keep pushing until at some stage there is breakthrough and the wheel begins to rotate under its own momentum, its heavy weight working in our favour. Each turn of the flywheel is building on the work done earlier, compounding the investment of effort. But no one could answer the question of when the one big push occurred that caused the thing to go so fast. It was the overall accumulation of effort, applied in a consistent direction that did it.

This is an image of the fact that the transformation of good to great comes about by a cumulative process, not in one fell swoop. There is no one single defining action, no grand programme, no one killer invention, no solitary lucky break, no wrenching revolution. It is a cumulative process which adds up to sustained and spectacular results.

The media often present breakthrough as if it were a magic overnight metamorphosis, but it is not. Forbes presented Circuit City in 1984 as an overnight success story. Alan Wurzel had taken over as CEO in 1973, with the company close to bankruptcy. By 1977 it had developed the selling of consumer electronics into the first ever Circuit City store. Then it converted its stereo stores to Circuit City stores and moved in 1982 to the first super store. From 1982 to 1999 it generated the highest return to shareholders of any company on the New York Stock Exchange, 22 times better than the market, including beating GE, Intel, Coca Cola and Wal-Mart.

A number of other stories are told: Nucor the steel people, who said "we did not make a decision that this was what we stood for at a given moment. It evolved through many agonised arguments and fights". Philip Morris: "Our success was evolutionary, as opposed to revolutionary, building success upon success. I don’t know that there was any single event". Walgreens: "There was no bright light that came on like a light bulb. It was a sort of evolution thing." Kroger: "It wasn’t a flash out of the blue.." Fannie Mae: "The was no one magical event, no one turning point..." and so it goes on. In one way or another all the eleven companies said the same - Abbott: "It wasn’t a blinding flash or sudden revelation from above..."

From the outside, as reported by the media, they might look like sudden dramatic breakthroughs, but from the inside, they felt completely different, more like an organic development process.

Of course many might say that they don’t have the time for contemplation and evolution. When you are in dire straits, immediate action is required. Not so, say the great companies, who faced with stark disaster, still took time to think and to remember their three circles, so that the right way out of the dilemma could be developed. Half of the companies covered were, at the beginning, facing bankruptcy or were close to it, and it wasn’t easy to ensure survival till the market began to realise that something promising was afoot.

Short term pressures had to be managed, and ingenious, though legal, methods were evolved to keep the analysts happy about improvement year by year, while they were investing behind the scenes in the future. Ask Abbott how they did it.

Collins shows how power exists in the fact of continuous improvement and the delivery of results. Within the company people feel the steadily increasing speed of the flywheel and their enthusiasm grows. This then begins to communicate itself to investors. Just as in the flywheel metaphor, visible results begin to accrue and the energy developed makes it turn ever quicker.

There were no great communication campaigns inside the companies. "When you let the flywheel do the talking, you don’t need to fervently communicate your goals. People can just extrapolate from the momentum of the flywheel for themselves…… The goal almost sets itself." Everyone wants to be part of a winning team and when small wins become bigger wins, people want to be counted in.

The reverse of the flywheel is the "doom loop", experienced by many companies who never used adversity as the first stepping stone to becoming great. Many stories exist of good companies which, faced with disappointing results, kept changing course, with no mechanism like the Hedgehog Concept to keep them following a consistent path. New acquisitions followed each other, with no sense of consistent purpose, or sense of their potential to be the best in something. Major restructurings followed. Companies lurched from one grand idea to the next. Massive downsizing was made an act of policy. CEOs changed with unsettling rapidity, each trying to make a different mark on the future of the company.

Great companies, or those on the path to greatness, used acquisitions as an accelerator of flywheel momentum, not as the creator of it. Their CEOs worked at what was developing in the company, not jumping into any bright possibility that had no coherence with the company’s raison d’etre.

Horrifying examples are given of CEOs who thwarted promising developments to chase some totally new idea, which also fitted with their personal desires, as if the company was their personal fief. The case of the Harris Corporation is cited where a new CEO moved company HQ from Ohio to Florida, where he had his home and ocean-going yacht. The company was beginning to move the flywheel in printing and communications, when the CEO insisted on a move into office automation and tried to lock horns with IBM, Wang and DEC. Geographic and product change, with disregard for the three circles, led to disastrous results.

A table makes a comparison between the good to great companies and the comparison ones which were used. Under the heading "Signs that you’re on the flywheel", we read: "Reach breakthrough by an accumulation of steps, one after the other, turn by turn of the flywheel; (it) feels like an organic evolutionary process". Under the heading "Signs that you’re in the doom loop" we read: "Implement big programs, radical change efforts, dramatic revolutions; chronic restructuring - always looking for a miracle moment or new saviour".

Readers of the summaries on the VLRC will possibly have read my summary of Tom Peters’ book Re-imagine. A comparison with Good to Great is instructive. One of Peters’ headings is "More Collins, More Claptrap". To read these two books and to enter into debate with them can be a significant experience.

From Good to Great to Built to Last

The last chapter develops the thought that the theme of Built to Last is actually the development from Good to Great, although it was written first. To re-read the summary in VLRC of Built to Last, which Collins wrote with Jerry Porras, is a worthwhile experience, particularly if undertaken with a study of the Tom Peters summary. Better still read the three books. It could be a life changing or a business changing experience!!

The team for the later book decided to carry out the research as if Built to Last didn’t exist, to avoid bias. Then after completion of the second study they could ask how, if at all, the two studies related. This is discussed in the last chapter. They come up with four main points:

  1. The early leaders in Built to Last companies followed the same approaches as the Great to Good ones, but as entrepreneurs in small early stage companies, rather than as CEOs trying to transform established companies from good to great.
  2. Great to Good is not a sequel to Built to Last, but a "prequel". Great to Good concepts bring sustained great results. Built to Last concepts applied to these great companies, make for an enduring great company.
  3. Having worked on the hedgehog principle to achieve sustained great results, if you carry on applying these core values, never deviating from the values, whatever changes you make, you will endure.
  4. The two books enrich each other. Built to Last poses the question "What is the difference between a "good" BHAG (Big Hairy Audacious Goal) and a bad "BHAG". Perhaps the second book goes some way toward an answer.

Collins looks back at some of the companies in Built to Last and sees how before they became obviously enduring ones, they went through the stages set out in Great to Good. Wal-Mart is thought of as a company that leapt on to the scene. This is far from the truth. Sam Walton began in 1945 with a single dime store. It was seven years before he opened a second one. Step by step he turned the flywheel until the Hedgehog Concept of large discount marts emerged as a natural evolutionary step in the mid 60s. It took him a quarter of a century to grow from that single store to a chain of 38 stores. Then from 1970 to 2000 Wal-Mart hit breakthrough momentum and exploded to over 3000 stores, with $150 billion in revenues. The only difference from the stories in Great to Good is that Sam Walton did not take an existing good firm to greatness. He started the firm in a very small way and it was some time before it would have qualified for inclusion in the later research.

Hewlett Packard is another case of small beginnings, becoming good and then making the transition to greatness, and finally it can be said that it was built to last. It has joined the ranks of the few who endure over a long period. The two founders are an example of people who got on a small bus together, without knowing what it was that they wanted to do, other than have a company to do something worthwhile. And they took a time to decide what that should be. It was the classic example of an earlier chapter in the current book "First who..and then what".

In the Great to Good stage the companies develop and live by their three circles; they establish their own Hedgehog Concept. Then, when they can be called enduring the following statements will be true of them:

  1. Enduring great companies don’t merely exist to deliver returns to shareholders. Indeed in a truly great company, profits and cash flow become like blood and water to a healthy body. They are absolutely essential to life, but they are not the VERY POINT of life.
  2. Enduring companies preserve their core values and purpose while their business strategies and operating practices adapt to a changing world. This is the magic combination of "preserve the core and stimulate progress".

Each of the Great to Good findings enables all four of the key ideas of Built to Last:

  1. Clock building, not time telling. Build something that will endure through many product life cycles and through many leaders after the original gifted leader has moved on, instead of being built around a single great leader or great idea.
  2. Belief in AND rather than OR, eg, purpose and profit, continuity and change, freedom and responsibility.
  3. Core ideology. Instil core values (essential and enduring tenets) and core purpose (fundamental reason, beyond just making money), as principles to inspire people and guide decisions for a long time to come.
  4. Preserve the core/stimulate progress. The core ideology remains the anchor while change, innovation, improvement and renewal is stimulated in everything else. Set and achieve BHAGs in consistency with the core ideology.

These points are set out effectively in tabular form. The BHAGs are discussed a little more, to show that they are not a matter of bravado, if they are good, but are based on understanding, combining the quiet understanding of the three circles with the audacity implicit in a BHAG to get a magic mix.

In the last few pages the important point is made that if "we organised the majority of our work around the principles of the Hedgehog Concept, and pretty much ignored or stopped doing everything else, our lives would be simpler and our results vastly improved".

An idealistic, but practical paragraph ends the book, before moving on to ninety pages of valuable appendices, which amplify some of the detail of the research:

"When all the pieces come together, not only does your work move toward towards greatness, but so does your life. For in the end it is impossible to have a great life unless it is a meaningful life. And it is very difficult to have a meaningful life without meaningful work. Perhaps, then, you might gain that rare tranquillity that comes from knowing that you’ve had a hand in creating something of intrinsic excellence that makes a contribution. Indeed, you might even gain that deepest of all satisfactions; knowing that your short time on this earth has been well spent, and that it mattered."

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