Good to Great

Why Some Companies Make the Leap...And

Others Dont

by Jim Collins

Management & Leadership, Entrepreneurship & Small Business

Good to Great presents the findings of a five-year study by the

author and his research team. The team identified public companies
that had achieved enduring success after years of mediocre
performance and isolated the factors which differentiated those
companies from their lacklustre competitors.

These factors have been distilled into key concepts regarding

leadership, culture and strategic management.

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 Good-to-great companies can teach others how to
make the same leap.

Jim Collins previous best-seller Built to Last explains how great

companies sustain high performance and stay great. Most companies,
however, are not great. Hence the more burning question: How do
companies go from good to great? What do they do differently from
their competitors who stay mediocre at best?

To answer these questions, Jim Collins and his research team

studied three groups of public US companies in a five-year project:

Good-to-great companies, which had been performing at or below

the average stock market performance for 15 years, before making a
transition to greatness, in other words generating cumulative
returns of at least three times the general stock market over the next
15 years.

Direct comparison companies, which remained mediocre or

dwindled although they had roughly the same possibilities as the
good-to-great companies during the time of transition.

Unsustained comparison companies, which made a short-lived

transition from good-to-great, but slid back to performing at a level
substantially below the stock market average after their rise.

Over the course of their research, Collins and his team examined
over 6,000 press articles and 2,000 pages of executive interviews. The

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goal was to discover what the good-to-great companies had done
differently, and thus help other companies make the same leap.

Good-to-great companies can teach others how to make the same

leap.

Finding a simple Hedgehog concept provides a

clear path to follow.

Imagine a cunning fox hunting a hedgehog, coming up with a

plethora of surprise attacks and sneaky tactics each day to devour the
tasty critter. The hedgehogs response is always the same: curl up in a
spiky, unbreachable ball. Its adherence to this simple strategy is the
reason the hedgehog prevails day after day.

Good-to-great companies all found their own simple Hedgehog

concept by asking themselves three key questions:

1. What can we be the best in the world at?

2. What can we be passionate about?

3. What is the key economic indicator we should concentrate on?

At the intersection of the questions, after an average of 4 years of

iteration and debate, good-to-great companies eventually discovered
their own simple Hedgehog concept. After that point, every decision
in the company was made in line with it, and success followed.

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 Consider the drugstore chain Walgreens. They decided simply that
they would be the best, most convenient drugstore with a high
customer profit per visit. This was their Hedgehog concept, and by
pursuing it relentlessly they outperformed the general stock market
by a factor of 7.

Their competitor, Eckerd Pharmacy, lacked a simple Hedgehog

concept and grew sporadically in several misguided directions,
eventually ceasing to exist as an independent company.

Finding a simple Hedgehog concept provides a clear path to

follow.

Success comes from many tiny incremental

pushes in the right direction.

In retrospect, good-to-great companies seemed to go through a

sudden and dramatic transformation. The companies themselves,
however, were often unaware they were even in the midst of changing
at the time: their transformation had no defined slogan, launch event
or change program.

Rather, their success was a sum of tiny, incremental pushes in the

direction of their simple strategy, the Hedgehog concept. Like pushing
a flywheel, these small improvements generated results which
motivated people to push further, till enough speed was gathered for a
breakthrough. Unwavering faith and adherence to the Hedgehog
concept was rewarded by a virtuous circle of motivation and progress.

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 Consider Nucor, the steel manufacturer which outperformed the
general stock market by a factor of 5. After battling the threat of
bankruptcy in 1965, Nucor understood they could make steel better
and cheaper than anyone else by using mini-mills, a cheaper and more
flexible form of steel production. They built a mini-mill, gained
customers, built another one, gained more customers and so on.

In 1975 CEO Ken Iverson realized if they just kept pushing in the
same direction, they could one day be the most profitable steel
company in the US. It took over two decades, but eventually the goal
was reached.

Comparison companies did not strive to consistently build

momentum in one direction, instead trying to change their fortunes
with dramatic changes and hasty acquisitions. Since these delivered
lackluster results, they became discouraged and were forced to once
again attempt a change, not letting the flywheel gather speed.

Success comes from many tiny incremental pushes in the right

direction.

New technology should be viewed only as an

accelerator toward a goal, not as a goal itself.

Good-to-great companies used new technology primarily to

accelerate their momentum in the direction they were already going
in, but never to indicate the direction itself. They saw technology as a
means to an end, not the other way around.

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 Comparison companies often felt new technologies were a threat,
and worried about being left behind in a technology fad, scrambling to
adopt them without an overarching plan.

Good-to-great companies on the o ther hand carefully

contemplated whether the particular technology could accelerate
them on their path. If so, they became pioneers of that technology,
otherwise they either ignored it or merely matched their industrys
pace in adoption.

Walgreens, a major drugstore chain, provides an excellent

example of how new technology can best be harnessed.

At the beginning of the e-commerce boom, the online drugstore

company Drugstore.com was launched amid major market hype. The
mere perception of being slower in adopting online business cost
Walgreens 40 percent of its share-value, and the pressure was on for
them to lunge at this new technology.

Rather than yielding, they considered how an online presence

could help them in their original strategy: making the drugstore
experience even more convenient and further raising profits-per-
customer.

Just over a year later, they launched Walgreens.com, which

advanced their original strategy through e.g. online prescriptions.
While Drugstore.com lost nearly all of its original value in a year,
Walgreens bounced back and almost doubled its stock price in the
same time.

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 New technology should be viewed only as an accelerator toward
a goal, not as a goal itself.

Level 5 leaders drive successful transformations

from good to great.

All good-to-great companies enjoyed so-called level 5 leadership

during their transition.

Level 5 leaders are not only excellent individuals, team members,

managers and leaders, but also single-mindedly ambitious on behalf of
the company. At the same time they remain humble personally. They
are fanatically driven toward results, and want their company to
continue performing even after they leave.

Far from being ego-driven, level 5 leaders are modest and

understated. Level 5 leaders share the credit for their companys
achievements, downplaying their own role in them, but are quick to
shoulder blame and responsibility for any short-comings.

Take for example Darwin Smith, who transformed Kimberly-Clark

into one of the leading paper consumer goods companies in the world.
He refused to cultivate an image of himself as a hero or celebrity. He
dressed like a farm boy, spent his holidays working on his Wisconsin
farm and often found his favorite companions among plumbers and
electricians.

By contrast, 2 out of 3 comparison company CEOs had gargantuan

egos that were counterproductive for the long-term success of the
company. This was most evident in the lack of succession planning.

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 For example Stanley Gault, the legendarily tyrannical and
successful CEO of Rubbermaid, left behind a management team so
shallow that under his successor, Rubbermaid went from Fortune
Magazines most admired company to being acquired by a competitor
in just 5 years.

Level 5 leaders drive successful transformations from good to

great.

The right people in the right place are the

foundation of greatness.

Asking who must take precedence over asking what. The

transformation from good to great always began with getting the right
people into the company and the wrong people out of it, even before
defining a clear path forward.

The right people will eventually find a path to success. When Dick
Cooley took over as the CEO of Wells Fargo, he realized he could never
understand the major changes that would follow from the imminent
deregulation of the banking industry.

But, he reasoned that if he got the best and the brightest people
into the company, somehow together they would find a way to prevail.
He was right. Warren Buffet subsequently called Wells Fargos
executives, The best management team in business, as the company
prospered spectacularly.

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 Good-to-great companies focused more on finding people with the
right character traits rather than professional abilities, reasoning that
the right people can always be trained and educated.

With the right people, companies did not need to worry about
how to motivate them. They focused on who they paid, not how they
paid, and created an environment where hard workers thrived and
lazy workers left. In top management, people either jumped right off
or stayed for the long run.

Good-to-great companies never hired the wrong person even if the

need was dire, but hired as many right people as were available, even
without specific jobs in mind for them.

When good-to-great companies did see they had the wrong

person, they acted immediately. They would either get rid of them or
try to cycle them to a more suitable position. Delaying dealing with
the wrong people only frustrates the rest of the organization.

The right people in the right place are the foundation of

greatness.

Success requires confronting the nasty facts, while

never losing faith.

Good-to-great companies constantly walked the line of the so-

called Stockdale paradox, named after a US admiral captured during
the Vietnam War.

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 As a high-ranking officer detained at the infamous Hanoi Hilton
prison, Stockdale was tortured repeatedly by the enemy and did not
know if he would ever see his family again. Despite the dire
circumstances, he never lost faith that somehow he would get home.

Neither did he indulge in foolish optimism like some of his fellow

prisoners, who believed they would be home by Christmas, and were
heart-broken when it did not happen. Later, Stockdale credited his
survival to his ability to confront the facts of his situation while still
retaining faith.

In the same manner, good-to-great companies confronted the

brutal facts of their reality, and yet still retained unwavering faith that
somehow they would prevail in the end.

Whether they faced stiff competition or radical regulatory

changes, good-to-great companies dealt with the facts head-on instead
of burying their heads in the sand, and still managed to keep their
spirits up. For example, when Procter & Gamble (P&G) invaded the
paper-based goods market, the two major existing players reacted very
differently.

The market-leader, Scott Paper, felt that their game was up and
that they could never compete against a giant like P&G. They tried to
diversify and stay in categories where P&G did not compete.

At the same time Kimberly-Clark relished the opportunity to

compete against the best, and even held a moment of silence for
Procter and Gamble in one of their executive meetings.

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 The result: two decades later, Kimberly-Clark actually owned Scott
Paper and dominated P&G in 6 out of 8 product categories.

Success requires confronting the nasty facts, while never losing

faith.

Leaders must create an environment where the

brutal facts are aired without hesitation.

A strong, charismatic leader can be more of a liability than an

asset, if it means others wish to hide the unpleasant truth from him.

In management meetings, leaders must take the role of a Socratic

moderator, asking questions to uncover truthful opinions, not giving
ready answers. Leaders must also encourage debates to rage in the
meetings so the best possible decisions are reached.

Consider Pitney Bowes, which went from being a postage meter

producer about to lose its monopoly to being a major document
handling solution provider and outperforming the general stock
market by a factor of seven. Regardless, management at Pitney Bowes
spent most of its time in meetings discussing worrying facts, i.e. the
scary squiggly things that hide under rocks rather than celebrating
their successes.

When mistakes are made, they must be studied carefully to

understand what went wrong, but blame must not be assigned, since
it would discourage people from airing the truth.

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 Red flag mechanisms which raise alerts at critical business signals
can force managers to pay attention to the harsh facts.

Good-to-great companies did not have more or better information

than the comparison companies, they merely confronted it and dealt
with it more honestly.

Leaders must create an environment where the brutal facts are

aired without hesitation.

A culture of rigorous self-discipline is needed to

adhere to the simple Hedgehog concept.

Dave Scott is a former triathlete who used to bike 75 miles, run 17

miles and swim 12 miles every single day. Despite this grueling
regime, he still had the self-discipline to rinse his daily meal of cottage
cheese before eating it to minimize his fat consumption.

Good-to-great companies were filled with people with the same

level of diligence and intensity as Dave Scott, working toward the
simple strategy, the Hedgehog concept, which their company was
following.

Consider Wells Fargo, a bank which understood that operating

efficiency was going to be an important factor in the deregulated
banking world. They froze executive salaries, sold the corporate jets
and replaced the executive dining room with a cheap college-dorm
caterer. The CEO even began reprimanding people who handed in
reports in fancy, expensive binders. All of this may not have been

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necessary for Wells Fargo to become a great company, but it
demonstrates they were willing to go the extra mile.

A culture of discipline is not the same as a single disciplinary

tyrant. Tyrannical CEOs did sometimes manage a temporary spell of
greatness for their companies, but they soon crumbled after the tyrant
left.

Take for example Stanley Gault, the CEO of Rubbermaid who

admitted he was a sincere tyrant and expected his managers to work
the same 80-hour weeks he did. Once he left, Rubbermaid lost 59% of
its value in just a few years, as no enduring culture of discipline was
left behind.

A culture of rigorous self-discipline is needed to adhere to the

simple Hedgehog concept.

About the Author

Jim Collins is an American author, lecturer and consultant, who

among other things, has taught at the Stanford University Graduate
School of Business and is a frequent contributor to Fortune, Business
Week and Harvard Business Review. His previous book Built to Last
sold over 4 million copies.

The author was inspired to write Good to Great when a business

acquaintance pointed out that his previous book examined only how
great companies stay great, not how they can become that way in the
first place.

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