Book Review 008: Good to Great - Jim Collins
/Jim Collins is a popular author of business books who also wrote Great by Choice and How the Mighty Fail. Good to Great, published back in 2001, takes a deep dive into how to build a sustainable business by asking yourself the question, "How can a good company become great?". He along with his team researched many companies and found patterns to create the "good to great" formulas which many businesses try to emulate even to this day.
By looking at the past 25 years of Fortune 100 companies on Wall Street, one can see how some Companies that appeared to be great, quickly disappeared, and others withstood the test of time. Jim Collins breaks down the success principle as follows: Hire the right talent, be specific in your purpose and goals, focus on results and make tough decisions.
In the process of gathering data for this book, Jim and his team looked at over 1,435 Fortune 500 companies that had 15-year cumulative returns at or below the stock market average, followed by cumulative returns that were three times the market over the next 15-year cycle. Companies that became the target of this metric were Fannie Mae, Gillette, Kroger, Walgreens, Wells Fargo, and Circuit City, to name a few.
Furthermore, the team compared these companies against those in the same industry but were unable to sustain "greatness" for a long period of time. Once the companies were selected, the team interviewed executives and upper Management, as well as review their forecasted goals, financial statements, and company culture. Some interesting statistics that were found early on included that trend that a company does not need a famous CEO nor does executive compensation play a role in the achievement of a corporation.
The book describes the path of a company transitioning from good-to-great as three stages:
Stage 1: Disciplined People
Collins saw that companies trending towards the path of becoming "great" needed the right people who displayed "level 5 leadership", meaning they were professionally driven, not for their own achievement and success, but for the greater good of the company. Furthermore, these leaders were humble, accepted responsibility, and were able to choose great successors.
State 2: Disciplined Thought
Leaders must be ready to face the data and ask the hard questions. They must be ready to accept the truth and make decisions based on facts. Jim shares that leaders must engage their team with dialogue and debate, not coercion. In other words, ask and lead with questions, not answers. Its often easy to fall back on "tribal knowledge" or past experience to give a quick answer, instead of facing the new reality. Do not use this opportunity to place blame, but self-examine. Also, implement controls, or mechanisms to be able to detect red flags before they become larger issues.
Stage 3: Disciplined Action
Great companies stimulate a culture of discipline. While early on, start-up companies may fuel their growth through the use of creativity and passion, as the company matures, they need to find a way to become more systematized, hire the right people, and build processes that are scaleable for the long term. This may become counter intuitive to a start-up promoting creativity and "forward thinking", however, leaders can create a disciplined framework and foster creativity within the framework for continued growth. Through researching these companies, Collins and his team found that greatness does not come from strategy or technology, but comes from careful and deliberate cycle of development followed by a leap forward in the right direction.
“The Flywheel and the Doom Loop”
Companies that go from good to great develop a pattern of growth. This pattern of steady buildups and breakthroughs is similar to the concept of a flywheel that builds momentum. The overall result is from the cumulative effect of small victories and good decisions made over time. They never have a meteoric rise or a “miracle moment” that can be pinpointed to a single event. This “flywheel effect” is circular and builds on the “accumulation of effort applied in a consistent direction.” On the other hand, companies that Collins and his team compared with good-to-great corporations but that didn’t make the grade, fell into the "doom loop". They launched new “miracle” programs that were the next big thing, and tried to buy their way into success through mergers and acquisitions. This caused frequent corporate restructuring and leadership change that landed them out of business.
“The Hedgehog Concept”
Jim Collins illustrates the "hedgehog concept" by explaining a Greek fable that pits a fox against a hedgehog. From the outside looking in, the fox is smart, cunning, and sneaky. On the other hand, the hedgehog is slow and unexciting. However, no matter how much ingenuity the fox shows in its attack, the hedgehog rolls into a ball with its spikes sticking outward. After numerous attempts, the fox leaves empty handed and defeated. The point is that the hedgehog knows its strengths and sticks to what it does best.
Good-to-great companies are like hedgehogs, able to focus on what they do better than their competition. That is why we constantly see competition dwindling in numerous industries such as airlines, healthcare, pharmaceuticals, and restaurants. For example, Walgreens sought to become America’s most convenient drugstore during its rise in the 70s, 80s, and 90s. The company decided to stick to high-traffic sites and pioneered the idea of drive-through prescription pickups. Walgreens was able to combine the idea of convenience and increased profit per customer per visit. By sticking to these two fundamental goals, they were able to rise to the top and crush their competition.
Collins explains how we all can find our hedgehog concept by asking ourselves what we can do better than any other organization, how do we make money, and what stimulates your dedication to the organization's goals? This ties back to stage 1, where by hiring the right employees who are passionate and driven, they are able to push the flywheel in one consistent direction harder and faster than others. This creates the momentum and push that the organization needs to become "great".
Favorite Quote: “While you can buy your way to growth, you absolutely cannot buy your way to greatness.”
Good to great is a perfect book for entrepreneurs, business owners, and employees alike, especially those in Management positions, to help shape the company culture and thought leadership by sticking to your strengths, goals of the organization, and making the tough decision.
Good Luck!
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