Book Report

Good to Great: Why Some Companies Make the Leap… and Others Don’t (Jim Collins, 1996)

In his book “Good to Great” Jim Collins asked the question, "Can a good company become a great company and if so, how?" Collins and a devoted team of 22 researchers embarked to discover what transforms good companies into truly great companies. To begin the research for the Good-to-Great study, they searched for companies that: performed at or below the general stock market for at least fifteen years; then at a transition point began to pull away from the competition, and sustained returns of at least 3 times the general market for the next fifteen years. They started with a list of 1,435 companies that appeared on the Fortune 500 list from 1965 to 1995 and ended up with only 11 that made the cut. These eleven companies produced, on average, a return of 6.9 times the general stock market during the 15 years following the transition points. Collins chose a 15-year span to avoid "one-hit wonders" and lucky breaks. The companies that were selected were Abbott Laboratories, Circuit City, Federal Home Loan Mortgage, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.

In the book, Collins highlights some important factors which are the result of the research. Although there are several factors involved for taking a company from good to great', what these great companies turned out to have in common was a particular kind of leader during the transition period, called Level 5 leaders. These top executives "possess a paradoxical mixture of personal humility and professional will"

In Good to Great Collins classifies leaders into five levels. A level 1 leader is a highly capable individual. He plays an important role in the success of his organization through his own talent, knowledge, skills, and good work habits. A level 2 leader is a contributing team member. He is very good at working with his team members and ensures that his team meets its assigned objectives, and fulfills the core purpose. A Level 3 leader is a competent manager. He is skilled at organizing people and resources towards the effective pursuit of company objectives. A Level 4 leader is an effective leader. He sets high level performance standards. He is remarkable at motivating his people and leading them single-mindedly towards realizing his vision for the organization. A Level 5 leader transforms the organization into a great institution. As mentioned earlier, he embodies personal humility and professional will. Leaders do not need to work sequentially through each level to reach the top, but each higher level requires the capabilities of all the lower levels.

Another important character of level 5 leadership is the window and the mirror concept. 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. In other words, level 5 leaders are very modesty. The level 5 leaders were seemingly ordinary people quietly producing unordinary results. Compared with Kimberly-Clark’s CEO, Scott Paper’s CEO, Al Dunlap, called himself a nickname: Rambo in Pinstripes in his book after selling off the company and pocketing his quick millions of dollars.

The second factor is staffing and specifically getting the right people on the bus, but with a different way than we expect. A lot of companies first decide the job that has to be done, and then choose the right people to perform that job. Yet this concept is the opposite. First you bring the right people on the bus and then you leave these people to figure out what to do. According to Collins research this was a factor that helps companies from good to great. Bank of America versus Wells Fargo is the perfect case shows us how the concept works. Wells Fargo had been recruiting talented people into the company without any specific job, because the CEO believed that these smart people could help company to face and deal with the future changes and difficulties. Well Fargo was easy to adapt to a changing world when banking deregulation arrived. Moreover, Wells Fargo went three times higher than general stock market which the banking fell 59 percent behind. CEO of Wells Fargo, Dick Cooley a level 5 leader, understand three simple truths. First, if you begin with “who,” rather than “what,” you can more easily adapt to a changing world. Second, if you have the right people on the bus, there are no problem to motivate and manage people goes. Right people are self-motivated by the inner drive to produce the best results, and right people don’t need to be tightly managed, they know what they should or should not do. Third, if you have the wrong people on the bus, you won’t get to the place where you want to go, whatever how hard to motivate and manage them. Right people are the most important asset in the company. Right people can turn a nearly bankruptcy company to Fortune 500 company.

The third reason why good-to-great companies make the transition is that they confront the brutal facts. Nobody likes to hear the bad news, but a company has to face it and take action about it. Furthermore all good to great companies create a culture wherein people have the opportunity to speak their minds and, ultimately, the truth will be heard. When A&P executives recognized their customer actually liked the modern superstore as part of the result of “The Golden Key” store, they just closed it because they didn’t like the answer. Unlike A&P, Kroger faced this cruel result bravely, and decided to “eliminate, change, or replace every single store and depart every region that did not fit the new realities”. After more than 20 years effort, Kroger became the number one grocery chain in America. When we compare the two cases, we conclude that “it is impossible to make superior decisions without knowing the entire process with an honest confrontation of the brutal facts”. Focus on corporation’s strategic management, a company which can confront the brutal fact will help it to make the right decision, get the real result of its program and make the correction. That’s why good to great companies faced the similar difficulty as comparisons companies but they responded differently, and ultimately achieved great results.

Next analyzed concept is the “Hedgehog” concept. Hedgehogs are very good at doing one big thing in comparison to a sneaky fox that always tries to find numerous ways to achieve its goals. Companies that adapt this concept are able to simplify a complex business into a single organizing concept that guides everything. This does not mean that the businesses themselves are uncomplicated. However, the Good-to-Great leaders are able to see through the complexity to the fundamental economic drive of the business. Collins simplified this in the three circles which are: what you are deeply passionate about, what you can be the best in the world at and what drives your economic engine. By comparing case of Eckerd versus Walgreens, Walgreens has a simple hedgehog concept that is to be “the best, most convenient drugstores, with high profit per customer visit”. Under this concept, it opens drugstores in every possible convenient location and added extra services to the store not only selling drugs, to increase the profit per customer visit. As a result, Walgreens generated cumulative stock returns from the end of 1975 to 2000 the exceeded the market by over fifteen times. Simple formula does not imply a simple business. Good-to-Great leaders continually analyze their organizations, until they really understand what drives their financial success. This goes together with learning from mistakes and figuring out what best works each time. Since figuring out the three circles of the hedgehog concept, in order to remain great you will have to keep the fundamental principles that made you great. If you stop doing them, you will slide backward, from great to good, or worse. Hasbro case is an example. Hasbro became the best in the world at acquiring and renewing tried-and-true toys, reintroducing and recycling them at just the right time to increase profit per classic brand. And its people had great passion for the business. Hasbro became a backward transition in part because it lost the discipline to stay within the three circles after the unexpected death of CEO Stephen Hassenfeld).

Discipline culture is another important factor that drives good-to-great companies to success. It’s about disciplined people who engage in disciplined thought and who then take disciplined action. Nucor, for example, had the Hedgehog Concept of harnessing culture and technology to produce steel. Main idea to the Nucor concept was the idea of aligning worker interests with management and shareholder interests through a democratic procedure. Because of the culture of discipline, Nucor had the simplest managing structure, the least managing staff and highest employee’s benefits. When people are fed up by more and more union strike, Nucor’s workers even reject to unionize.

Next factor is the way technology is perceived and used. Good-to-great companies used technology as an accelerator of momentum, not a creator of it. None of the good-to-great company began their transformations with pioneering technology, yet they all became pioneers in the application of technology once they grasped how it fit with their three circles and after they hit breakthrough. Before they became a pioneer in the application of the technology, they had to do the external and internal scanning to see is if the technology would fit their long term strategic goals and hedgehog concept.

Last factor is the flywheel effect. It built a momentum for greatness slowly, rather than in a single moment. For the people on the outside it looked like dramatic and revolutionary events that drove success, but for the people in the inside it was cumulative actions and processes, that led to breakthrough. The comparison companies followed a different pattern, the doom loop, where they tried to skip buildup and go directly to breakthrough with disappointing results.

In conclusion we can understand without a doubt why this book is a must read for anyone in business, running a business or starting a business. The above factors are definite characteristics of great companies that have the power to transform any decent company to a truly great.