“Level 5 Leaders” - leaders who have both “personal humility” and “professional will”. These are not rock-star leaders whose companies go into decline when they move on. They are diligent and hard working - more bite than bark. Celebrity leaders often work for a time, but appear to be damaging in the long run, because they don’t create sustained results.
Get the right people on the bus - that has to happen before the “what” decisions are taken. That can change if you have the right people, but the wrong people will certainly make the enterprise fail.
You must always be willing to “confront the brutal facts”. Don’t ignore reality in favor of what your hopes reflect it to become. Only by having accurate information can you achieve success.
The “Hedgehog concept” means having a simple, extremely clear concept of what their business is. That business is something they can
- Make money at
- Be passionate about, and
- Be the best in the world at
These are also known as “The Three Circles”
A culture of self-discipline is critical, because it creates an environment where people work within a defined system, and yet, because the confines of the system are known, gives them more freedom to act within that system.
Technology is an accelerator, not an agent of change. Good companies use it to execute better, but it won’t save a mediocre company.
“The Flywheel” refers to the idea of momentum - keep pushing in one direction and you’ll build up a lot of it that will help you to overcome obstacles. Momentum is built a little bit at a time - it’s not a dramatic, revolutionary change, but constant, diligent work.
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Good to Great: Why Some Companies Make the Leap... and Others Don't
Author: Jim Collins
The idea that sparked this book was to answer questions about how good companies might become great companies, and how they went about doing so.
The study looks at companies from 1965 to 1995, looking for those that, for 15 years, either tracked or underperformed the stock market, followed by a transition, and subsequently returning at least 3 times the stock market for at least 15 years. The goal was to eliminate “flash in the pan” success from the results. Further filtering was performed in order to ensure that companies also outperformed their industries, so as not to include spurious results showing entire industries that grew by leaps and bounds in a given period. Eleven companies were located that matched these criteria, and were studied in depth, and compared to competitors in their fields
The companies studied were:
Level 5 Leaders
All the companies studied had what Collins describes as “Level 5 Leaders”. Despite sounding like something from a space-alien worshiping cult, what the term refers to is an individual who is very humble on a personal level, but who possesses a great deal of drive and desire to succeed, where “success” is not personal, but defined by creating something great that will outlast their time at the helm. These are people with an unwavering will and commitment to do what is necessary to drive their organization to the top. Most of the good to great executives discussed luck as an important factor in their success [and perhaps cynical readers of The Black Swan will agree with that assessment more than the factors Collins cites - davidw]. Level 5 leaders, are, in any case, the kind of people who do not point to themselves as the cause for an organization’s success. The chapter closes with a discussion of whether Level 5 Leaders are born, or made, with the conclusion that many people probably have the kernel of abilities and attitude necessary to attain that status.
First Who … Then What
During the transformation from good to great, rather than concern themselves first with the “what” - products, direction, strategy - the companies studied ensured they had the right people “on the bus” before anything else. By having a strong team, these companies avoided the pitfall of the “lone genius” CEO. For example, think what would happen to Apple’s share price were something to happen to Steve Jobs. “Great” companies are those that have a very solid foundation, and don’t depend on the brilliance of any one person.
The research indicated that compensation did not correlate at all with the “good to great” process. No particular compensation scheme appeared to be advantageous.
Also important was that, while the companies were “tough” places to work, they were because of the general high quality and hard-working mindset, not because of ruthless management. Some practical tips for how to be rigorous:
Don’t hire someone unless you’re %100 sure that they’re the right person. It’s better to wait and get someone that you knowis a good fit.
Once you realize you need to fire someone, don’t put it off. Do it quickly and fairly, but do it and be done with it, rather than put it off.
Give good people good opportunities, rather than the biggest problems. Fixing problems makes you good, but taking advantage of the right opportunities can make you great.
Good to great teams were mostly composed of people who had a good sense of balance with the rest of their lives - family, church, and so on. Of course, they had a deep commitment to their companies, but not one that blinded them to the other important things in their lives.
Confront the Brutal Facts
One of the key factors in the success of the great companies was a series of good decisions. The good decisions flowed from the fact that they all made a consistent and thorough effort to confront reality, internalizing the facts relevant to their market. Having lofty goals can be good, but you can never lose sight of what the reality is on the ground, no matter how much you will it to be different.
In a large organization, where it’s impossible to personally poke your nose in all corners of the company every day, it is crucial to create a climate where honesty is valued and honored. If people aren’t telling it like it is, those at the top may not realize the truth until too late. Some tips to create this kind of climate:
It’s often better to ask questions rather than dispense “answers”.
Encourage healthy debate. It has to be real debate, not a show put on to make people feel included. It should also not just be argument for the sake of argument - reach a conclusion and move on.
When things go wrong, investigate to avoid repeating the mistake, instead of assigning blame. If people are too worried about protecting themselves, it becomes difficult to honestly analyze and learn from failures.
Create mechanisms, “red flags” that allow people to communicate problems instantly and without repercussions, and in a way that cannot be ignored.
Amidst these “brutal facts” that must be faced, you must also have faith in your final goal. By maintaining this vision, and keeping your ear to the ground, it won’t be necessary to motivate people - if you’ve got the right people, they’ll be motivated of their own accord.
The Hedgehog Concept
The “hedgehog concept” refers to a parable of a hedgehog and a fox, where the fox knows many things, but the hedgehog knows one big thing. The good to great companies were by and large built by “hedgehogs” - this doesn’t mean stupid - au contraire - it just means that they were able to focus on one big important thing that made their companies great. Sometimes it takes real genius to see through all the clutter and grab the one, simple, unique thing that gives you the advantage.
The “three circles” is an idea regarding how to find your “hedgehog concept”: think of three interlocking circles, representing 1) what you are passionate about, 2) what you can make money at, and 3) what can you be the best at. At the intersection of these three things lies the winning target. If you can bring all three things to bear, you have found a way to excel. Learn to realize, as well, what you will never be the best at - those are things you must avoid, if possible. The economics of various industries varied widely, but the good great companies were winners, even within industries that weren’t rising stars. One consistent rule of thumb is to identify a ratio, profit per X, (where X could be customer, web site user, per unit sold, per employee etc…) and focus on that. Sometimes it may not be obvious.
Passion, on the other hand, does not come from executive rah-rah sessions with employees, but by doing things that make people passionate on their own. Passion isn’t something that can be forced on people, it has to come from a mission that they truly believe in, that’s more than just a paycheck.
Another practical suggestion is to create a “Council”, of between 5 to 12 people, to discuss and gain insights into the organization. It should meet regularly, not a one-time group. Its members should bring to the table a deep understanding of some portion of the firm. They need to freedom to speak their minds, and always have the respect of the other Council members. The Council exists to help the chief executive, not reach a consensus. It is an informal group, in the sense that it is not spelled out in official documents or org charts.
Culture of Discipline
Great companies have both an entrepreneurial spirit and a sense of discipline. They are both necessary - without the drive to try new things, and some degree of independence, a company becomes a rigid, stifling hierarchy. Without some sense of discipline, things begin to break down as the company grows. The best companies have both latitude for individual action, as well as a culture of disciplined behavior. This begins, once again, with the right people. It’s useless trying to create rules to force the wrong people to behave correctly - it simply won’t work. Instead, you need to find people who have an innate sense of self-discipline that doesn’t come from above. There is a big difference between having a “tyrant” that enforces a culture of discipline by fear, and finding people who naturally adhere to a disciplined approach. The former will disintegrate when the leader moves on, the latter creates a lasting system.
One helpful approach to discipline is to have a “stop doing” list. Stop doing the things that aren’t central to your business. Stop doing the things that are just clutter, but even more importantly, stop doing even things that might be seen as important, if they are not in your “three circles”.
“Great companies adapt and endure” - technology is not a differentiator in and of itself, but rather something that enhances great companies. They use it to further increase their leverage, in a conscious, directed way, rather than rushing to embrace it for the sake of its newness. Technology won’t light a fire where there is none, but where there is already good momentum, judicious use of technology can help accelerate it. Technology is an enabler of change, not the cause of it - but the “people factors” must be in place before application of technology will do any good. Technology as a reaction - to the latest fashion, to the competition - was not what was found in great companies. These companies possess a drive all their own that pushes them to be the best in their chosen field, and picking the right technology is a natural part of that.
The “Flywheel” and “Doom Loop”
These two concepts represent positive and negative momentum. A flywheel is a heavy wheel that takes a lot of energy to set in motion - to do so usually requires constant, steady work, rather than a quick acceleration. Great companies’ transformations were like this as well. There was no magic recipe or no ‘aha’ moment when everything changed. Rather, with everything in place, lots of hard work slowly but steadily got the great companies going faster and faster, with a lot of momentum. Once it’s in motion, all that stored energy tends to keep it moving in the right direction.
Conversely, the “doom loop” is the vicious circle that unsuccessful companies fall into, rushing first in one direction, then another, in the hope of creating a sudden, sharp break with the past that will propel them to success. Some attempt to do this through acquisitions, others through bringing in a new leader who decides to change direction completely, in a direction incompatible with the company. The results are never good. The difference between the two approaches is characterized by the slow, steady, methodical preperation inherent in the flywheel, as compared to the abrupt, radical, and often revolutionary, rather than evolutionary changes within the company.
Built to Last
The results from this book were obtained without regards to Collins’ earlier work, Built to Last, but when all was said and done, Good to Great is what has to happen before a company becomes Built to Last. Much of what is present in Good to Great was present during the creation by their founders of the Built to Last firms. Companies that have endured have a raison d’être beyond simply making money - they have distinguishing and unique characteristics, goals and ways of operating that go beyond a simple desire to make money. These core values are preserved, while tactics change continuously to deal with an restless, tumultuous world that never stops.
The “Big Hairy Audacious Goal”, a concept introduced in Built to Last can be either good (as motivation, something to pursue), or bad (if it’s impossible or a bad fit). Good BHAGs are those formulated from a deep understanding, whereas bad ones come from brash recklessness without regard for the actual values and capabilities of the company.
Because it’s not really that much harder to be great than good, and if you’re not motivated to greatness, perhaps you should consider doing something else where you are.
Interestingly, CEO salaries don’t seem to be a major factor in terms of their correlation with “good to great” companies.
Detailed criticism of the book: Why “Good to Great” Isn’t Very Good
There is usually information in what someone doesn't say. Long time readers may have noticed that I have never reviewed one of the most popular business books of all time – "Good to Great." Call me a heretic, but I'm not a fan of it. It's one of the best selling business books ever, but I think there is too much fluff, and I think the research team made a huge mistake when compiling it.
Before I go into detail, let me say that I think Jim Collins is a bright guy and I admire what he attempted to do with the book. His major mistake is a very common one – one that rarely gets noticed. I will also say that there is still value in reading the book. There are some good ideas inside (like the "stop doing" list), but I'm sick and tired of people taking it as gospel. I've read too many things like this:
This nearly 300-page book is packed with leading edge thinking, clear examples, and data to support the conclusions. It is a challenge to all business leaders to exhibit the discipline required to move their companies from Good To Great.
That, and the fact that the sales seem to be driven as much by churches as by businesspeople, is what finally made me write this post. (The point there being that it has sold more than other business books in part because it had a secondary market). "Good to Great" might encourage you and give you some good ideas, but it isn't a panacea to creating great organizations.
I read "Good to Great" in 2004 and lumped it together with most other business books. It was ok and there were a handful of sentences I underlined to go back to for inspiration, but it didn't impress me the way some books do. One day I happened to be chatting with someone that had worked with one of the good-to-great companies during the supposed transformation, and this person said the company was all screwed up inside. So that got me thinking…is "Good to Great" sound research?
I picked up the book and re-read it. A couple of things struck me.
The Corporate Barnum Effect
First of all, the good-to-great principles are true in the same way a horoscope is true. They are fairly generic and thus we all apply them from our own viewpoint to make them true. I believe that some "Good to Great" readers that love the book may be suffering from the Barnum effect. The principles Collins proposes aren't bad ones, but they are ambiguous and open to interpretation, which in effect decreases their usefulness. For instance, Collins says good-to-great companies practice "First Who, Then What," which basically means "hire good people." I'm willing to bet no one read the book and said "Eureka! I've been hiring slimy weasels when I should have been hiring top performers. That is why we aren't a great company." My guess is that most people think their way of hiring or interviewing is the best way to get the "good people" and so they liked hearing Collins say this. They ignore the fact that after reading the chapter, you really don't have a better idea of how to do it.
Vague but Appealing BS
Level5 leadership is vague. The only trait people seem to agree on is that level 5 leaders have humility. Humble leaders can be a good thing, but if Jim Collins can't even tell whether or not Jack Welch was a level 5, what chance do the rest of us have?
Q: Was Jack Welch a Level 5?
A: His report card does not come in until [new CEO Jeff] Immelt exceeds him. If Immelt does not exceed him, then he has failed. Jack Welch did not make GE great. GE was already great. Every GE CEO has been to his era what Welch was to his, without exception. It takes 50 years to create a GE. Generations of leaders built it. Whether Welch was a Level 5 comes down to a question we don't know the answer to. Was Welch first and foremost ambitious for himself or for GE? Only he knows that.
Isn't Collins supposed to be the expert on Level5 leadership? Hasn't more been written about Jack Welch than about most other CEOs? And Collins can't tell? He's either being diplomatic and refusing to say "no, Welch wasn't" or Level 5 leadership is business jibber jabber. Since it is vague, it allows us all to see ourselves as Level 5 leaders because of the Lake Wobegon effect. So we read this book and we feel good, like it describes our leadership style (more Barnum effect too).
A Lack of Disconfirming Research
I've read all the notes in the book about how the research was done, and I think Collins and his team made a huge mistake. The good-to-great qualities, once determined, were never used to search for counterexamples. What I mean is that Collins and his team never said "are there any companies that have all of our good-to-great qualities that weren't good-to-great?". This is important, so let me explain.
Humans have a confirmation bias. We look for things that validate our preconceptions. But when you reach a conclusion you have to say "what would it take to prove this conclusion false?" The most popular example of this is this card test.
Collins' team looked at the companies that went from good to great and said "what do all these have in common?" They never went back and said "are there any companies that have these traits that did not make the leap from good to great?" And I understand why they didn't. Because these principles are vague and it would be hard to debate whether or not an unsuccessful company was doing these good-to-great things. You could always say a company is in the process and will soon be great. Or you could say so and so isn't a *real* level5 leader. I tried to find some examples, but I kept coming back to the same questions. How can you definitely say whether or not a company is following the good-to-great principles? You can't.
Somebody has to win. Somebody has to be the best. And being the winner does not always mean you have some skill. The belief that it does is called the survivorship bias, and it may apply to good-to-great. I really don't know. Were the good-to-great companies examples of survivorship bias? I'll be honest in that I don't fully understand how to analyze it or I would. (For years I have been nagged by the question of whether or not Warren Buffett is successful because of suvrivorship bias. I lean towards no, but I don't know how to prove it.) What I do know is that humans tend to conveniently make random demarcations in data to get the patterns and results that we want, when you are looking for something specific, it is amazingly easy to find data to support your preconceptions.
What They Don't Know
Collins also doesn't know what he doesn't know. In other words, maybe there were causes that he and his research team were not aware of. Perhaps executives at the good-to-great companies better understood the economics of their industry. Or maybe they were more financially saavy and understood how money flowed through the company and where their profit really came from. It is common for companies not to really understand these things fully. But Collins would have no way of uncovering that, and even if he did, who would write a book that encourages would-be business leaders to study up on the economics of their industry and better analyze cash flow statements? It wouldn't sell very well because that stuff is boring and hard.
The Tom Peters Criticism
Tom Peters has pointed out that Collins procedure may not have identified the companies most of us would consider great.
Point No. 2 is that companies that Jim calls great have performed well. I wouldn't deny that for a minute but they haven't led anybody anywhere. I don't give a damn whether Microsoft is around 50 years from now. Microsoft set the agenda in the world's most important industry at a critical period of time, and that to me is leadership, not the fact that you are able to stay alive until your beard is 200 feet long.
He has a good point. Has Collins really used the right criteria for greatness?
An alternate explanation
I would say that companies that most of the things Collins mentioned can be summed up by saying "good companies make good decisions." Hiring the right people? That describes a company that makes good hiring decisions. Confronting brutal facts? That is an important part of the process of making good decisions. Using technology the right way? Again, the result of good decision making. I would say that great companies don't have a list of platitudes to follow, as "Good to Great' would imply, but that they simply have good processes for making business-related decisions.
Lest you think I am the only person out there unimpressed by the book, check out Wharton's review of it.
Collins asks an interesting question. Unhappily, the methodology he used to formulate an answer is questionable and the answer is almost disappointing in its simplicity: Great companies become great by staying focused: focused on their products, their customers and their businesses. They aspire to higher levels of excellence, are never content to become complacent and are passionate about their products. They have leadership that is not ego-driven, and have organizational cultures that embrace constant change. That's the book.
And instead of sending me hatemail about how stupid I am for criticizing the world's greatest business book, you can criticize mine instead. I wrote the first chapter for the business book More Space. So go download it (click on an author's name) and mark it up. And while you are at it, download the chapters written by Lisa and by Marc. They have more practical value and immediate application to your work life than "Good to Great" ever will.
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