Book of the Week: Good to Great
27 Jun 2014
What does it take to make a good company, great? Jim Collins and his research team spent 5 years to find out. Good to Great was published in 2001, before the financial crisis of 2008. At the end of each chapter, there is a helpful summary. The things that make companies great should be something that transcends time periods. The Companies Jim and team developed some stringent criteria based on the stock performance of publicly traded companies to identify the great companies. The 11 companies that made the cut are Abbott Laboratories (ABT), Circuit City Stores, Fannie Mae (FNMA), Gillette Company, Kimberly-Clark (KMB), Kroger (KR), Nucor (NUE), Philip Morris (PM), Pitney Bowes (PBI), Walgreens (WAG) and Wells Fargo (WFC). Fannie Mae is surprising, because their greatness caused the financial crisis due to the creation of mortgage-backed securities and trying to manage risk with them. Gillette merged with Proctor and Gamble (PG), who was painted as a nemesis in the book. Circuit City went bankrupt. Greatness doesn’t always last. The topic of maintaining greatness is covered in Jim’s other book, Built to Last. Level 5
- Level 5 - Executive - Builds enduring greatness through a paradoxical combination of personal humility plus professional will.
- Level 4 - Effective Leader - Catalyzes commitment to and vigorous pursuit of a clear and compelling vision; stimulates the group to high performance standards.
- Level 3 - Competent Manager - Organizes people and resources toward the effective and efficient pursuit of predetermined objectives.
- Level 2 - Contributing Team Member - Contributes to the achievement of group objectives; works effectively with others in a group setting.
- Level 1 - Highly Capable Individual - Makes productive contributions through talent, knowledge, skills, and good work habits.
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.
Often people credit the CEO of the company if the company is successful. Yes, the CEO is important, but not in the rockstar CEO sense. Level 5 CEOs are often understated people you never heard of, because it is not in the companies interest for them to be in the spotlight. They have great humility, but are very driven to accomplish goals. They get stuff done without seeking credit. Team Great leaders are able to build a great team. Companies that rely on a single figure flame out when that figure disappears. If you build a great team, your worst problems will turn into opportunities. People are at the core at creating a great company. This goes with the risk that the people will leave to go on and do bigger things. Hiring great people should be a hire priority if you want to build a great company. The Facts
“This is very important lesson. You must never confuse faith that you will prevail in the end— which you can never afford o lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be” - Admiral Jim Stockdale
Motivating people is a waste of time. If you hired good people, you wouldn’t need to motivate them. Confronting the facts is a lot like pivoting in The Lean Startup. If the facts tell you that you need to change business direction. Then you need to do it, even it means abandoning your cash cow. People will be more forth coming with the facts if you don’t shoot the messenger. If everyone knows they are in it together, they are more likely to work together to reach a solution. Hedgehog Concept The hedgehog concept is a simple concept that flows from deep understanding of the intersection of
- What you can be the best in the world at
- What drives your economic engine
- What are you deeply passionate about
It is about being the best at something and measuring it by using the right metric that characterizes your economic engine. I would refer you to Cal Newport’s So Good They Can’t Ignore You if you want to read about passion. Passion is not something you start out with. If is something that you are willing to go behind and invest considerable effort, because you want to, not because you have to. Some companies did not do that well, because they were focused on the wrong metrics on things they weren’t very good at. The hedgehog concept helps align the company. Flywheel When you hear about companies becoming an overnight success, it is a lie. It makes for a good news story, but is far from the truth. Things are built up over time like compounding interest. Seeds planted in the past begin to bear fruit. Mushrooms may pop up over night, but they have been growing there all along. Building a Great Company
- Put a driven leader with humility in place.
- Build a great team around the leader.
- Confront the facts and be able to have faith you will succeed
- Choosing something you can excel at
- Have right goals and metrics that give you the right economics since you looked at the facts.
- Be disciplined in working toward goals
- Keep working at it
I read this book, not to turn a good company into a great company, but to build a great company from the start. It starts with the people.