Why Some Companies Make the Leap and Others Don’t Good To Great
Author- Jim Collins
James Collins loved Stanford University – doing his undergrad, then MBA and then teaching career from there (won distinguished teaching award). In between, he worked for top companies like Mckinsey and HP. In 1995, he founded a management laboratory where he conducts research and also teaches CEOs, Senior leadership, executives from the corporate and social sectors. In 2017, Forbes selected Jim as one of the 100 Greatest Living Business Minds.
Good to Great has been cited by many CEOs as “the best management book they have ever read” and was in Time’s list of 25 Most Influential Management Books ever. The book talks about a company making a transition from Good to Great. These were okay/good companies but then truly moved to becoming Great companies. To identify the great companies, Collins and his team selected 1435 good companies and examined their performance over 40 years and finally out of those 1435 companies selected 11 companies that became great. These were Abbott, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens and Wells Fargo. To ensure quantitative rigour, all these good to great companies had:
- 15 years of cumulative stock returns at/ below the general stock market
• A distinct transition point
• Followed by cumulative stock returns of >3 times general market over the next 15 years
These 11 companies were then compared against 2 groups of companies: the first group being companies from same industry (with similar circumstances but couldn’t make that leap), and the second being the group of “comparison companies” that made the leap but didn’t sustain the performance. E.g. Bank of America was the comparison company to Wells Fargo.
So what did he find in the research? The best summary is from his own article reproduced below:
“I want to give you a lobotomy about change. I want you to forget everything you’ve ever learned about what it takes to create great results. I want you to realize that nearly all operating prescriptions for creating large-scale corporate change are nothing but myths.
The Myth of the Change Program: This approach comes with the launch event, the tag line, and the cascading activities.
The Myth of the Burning Platform: This one says that change starts only when there’s a crisis that persuades “unmotivated” employees to accept the need for change.
The Myth of Stock Options: Stock options, high salaries, and bonuses are incentives that grease the wheels of change.
The Myth of Fear-Driven Change: The fear of being left behind, the fear of watching others win, the fear of presiding over monumental failure—all are drivers of change, we’re told.
The Myth of Acquisitions: You can buy your way to growth, so it figures that you can buy your way to greatness.
The Myth of Technology-Driven Change: The breakthrough that you’re looking for can be achieved by using technology to leapfrog the competition.
The Myth of Revolution: Big change has to be wrenching, extreme, painful—one big, discontinuous, shattering break.
Wrong. Wrong. Wrong. Wrong. Wrong. Wrong. Totally wrong.
Here are the facts of life about these and other change myths. Companies that make the change from good to great have no name for their transformation—and absolutely no program. They neither rant nor rave about a crisis—and they don’t manufacture one where none exists. They don’t “motivate” people—their people are self-motivated. There’s no evidence of a connection between money and change mastery. And fear doesn’t drive change—but it does perpetuate mediocrity. Nor can acquisitions provide a stimulus for greatness: Two mediocrities never make one great company. Technology is certainly important—but it comes into play only after change has already begun. And as for the final myth, dramatic results do not come from dramatic process—not if you want them to last, anyway. A serious revolution, one that feels like a revolution to those going through it, is highly unlikely to bring about a sustainable leap from being good to being great.”
All the companies at the time of the transition had level 5 leadership, exhibiting the duality of personal humility (work on inspired standards rather than charisma to keep all motivated) and professional will (huge ambition for the company and not self). Most importantly they always set up their successors so that the company can achieve greatness even without them. The following are the 5 levels of leadership as described by the author:
Highly Capable Individual – One who makes productive contributions through talent, knowledge, skills, and good work habits.
Contributing Team Member – Contributes individual capabilities to the achievement of group objectives and works effectively with others.
Competent Manager – Organizes people and resources toward the effective and efficient pursuit of predetermined objectives.
Effective Leader – Catalyses commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards.
Level 5 Executive – Builds enduring greatness through a paradoxical blend of personal humility and professional will.
Next thing that all Good to Great companies follow is to first get right people on board and then decide which direction or path to take. On the other hand, the comparison companies first made grand vision and strategies and then rally people behind it. Their leaders individually might be talented but fail in developing strong executives and thus the model fails as soon as leader leaves. So they kept having one change management programme after another.
Next is to be rigorous but not ruthless about people. All good to great companies are rigorous in making people related decision to develop a superior executive team. They constantly review and refine. This is called the Stockdale Paradox and it includes balancing 2 elements: confronting uncomfortable facts and retaining faith that you can and will prevail. An environment of truth is created by always leading with questions and not answers, by engaging in dialogue and debate not coercion, by conducting autopsies without blaming one another if mistakes happen, and lastly by building “red flag” mechanism to gather feedback. On the other hand, layoffs were used 5 times more in comparison companies than good to great companies.
The Hedgehog and the Fox: The fox, referring to comparison companies, is crafty, cunning, knows many tricks but lacks consistency. On the other hand, hedgehog is simple, seemingly unimpressive but highly consistent. As per the author, a good to great company takes about 4 years to achieve its hedgehog concept. 3 circles combine to create greatness – what you can be the best in the world at, what you are deeply passionate about, and what drives your economic engine.
Leveraging Technology: Good to great companies think of technology as the means of accelerating success and not creator of momentum. They don’t jump the bandwagon of new technology, rather they strategically select new technologies which align with their hedgehog concepts.
Flywheel Effect: Next Collin compares how a good to great company and comparison companies build momentum. The transition from good to great transition is not an overnight process and there is also no single factor for its success. It involves many interlocked steps & factors that build on one another till it reaches a breakthrough point similar to how a flywheel picks up momentum turn by turn. The companies usually do not realize their own transformation until after the fact. On the other hand, comparison companies fall in the category of doom loop – which means they ignore the importance of gradual momentum and skip steps in order to achieve breakthrough quickly. New event, leader, direction, program kicks in every now and then which results in overall poor performance.
Collin emphasises on disciplined culture of a company which helps in building and sustaining great results. Disciplined people are free to work in a framework shaped by high expectations and clear communication. A successful start-up often doesn’t grow into a great company because, as they grow, bureaucracy is introduced to make up for the incompetence and lack of discipline.
The book, not surprisingly given its large scope, has its fair share of criticism around three areas:
- While the choice of Great companies was scientific, the recipe for success itself is very subjective and completely ignores strategic opportunities the company may have chosen.
- Like many success mantras, it is backward looking. Many of these companies (e.g. Fannie Mae) were unable to sustain themselves beyond the period of study.
- The advice (hire good people, avoid drastic change management programs, be consistent) is hardly new or out of the world. It is common sense rehashed.
Why should you read the book- The book was published in 2001 but still holds relevance, due to its simple yet effective message: Build your own flywheel. The chapters are crisp and written in easy language. Inspirational and instructional, the success ingredients come in handy to the readers, especially the ones in leadership roles: think about the things that they should stop doing and things to start doing to grow and become better.