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GOOD TO GREAT: Why Some Companies Make the Leap and Others Don’t

  1. Good is the Enemy of Great
  2. Level 5 Leadership
  3. First Who … Then What
  4. Confront The Brutal Facts (Yet Never Lose Faith)
  5. The Hedgehog Concept – (Simplicity within the Three Circle)
  6. A Culture of Discipline
  7. Technology Accelerators
  8. The Flywheel and The Doom Loop
  9. From Good To Great To Built To Last

Our five-year quest yielded many insights, a number of them surprising and quite contrary to conventional wisdom, but one giant conclusion stands above the others: We believe that almost any organization can substantially improve its stature and performance, perhaps even become great, if it conscientiously applies the framework of ideas we’ve uncovered. Good-to-Great Companies

Level 5 Leadership

It is very important grasp that Level 5 leadership is not just about humility and modesty. It is equally about ferocious resolve, an almost stoic determination to do whatever needs to be done to make the company great.

Level 5 leaders look out the window to apportion creat to factors outside themselves when thinsg 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.

Key Point

  • Every good-go-great company had Level 5 leadership during the pivotal transition years.
  • “Level 5” refers to a five-level hierarchy of executive capabilities, with Level 5 at the top. Level 5 leaders embody a paradoxical mix of personal humility and professional will. They are ambitious, to be sure, but ambitious first and foremost for the company, not themselves.
  • Level 5 leaders set up their successors for even greater success in the next generation, whereas egocentric Level 4 leaders often set up their successors for failure.
  • Level 5 leaders display a compelling modesty, are self-effacing and understated. In contrast, two-thirds of the comparison companies had leaders with gargantuan personal egos that contributed to the dismise or continued mediocrity of the company.
  • Level 5 leaders are fanatically driven, infected with an incurable need to produce sustained results. They are resolved to do whatever it takes to make the company great, no matter how big or hard the decisions.
  • Level 5 leaders display a workmanlike diligence – more plow horse than show horse.
  • Level 5 leaders look out the window to attribute success to factors other than themselves. When things go poorly, however, they look in the mirror and blame themselves, taking full responsibility. The comparison CEOs often did just the opposite – they looked in the mirror to take credit for success, but out the window to assign blame for disappointing results
  • One of the most damaging trends in recent history is the tendency (especially by boards of directors) to select dazzling, celebrity leaders and to de-select potential Level 5 leaders.

Unexpected Findings

  • Larger-than-life, celebrity leaders who ride in from the outside are negatively correlated with going from good to great. Then of eleven good-go-great CEOs came from inside the company, whereas the comparison companies tried outside CEOs six times more often.
  • Level 5 leaders attribute much of their success to good luck, rather than personal greatness.
  • We are not looking for Level 5 leadership in our research, or anything like it, but the data was overwhelming and convincing. It is an empirical, not an ideological, finding.

First Who… Then What

Six of the eleven goo-to-great companies recorded zero layoffs from ten years before the breakthrough date all the way through 1998, and four others reported only one or two layoffs.

  • Practical Discipline #1: When in doubt, don’t hire – Keek looking
  • Practical Discipline #2: When you know you need to make a people change, act

 Letting the wrong people hang around is unfair to all the right people, as they inevitably find themselves compensating for the inadequacies of the wrong people. Worse, it can drive away the best people. Strong performers are intrinsically motivated by performance, and when they see their efforts impeded by carrying extraweight, they eventually becom frustrated.

  • Practical Discipline #3: Put your best people on your biggest opportunities, not your biggest problems.

Key Points

  • The good-to-great leaders began the transformation by first getting the right people on the bus (and the wrong people off the bus) and then figured out where to drive it.
  • The key point of this chapter is not just the idea of getting the right people on the team. The key point is that “who” questions come before “what” decisions – before vision, before strategy, before organization structure, before tactics. First who, then what – as a rigorous discipline, consistently applied.
  • The comparison companies frequently followed the “genius with a thousand helpers” model – a genius leader who sets a vision and then enlists a crew of highly capable “helpers” to make the vision happen. This model fails when the genius departs.
  • The good-to-great leaders were rigorous, not ruthless, in people decisions. They did not rely on layoffs and restructuring as a primary strategy for improving performance. The comparison companies used layoffs to much greater extent.
  • We covered three practical disciplines for being rigorous in people decisions:
    1. When in doubt, don’t hire – Keep looking. (Corollary: A company should limit its growth based on its ability to attract enough of the right people.)
    2. When you know you need to make a people change, act. (Corollary: First be sure you don’t simply have someone in the wrong seat.)
    3. Put your best people on your biggest opportunities, not your biggest problems. (Corollary: If you sell off your problems, don’t sell off your best people.)
  • Good-to-great management teams consist of people who debate vigorously in search of the best answers, yet who unify behind decisions, regardless of parochial interests.

Unexpected Findings

  • We found no systematic pattern linking executive compensation to the shift from good to great. The purpose of compensation is not to “motivate” the right behaviors from the wrong people, but to get and keep the right people in the first place.
  • The old adage “People are your most important asset” is wrong. People are not your most important asset. The right people are.
  • Whether someone is the “right person” has more to do with character traits and innate capabilities than with specific knowledge, background, or skills.

Confront The Brutal Facts (Yet Never Lose Faith)

The moment a leader allows himself to become the primary reality people worry about, rather than reality being the primary reality, you have a recipe for mediocrity, or worse. This is one of the key reasons why less charsmatic leaders often produce better long-term results than their more charismatic counterparts.

Key Points

  • All good-go-great companies began the process of finding a path to greatness by confronting the brutal facts of their current reality.
  • When you start with an honest and diligent effort to determine the truth of your situation, the right decisions often become self-evident. It is impossible to make good decisions without infusing the entire process with an honest confrontation of the brutal facts.
  • A primary task in taking a company from good to great is to create a culture wherein people have a tremendous opportunity to be heard and, ultimately, for the truth to be heard.
  • Creating a climate where the truth is heard involves four basic practices:
    1. Lead with questions, not answers.
    2. Engage in dialogue and debate, not coercion.
    3. Conduct autopsies, without blame.
    4. Build red flag mechanisms that turn information into information that cannot be ignored.
  • The goo-to-great companies faced just as much adversity as the comparison companies, but responded to that adversity differently. They hit the realities of their situation head-on. As a result, they emerged from adversity even stronger.
  • A key psychology for leading from good to great is the Stockdale Paradox: Retain absolute faith that you can and will prevail in the end, regardless of the difficulties, AND at the same time confront the most brutal facts of your current reality, whatever they might be.

Unexpected Findings

  • Charisma can be as much a liability as an asset, as the strength of your leadership personality can deter people from bringing you the brutal facts.
  • Leadership does not begin just with vision. It begins with getting people to confront the brutal facts and to act on the implications.
  • Spending time and energy trying to “motivate” people is a waste of effort. The real question is not, “How do we motivate our people?” If you have the right people, they will be self-motivated. The key is to not de-motivate them. One of the primary ways to de-motivate people is to ignore the brutal facts of reality.

5. Hedgehog Concept (Simplicity Within The Three Circles)

Key point

  • To go from good to great requires a deep understanding of three intersecting circles translated into a simple, crystalline concept (the Hedgehog Concept):
  • The key is to understand what your organization can be the best in the world at, and equally important what it cannot be the best at – not what it “wants” to be the best at. The Hedgehog Concept is not a goal, strategy, or intention; it is an understanding.
  • If you cannot be the best in the world at your core business, then your core business cannot form the basis of your Hedgehog Concept.
  • The “best in the world” understanding is a much more severe standard than a core competence. You might have a competence but necessarily have the capacity to be truly the best in the world at that competence. Conversely, there may be activities at which you could become the best in the world, but at which you have no current competence.
  • To get insight into the drivers of your economic engine, search for the one denominator (profit per x or, in the social sector, cash flow per x) that has the single greatest impact.
  • Good-to-great companies set their goals and strategies based on understanding, comparison companies set their goals and strategies based on bravado.
  • Getting the Hedgehog Concept is an iterative process. The Council can be a useful device.

Unexpected Findings

  • The good-go-great companies are more like hedgehogs – simple, dowdy creatures that know “one big thing” and stick to it. The comparison companies are more like foxes – crafty, cunning creatures that know many things yet lack consistency.
  • It took four years on average for the good-to-great companies to get a Hedgehog Concept.
  • Strategy per se did not separate the good-to-great companies from the comparison companies. Both sets had strategies, and there is no evidence that the good-to-great companies spent more time on strategic planning than the comparison companies.
  • You absolutely do not need to be in a great industry to produce sustained great results. No matter how bad the industry, every good-go-great company figured out how to produce truly superior economic returns.

6. A Culture of Discipline

Key Point

  • Sustained great results depend upon building a culture full of self-disciplined people who take disciplined action, fanatically consistent with the three circles.
  • Bureaucratic cultures arise to compensate for incompetence and lack of discipline, which arise from having the wrong people on the bus in the first place. If you get the right people on the bus and the wrong people off, you don’t need stultifying bureaucracy.
  • A culture of discipline involves a duality. On the one hand, it requires people who adhere to a consistent system; yet, on the other hand, it gives people freedom and responsibility within the framework of that system.
  • A culture of discipline is not just about action. It is about getting disciplined people who engage in disciplined thought and who then take disciplined action.
  • The good-to-great companies appear boring and pedestrian looking in from the outside, but upon closer inspection, they’re full of people who display extreme diligence and a stunning intensity (they “rinse their cottage cheese”).
  • Do not confuse a culture of discipline with a tyrant who disciplines – they are very different concepts, one highly functional, the other highly dysfunctional. Savior CEOs who personally discipline through sheer force of personality usually fail to produce sustained results.
  • The single most important form of discipline for sustained results is fanatical adherence to the Hedgehog Concept and the willingness to shun opportunities that fall outside the three circles.

Unexpected Findings

  • The more an organization has the discipline to stay within its three circles, with almost religious consistency, the more it will have opportunities for growth.
  • The fact that something is a “once-in-a-lifetime opportunity” is irrelevant, unless it fits within the three circles. A great company will have many once-in-a-lifetime opportunities.
  • The purpose of budgeting in a good-to-great company is not to decide how much each activity gets, but to decide which arenas best fit with the Hedgehog Concept and should be fully funded and which should not be funded at all.
  • “Stop doing” lists are more important than “do do” lists.

7. Technology Accelerators

Abbott

Pioneered application of computer technology to increase economic denominator of profit per employee. Not a leader in pharmaceutical R& D— leaving that to Merck, Pfizer, and others that had a different Hedgehog Concept.

Circuit City

Pioneered application of sophisticated point-of-sale and inventory-tracking technologies— linked to the concept of being the “McDonald’s” of big-ticket retailing, able to operate a geographically dispersed system with great consistency.

Fannie Mae

Pioneered application of sophisticated algorithms and computer analysis to more accurately assess mortgage risk, thereby increasing economic denominator of profit per risk level. “Smarter” system of risk analysis increases access to home mortgages for lower-income groups, linking to passion for democratizing homeownership.

Gillette

Pioneered application of sophisticated manufacturing technology for making billions of high-tolerance products at low cost with fantastic consistency. Protects manufacturing technology secrets with the same fanaticism that Coca-Coca protects its formula.

Kimberly-Clark

Pioneered application of manufacturing-process technology, especially in nonwoven materials, to support their passionate pursuit of product superiority. Sophisticated R& D labs; “babies crawl about with temperature and humidity sensors trailing from their tails.”

Kroger

Pioneered application of computer and information technology to the continuous modernization of superstores. First to seriously experiment with scanners, which it linked to the entire cash-flow cycle, thereby providing funds for the massive store-revamping process.

Nucor

Pioneered application of the most advanced mini-mill steel manufacturing technology. “Shop the world over” for the most advanced technology. Willing to make huge bets (up to 50 percent of corporate net worth) on new technologies that others viewed as risky, such as continuous thin slab casting.

Philip Morris

Pioneered application of both packaging and manufacturing technology. Bet on technology to make flip-top boxes— the first packaging innovation in twenty years in the industry. First to use computer-based manufacturing. Huge investment in manufacturing center to experiment with, test, and refine advanced manufacturing and quality techniques.

Pitney Bowes

Pioneered application of advanced technology to the mailroom. At first, it took the form of mechanical postage meters. Later, Pitney invested heavily in electrical, software, communications, and Internet engineering for the most sophisticated back-office machines. Made huge R& D investment to reinvent basic postage meter technology in the 1980s.

Walgreens

Pioneered application of satellite communications and computer network technology, linked to its concept of convenient corner drugstores, tailored to the unique needs of specific demographics and locations. A “swallow your tonsils” big investment on a satellite system that links all stores together, like one giant web of a single corner pharmacy. “Like a trip through NASA space center.” Led the rest of the industry by at least a decade.

Wells Fargo

Pioneered application of technologies that would increase economic denominator of profit per employee. Early leader in twenty-four-hour banking by phone, early adopter of ATMs, first to allow people to buy and sell mutual funds at an ATM, pioneer in Internet and electronic banking. Pioneered sophisticated mathematics to conduct better risk assessment in lending.

Key Points

  • Good-to-great organizations think differently about technology and technological change than mediocreones.
  • Good-to-great organizations avoid technology fads and bandwagons, yet they become pioneers in the application of carefully selected technologies.
  • The key question about any technology is, Does the technology fit directly with your Hedgehog Concept? It yes, then you need to become a pioneer in the application of that technology. If no, then you can settle for parity or ignore it entirely.
  • The good-to-great companies used technology as an accelerator of momentum, not a creator of it. None of the good-go-great companies 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.
  • How a company reacts to technological change is a good indicator of its inner drive for greatness versus mediocrity. Great companies respond with thoughtfulness and creativity, driven by a compulsion to turn unrealized potential into results; mediocre companies react and lurch about, motivated by fear of being left behind.

Unexpected Findings

  • The idea that technological change is the principal cause in the decline of once-great companies (or the perpetual mediocrity of others) is not supported by the evidence. Certainly, a company can’t remain a laggard and hope to be great, but technology by itself is never a primary root cause of either greatness or decline.
  • Across eighty-four interviews with good-go-great executives, fully 80 percent didn’t even mention technology as one of the top five factors in the transformation. This is true even in companies famous for their pioneering application of technology, such as Nucor.
  • “Crawl, walk, run” can be a very effective approach, even during times of rapid and radical technological change.

8. The Flywheel and The Doom Loop

Key Points

  • Good-to-great transformations often look like dramatic, revolutionary events to those observing from the outside, but they feel like organic, cumulative processes to people on the inside. The confusion of end outcomes (dramatic results) with process (organic and cumulative) skews our perception of what really works over the long haul.
  • No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment.
  • Sustainable transformations follow a predictable pattern of buildup and breakthrough. Like pushing on a giant, heavy flywheel, it takes a lot of effort to get the thing moving at all, but with persistent pushing in a consistent direction over a long period of time, the flywheel builds momentum, eventually hitting a point of breakthrough.
  • The comparison companies followed a different pattern, the doom loop. Rather than accumulating momentum – turn by turn of the flywheel – they tried to skip buildup and jump immediately to breakthrough. Then, with disappointing results, they’d lurch back and forth, failing to maintain a consistent direction.
  • The comparison companies frequently tried to create a breakthrough with large, misguided acquisitions. The good-to-great companies, in contrast, principally used large acquisitions after breakthrough, to accelerate momentum in an already fast-spinning flywheel.

Unexpected Results

  • Those inside the good-to-great companies were often unaware of the magnitude of their transformation at the time; only later, in retrospect, did it become clear. They had no name, tag line, launch event, or program to signify what they were doing at the time.
  • The good-to-great leaders spent essentially no energy trying to”create alignment”,”motivate the troops”, or “manage change.” Under the right conditions, the problems of commitment, alignment, motivation, and change largely take care of themselves. Alignment principally follows from results and momentum, not the other way around.
  • The short-term pressures of Wall Street were not inconsistent with following this model. The flywheel effect is not in conflict with these pressures. Indeed, it is the key to managing them.

9. From Good To Great To Built To Last

Concepts in Good go GreatRelationship to Concepts in Built to Last
Level 5 LeadershipClock Building, Not Time Telling
Level 5 leaders build a company that can tick along without them, rather than feeding their egos by becoming indispensable.
Genius of AND
Personal humility AND professional will
Core Ideology
Level 5 leaders are ambitious for the company and what it stands for; they have a sense of purpose beyond their own success.
Preserve the Core/Stimulate Progress
Level 5 leaders are relentless in stimulating progress toward tangible results and achievement, even if it means firing their brothers.
First Who…Clock Building, Not Time Telling
Practicing “first who” is clock building; practicing “first what” (setting strategy first) is time telling.
Genius of AND
Get the right people on the bus AND the wrong people off the bus.
Core Ideology
Practicing :first who” means selecting people more on their fit with the core values and purpose than on their skills and knowledge.
Preserve the Core/Stimulate Progress
Practicing “first who” means a bias for promoting from within, which reinforces the core valuse.
Confront the Brutal Facks (Stockdale Paradox)Clock Building, Not Time Telling
Creating a climate where the truth is heard is clock building, especially if you create red flag mechanisms
Genius of AND
Confront the brutal facts of your current reality AND retain unwavering faith that you will prevail in the endthe Stockdale Paradox.
Core Ideology
Confornting the brutal facts clarifies the values an organization truly holds as core versus those that it would like to hold as core.
Preserve the Core/Stimulate Progress
Brutal facts clarify what must be done to stimulate progress.
Hedgehog Concept (The Three Circles)Clock Building, Not Time Telling
The Council mechanism is consummate clock building.
Genius of AND
Deep understanding AND incredible simplicity.
Core Ideology
The “what you are passionate about” circle overlaps nicely with core values and purpose. Only those values about with you are so passionate that you would never, under any conditions, give them up qualify as truly core.
Preserve the Core/Stimulate Progress
Good BHAGs flow from understanding’ bad BHAGs flow from bravado. Great BHAGs sit right smack in the middle of the three circles.
Culture of DisciplineClock Building, Not Time Telling
Operating through sheer force of personality as a disciplinarian is time telling; building an enduring culture of discipline is clock building.
Genius of AND
Freedom AND responsibility.
Core Ideology
A culture of discipline ejects those who do not share the values and standards of an organization.
Preserve the Core/Stimulate Progress
When you have a culture of discipline, you can give people more freedom to experiment and find their own best path to results.
Technology AcceleratorsClock Building, Not Time Telling
Technology accelerators are a key part of the clock.
Genius of AND
Shun technology fads AND pioneer the application of technology.
Core Ideology
In a great company, technology is subservient to core values, not the other way around.
Preserve the Core/Stimulate Progress
The right technologies accelerate momontum in the flywheel, toward the achievement of BHAGs.
Flywheel, Not DoomClock Building, Not Time Telling
The flywheel effect creates the sustained building of momentum, and does not depend on the presence of a charismatic visionary to motivate people.
Genius of AND
Evolutionary, incremental process AND revolutionary, dramatic results.
Core Ideology
The doom loop makes it almost impossible to instill core values and purpose, as people chronically wonder, “Who are we? What do we stand for?”
Preserve the Core/Stimulate Progress
The smooth consistendy of the flywheel and the cumulative building of momentum to a point of breakthrough create the perfect conditions for instilling core values while stimulating change and progress.

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