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[Book Summary] Good to Great: Why Some Companies Make the Leap…and Others Don’t

Good to Great (2011) presents the findings of a five-year study by Jim Collins and his research team. They identified public companies that had achieved enduring success after years of mediocre performance and isolated the factors that differentiated those companies from their lackluster competitors. These factors have been distilled into key concepts regarding leadership, culture, and strategic management.

[Book Summary] Good to Great: Why Some Companies Make the Leap...and Others Don't

“Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice.” – Jim Collins

Jim Collins and his team studied 11 publicly traded companies that performed at or below the market average for 15 years, then outperformed the market by more than threefold over the next 15 years.

Collins compared these ‘Good to Great’ companies to nearly identical companies (same industry, size, and access to resources) that failed to outperform the market. Collin’s and his team discovered that the Good to Great companies mastered three concepts the comparison companies did not. You can use these three concepts to determine if the companies you invest in, the company you work for, or the business you own can go from good to great.

Content Summary

Genres
Introduction: Take your company from good to great.
Finding your “hedgehog concept” will give you a clear path to follow.
Success comes from many tiny, incremental pushes in the right direction.
New technology should be viewed as an accelerator toward a goal – not as a goal itself.
Level 5 leaders drive successful transformations from good to great.
The right people in the right place are the foundation of greatness.
Success requires confronting reality – and never losing faith.
Leaders must create an environment where harsh facts can be aired without hesitation.
Foster a culture of rigorous self-discipline to adhere to the simple hedgehog concept.
The Hedgehog Concept
The Bus
Level 5 Leadership
Final Summary
About the author
Video and Podcast

Genres

Entrepreneurship, Management, Leadership, Social Sciences, Library Management, Strategic Business Planning, Company Business Profiles

Introduction: Take your company from good to great.

Jim Collins’s previous best seller, Built to Last, explains how great companies sustain high performance and stay great.

But the thing is, most companies aren’t “great” – which begs the question: How do companies go from good to great? And what do they do differently from their competitors who stay mediocre at best?

To answer this conundrum, Collins and his research team studied three groups of public US companies over a five-year period.

First, they looked at good-to-great companies – companies that had been performing at or below the average stock market performance for 15 years before making the transition to “greatness.” What is greatness? According to Collins, it’s a company that’s been generating cumulative returns of at least three times the general stock market for 15 years.

The second group of companies they studied were the direct comparison companies. These organizations remained mediocre or dwindled even though they had roughly the same possibilities as the good-to-great companies during a period of transition.

And the third group, unsustained comparison companies, made a short-lived transition from good to great before sliding back to a performance level substantially below the stock market average.

Over the course of their five years of research, Collins and his team examined over 6,000 press articles and 2,000 pages of executive interviews to pinpoint exactly what good-to-great companies did differently.

This summary distills their findings into actionable steps that’ll help your company make the same leap.

Finding your “hedgehog concept” will give you a clear path to follow.

Jim Collins has an analogy for a strategy that good-to-great businesses use to clarify their business decisions.It goes like this:

Imagine a cunning fox hunting a hedgehog. Each day, the fox comes up with a plethora of surprise attacks and sneaky tactics to devour it. And each time, the hedgehog responds in the same way: it curls up into a spiky, unbreachable ball. Its adherence to this simple strategy is the reason the hedgehog prevails day after day.

Good-to-great companies all find their own hedgehog concept by asking themselves three key questions:

  • What can we be the best in the world at?
  • What can we be passionate about?
  • What is the key economic indicator we should concentrate on?

After an average of four years of iteration and debate around these questions, good-to-great companies eventually discover their own simple hedgehog concept. From that point on, every decision the company makes is in line with this concept – and success follows.

The hedgehog concept is about knowing yourself as a company, acting in line with that identity, and having a clear goal. By asking and answering these questions, you can grow in a focused way rather than sporadically in several directions.

It’s all about simplicity.

Success comes from many tiny, incremental pushes in the right direction.

When you look at them from a distance, good-to-great companies seem to go through a sudden and dramatic transformation. The companies themselves, however, are often totally unaware they’re in the midst of changing; their transformation has no defined slogan, launch event, or change program.

Rather, their success is the sum of tiny, incremental pushes in the direction of their simple strategy. Like with a flywheel, these small improvements generate results that motivate the companies to push further – until enough speed is gathered for a breakthrough. Their unwavering faith and adherence to the hedgehog concept is rewarded by a virtuous circle of motivation and progress.

The Flywheel Concept from Good To Great by Jim Collin

Consider Nucor, a steel manufacturer that was battling the threat of bankruptcy in 1965.

Nucor understood they could make steel better and more efficiently than anyone else by using mini-mills – a cheaper and more flexible form of steel production. They built a mini-mill, gained customers, built another one, gained more customers, and so on.

In 1975, CEO Ken Iverson realized that if they just kept doing the exact same thing – kept pushing in the same direction – they could one day be the most profitable steel company in the US. It took over two decades, but eventually the company reached its goal. Nucor went on to outperform the general stock market by a factor of five.

The company’s competitors didn’t consistently strive to build momentum in one direction. Instead, they tried to change their fortunes with dramatic shifts and hasty acquisitions. When these didn’t create the results they were looking for, they became discouraged – and were again forced to change direction, which prevented the flywheel from gathering any momentum.

Once you form your hedgehog concept, stick with it. That’s the only way to see results.

New technology should be viewed as an accelerator toward a goal – not as a goal itself.

Good-to-great companies primarily use new technology to accelerate their momentum in the direction they’re already going. They never let the technology indicate the direction itself. For these companies, technology is a means to an end – not the other way around.

When a good-to-great company is contemplating whether to adopt a particular technology, they stack it up against their larger company goals and direction. If this technology can help them on that path, great – they’ll become pioneers in it! Otherwise, they’ll either ignore it or match their industry’s pace in adopting it.

Comparison companies, on the other hand, often feel that new technologies are a threat. They worry about being left behind in a technology fad and scramble to adopt the technology with no real overarching plan.

The drugstore chain Walgreens provides an excellent example of how new technology can best be harnessed.

At the beginning of the e-commerce boom, an online drugstore company called Drugstore.com was launched amid major market hype. The mere perception of being slower in adopting online business cost Walgreens 40 percent of its share value, and the pressure was on for them to lunge at this new technology.

Rather than yielding, Walgreens considered how an online presence could help them with their original strategy: making the drugstore experience even more convenient and raising profits per customer.

Just over a year later, they launched Walgreens.com, which advanced their original strategy through new features like online prescriptions. While Drugstore.com lost nearly all of its original value in a year, Walgreens bounced back and almost doubled its stock price in the same time.

Level 5 leaders drive successful transformations from good to great.

We all know that company leadership is important. But through his research, Collins discovered just how critical it is.

Each company who went from good to great had level 5 leadership during their transition. Level 5 leaders are not only excellent individuals, team members, managers, and leaders; they’re also single-mindedly ambitious on behalf of the company, fanatically driven toward results, and want their organization to continue performing long after they leave.

And another thing: they’re humble.

Far from being ego-driven, level 5 leaders are modest and understated. They’re slow to take credit for their company’s achievements. They’re always looking for opportunities to praise their team but are quick to shoulder blame and responsibility for any shortcomings.

Yes, this sounds like a magical person – but great companies are built by great leaders.

Take, for instance, Darwin Smith, who transformed Kimberly-Clark into one of the world’s leading paper-based consumer goods companies. He refused to cultivate an image of himself as a hero or a celebrity. Instead, he dressed like a farmer, spent his holidays working on his Wisconsin farm, and enjoyed hanging out with plumbers and electricians.

By contrast, two out of three comparison company CEOs have gargantuan egos that are counterproductive for the long-term success of their organization. This is most evident in the lack of succession planning.

Stanley Gault is a prime example. The legendarily tyrannical (and successful) CEO of Rubbermaid left behind a management team so shallow that, under his successor, Rubbermaid went from Fortune Magazine’s most admired company to being acquired by a competitor in just five years.

The right people in the right place are the foundation of greatness.

The importance of hiring the right people goes beyond just the CEO and top leadership. Collins found that focusing on hiring good people throughout the entire company makes a huge impact.

In fact, asking “who” takes precedence over asking “what.” In other words, the transformation from good to great always begins with getting the right people into the company and the wrong people out of it – even before defining a clear path forward. That’s because the right people will eventually find a path to success.

When Dick Cooley took over as the CEO of (pre-scandal) Wells Fargo, he realized he could never anticipate the major changes that would result from the deregulation of the banking industry.

But he reasoned that if he got the best and the brightest people into the company, somehow together they would find a way to prevail. He was right. Warren Buffett subsequently called Wells Fargo’s executives “the best management team in business,” and the company prospered spectacularly.

Good-to-great companies focus more on finding people with the right character traits rather than professional abilities. They figure the right people can always be trained and educated, and they foster an environment where hard workers thrive and lazy workers leave. In top management, people either jump ship – or stay for the long run.

Good-to-great companies never hire the wrong person, even if the need is dire. But they hire as many right people as are available – even without specific jobs in mind for them.

And when good-to-great companies see they have the wrong person, they act immediately. They either fire that employee or try to cycle them to a more suitable position.

Don’t put off dealing with the wrong people – it’ll only frustrate the rest of the organization.

Success requires confronting reality – and never losing faith.

Good-to-great companies constantly walk the line of the Stockdale paradox, which was named after a US admiral captured during the Vietnam War.

As a high-ranking officer detained at the infamous “Hanoi Hilton” prison, Stockdale was repeatedly tortured by the enemy. Not knowing if he would ever see his family again, and despite the dire circumstances, he never lost faith that somehow he would get home.

On the flip side, he didn’t indulge in foolish optimism like some of his fellow prisoners who believed they’d be home by Christmas – and were heartbroken when that didn’t happen. Later, Stockdale credited his survival to his ability to confront the facts of his situation while still retaining faith.

This is something good-to-great companies do as well. They confront the brutal facts of their reality – and yet still retain unwavering faith that somehow they’ll prevail in the end.

Whether they face stiff competition or radical regulatory changes, good-to-great companies master the delicate balance of being able to acknowledge these realities without becoming defeatist. In fact, some take it as a challenge.

For example, when Procter & Gamble invaded the paper-based goods market, the two major existing players reacted very differently.

The market leader, Scott Paper, felt that their game was up and that they could never compete against a giant like P&G. They tried to diversify into categories where P&G didn’t compete.

At the same time, Kimberly-Clark relished the opportunity to compete against the best. They even held a moment of silence for P&G during one of their executive meetings.

The result? Two decades later, Kimberly-Clark actually owned Scott Paper – and dominated P&G in six out of eight product categories.

Leaders must create an environment where harsh facts can be aired without hesitation.

A company can’t face harsh facts if they’re never voiced. So it’s up to leaders to create an environment where tough issues can be aired without hesitation. A strong, charismatic leader can be more of a liability than an asset if it means others want to hide the unpleasant truth from them.

In management meetings, leaders must take the role of a Socratic moderator – asking questions to uncover truthful opinions instead of giving ready answers. Leaders should also encourage debates to rage during meetings so the best possible decisions are reached.

When mistakes are made, study them carefully to understand what went wrong, but don’t assign blame; this just discourages people from airing the truth.

Create red flag mechanisms to empower your team to raise alerts about their concerns. This will help you pay attention to the truth – even if it’s hard to hear.

Collins found that good-to-great companies didn’t have more, or better, information than the comparison companies. They merely confronted it and dealt with it more honestly.

Foster a culture of rigorous self-discipline to adhere to the simple hedgehog concept.

Let’s go back to the hedgehog concept for a moment – the idea that by asking yourself a few questions as an organization, you can create a compass that will help get your company go from good to great.

To get the most out of this hedgehog method, you need a culture of rigorous self-discipline. It’s not enough to just know the direction you’re going in. You need to actively take the steps to get there.

A culture of self-discipline is not the same as a single disciplinary tyrant.Tyrannical CEOs can sometimes manage a temporary spell of greatness for their companies. But when the discipline in a company is enforced by a tyrant, it’s not sustainable. People will take the opportunity to rebel any time they aren’t under the watchful eye of the tyrant. And once the tyrant is gone for good, the discipline will crumble.

This actually happened at Rubbermaid. Within a few years of the self-proclaimed “sincere tyrant” and CEO Stanley Gault leaving, Rubbermaid lost 59 percent of its value.

Good-to-great companies are filled with people who have high levels of diligence and intensity – people working toward their company’s simple hedgehog strategy.

Consider, again, Wells Fargo. The company understood that operating efficiently was going to be an important factor in the deregulated banking world. They froze C-suite salaries, sold the corporate jets, and replaced the executive dining room with a cheap college-dorm caterer. The CEO even began reprimanding people who handed in reports in fancy, expensive binders. All of this may not have been necessary for Wells Fargo to become a great company, but it demonstrates they were willing to go the extra mile.

Leadership went along with all of this because they knew these luxuries weren’t helping them with their simple hedgehog goal – and they had the self-discipline to sacrifice those comforts.

The Hedgehog Concept

“The fox knows many things, but the hedgehog knows one big thing.” – Ancient Greek Parable

The Good to great companies had a hedgehog concept – a core strategy; a unifying vision they simplified their business around. The Good to Great companies discovered their hedgehog concept by focusing on three circles.

The Hedgehog Concept

Circle #1: What can we (and can not) be the best in the world at?

Wells Fargo outperformed the market by a multiple of four from 1983 to 1998, “accept(ed) the truth that it could not be better than Citicorp in global banking. Wells Fargo then turned its attention to what it could be the best in the world at: running a bank like a business, with a focus on the western United States.”– Jim Collins

Circle #2: What is our economic engine?

How can the company generate more profit per X than any other company in the industry (X might be customers of a certain demographic, like new mothers living in Manhattan; or employees or stores)? Wells Fargo discovered that by restructuring their branches to have more ATMs and fewer employees, they could generate more profit per employee than any other bank.

Circle #3: What are we deeply passionate about?

A big difference between Philip Morris (a Good to Great company from 1964 to 1979) and other tobacco companies, was executives at Philip Morris genuinely believed life was better with cigarettes, despite the long‐term health risks. A Philip Morris vice‐chairman once said, “I love cigarettes, it’s one of the things that makes life really worth living.”

The Bus

Good to Great companies are careful about who they let on their bus, are quick to get the wrong people off their bus, and constantly move the right people around until they find the right seat.

All good to great managed their people (i.e., their bus) using three principles:

  • Principle #1: When in doubt, don’t hire – keep looking.
  • Principle #2: When you know you need to make a people change, act. Collins says, “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.” You’ll know if you need to make a change if the answer is ‘no’ either questions: “Would we hire this person again?” & “If this person told us she was leaving to pursue a new exciting opportunity, would we feel terribly disappointed?”
  • Principle #3: Put your best people on your biggest opportunities, not your biggest problems.

Level 5 Leadership

“Compared to high‐profile leaders with big personalities who make headlines and become celebrities, the good‐to‐great leaders seem to have come from Mars…They are more like Lincoln and Socrates than Patton or Caesar.” – Jim Collins

All the Good to Great leaders were Level 5 leaders ‐ great managers with the perfect mix of humility and stoic resolve to do whatever it took to make the company great.

The Level 5 leaders Collins interviewed routinely said things like, “I don’t think I can take much credit. We were blessed with marvelous people.” The leaders of Good to Great companies didn’t care about being famous or well‐liked; they only cared about making their company great. One good to great CEO of a family pharmaceutical company kicked family members off the board when he took over the company because that’s what was needed to move the company forward. Another CEO routinely went against Wall Street and held to his vision even after Wall Street analysts downgraded the company’s stock.

“Look for situations where extraordinary results exist but where no individual steps forth to claim excess credit. You will likely find a potential Level 5 leader at work.” – Jim Collins

Final Summary

The key takeaway here is that:

Companies that go from good to great do so by creating a simple hedgehog concept, hiring the right people (especially at the leadership level), and pursuing their strategy with a culture of rigor and self-discipline. A few pointed questions will help you form your hedgehog concept: What can you be the best in the world at? What can you be passionate about? And what key economic indicator should you concentrate on?

About the author

Jim Collins is a student and teacher of what makes great companies tick, and a Socratic advisor to leaders in the business and social sectors. Having invested more than a quarter-century in rigorous research, he has authored or coauthored six books that have sold in total more than 10 million copies worldwide. They include Good to Great, Built to Last, How the Mighty Fall, and Great by Choice.

Driven by a relentless curiosity, Jim began his research and teaching career on the faculty at the Stanford Graduate School of Business, where he received the Distinguished Teaching Award in 1992. In 1995, he founded a management laboratory in Boulder, Colorado.

In addition to his work in the business sector, Jim has a passion for learning and teaching in the social sectors, including education, healthcare, government, faith-based organizations, social ventures, and cause-driven nonprofits.

In 2012 and 2013, he had the honor to serve a two-year appointment as the Class of 1951 Chair for the Study of Leadership at the United States Military Academy at West Point. In 2017, Forbes selected Jim as one of the 100 Greatest Living Business Minds.

Jim has been an avid rock climber for more than forty years and has completed single-day ascents of El Capitan and Half Dome in Yosemite Valley.

Learn more about Jim and his concepts at his website, where you’ll find articles, videos, and useful tools. jimcollins.com

Jim Collins

Video and Podcast

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