Tuesday, November 29, 2016

Good to Great - Jim Collins (and team)

In 1996 Jim Collins and his team set out to answer a question - can good companies become great companies? It took him and his team 5 years, during which time they analysed 1435 Fortune 500 companies. Articles were read, interviews conducted, metrics run and finally the team zeroed down to 11 companies that fell in the good to great category (parameters include 15 year cumulative stock returns on or below general stock market, punctuated by a transition point, then cumulative returns at least three times the market over the next 15 years). These 11 companies (Abbott, Circuit City, Fannie May, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens and Wells Fargo) returned 6.9 times the stock market in a period of 15 years, a dollar grew to 470 as against 56 in the stock market. Spectacular stuff - and Collins puts down his insights on how it works. I found it to be a riveting book.
Random House, 300 p, Rs. 899
To begin with Collins says - good is the enemy of great. Wonderful. Some quick insights about the 11 companies - they had insiders as CEOs, factors like executive compensation, strategy, technology showed no correlation to their performance, they had a clear focus on what to do and what not to do, did not grow through mergers and acquisitions, no name, tagline, launch events to announce change programs. They just did it the hard way. Clear. Honest. Nose to the ground.

As Collins says - greatness is not a function of circumstance, it is a matter of conscious choice. He also says that by applying these principles any company can become good to great. I feel they can be applied to an individual as well.

In his graph that splits the growth story of a company from good to great into two parts - 1) buildup and 2) breakthrough - Collins points out to some common characteristics -

Buildup stage
1) Level 5 leadership (leaders who are not show men - self-effacing, quiet, reserved and shy leaders who brought great personal humility and intense professional will).
2) First who ...then what (they got the right people in and placed them in the right seats on the bus and - got the wrong people off. The right people are our most important asset)
3) Ability to confront brutal facts (the ability to keep faith in the big goal while also being fully aware of the brutal facts)

Breakthrough stage
4) Hedgehog concept (Identifying areas where they can be the best in the world, where they are passionate and where the economic indicators are strong. If you cannot be the best in your core business, then your core business cannot form the basis of a great company. It must be replaced with a simple concept that reflects deep understanding of the intersecting circles)
5) Culture of Discipline - (you don't need a hierarchy when you combine a culture of discipline with an ethic of entrepreneurship, then you get the alchemy of great performance)
6) Technology accelerators (these companies carefully selected technologies that helped them accelerate, not because technology was a fad but because technology helped them along in doing what they loved doing. Technology itself was not primary driver)

In simpler terms - summing it all up in the chapter on the Flywheel and the Doom Loop, Collins says "Those who launch revolutions, dramatic change programs and wrenching restrictions will almost certainly fail to make the leap from good to great'. The ones who succeeded were those who built momentum until a point of breakthrough."

I) Level 5 Leadership
"You can accomplish anything in life provided that you do not mind who gets the credit" - Harry S  Truman

The Level 5 leader evolves from being a
1) Highly capable individual (makes productive contributions through talent, knowledge, skills and good work ethic)
2) Contributing team member (contributes individual capabilities to the achievement of group objectives and works effectively with others in a group)
3) Competent manager (organises people and resources toward the effective and efficient pursuit of predetermined objectives)
4) Effective leader (catalyses commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards)
5) Level 5 leader.(builds enduring greatness through a paradoxical blend of personal humility and professional will)

As mentioned earlier these leaders were a combination of Personal humility and Professional will. They were highly passionate about making their company great. It was all about the company and not about them.
A quote from one of them - "I want to look out from my porch at one of the greatest companies in the world someday and be able to say 'I used to work there'

The Level 5 leaders set the company up for next generations. They are not tyrants who are always about themselves -  "I" as against "We". When their team was asked to describe them they used words like - humble, modest, shy, gracious, mild mannered, self effacing, understated. Level 5 leaders never wanted to become larger than life heroes. But they had a fierce resolve to do whatever needs to be done to make the company great. They were fanatically driven and infected with an incurable need to produce results.

An interesting aspect about the Level 5 leaders was that they apportioned credit to factors outside themselves (when they got good results they credited others) and when things went wrong they took full responsibility. Called the window and mirror approach - throw credit out of window and take blame at self. So much so when they could not find a specific person or event to give credit to, they credited good luck. When things went poorly they apportioned responsibility

To move from a Level 4 (effective leader) to Level 5 leader Collins says - self reflect, engage in conscious personal development, seek a good mentor, a great teacher, (having loving parents helps) or perhaps undergo a significant life altering experience. In fact Collins says that by practicing the good to great discipline one can become a Level 5 leader.

Every good to great company had Level 5 leadership who brought a workman like diligence, a need to produce sustained results, whose ambitions were not personal but for the company and who set up successors for success. This was prerequisite number one.

II) First who...then what
Collins says - get the right people on the bus - and get them in the right seat - even before you figure out what you want to do and how. The Good to Great teams hired people wherever and whenever without even having a specific job for them in hand. When you get the right people on the bus - you have a self motivated bunch who want to be part of creating something great, who adapt faster, who don't need to be motivated.

Get the wrong people off the bus. Clearly the wrong people will not get you anywhere.

A quote from one Level 5 leader - 'I don't know where to take this company but if I start with the right people and ask the right questions and engage them in vigorous debate we will find out.'

Succession plan
Most CEOs must answer this single most difficult question - who succeeds them. The superstar successor needs to come out of multiple outstanding candidates, the best executive team and group dialogue. You need to have good bench strength.

Compensation was not a factor
Interestingly good to great executives received less compensation compared to their peers. The compensation system should get the right people on the bus and keep them there. The right people are your greatest asset.

Who are the right people?
When you hire, place emphasis on -
  • character 
  • work ethic
  • basic intelligence 
  • dedication to fulfilling commitments. 
Recruit people who share the corporate values, then provide them training to accomplish the company mission. Find their core values - who are they and why are they. Ask them questions as to why they made their decisions. (Like the World War II veteran who escaped twice after being captured - he can get out of anything.)

Ruthless vs Rigorous
Consistently apply exacting standards at all time, and at all levels, especially in upper management.
"The only way to deliver to the people who are achieving is to not burden the with the people who are not achieving."
Rigor applies first to the top management. To be rigorous in people decisions, first become rigorous in top management decisions.

How to be rigorous
1) When in doubt don't hire...keep looking
"No company can grow its revenues consistently faster than its ability to get enough of the right people to implement the growth and still become a great company. If your growth rate in revenues outpaces your growth rate in people you cannot build a great company.'
To transition from mediocrity to excellence, get the right people - from delivery boys to courteous drivers.

2) When you know you need to make a people change, act
The moment you feel the need to tightly manage, you've made a mistake. The best people don't need to be tightly managed. Guided, taught, led but not tightly managed.
In Good to Great companies people got on the bus and stayed there for a long time, or got off in a hurry.
Take time and make rigorous A+ selections upfront.
Also see - is someone in the wrong seat? Find the right role for them. Put square pegs in square holes and round in round.

Letting the wrong people hang around is unfair to the right people.
Ask these questions - would I hire the person again 2) if someone was leaving, would you feel disappointed or relieved

3) Put your best people on your best opportunities, not the biggest problems
When you decide to sell of your problems do not sell of your best people. The good ones may disagree and fight on every decisions but they unify in decision. They are always looking for the best answer and for the good of the company.

The right people loved the job, loved what they were doing, the time at the company was like a love affair. Members tended to become and remain friends for life. These were great teams built for a cause.

Always who before what (vision, strategy, organization structure, tactics), apply rigorous discipline.

III) Confront Brutal Facts (Yet Never Lose Faith)
Make decisions based on brutal facts. Determine the truth of the situation and the right decision becomes self evident.
Deal with the facts - do not turn a blind eye to any reality inconsistent with your vision.
People should not fear the leader. Start all meetings with a look at the previous year and then discuss things that may impede future results.
'I had not need for cheering dreams. Facts are better than dreams."- Churchill

Leadership is about creating a space where truth is heard and facts confronted. You should be able to 'have your say' and be 'heard'.

A climate where truth is heard is one where the leader should
1) Lead with questions and not answers. Ask questions to understand and not manipulate
2) Engage in dialogue and debate and not coercion, Have intense dialogue, argue and debate and engage in healthy conflict
3) Conduct autopsies without blame
4) Build red flag mechanisms,

Turn information into information that cannot be ignored
These teams were excited at challenging the best

Stockdale Paradox
The name comes from Admiral Jim Stockdale, the highest ranked US military officer during the Vietnamese war, who survived years of torture (over twenty times). His secret - unwavering faith amid brutal facts.
"I never lost faith in the end of the story. I never doubted not only that I would get out, but also that I would prevail in the end and turn the experience into the defining event of my life, which, in retrospect, I would not trade.'
When asked who did not make it out he said the optimists died first.
'Never confuse faith that you will prevail in the end - which you can never afford to lose - with the discipline to confront the most brutal facts of your current reality, whatever they might be'.
What separates people is how they deal with difficulty.

  • Retain faith that you will prevail in the end regardless of the difficulties.
  • Confront the most brutal facts of your current reality.
  • Make an honest and diligent effort to determine the truth, create a culture where people have a tremendous opportunity to be heard
  • Respond to adversity differently and emerged stronger
  • Don't spend time trying to motivate people; instead hire the right people who are self motivated and then try not to demotivate them. One way to demotivate people is by ignoring brutal facts of reality
IV) Hedgehog Concept
Know one big thing well. One organizing idea, that unifies and guides everything.
Take a complex world - simplify it. Do you have it?
Eg. Freud for unconscious, Einstein for relativity, Marx for class struggle, Darwin for natural selection. What are you known for?

Example of one such concept from one of the 11 companies of the Concept - 'The best, most convenient drug stories with high profit per customer visit'.

Prune away all that does not fit with the hedgehog concept. The Hedgehog concept is a simple crystalline concept that flows from a deep understanding about the intersection of the 3 circles
1) What you can be the best in the world at (and what you cannot be)?
2) What drives your economic engine (profit per customer etc)?
3) What are you deeply passionate about?

Hedgehog concept is an understanding of what you can be best at.

Insight into your economic engine - If you could pick one and only one ratio - profit per x - to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?

What's your companies passion? The Good to Great companies only did things that they could get passionate about.

To clarify the Hedgehog concept some of the Good to Great companies took five years. One way to moving this tough process along is a device called the Council - a group of right people who participate and debate - guided by the three circles. They should Ask the right questions. Dialogue and debate. Make decisions, Autopsy the results and learn.
Go around the cycle - Questions - Dialogue and debate - Executive decisions - Autopsies and analyses - all guided by the 3 circles - and you will gain the understanding.

V) Culture of Discipline
Liberty on one side, Responsibility on the other.

To Facilitate a Culture of Discipline + Ethic of entrepreneurship
  • Build a culture around freedom and responsibility within a framework
  • Fill the culture with self disciplined people who go to great lengths to fulfill their responsibilities
  • Adhere to the hedgehog concept, the intersection
  • Create a 'stop doing  list'
Good to great companies have consistent systems with clear constraints, but gave freedom and responsibility within the framework that exists.

The key is that Disciplined people bring Disciplined thought (thus creating the buildup momentum). Disciplined thought leads to Disciplined actions. This leads to breakthrough.

Most lack the discipline to figure out with ego less clarity what they can be the best at and the will to do whatever it takes to turn that potential into reality.
Do not discipline the organization through force. Build an enduring culture of discipline.

A stop doing list is most important. Use budgeting to determine which activities should be strengthened and which to eliminate. Discipline - do the right thing and not do the wrong thing.

What discipline do I need to bring in?

VI) Technology accelerators
"Most men would rather die than think. Many do. - Bertrand Russell
Most Good to Great companies were the crawl, walk and run companies. They took their time and grew at their pace. When the Internet came, most paused and reflected. They decided to think instead of taking hasty decisions.

Good to Great companies thought differently about technology. Their hedgehog concept drove technology and not the other way around. Technology by itself was not a prime case of greatness.
Strategy/Performance/ become the best/ winning

'I've always wanted to see it as a great company. No justification. No explanation.' - A Good to Great company executive.

Those who built Good to Great companies were not motivated by fear. (And fear being the opposite of love - one could safely conclude that they were motivated by love.) They were motivated by a deep creative urge and an inner compulsion for excellence for its own sake. They reacted with thoughtfulness and creativity, to turn unreached potential into results.

The Flywheel and the Doom Loop
Flywheel - Growth
To build anything great remember - each turn of the flywheel builds upon work done earlier, compounding your investment of effort. Your effort must be in one direction, consistently, until it builds enough momentum to take off. It's an accumulation of effort applied in a consistent direction
  • Buildup and breakthrough
  • Organic development process
  • Evolved over time
  • No name for transformations, no tag line, no event
  • No miracle moment
One Good to Great executive said -
'Don't agree with those who say you cannot build a great company because Wall Street won't let you.'
He said his company did the following
- 'Communicate with analysts to educate them on what we are doing and where we are going.'

Commit 15% but plan to deliver 25%.
With the earnings, invest in new projects
Under promise and over deliver

Tremendous power exists in the fact of continued improvement and delivery of results
Build up momentum - The right people want to be part of the winning team. They want to produce visible, tangible results. Involved in something that works. When you produce results, point to tangible accomplishments, show how it looks in the overall context.
People see results and feel buildup. They are energised. They simply knew. They saw tangible evidence.
The flywheel does the talking.

Doom Loop - Downward spiral
  • Misguided use of acquisitions - use acquisitions as accelerators of flywheel momentum. You can buy growth but not greatness
  • Leaders who stop the flywheel
What works over long haul is the flywheel. Alignment follows from results and momentum, not the other way around. Be consistent. Coherent. - magnifying effect. Diligently and successfully apply each concept in the framework

Good to Great and Built to Last
It is your work in life that is the ultimate seduction - Picasso

Good to great framework works for start ups to established companies
The central concept of Built to Last is -
"Discover your core values and purpose beyond making just  money and combine this with the dynamic of the core/ stimulate progress.'

How to preserve the core and adapt?
Embrace the key concept of preserve the core and stimulate progress on the other hand

Built to last ideas
  • Clock building and not time telling (endure and adapt through generations)
  • Genius of AND (have both not one or another)
  • Core ideology - to guide decisions
  • Preserve the core / stimulate progress
Bad BHAGs are built on bravado and good BHAGs on understanding.

'Commitment made to each other' - what made these teams outperform was that they had made a commitment to one another. By using the principles you work no harder, get better results and its more fun.

'Good to Great' is a wonderful book that has several wonderful concepts and principles that companies (and individuals) can use to better their performance right away - Leadership concepts, picking the right teams, picking the approach to survive tough times, clarity of the Hedgehog concept, building a culture of discipline and use of technology to accelerate growth.  All one needs to do is answer the questions the book poses and the path appears. It comes out of deep analyses, out of facts.

That great things are built step by step, brick by brick, by following boring routines, by being clear about the overall good of the team, that the clarity of the hedgehog concept guides many such actions is evident when you apply the concepts to someone on the cusp of greatness like Virat Kohli. In fact he has already given quotes that are startlingly akin to the Stockdale paradox when he scored 80 odd against Australia in the World Cup T20 last year. His penchant for organic growth, for a culture of discipline is evident as well.

Another parallel I can draw is the one between this book and the Mindset by Carol Dweck. Both debunk the idea of the miracle. They talk of process, hard work and belief in self when things are going wrong around you. You can only come back with more effort. It helps to combine effort with clarity, discipline and the right mix of people and thoughts around you.


Anonymous said...

Thanks for that detailed write up. Clear concepts and what's also appealing, is they're seemingly so doable. Some of those quotes are inspiring too...I especially liked the 'I don't know where to take this company but if I start with the right people and ask the right questions and engage them in vigorous debate we will find out.' loved the scope to iterate that it offers. A post to bookmark.

Harimohan said...

Thanks Anon.