Revisiting a Business Classic: Good to Great (2001)

Revisiting a Business Classic: Good to Great (2001)

By Theo Winter White

“What catapults a company from merely good to truly great? A five-year research project searched for the answer to that question, and its discoveries ought to change the way we think about leadership.”

— Harvard Business Review, “10 Must-Reads on Leadership”

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Quick Overview With reported sales exceeding 4 million copies, Good to Great: Why Some Companies Make the Leap... and Others Don't is one of the highest grossing and most famous business management books ever written, which came to fruition off the back of an exhaustive research investigation that began in 1996 and took 5 years to complete. The book’s primary author, Jim Collins, in collaboration with his 21-member research team, identified 11 “great” companies from Fortune 500 data that started out by displaying years of average stock market performance before reaching a certain “transition point” — the point at which the company’s stock started to skyrocket. Each great company was carefully selected on the basis of having a rival comparison company that did not go on to greatness, despite being in a similar market position and having the same potential. Good to Great is about understanding the specific factors that separated the great companies from the average ones and, at the time of publication, appeared to dispel many myths around how the breakthrough to greatness occurs.

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Author Jim Collins (1958 —) has authored or co-authored four business bestsellers, including Built to Last (1994), Good to Great (2001), How the Mighty Fall (2009) and Great by Choice (2011). Collins attained his degree in mathematical sciences at Stanford University in 1980 followed by his MBA in 1983, after which he worked as a consultant with McKinsey and then as a product manager for Hewlett-Packard. Collins began his research and teaching career on the faculty at Stanford Graduate School of Business, where he received the Distinguished Teaching Award in 1992. Three years later, he founded a “management laboratory” in his hometown of Boulder, Colorado, the site for conducting the bulk of the research in his books. Collins is noted as an avid rock climber.

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Background Before writing Good to Great, Collins co-authored Built to Last (1994) with Jerry Porras, which involved a 6-year study exploring the habits of 18 exceptional companies, selling over 1 million copies and thrusting Collins into the global business spotlight.

After finishing Built to Last, Collins was looking for a new research project to work on when he was having dinner with his friend and former McKinsey colleague, Bill Meehan, who told Collins something that would alter the course of his life and consume his thoughts every day for the next 5 years. His friend, while affirming the merits of Built to Last, confessed that it was essentially useless to him because the great companies described in the book were the result of great parenting — great leaders — who gave their companies a head start in life. What would really be useful was a book that showed what the average could do to become great.

Collins was mulling over his friend’s comments on the flight back home and later, sitting on his front porch, he was struck by an idea that would become the basis of his next book, Good to Great. He drew a straight line across the length of a piece of paper, followed by a second line directly tracing the path of the first. When the line approached the mid-point on the page it began to climb, while the other line continued to plateau. He wrote on the paper: “Some go from good to great. Others do not. Why?”

Apparently, at the time, Collins thought it was such an obvious question that someone else must have answered it already, but when he began exploring the matter further he came up empty. The theories were plentiful, of course, but nobody had conducted a serious investigation. What makes Good to Great so groundbreaking is precisely this point: nobody had set out to answer such a fundamental business proposition. If there were a specific formula that led to greatness, every businessperson on the planet would want to know of its existence.

Collins and his team began the Good to Great research project in 1996 by compiling a list of 1,435 companies from the Fortune 500 stock market data from 1965 to 1995 in search of those special few that showed extraordinary financial results. They eventually whittled the list down to 11. Each of the 11 great companies were chosen because they followed the same basic pattern: “15-year cumulative stock returns at or below the general stock market, punctuated by a transition point, then cumulative returns at least three times the market over the next 15 years.”

The key to the entire research project rested on something Collins called the “matched paramethod,” which he learned from his co-author and mentor Jerry Parras while conducting the research for Built to Last. For each great company, they carefully selected a slightly less exciting "comparison company" (or control group) “based on similarity of business, size, age, customers, and performance leading up to the transition.” In some cases, companies from the comparison group started to make the leap to greatness, but then failed to sustain momentum. The final 11 matches weren’t just a small sample of possible Fortune 500 candidates that met their criteria; they were the only ones.

Good to Great table

Walgreens (now America’s 2nd largest pharmacy store chain) is given as an example of a great company that, for 40 years, didn’t appear very remarkable and had more or less remained in line with the general market. Then, in 1975, very suddenly and unexpectedly, its stock price began to soar into the clouds and never looked back. If you invested $1 in Walgreens in 1975, you would’ve seen an astounding return of $562 by 2000. Eckerd — Walgreens’s major competitor during the late 1900s — while in a comparable market position and with similar resources, did not go on to greatness and was eventually broken up and sold off in 2004.

The key question the research team had to work out was not what the 11 good-to-great companies all shared in common, but what was different about the great company (Walgreens) from its rival comparison company (Eckerd)?

They delved into the histories of each of the 11 pairs of companies — financial records, board members, strategy decisions, management approaches, computer systems, acquisitions, etc. — and even interviewed as many of the key players they could find that were in working for the companies during the period of transition.

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Key Concepts Collins’ team made intriguing discoveries along the way: there were no links between executive remuneration and greatness; mediocre companies seemed to hire external CEOs while great companies promoted from within; technology was relied on by mediocre companies whereas great companies paid more attention to their people and culture; mediocre companies had unoriginal mission statements, while great companies had “big hairy audacious goals.”

The most important findings went on to have their own chapter and were required to meet a rigorous standard before being allowed into the book. In the end, every primary concept in the final framework showed up as a change variable in 100% of the good-to-great companies and in less than 30% of the comparison companies during the pivotal transition years.

In total, they ended up with 7 primary insights:

Disciplined People (The Build Up to Greatness) 1) Level 5 Leadership 2) First Who … Then What

Disciplined Thought (The Break Through to Greatness) 3) Confront the Brutal Facts 4) Hedgehog Concept

Disciplined Action (Sustained Greatness) 5) Culture of Discipline 6) Technology Accelerators 7) From Good to Great to Built to Last

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Level 5 Leadership One of the strongest, most consistent contrasts between the good-to-great companies and the comparison set was something termed “Level 5” leadership, defined as “a paradoxical blend of personal humility and professional will.”

Level 5 stands on the shoulders of four other levels in a hierarchy that describe aspects of being an effective leader, executive, team member, and individual. According to Collins, the best (and rarest) leaders are those who embody the traits in each of these four levels plus Level 5. These leaders of the great companies were not the charismatic, larger-than-life personalities that you might expect to be in charge of a multi-billion dollar corporation. Of course, they were all highly ambitious, but their ambition was for the company, not for themselves. They were the opposite of many of Level 4 executives found in the comparison companies, who were typical of an egocentric celebrity figurehead. The truly great leaders cared more about success than the spotlight. Many were quiet and awkward. All showed a fierce dedication to the needs of others and success of their company. Ironically, many of the people who are best equipped to lead companies are the ones who are often most reluctant to because they are humble by nature, yet Collins notes that one of the more damaging trends in recent history has been the tendency among boards to hire charming personalities and overlook Level 5 leaders.

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First Who, Then What Everything in the good-to-great framework can be traced back to a single overarching theme: the right people. In management circles, you will often hear the phrase “get the right people on the bus.” It originated from Good to Great, along with the idea that “people aren’t you’re greatest asset — the right people are.”

“The most important leadership skill is clearly the ability to make great people decisions and to put people in the right seats and to rigorously change the bus if you have to.” — Jim Collins

The great companies didn’t hire simply to fill empty seats on the bus. If there was doubt about a candidate, it was better to wait. The great companies recruited slowly and fired quickly. They assembled people who were the right fit (personality, skills and values) and quickly got rid of people who weren’t. Where possible, they hired for character first; experience and skills second. Collins indicates that if you feel as though you need to constantly watch your new employee and sit on top of them with a checklist, you’ve already made a hiring mistake. The right people are innately trustworthy and accountable — they may want guidance, but not micromanagement.

Often we think of corporate planning and organisational structure before hiring the right people, yet Collins advises to think about the process in the reverse. Once the right people are on the bus, then, and only then, should you consider strategy.

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Hedgehog Concept (The 3 Circles) The concept derives from an ancient Greek parable of a cunning fox that tries to eat a hedgehog. Somewhat similar to the Wile E. Coyote and Road Runner cartoons, the fox has many strategies and schemes up his sleeves, but the Hedgehog is very good at doing one thing over and over again: rolling into a ball whenever the fox comes too close. The lesson is to know what you’re good at and focus on doing that one thing well, not diffusing your effort across many areas.

For example, in the Walgreens vs. Eckerd comparison, Eckerd had many complex strategies for growth, whereas Wallgreens’ strategy was simple: replace all inconveniently located drugstores with more convenient ones.

Of course, it’s possible to have a simple strategy that is totally wrong. What really distinguished the good-to-great companies is described in a model of 3 intersecting circles, considered by some to be the most important concept in the book:

1. What You Can Be Best At (Strengths) 2. What You Are Passionate About (Values) 3. What Makes You Money (Economic Driver)

They key to a company’s success, Collins’ argues, is a deep understanding of these 3 elements. If your core business is not precisely in the middle, you will not become a great company.

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Criticism Many of the central ideas, and the reliability of the ideas, presented in Good to Great have come under fire in the near two decades since publication, with some critics wholly dismissing the relevance of the book.

Common criticisms of Good to Great include a lack of scientific rigour applied to the research findings; the research methodology is inherently prone to confirmation bias; the generality of the findings makes them prone to the Barnum effect (people find meaning in vague descriptions that could apply to anything); the question of applicability to small-to-medium sized businesses; and, most especially, the poor or average performance of the majority of “great” companies in the years since publication.

For example, Circuit City (the electronics retailer) went bust in 2009 and Fannie Mae (the mortgage lender) was taken over by the U.S. government in 2008. Does the weakening and decline of so many “great” companies effectively negate the lessons in Good to Great? Collins doesn’t think so — and argues just the opposite. His suggested rationale for the demise of Circuit City and Fannie Mae, like many other companies that fall from grace, was chiefly due to a shift from a humble drive to an attitude of arrogance (overreaching in terms of undisciplined growth and undisciplined risk-taking) — disregarding the very things that made them successful in the first place. This theme is explored in more detail in Collins’ 2009 book, How the Mighty Fall, in which he states that “just because a company falls doesn't invalidate what we can learn by studying that company when it was at its historical best."

A specific criticism of what is arguably Collins’ most important concept, Level 5 Leadership, is the lack of effort made to disconfirm the hypothesis. Are there, for example, companies run by level 5 leaders who have negatively impacted financial performing during their tenure? Does a level 5 leader at a Fortune 500 company have the same impact at a small or medium-sized enterprise — or is a different type of leader more effective? What other research is available to support Collins’ conclusions? These and many other questions remain unanswered although Collins appears to operate on the assumption that his findings are universally valid.

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Final Comments Although technically written 7 years after Built to Last, Collins reflects that Good to Great was ironically more like its prequel. Whereas Good to Great is about how to survive the ascent to the summit, Built to Last is about what to do once you’ve made it to the top.

Perhaps the most surprising discovery made by Collins is that going from good to great is less about clever business strategy or tactics, and more of a commentary on human nature, specifically virtuous character. Some of the central themes of the book are discipline, focus, simplicity, avoiding a diffusion of effort, and the power of patience and humility. Great companies did not look for shortcuts. Instead, they took the long, hard road to success. “There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment,” says Collins. The central analogy he uses for describing the transformation process is like pushing a giant flywheel, one that is incredibly hard to move, depending on the combined effort of many strong, disciplined people to get it going, but once it starts turning, each successive revolution makes it easier and easier to turn as momentum builds up, generating enough cumulative energy for the ultimate breakthrough.

Even if you are not sitting on the board of a multi-national giant trying to work out the structure of CEO compensation (Collins suggests it is a non-core factor), there is something that every stripe of leader, manager and individual can take away from any given chapter. There is also much to learn about leadership styles and leadership strategies from the detailed case studies. The central message advanced by the book is that in order to go from good to great, you need to have a special type of leader at the helm who puts the company interest ahead of their own, one who is dedicated to building a great executive team made of the “right stuff” who will work together to achieve a clear goal by understanding the 3 circles.

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