The book of the month: “Good to Great: Why some companies make the leap…and others don’t” by Jim Collins

News categories: the New Economy economics, enterprise and business strategy, human capital management and recruiting

“We were surprised, shocked really, to discover the type of leadership required for turning a good company into a great one. 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. Self-effacing, quiet, reserved even shy – these leaders are a paradoxical blend of personal humility and professional will. They are more like Lincoln and Socrates than Patton or Caesar. […] Some of the key concepts discerned in the study fly in the face of our modern business culture and will, quite frankly, upset some people."

Jim Collins

A Decade ago Jim Collins made a name for himself with the book “Built to Last: Successful Habits of Visionary Companies”. That best-seller, written with Jerry Porras, looked deeply at companies that were outstanding at their founding and managed to sustain their greatness. But the companies he wrote about in that book were, for the most part, always great. They never had to turn themselves from good companies into great companies. They had parents like David Packard and George Merck, who shaped the character of greatness from early on. But what about the vast majority of companies that wake up partway through life and realize that they are good, but not great ? What about companies that are merely good, or even mediocre, and then achieve greatness ? That is the subject of Collins’ “Good to Great: Why Some Companies Make the Leap…and Others Don’t”, the culmination of five years of work by Collins and a team of 20 researchers.

What this book makes unique and a must read for everybody interested in management is that it breaks with the common opinions about what the best leaders are or have to be. Collins and his team are proving that the best leaders are not the famous charismatic “super CEO” type of managers. Instead, they are making the case, that level 5 leaders, that is how they are calling them, are the ones who are able to lead their companies from good to great. Level 5 leaders are ambitious for the success of the company rather than for themselves. They also want to set up the company for success in the next generation, so it can be come even greater. In contrast, the level 4 leader is not interested in having the company continue on a great level after he’s gone. After all, it’s a testament to his greatness that his company can’t sustain its greatness without him.

Collins insists, that he was not looking specifically for Level 5 leader in his study. In fact he told his researchers to downplay the role of the top executive in order to avoid the “leadership is everything” line of thinking so common today. They identified out of 1,435 companies that appeared on the Fortune 500 companies that followed a pattern: 15 years of cumulative stock returns at or below the general stock market, then a transition point leading to cumulative returns of at least three times the market over the next 15 years. These are, according to Collins criteria, the companies that went from good or average to great. The researchers found 11 companies that met this criteria. They were hardly glamorous corporations: Kimberley-Clark, Abbott, Fannie Mae, Gillette, Pitney Bowes, Circuit city, Kroger, Nucor, Philip Morris, Walgreens and Wells Fargo. The team then compared these good-to-great companies with a group of “direct comparison companies” – those that were in the same industry as the good-to-great companies with the same opportunities and similar resources at the time of transition, but couldn’t make the leap, and another group of companies – named “unsustained comparisons”, which made a short term shift from good to great but failed to maintain the trajectory. Then they tried to identify what was inside the Black Box which represented the specific capability of the good-to-great companies compared with the others. They compared the 28 companies under investigation and were looking for everything from acquisitions to executive compensation, from business strategy to corporate culture, from layoffs to leadership style, from financial ratios to management turnover. Collins and his team were just as astonished at what they did not find as what they did. Here some examples:

- Lager-than-life, celebrity leaders who ride in from the outside are negatively correlated with taking a company from good to great. Ten of eleven good-to-great CEOs came from inside the company, whereas the comparison companies tried outside CEOs six times more often.

- They found not systematic pattern linking specific forms of executive compensation to the process of going from good to great. The idea that the structure of executive compensation is a key driver in corporate performance is simply not supported by the data.

- The good-to-great companies did not focus principally on what to do to become great; they focused equally on what not to do what to stop doing

- Technology and technology-driven change has virtually nothing to do with igniting a transformation from good to great. Technology can accelerate a transformation, but technology cannot cause a transformation

- The good-to-great companies paid scant attention to managing change, motivating people, or creating alignment. Under the right conditions, the problems of commitment, alignment, motivation, and change largely melt away.

- The good-to-great companies had not name, tag line, launch event, or program to signify their transformations. Indeed, some reported being unaware of the magnitude of the transformation at the time; only later, in retrospect, did it become clear. They produced a truly revolutionary leap in results, but not by a revolutionary process.

- The good-to-great companies were not, by and large, in great industries, and some were in terrible industries. So Collins concludes: greatness is not a function of circumstance. Greatness is largely a matter of conscious choice.

Colin’s and his researcher’s findings, in particular about leadership, may well influence the way companies go about choosing CEOs. Instead of seeking the brightest star in the firmament, boards may more readily look inside their own companies.

According to Collin’s, the boards in the good-to-great companies understood that they were trying to built share value; the boards in the comparison companies were trying to increase share price. The difference in Collin’s words is, that a CEO can affect share price in a two-year period in any number of ways without increasing underlying share value. Thinking about the price of a share in anything less than a five-year horizon, means to confuse the concepts of price and value. And that requires from the board to stay back and select a CEO that is focused on the fundamentals of the company not on hype and their own celebrity.

Collins cites several examples in his books that emphasize the difference between level 5 and level 4 leaders. As an example for a level 4 leader he names Stanley Gault at Rubbermaid. A man who knew what to do, when he joined, and who got good results, even great results, but when he walks away, the place implodes – he just left helpers, no one that could replace him. He lacked to transfer his capabilities into the organization – which is what level 5 leaders do, who prepare their companies for the days after them. Level 5 leaders are very comfortable being surrounded by outstanding people. They also try to create the excellence within the organization, within its structural capital instead to tie it to a person, to themselve, like level 4 leaders do.

Here the key findings of the study:

Collins concludes that average companies can indeed morph into great ones. Provided that the select disciplined people and apply disciplined thought and disciplined action. Among the conclusions about Good to Great companies:

1. Their leaders are less differentiated by charisma or brilliant vision and more by humility, unrelenting will and by focus on the fundamentals of the company

2. Their focus is first on WHO (i.e., getting the right people through the door and in the right position, and the wrong people out door), then WHAT (i.e., figuring out and building the strategy)-- not the other way around.

3. They confront the brutal facts and deal with them directly and decisively by "shining a light" on the key issues impacting the business and taking a "need to know" perspective at all times to reality as it really exists. At the same time, this pragmatism is counterbalanced by an unrelenting guttural belief that they will prevail in the end (called the Stockdale Paradox).

4. They build their strategy around three core circles (target markets they realistically believe they can dominate, ones with compelling economics, and ones they can be truly passionate about), and then come up with a crystallizing concept (called the Hedgehog) that flows from a deep understanding of the dynamics of the three circles.

5. The hedgehog concept's power is less a function of one big transformation and more a product of many incremental improvements, culminating in the breakout success (debunking the myth of the overnight success). Ironically, to those inside the company the magnitude of the transformation is often unclear at the time.

6. They depend on building a culture of self-disciplined team members around the three circles (disciplined people, practicing disciplined thought and translating that into disciplined action) to the point of avoiding any "once in a lifetime opportunities" that fall outside the hedgehog concept. Also, as a result, they are able to avoid bureaucratic corporate structures.

7. They embrace new technologies solely as accelerators of the three circles and not creators of them, and avoid investments that don't specifically feed the three circles.

8. There are no inconsistencies with reconciling short-term financial performance pressures and maintaining long-term adherence to working the flywheel of the hedgehog concept to create a virtuous cycle of growth and sustenance. In short, these companies embrace the paradox that managing for both short-term and long-term success simultaneously is challenging but part of the "problem" being solved by the business.

As I wrote earlier, we are today somehow at an inclination point in enterprise management which requires companies to conceive, implement and use new techniques in general management that will keep them in business in the future and enable them to manage for sustainable profitability and growth in an environment, that is totally different from the one, where most of our management techniques of today originated: from the industrial manufacturing enterprise. But succeed in the transformation is not only about management techniques and management systems. It’s at least equally important which people are running the companies, it’s also important to select the right top managers and CEO’s. Collin’s new book provides very valuable and surprising insights for the criteria boards have to imply in this selection process.

“GOOD TO GREAT” is one of those rare books that presents important research findings, and then explains in a clear, concise and compelling manner how to take that learning and directly apply it to effect a good-to-great transformation in any company.

About the author:

Jim Collins is coauthor of “Built to Last”, a bestseller for over five years with a million copies in print. A student of enduring great companies, he serves as a teacher to leaders throughout the corporate and social sectors. Formerly a faculty member at the Stanford University Graduate School of Business, where he received the Distinguished Teaching Award, he now works from his management research laboratory in Boulder, Colaroda, USA. He can be reached at www.jimcollins.com

Good to Great: Why some companies make the leap…and others don’t
by Jim Collins

Hardcover - 320 pages (October 2001)
HarperCollins; ISBN: 0066620996

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