GOOD TO GREAT By Jim Collins Chapter 1

GOOD TO GREAT By Jim Collins Chapter 1: Good is the Enemy of Great Team 2 Presenters: Gabriel Gamez Nancy Nguyen Raquel Vasquez Quintin Jordan Chris Flockerzy Sarah Doyle Lydia Herschap Monica Del Bosque

Introduction/Concept Research q Why is Greatness so Uncommon q Epiphany of 1996 & Research q Analysis of corporations transitioning from good to great q. Can a Good Company Become a Great Company? and if so, How?

List of “Great” Companies Chosen Company Result from Transition Point to 15 years beyond Transition T Years to 1 Year + 15 Abbott 3. 98 times the market 1974 -1989 Circuit City 18. 50 times the market 1982 -1997 Fannie Mae 7. 56 times the market 1984 -1999 Gillette 7. 39 times the market 1980 -1995 Kimberly-Clark 3. 42 times the market 1972 -1987 Kroger 4. 17 times the market 1973 -1988 Nucor 5. 16 times the market 1975 -1990 Philip Morris 7. 06 times the market 1964 -1979 Pitney Bowes 7. 16 times the market 1973 -1988 Walgreens 7. 34 times the market 1975 -1990 Wells Fargo 3. 99 times the market 1983 -1998

Circuit City Then & Now

Best Buy vs. Circuit City Debt Comparison 2005 -2009 100, 0% 80, 0% 60, 0% 52, 0% 45, 5% 38, 8% 43, 8% 44, 9% 40, 0% 55, 3% 35, 7% 59, 9% 32, 6% 20, 0% 2005 2006 2007 Circuit City Net Income 2009 Best Buy Period Ending Total Revenue Cost of Revenue Gross Profit 2008 Asset to Liability Ratio Best if Under 36%, higher than this percentage is considered a high risk. Circuit City 2008 $40, 023, 000 $30, 477, 000 $9, 546, 000 2007 $35, 934, 000 $27, 165, 000 $8, 769, 000 $1, 407, 000 $1, 377, 000 Period Ending Total Revenue Cost of Revenue Gross Profit Net Income 2008 2007 $11, 743, 691 $12, 429, 754 $9, 318, 174 $9, 501, 438 $2, 425, 517 $2, 928, 316 ($319, 897) ($8, 281)

Phase 1: The Search To find companies that showed the good-to-great pattern q. The Basic Pattern: • 15 year cumulative stock at or below the general stock market • Punctuated by a transition point • Cumulative returns at least three times the market over the next 15 years q. Why 15 years? • It would transcend one-hit wonders and lucky breaks. • It would exceed the average tenure of most CEO’s. Helping to separate the great companies from the companies that just happened to have a single great leader. q. Why three times the market?

Criteria for Selection as a Good-to. Great Company “The focus of this particular research effort is on the very specific question of how to turn a good organization into one that produces sustained great results. ” Jim Collins 1. Company shows a pattern of “good” performance punctuated by a transition point, after which shifts to “great” performance. 2. The good-to-great performance pattern must be a company shift, not an industry event. 3. At the transition point, the company must have been an established ongoing company, not a start-up. Also it had to have been publicly traded with stock return data available at least ten years prior to the transition point. 4. Transition point had to occur before 1985 5. The company had to appear in the 1995 Fortune 500 rankings, published in 1996 6. Finally, at time of selection, the company should still show an upward trend.

Good-to-Great Selection Process Cut 1 1, 435 companies Selected from Fortune 500 1965 - 1995 Cut 2 126 companies Selected from full CRSP data pattern analysis Cut 3 19 companies Selected into industry analysis Cut 4 11 companies Selected into goodto-great set

The Entire Study Set Good-to-Great Companies Abbott Circuit City Fannie Mae Gillette Kimberly-Clark Kroger Nucor Philip Morris Pitney Bowes Walgreens Wells Fargo Direct Comparison Companies Upjohn Silo Great Western Warner. Lambert Scott Paper A&P Bethlehem Steel R. J. Reynolds Addressograph Eckerd Bank of America Unsustained Comparison Companies Burroughs Chrysler Harris Hasbro Rubbermaid Teledyne

Phase 2: Compared to What? q Goal: To find what the good-to-great companies shared in common and how they were distinguished from their industry. q Process: Compare the good-to-great companies against “direct” comparison companies and “unsustained” comparison companies. • Direct Comparison Company- a company who is in the same industry and has the same resources and similar opportunities as a great company, but did not transition • Unsustained Comparison Company-a company who did transition to greatness but was unable to sustain it for 15 years

Direct Comparisons q. Tried to create a “historical controlled experiment” to conduct a direct comparative analysis, in order to find the distinguishing variables that account for the transition from good to great. q. Why did the direct comparison companies fail? q. What was different?

Direct Comparison Selection Method q Six Criteria: • 1. Business Fit- similar products and services • 2. Size Fit- same basic size based on a revenue ratio • 3. Age Fit- founded in the same era • 4. Stock Chart Fit- the cumulative stock returns to the market of the comparison company should roughly track the pattern of the good-to-great company, until the point of transition, and then is outperformed. • 5. Conservative Test- at time of transition is more successful • 6. Face Validity- in a similar line of business and at the time of selection into the study, is less successful than the good-to-great company

Scoring Scale and Example Kroger Score A&P 3. 17 Safeway 2. 58 Winn-Dixie 2. 5 American Stores 2. 42 Giant Foods, Inc. 2. 33 Jewel 2. 25 Albertson’s 2. 08 Food Fair 1. 5 Grand Union 1. 0 � 4= fits the criteria extremely well � 3= fits the criteria reasonable well � 2= fits the criteria poorly � 1= does not fit the criteria

“Unsustained” Comparisons q. To determine how a company can sustain great results and why these comparison companies failed to. q. Question of Sustainability • Resnick and Smunt Critique

“Unsustained” Comparison Example Good-to-Great Companies Transition Point Harris Corporation

“Great” Companies 2009 Status Good-to-Great Companies Revenues Profits Abbott $ 59, 034. 00 $ 2, 157. 0 Circuit City $ 11, 743. 70 $ (319. 9) Fannie Mae $ 22, 652. 00 $ (58, 707. 0) Gillette/Procter & Gamble $ 83, 503. 00 $ 12, 075. 0 Kimberly-Clark $ 19, 415. 00 $ 1, 690. 0 Kroger $ 76, 000. 00 $ 1, 249. 4 Nucor $ 23, 663. 30 $ 1, 831. 0 Philip Morris International $ 25, 705. 00 $ 6, 890. 0 Pitney Bowes $ 6, 262. 30 $ 419. 8 Walgreens $ 59, 034. 00 $ 2, 157. 0 Wells Fargo $ 51, 652. 00 $ 2, 655. 0 -cnn. money. com Fortune 500 2009 list

Phase 3: Inside the Black Box Great Results Good Results What’s Inside The Black Box

Phase 3: Inside the Black Box q. Good to Great …a process • All concepts were derived directly from the evidence “Core Method was a systematic process of contrasting the good to great examples to the comparisons, always asking, “What’s the difference? ”

The dog that did not bark Dogs that were expected to bark but didn’t, turned out to be some of the best clues. q • • Famous CEO Well defined strategy Technology No launch event

Phase 4: Chaos to Concept �Looping back and forth �Developing ideas and testing them against the data �Revising the ideas �Building a framework �Seeing it break under the weight of evidence �Rebuilding it yet again �Repeating until everything hangs together in a coherent framework of concepts �Taking lumps of unorganized info, seeing patterns, and extracting order from the mess (Focus on strengths)

Meeting the Concept Criteria q. Each concept met a rigorous standard before it was deemed significant q. Each concept was a change variable in 100% of the good to great companies and only 30% of comparison companies q. Any insight that failed did not make it into the book as a chapter level concept

A process built on humility q. DON’T SETTLE, you could be wrong! q. If you’re not wrong frequently, you’re not trying hard enough. q. We’re smart only if we admit we’re not so smart.

From good to great: The Flywheel

Chaos to Concept Example: Gillette q. Chaos: Gillette didn’t track success of most promotional programs (didn’t know how each in store piece was used or how many made it into stores) q. Gillette needed to focus strategy on placement rather than quantity q. What was the most cost effective way to do this?

Gillette cont. q“Each piece needs to meet our objective now, if it doesn’t, we need to look at what we’re doing. ” Leslie Palmer (Gillette Communications Manager) q. Responsible for communication between 300 sales reps and marketing groups q. No communication q“Sending in bulk” q½ of promotion displays not being used

Gillette’s solution q Palmer found info from sales reps, rather than using her position to make an uneducated decision q Because reps price and promote products, and talk to store management, Palmer found through surveys that promotion material was sent, “to late, heavy, much, and often. ” q The decision led to an improved company approach, and provided detailed product placement information (what was most popular and where) and generated new ideas for promotion products

Level 5: Leadership • According to Jim Collins, leaders: • Were thought to be: • Celebrities • High profile company leaders • Are actually: • Quiet • Reserved • Humble Image found at: http: //images. google. com/imgres? imgurl=http: //www. paperhall. org/inductees/photos/2004 pix/d_smith. jpg&imgrefurl=http: //www. paperhall. org/inductees/bios/2004 /darwin_smith. php&usg=__2 IKz. VENxe. ZGLIxj. Moq. CIt. FLPc. ZU=&h=460&w=356&sz=76&hl=en&start=1&um=1&tbnid=Oru. Vp 1 y. VRj. G 0 u. M: &tbnh=128&tbnw=99&pr ev=/images%3 Fq%3 Ddarwin%2 Be. %2 Bsmith%26 hl%3 Den%26 rls%3 Dcom. microsoft: en-us%26 sa%3 DX%26 um%3 D 1 Darwin E. Smith Chairman and CEO Kimberly-Clark Corporation

Leadership in Strategic Management… q. Coulter states: • Strategic leadership is the ability to: • • • Anticipate Envision Maintain flexibility Think strategically Initiate changes to ensure a valuable future for the organization v “Great” leaders have both the attributes described by Collins and Coulter

First Who…then What. q“The right people are your most important asset. ” • Great leaders: • • “First got the right people on the bus” “The wrong people off the bus” “The right people in the right seats” “And then they figure out where to drive it. ”

Confront the Brutal Facts (Yet Never Lose Faith). q“Stockdale Paradox: ” • “Maintain faith that you can prevail, regardless of the difficulties” • “Have the discipline to confront the facts of your reality” q“Understand your company’s situation” q“Listen for the truth”

The Hedgehog Concept (Simplicity within the Three Circles). Image found at: http: //www. emeraldinsight. com/fig/2610300502001. png

Phase 4 Cont. Part III: A Culture of Discipline q“All companies have a culture but few have a culture of discipline. ” • Southwest Airline employees willing to take pay cuts. • Wal-mart makes sure suppliers add value while still contributing to achieve low cost

Technology Accelerators q“…pioneers in the application of carefully selected technologies. ” • Scanners, RFID, Self Checkout, etc….

The Flywheel and the Doom Loop q“No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. ” • Large emphasis on developing good relationships internally and externally

From Good to Great to Built to Last q“This Book is about how to turn a good organization into one that produces sustained great results. ” q Laying the groundwork for an Enduring Great Company. Good to Sustained Build to Enduring Great Last Great Concepts Results Concepts Company

The Timeless “Physics” of Good to Great q Sustaining In a New Economy q Law of Organized Human Performance q Good to Great is a Choice q Good Company Becoming Great?

Key Points to Take Away q. Good companies become accustom to being mediocre and so therefore do not become great. q. Jim Collins and his research team’s overall goal are to discover if and how a company can transition from a good company to a great company with sustained results. q. According to Jim Collins great companies did not transition in one fell swoop instead it was a combination of disciplined people, disciplined thought,

References � Bowersox, Donald J. , David J. Closs, and M. B. Cooper. Supply Chain Logistics Management. 3 rd ed. New York: Mc. Graw-Hill Irwin, 2010. Print. � Collins, Jim. Good To Great. New York: Harper. Collins, 2001. Print. � Coulter, Mary. Strategic Management In Action. 5 th ed. New Jersey: Prentice Hall, 2010. Print. � Paper Industry International Hall of Fame, Inc. "Darwin E. Smith. " Paperhall. org. Paper Industry International Hall of Fame, Inc. Web. 22 Jan. 2010. <http: //www. paperhall. org/inductees/bios/2004/darwin_smith. php>. � Pausch, Randy. The Last Lecture. New York: Hyperion, 2008. Print. � Website, (2009) Best Buy Financials, http: //finance. yahoo. com/q/is? s=BBY&annual. Retrieved January 19, 2009. � Website, (2009) Circuit City Financials, http: //finance. yahoo. com/q? s=CCTYQ. PK. Retried January 19, 2009. � Website, (2009) Circuit City Downfall,