GOOD TO GREAT BY JIM COLLINS CHAPTER 1

GOOD TO GREAT BY JIM COLLINS CHAPTER 1 TEAM 2 CAITLIN CLARK STEPHEN MASSIMI WILL MAYRATH MATT VATANKHAH KATIE TREVINO

G OOD IS THE ENEMY OF THE GREAT.

Overview � While presenting his first book, Bill Meehan, the managing director of the San Francisco office of Mc. Kinsey & Company, told Jim Collins, �“You know, Jim, we love Built to Last around here. You and your coauthor did a very fine job on the research and writing. Unfortunately, it’s useless. ” � This was the spark of curiosity that began five years of research and resulted in Good to Great.

Overview, continued � The five-year research effort yielded many insights, but one conclusion stands out above the others �Most any organization can substantially improve its stature and performance, perhaps even become great, if it conscientiously applies the framework of ideas we’ve uncovered

Phase 1: The Search First task was to find companies that showed the good-to-great pattern (Table 1) � Launched a six-month “death march of financial analysis, ” looking for companies that showed the following basic pattern: � �Fifteen-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 fifteen years

Phase 1: The Search, continued Company Results from Transition Point to 15 Years beyond Transition Point* T Year to T Year + 15 Abbot 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 *Ratio of cumulative stock returns relative to the general stock market

Phase 1: The Search, continued � Criteria for Selection as a Good-to-Great Company �Company shows a pattern of “good” performance punctuated by a transition point, after which it shifts to “great” performance �Good-to-great shift must be a company shift, not an industry event �At the transition point, the company must have been an established, ongoing company, not a start-up

Phase 1: The Search, continued � Criteria for Selection as a Good-to-Great Company, continued �The transition point had to occur before 1985 so that there would be enough data to assess the sustainability of the transition �Whatever the year of transition, the company still had to be a significant, ongoing, stand-alone company at the time of selection �At the time of selection, the company should still show an upward trend

Phase 1: The Search, continued � The Good-to-Great Screening and Selection Process �Cut 1: From the Universe of Companies to 1, 435 Companies ○ Selected from the Fortune 500, 1965 – 1995 �Cut 2: From 1, 435 Companies to 126 Companies ○ Selected into full CRSP data pattern analysis �Cut 3: From 126 Companies to 19 Companies ○ Selected into Industry Analysis �Cut 4: From 19 Companies to 11 Good-to-Great Companies ○ Selected into Good-to-Great Set

Phase 2: Compared to What? � Two types of comparison companies �Direct comparisons ○ Companies that were in the same industry as the good-to-great opportunities and similar resources at the time of transition, but showed no leap from good to great �Unsustained comparisons ○ Companies that made a short-term shift from good to great but failed to maintain the trajectory ○ Intended to address the question of sustainability ○ Comparisons are displayed in Appendix 1. C, page 234

Phase 2: Compared to What, continued � Direct Comparisons �Purpose of direct comparison analysis is to create as close to a “historical controlled experiment” as possible �Helped in identifying distinguishing variables that account for the transition from good to great �Performed a systematic and methodical collection and scoring of all obvious comparison candidates for each good-togreat company

Phase 2: Compared to What? , continued � Direct Comparison Criteria �Business Fit ○ At the time of transition, the comparison candidate had similar products and services as the good-togreat company �Size Fit ○ At the time of transition, the comparison candidate was the same basic size as the good-to-great company �Age Fit ○ The comparison candidate was founded in the same era as the good-to-great company

Phase 2: Compared to What? , continued � Direct Comparison Criteria, continued �Stock Chart Fit ○ The cumulative stock returns to market chart of the comparison candidate roughly tracks the pattern of the good-to-great company until the point of transition �Conservative Test ○ At the time of transition, the comparison candidate was more successful than the good-to-great company �Face Validity ○ Takes into account two factors � Comparison candidate is in a similar line of business at the time of selection � Comparison candidate is less successful than the good-togreat company at the time of selection

Phase 2: Compared to What? , continued � Direct Comparison Scoring �Scored each comparison candidate on each of the six criteria on a scale of 1 to 4: ○ 4 = comparison candidate fits the criteria extremely well—there are no issues or qualifiers ○ 3 = comparison candidate fits the criteria reasonably well—there are minor issues or qualifiers ○ 2 = comparison candidate fits the criteria poorly— there are major issues and concerns ○ 1 = comparison candidate fails the criteria

Phase 2: Compared to What? , continued The Entire Study Set Good-to-Great Companies Comparison Companies Abbot Upjohn Circuit City Silo Fannie Mae Great Western Gillette Warner-Lambert Kimberly-Clark Scott Paper Kroger A&P Nucor Bethlehem Steel Philip Morris R. J. Reynolds Pitney Bowes Addressograph Walgreens Eckerd Wells Fargo Bank of America Unsustained Companies Burroughs Chrysler Harris Hasbro Rubbermaid Teledyne

Phase 3: Inside the Black Box � Research Phase �Systematically coded all materials into categories, conducted interviews, and initiated a wide range of analyses � Project began with the goal of building a theory from the ground up

Phase 3: Inside the Black Box, continued � In the study, what they didn’t find turned out to be some of the best clues to the inner workings of good to great Great Results Good Results What’s Inside the BLACK BOX?

Phase 3: Inside the Black Box, continued � Company Coding Documents Collected �All major articles published on the company over its entire history �Materials obtained directly from companies �Books written about the industry, company, and/or its leaders �Business school case studies and industry analyses �Business and industry reference materials �Annual reports, proxy statements, analyst reports, and any other materials available on the company, especially during the transition era

Phase 3: Inside the Black Box, continued � Coding System Categories �Category 1: Organizing Arrangements �Category 2: Social Factors �Category 3: Business Strategy, Strategic Processes �Category 4: Markets, Competitors, and Environment �Category 5: Leadership �Category 6: Products and Services

Phase 3: Inside the Black Box, continued � Coding System Categories, continued �Category 7: Physical Setting and Location �Category 8: Use of Technology �Category 9: Vision: Core Values, Purpose, and BHAGs �Category 10 ○ A: Change/Transition Activities during Transition Era of Corresponding Good-to-Great Company (Direct Comparisons Only) ○ B: Attempted Transition Era (Unsustained Comparisons Only) �Category 11: Posttransition Decline (Unsustained Comparisons Only)

Phase 3: Inside the Black Box, continued � Other Research Elements �Financial Spreadsheet Analysis ○ Examined all financial variables for 980 combined years of data (35 years on average per company) ○ Comprised gathering raw income and balance sheet data and examining variables in both the pre- and posttransition decades �Executive Interviews ○ Conducted interviews of senior management and board members, focusing on those in office during the transition era

Phase 3: Inside the Black Box, continued � Special Analysis Units �Acquisitions and Divestitures ○ Sought to understand the role of acquisitions and divestments in the transition from good to great �Industry Performance Analysis ○ Looked at the performance of the companies versus the performance of the industries �Executive Churn Analysis ○ Looked at the extent to which the executive teams changed during the crucial points in companies’ histories �CEO Analysis ○ Performed a qualitative examination of each set of CEOs during the transition eras in all three sets of companies

Phase 3: Inside the Black Box, continued � Special Analysis Units, continued � Executive Compensation ○ Examined across the twenty-eight companies studied, from ten years before the transition point to 1998 � Role of Layoffs ○ Sought to examine all companies for evidence of layoffs as a conscious tactic to improve company performance � Corporate Ownership Analysis ○ Aimed to determine if there were any significant differences between companies � Media Hype Analysis ○ Looked at the degree of “media hype” surrounding the companies � Technology Analysis ○ Examined the role of technology, drawing largely upon executive interviews and written source materials

Phase 3: Inside the Black Box, continued � Comparative Analysis Frameworks �Performed throughout the research effort �While less detailed than the other portions of the research effort, all were derived directly from research evidence �Included topics such as ○ The use of bold corporate moves ○ Executive class versus egalitarianism ○ Three-circle analysis and fit with core values and purpose

Phase 4: Chaos to Concept � Every primary concept in the final framework showed up as a change variable in 100 percent of the good-togreat companies and in less than 30 percent of the comparison companies during the pivotal years � The Flywheel captures the gestalt of the entire process of going from good to great

Phase 4: Chaos to Concept, continued G U O R H! TH K A E BR BUILDUP… LEVEL 5 LEADERSHIP FIRST WHO. . THEN WHAT DISCIPLINED PEOPLE CONFRONT THE BRUTAL FACTS HEDGEHOG CONCEPT DISCIPLINED THOUGHT FLYWHEEL CULTURE OF TECHNOLOGY DISCIPLINE ACCELERATORS DISCIPLINED ACTION

Phase 4: Chaos to Concept, continued � The Flywheel—Disciplined People �Level 5 Leadership ○ Good-to-great leaders are self-effacing, reserved, even shy—a paradoxical blend of personal humility and professional will �First Who…Then What ○ Good-to-great leaders first got the right people on the bus, the wrong people off the bus, and the right people in the right seats ○ Then they figured out where to drive it ○ People are not your most important asset. The right people are.

Phase 4: Chaos to Concept, continued � The Flywheel—Disciplined Thought �Confront the Brutal Facts (Yet Never Lose Faith) ○ Every good-to-great company embraced what came to be called the Stockdale Paradox � Must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties, AND at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be �The Hedgehog Concept (Simplicity within the Three Circles) ○ To go from good to great requires transcending the curse of competence ○ If you cannot be the best in the world at your core business, then your core business absolutely cannot form the basis of a great company � It must be replaced with a simple concept that reflects deep understanding of three intersecting circles

Phase 4: Chaos to Concept, continued � The Flywheel—Disciplined Action �A Culture of Discipline ○ When you have disciplined people, you don’t need hierarchy ○ When you have disciplined thought, you don’t need bureaucracy ○ When you have disciplined action, you don’t need excessive controls ○ When you combine a culture of discipline with an ethic of entrepreneurship, you get the alchemy of great performance

Phase 4: Chaos to Concept, continued � The Flywheel—Disciplined Action, Continued �Technology Accelerators ○ Good-to-great companies think differently about the role of technology �They never use technology as the primary means of igniting a transformation ○ Paradoxically, they are pioneers in the application of carefully selected technologies ○ Technology by itself is never a primary, root cause of either greatness or decline

Phase 4: Chaos to Concept, continued � The Flywheel and the Doom Loop �Those who launch revolutions, dramatic change programs, and wrenching restructurings will almost certainly fail to make the leap from good to great ○ Good-to-great transformations never happened in one fell swoop �Rather, the process resembled relentlessly pushing a giant heavy flywheel in one direction, building momentum until a point of breakthrough

Phase 4: Chaos to Concept, continued � From Good to Great to Built to Last �Built to Last is about how you take a company with great results and turn it into an enduring great company of iconic stature ○ To make that shift requires core values and a purpose beyond just making money combined with the key dynamic of preserve the core / stimulate progress Good to Great Concepts Sustained Great Results Built to Last Concepts Enduring Great Company

The Timeless “Physics” of Good to Great � This book is ultimately about one thing: �The timeless principles of good to great ○ It’s about how you take a good organization of any type and turn it into one that produces sustained great results, using whatever definition of results best applies to your organization � That good is the enemy of great is not just a business problem—it is a human problem �If we have cracked the code on the question of good to great, we should have something of value to any type of organization