Good To Great Chapter 1 GOOD IS THE

Good To Great Chapter 1 GOOD IS THE ENEMY OF GREAT Team 2

Good is the enemy of great. � Jim Collins – Author 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. ” – Bill Meehan � “You � Curious, he obviously wanted an explanation. Bill went on to explain that the companies written about in Jim’s previous book were, for the most part, always great. They never had to turn themselves from good companies into great ones.

Good to Great? � Can a good company become a great company and, if so, how? � A vast majority of good companies remain just that – good, but not great. � So began the journey….

Undaunted curiosity � People often asked Jim, “What motivates you to undertake these huge research projects? ” ◦ His reply was: “Curiosity. It’s deeply satisfying to climb into the boat, like Lewis and Clark, and head West saying, “We don’t know what we’ll find when we get there, but we’ll be sure to let you know when we get back. ””

The Research � 21 people (teams of 4 -6 at a time) � 5 years � “We identified companies that made the leap from good results to great results and sustained those results for at least 15 years. ” ◦ Most companies never achieve greatness.

To put that into perspective… � If you invested $1 in a mutual fund of the good-to-great companies in 1965, holding each company at the general market rate until the date of transition, and simultaneously invested $1 in the good-to-great fund taken out on January 1, 2000, would have multiplied 471 times, compared to a 56 fold increase in the market.

Phase 1 - The Search Performance over fifteen years Three times the market Leader in the industry Should something other than returns be used?

From 1, 435 to 11 companies 1 Fortune rankings 1965, 1975, 1985, 1995 � Cut 2 University of Chicago Center for Research in Security Prices. � Cut 3 Continuous growth 4 Companies not industries that made a transition

The Surprise � Fannie Mae beat GE and Coca-Cola � Walgreens beat Intel

Good-to-Great Company Times the market time frame Abbott 3. 98 1974 -1989 Circuit City 18. 5 1982 -1997 Fannie Mae 7. 56 1984 -1999 Gillette 7. 39 1980 -1995 Kimberly-Clark 3. 42 1972 -1987 Kroger 4. 17 1973 -1988 Nucor 5. 16 1975 -1990 Philip Morris 7. 06 1964 -1979 Pitney Bowes 7. 16 1973 -1988 Walgreens 7. 34 1975 -1990 Wells Fargo 3. 99 1983 -1998

Current news � Clock ticking for Circuit City's survival Bankrupt electronics seller says it has until next week to reach deal with 'potential' buyers for its business or else it may have to start liquidating. (cnn money 1/9/2009) � Fannie Mae Bail out

Phase 2: Compared to What? Comparison - Contrasting good-to-great companies to a carefully selected set of “comparison companies. Crucial Question - What did the good-to-great companies share in common? OR -What did the good-to-great companies share in common that distinguished them from the comparison companies?

Phase 2: continued Selected two sets of comparison companies. Set 1 – Consisted of “direct comparisons” – companies 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 showed no leap from good to great.

Direct Comparison Selection Process The teams performed a systematic and methodical collection and scoring of all obvious comparison candidates for each good-to-great company, using the following six criteria. 1. Business Fit: Had similar products and services as the good-to-great company. 2. Size Fit: Was the same basic size as the good-to great company.

Direct Comparison Selection Process cont. 3. Age Fit: Was founded in the same era as the good-to -great companies. 4. 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. 5. Conservative Test: At the time of transition, the comparison candidate was more successful than the good-to-great company – larger and more profitable with a stronger market position and reputation.

Direct Comparison Selection Process cont. 6. Face Validity: Takes into account two different factors: First, the comparison candidate is in a similar line of business at the time of selection into the study. Second, the comparison candidate is less successful than the good-to-great company at the time of selection into the study. Face validity and conservative test work together. Conservative test ensures that the comparison company was stronger than good-to-great company at the year of the good-to -great company’s transition and face validity ensures the comparison company was weaker that the good-to-great company at the time of selection into the study. Companies scored on scale of 1 – 4.

Unsustained Comparison Unsustained comparison were companies that made a short-term shift from good-to-great but failed to maintain the trajectory-to address the question of sustainability. After all of this the team came up with twenty-eight companies: eleven good-to great, eleven direct comparison, and six unsustained comparisons.

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

Phase 3: Inside the Black Box � Collected articles on 28 companies, dating back 50+ years � Coded material into categories (600 articles) ◦ Strategy, leadership, technology, etc. � Conducted interviews with good-to-great executives (2000 pages) � The total project consumed people years of effort. � Held Weekly Debates over each of the 28 companies to draw conclusions and ask questions to “what it all means”

Phase 3 Continued…. � Built theory from the ground up, not to test or prove any theory. � Noticed the case that “dogs that DID NOT bark” which is the opposite of what we expect � Examples of Key facts noticed between good to great companies ◦ Celebrity CEO’s are negative, but happens 6 x more often. Most Good CEO’s come from Inside the company. ◦ Executive compensation means nothing & does not drive performance. ◦ There is no evidence that good-to-great companies spent more time on strategy. ◦ Good-to-great companies focused on what NOT to do and what to STOP doing to become great, instead of what to do

Phase 3 Continued…. � More examples…. ◦ Good-to-great companies focused on what NOT to do and what to STOP doing to become great, instead of what to do ◦ Technology has nothing to do with the transformation of good to great (it can help but not cause) ◦ Mergers play no role. 2 wrongs never make 1 right. ◦ Good-to-Great companies paid NO attention to managing change, motivating people, and creating alignment. These problems solve themselves in transition. ◦ These companies did not set up a process for transformation, but focused on the results. It all became clear in the end. ◦ You don’t have to be a great industry to begin with. (Many were actually terrible) It is a matter of conscious choice.

Phase 4 – Chaos to Concept � What was required to go from all the data, analyses, debates, and “dogs that did not bark” to the final findings in this book? ◦ “The best answer I can give is that is was an iterative process of 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, and rebuilding it yet again. � That process was repeated over and over, until everything was a coherent framework of concepts.

Opinions? � He reiterates many times that the concepts in the final framework of this book “were not my opinions!” While he cannot extract his own psychology and biases entirely, each and every finding in the book met a rigorous standard before the research teams deemed it significant. ◦ 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 pivotal years.

The Flywheel �Concept used to describe the break through when these companies transitioned from good to great. ◦ Think of the transformation as a process of buildup followed by breakthrough, broken into three broad stages: disciplined people, disciplined thought, and disciplined action.

Level 5 Leadership: The Build Up � The leaders that take companies from good to great do not share the personalities of high profile leaders � Instead they are self effacing, quiet, reserved and sometimes even shy � They are a blend of personal humility and professional will

First who…then what � Good-to-great leaders do not set a new vision and strategy first � Instead they get the right people on the “bus”, the wrong people off the “bus”, and then the right people in the right seats � After this is accomplished then they figure out where to “drive it” � “Most importantly, people are not the most important asset, the right people are”

Stockdale Paradox � “You 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. ”

The Hedgehog Concept � To go from good-to-great requires transcending the curse of competence � Just because something is a core business doesn’t mean that you can be the best at it. � If you cant be the best at the core business, then it cant be the foundation for a great company

A Culture of Discipline � All companies have a culture, some have discipline, but few have culture of discipline: ◦ When there is disciplined people, you don’t need hierarchy ◦ Disciplined thought, you don’t need bureaucracy ◦ Disciplined action, you don’t need excessive controls � Combine culture of discipline with entrepreneurship you get a great performance

Technology Accelerators � Good-to-great companies use technology as the primary means of igniting transformation � However, they are pioneers in the application of “carefully selected technologies”

Good To Great Formula � Good to great concepts + sustained great results + built to last concepts = enduring great company

Timeless Physics � While the world economy is constantly changing, the principles involving good to great companies never changes. � For example: During the early 1980’s the banking industry was completely transformed in about 3 years. One company applied the principles of good to great and produced great results making them one of the strongest banks in the United States. The bank was Wells Fargo.

Takeaways � Good is the enemy of great. � What is systematically different between the “good” and the “great” companies? � Leaders are more like Lincoln and Socrates than Patton or Caesar. �Any questions?