Good to GreatGood to GreatChapter 7Chapter 7

Technology AcceleratorsTechnology Accelerators

Level 5Leadership

First Who…Then What

Confront theBrutal Facts

HedgehogConcept

Culture ofDiscipline

TechnologyAccelerators

Disciplined People Disciplined Thought Disciplined Action

BuildupBreakthrough

TechnologyAccelerators

Good to Great

Technology Accelerators

Yet they often become pioneers in the application of carefully selected technologies.

Does it fit directly with your Hedgehog Concept?

Good-to-greats used technology as an accelerator of momentum, not a creator of it.

Good-to-greats avoid technology fads and bandwagons.

Technology Accelerators

Technology by itself is never a root cause of either greatness or decline.

“Crawl, walk, run” can be a very effective approach, even during times of rapid and radical technological change.

CHAPTER 8The Flywheel and the Doom LoopThe Flywheel and the Doom Loop

Level 5Leadership

First Who…Then What

Confront theBrutal Facts

HedgehogConcept

Culture ofDiscipline

TechnologyAccelerations

Disciplined People Disciplined Thought Disciplined Action

BuildupBreakthrough

Flywheel

Good to Great

The Flywheel

Good-to-great transformations never happened in one fell swoop.

There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment.

Instead they followed a predictable pattern of buildup and breakthrough.

Like pushing on a giant, heavy flywheel, it takes a lot of effort to get the thing moving at all, but . . .

The Flywheel

With persistent pushing . . . In a consistent direction . . .Over a long period of time . . .

In good-to-great companies problems of commitment, alignment, motivation, and change largely take care of themselves.

Alignment follows from results and momentum, not the other way around.

The flywheel builds momentum . . .Eventually hitting a point of breakthrough.

THE FLYWHEEL AND THE DOOM LOOP

““Step by step, action by action, decision by decision, Step by step, action by action, decision by decision, turn by turn of the flywheel – that adds up to turn by turn of the flywheel – that adds up to sustained and spectacular resultssustained and spectacular results” (p.165).” (p.165).

THE FLYWHEEL AND THE DOOM LOOP

“ “Tremendous power exists in the fact of Tremendous power exists in the fact of continued improvement and the delivery of continued improvement and the delivery of results. Point to tangible accomplishments … results. Point to tangible accomplishments … people see and feel the buildup of momentum, people see and feel the buildup of momentum, they will line up with enthusiasmthey will line up with enthusiasm” (p.174).” (p.174).

Media’s influence on our perceptionsMedia’s influence on our perceptions

Often, the media doesn’t cover a company until Often, the media doesn’t cover a company until the flywheel is already turning at a thousand the flywheel is already turning at a thousand rotations per minute.rotations per minute.

Skews our perception of how the Skews our perception of how the transformation happenstransformation happens

Portrays the transformation as some sort of an Portrays the transformation as some sort of an overnight metamorphosisovernight metamorphosis

Circuit City – turning the flywheelCircuit City – turning the flywheel

Alan Wurtzel – CEO in 1973Alan Wurtzel – CEO in 1973Struggling with a crushing debt loadStruggling with a crushing debt loadImplemented a warehouse Implemented a warehouse

showroom styleshowroom style1982 – with 9 years of turning the 1982 – with 9 years of turning the

flywheelflywheelWithin the next 5 years C.C. shifted Within the next 5 years C.C. shifted

entirely to this conceptentirely to this concept

Circuit City Cont.Circuit City Cont.Generated highest total return to Generated highest total return to

shareholders of any company on the NYSE shareholders of any company on the NYSE Cumulative stock returns 22x better than the Cumulative stock returns 22x better than the

market market (Intel, Wal-Mart, GE, Hewlett-Packard and (Intel, Wal-Mart, GE, Hewlett-Packard and Coca-Cola)Coca-Cola)

There were not any articles of significance in There were not any articles of significance in the decade leading up to the transitionthe decade leading up to the transition

After the transition there were 97 articles After the transition there were 97 articles worth examining worth examining

22 with significant information22 with significant information

What is this Transformation called?What is this Transformation called?

• The good to great companies had no name The good to great companies had no name for their transformationsfor their transformations

• No launch event, no tag line, no No launch event, no tag line, no programmatic feel whatsoever programmatic feel whatsoever

• Some say that executives weren't even Some say that executives weren't even aware that a major transformation was aware that a major transformation was under way until they were well into it.under way until they were well into it.

• Often more obvious to them after the fact Often more obvious to them after the fact than at the timethan at the time

There is no miracle moment!There is no miracle moment!It may look like a single-stroke breakthrough to It may look like a single-stroke breakthrough to

those viewing it from the outsidethose viewing it from the outsidePeople on the inside see it as a deliberate People on the inside see it as a deliberate

process of figuring out what needs to be done to process of figuring out what needs to be done to create the best future resultscreate the best future results

Then take those steps, one after the other, turn Then take those steps, one after the other, turn by turn of the flywheel.by turn of the flywheel.

Consistent pushing of the flywheel over an Consistent pushing of the flywheel over an extended point of timeextended point of time

Inevitably you will hit a point of breakthroughInevitably you will hit a point of breakthrough

Not Just A Luxury of CircumstanceNot Just A Luxury of Circumstance

• Good-to-Great companies paid no Good-to-Great companies paid no attention to long term constraints.attention to long term constraints.– Instead, they embraced those constraintsInstead, they embraced those constraints

• This also applies to the short-term This also applies to the short-term pressures of Wall Streetpressures of Wall Street

• The key is to harness they flywheel to The key is to harness they flywheel to manage these short-term pressuresmanage these short-term pressures

“The good-to-great companies were subject to the same short-term pressures from Wall Street as the comparison companies. Yet, unlike the comparison companies, they had the patience and discipline to follow the buildup-breakthrough flywheel model despite these pressures. And, in the end, they attained extraordinary results by Wall Street’s own measure of success.”

Blue PlansBlue Plans• Blue Plans- One method for managing short-term

pressures --- Abbot Labortories

• Each year, Abbot would tell analysts that it expected to grow 15%, for example. At the same time, it would set an internal goal of a much higher growth rate, say 25%– Meanwhile, it kept a ranked-ordered list of proposed

entrepreneurial projects that had not yet been funded, Blue Plans

– Abbot would then take the difference between the analysts growth rate and the actual growth rate and channel those funds into the Blue Plans

– This managed short term pressures while systematically investing in the future

Wall Street• Good-to-Great companies, such as Good-to-Great companies, such as

Abbot, effectively managed Wall Street Abbot, effectively managed Wall Street during their buildup-breakthrough yearsduring their buildup-breakthrough years

• These companies simply focused on These companies simply focused on accumulating results, often under accumulating results, often under promising and over deliveringpromising and over delivering

• As the results began to accumulate – as As the results began to accumulate – as the flywheel built momentum – the the flywheel built momentum – the investing community came along with investing community came along with great enthusiasmgreat enthusiasm

Flywheel EffectFlywheel Effect

Tremendous power exists in the fact of Tremendous power exists in the fact of continued improvement and the delivery of continued improvement and the delivery of results. Point to tangible results. Point to tangible accomplishments.accomplishments.

When you do this in such a way that people When you do this in such a way that people see and feel the buildup of momentum, see and feel the buildup of momentum, they will line up with enthusiasm. – This is they will line up with enthusiasm. – This is the flywheel effect and it applies not only to the flywheel effect and it applies not only to outside investors but also to internal outside investors but also to internal constituent groups.constituent groups.

Flywheel Effect

Flywheel EffectFlywheel EffectCollins found the question of alignment Collins found the question of alignment

was not a key challenge faced by good was not a key challenge faced by good to great companies.to great companies.

“Clearly, the good to great companies did get incredible commitment and alignment – they artfully managed change – but they never really spent much time thinking about it. It was utterly transparent to them. We learned that under the right conditions, the problems of commitment, alignment, motivation, and change just melt away. They largely take care of themselves.”

The Doom LoopThe Doom Loop

The Doom LoopThe Doom LoopInstead of a quiet & careful process of

figuring out what needed to be done and simply doing it…

Comparison Companies1. Frequently Launched New Programs

2. Made it a big deal to Motivate

3. Programs failed to produce lasting results

4. Fell inside the doom loop

The Doom Loop Continued…

The Doom Loop ContinuedThe Doom Loop Continued…• For Example:

– Warner-Lambert ( Comparison Company to Gillette)• 1979 – Aimed to be a Consumer Products Company• 1980 – Decided aim towards Health Care (went after Merck)• 1981 – Went back to Consumer Products• 1987 – Once again went back to Health Care• 1990 – Went back AGAIN to Consumer Products

The Doom Loop Continued…The Doom Loop Continued…– Warner Lambert Warner Lambert Continued…Continued…• Went back and forth from 1979 to 1998Went back and forth from 1979 to 1998• Each CEO tried to make a mark with him own Each CEO tried to make a mark with him own

programprogram• Fired 20,000 people in search of a breakthroughFired 20,000 people in search of a breakthrough• They would get results, but slack off, and couldn’t They would get results, but slack off, and couldn’t

sustain the momentum of a breakthrough flywheel.sustain the momentum of a breakthrough flywheel.• Finally Stock Returns Flattened and they disappeared Finally Stock Returns Flattened and they disappeared

as an independent company to Pfizer.as an independent company to Pfizer.

The Doom Loop Continued…The Doom Loop Continued…

• Two common patterns of the Doom Loop from company to company:

1. The Misguided Use of Acquisitions

2. Leaders Who Stop the Flywheel

The Misguided Use of AcquisitionsThe Misguided Use of Acquisitions

• ““When the going gets tough, we go When the going gets tough, we go shopping!” shopping!” – Pete Drucker observed that that the Pete Drucker observed that that the

drive for mergers and acquisitions drive for mergers and acquisitions comes less from sound reasoning comes less from sound reasoning and more from the fact that doing and more from the fact that doing deals is a much more exciting way to deals is a much more exciting way to spend your day than doing actual spend your day than doing actual work.work.

The Misguided Use of AcquisitionsThe Misguided Use of Acquisitions

• Why did the good-to-great companies Why did the good-to-great companies have a substantially higher success rate have a substantially higher success rate with acquisitions, especially major with acquisitions, especially major acquisitions?acquisitions?– The key to their success was that they The key to their success was that they

used acquisitions as an accelerator of used acquisitions as an accelerator of flywheel momentum, not a creator of it.flywheel momentum, not a creator of it.

– In contrast, the comparison companies In contrast, the comparison companies frequently tried to jump right to frequently tried to jump right to breakthrough via an acquisition or merger.breakthrough via an acquisition or merger.

Leaders Who Stop the FlywheelLeaders Who Stop the Flywheel

The other frequently observed doom loop pattern is that of new leaders who stepped in, stopped an already spinning flywheel, and threw it in an entirely new direction.For example: In 1978, Joseph Boyd became the

new CEO of Harris Corporation. His first key decision was to move the company headquarters from Ohio to Florida. In the early 80’s he also decided to divest the their printing division (their primary and very successful division) and go headlong into the office automation business. By 1988 the company had fallen over 70% behind its competitors.

The Flywheel as a Wraparound IdeaEach piece of the system reinforces the other parts.An integrated whole that is much more powerful than the sum of the parts.

How to Tell if You're on the Flywheel or in the Doom Loop

Flywheel Doom Loop

Follow a pattern of buildup leading to breakthrough.

Reach breakthrough by an accumulation of steps, one after the other, turn by turn of the flywheel; feels like an organic evolutionary process.

Confront the brutal facts to see clearly what steps must be taken to build momentum.

Attain consistency with clear Hedgehog Concept, resolutely staying within the three circles.

• Skip buildup and jump right to breakthrough.

• Implement big programs, radical change efforts, dramatic revolutions; chronic restructuring-always looking for a miracle moment or new savior.

• Embrace fads and engage in management hoopla, rather than confront the brutal facts.

• Demonstrate chronic inconsistency-lurching back and forth and out of the three circles.

Flywheel or Doom Loop cont’

Flywheel Doom Loop• Follow the pattern of disciplined

people (“first who”), disciplined thought, disciplined action.

• Harness appropriate technologies to your Hedgehog Concept, to accelerate momentum.

• Make major acquisitions after breakthrough (if at all)

• Spend little energy trying to motivate or align people.

• Let results do the most of the talking.

• Maintain consistency over time.

• Jump right to action, without disciplined though and without first getting the right people on the bus.

• Run about like Chicken Little in reaction to technology.

• Make major acquisitions before breakthrough.

• Spend a lot of energy trying to align and motivate people.

• Sell the future.• Inconsistency over time.

How to Start

• Level 5 Leaders

• Getting the right people on the bus.

• Completely understand the three circles of your Hedgehog Concept.

Takeaways

• Buildup and Breakthrough• Not just a Luxury of Circumstance• Flywheel Effect• Doom Loop• What to Do and What to Avoid

The Doom Loop

The Flywheel Effect

Building Vision

• Do we know what is core and what is not?

• What is our vision?• Do we have a good

BHAG?• What should be some of

our base camps?

Level 5Leadership

First Who…Then What

Confront theBrutal Facts

HedgehogConcept

Culture ofDiscipline

TechnologyAccelerators

Disciplined People Disciplined Thought Disciplined Action

BuildupBreakthrough

Good to Great