WhySomeCompanies

MaketheLeap...

andOthersDon't

RANDOMHOUSE

BUSINESSBOOKS

Acknowledgments

ix

Preface

xiii

1:GoodIstheEnemyof

Great

1

2:Level5Leadership

17

3:FirstWho...ThenWhat

4

1

4:ConfronttheBrutalFacts

(YetNeverLoseFaith)

5:TheHedgehogConcept

(SimplicitywithintheThreeCircles)

6:ACultureofDiscipline

7:TechnologyAccelerators

8:TheFlywheelandtheDoomLoop

9:FromGoodtoGreattoBuilttoLast

EPILOGuE:FrequentlyAskedQuestions

ResearchAppendices

Notes

Index

C

H

A

P

T

E

R

1

That'swhatmakesdeathso

hard-unsatisfiedcuriosity.

-BERYL

WestwiththeNight1

odistheenemyofgreat.

Andthatisoneofthekeyreasonswhywehavesolittlethatbecomes

great.

Wedon'thavegreatschools,principallybecausewehavegoodschools.

Wedon'thavegreatgovernment,principallybecausewehavegoodgov-

ernment.Fewpeopleattaingreatlives,inlargepartbecauseitisjustso

easytosettleforagoodlife.Thevastmajorityof

companiesneverbecome

great,preciselybecausethevastmajoritybecomequitegood-andthatis

theirmainproblem.

Thispointbecamepiercinglycleartomein1996,whenIwashaving

dinnerwithagroupofthoughtleadersgatheredfor

adiscussionabout

organizationalperformance.BillMeehan,themanagingdirectorofthe

SanFranciscoofficeof

Company,leanedoverandcasually

confided,"Youknow,Jim,weloveBuilttoLastaroundhere.Youand

yourcoauthordidaveryfinejobontheresearchandwriting.Unfortu-

nately,it'suseless."

Curious,Iaskedhimtoexplain.

"Thecompaniesyouwroteaboutwere,forthemostpart,alwaysgreat,"

hesaid."Theyneverhadto

turnthemselvesfromgoodcompaniesinto

greatcompanies.TheyhadparentslikeDavidPackardandGeorge

Merck,whoshapedthecharacterofgreatnessfromearlyon.Butwhat

aboutthevastmajorityofcompaniesthatwakeuppartwaythroughlife

andrealizethatthey'regood,butnotgreat?"

InowrealizethatMeehanwasexaggeratingforeffectwithhis"useless"

comment,buthisessentialobservationwascorrect-

thattrulygreat

2

JimCollins

GoodtoGreat

3

panies,forthemostpart,havealwaysbeengreat.Andthevastmajorityof

goodcompaniesremainjustthat-good,butnotgreat.Indeed,Meehan's

commentprovedtobeaninvaluablegift,asitplantedtheseedofaques-

tionthatbecamethebasisofthisentirebook-namely,Canagoodcom-

panybecomeagreatcompanyand,ifso,how?Oristhediseaseof"just

beinggood"incurable?

Fiveyearsafterthatfatefuldinnerwecannowsay,withoutquestion,that

goodtogreatdoeshappen,andwe'velearnedmuchabouttheunderlying

variablesthatmakeithappen.InspiredbyBillMeehan'schallenge,my

researchteamandIembarkedonafive-yearresearcheffort,ajourneyto

exploretheinnerworkingsofgoodtogreat.

Toquicklygrasptheconceptoftheproject,lookatthechartonpage2."

Inessence,weidentifiedcompaniesthatmadetheleapfromgoodresults

togreatresultsandsustainedthoseresultsforatleastfifteenyears.Wecom-

paredthesecompaniestoacarefullyselectedcontrol

groupofcomparison

companiesthatfailedtomaketheleap,oriftheydid,failedtosustainit.

Wethencomparedthegood-to-greatcompaniestothecomparisoncom-

paniestodiscovertheessentialanddistinguishingfactorsatwork.

Thegood-to-greatexamplesthatmadethefinalcutintothestudy

attainedextraordinaryresults,averagingcumulativestockreturns6.9

timesthegeneralmarketinthefifteenyearsfollowingtheirtransition

Toputthatinperspective,GeneralElectric(considered

many

tobethebest-ledcompanyinAmericaattheendofthetwentiethcen-

tury)outperformedthemarketby2.8timesoverthefifteenyears1985to

Furthermore,ifyouinvested$1inamutualfundofthegood-to-

greatcompaniesin1965,holdingeachcompanyatthegeneralmarket

rateuntilthedateoftransition,and

invested$1inagen-

eralmarketstockfund,your$1inthegood-to-greatfundtakenouton

January

2000,wouldhavemultiplied471times,comparedtoa56fold

increaseinthe

Theseareremarkablenumbers,madeallthemoreremarkablewhen

youconsiderthefactthattheycamefromcompaniesthathadpreviously

beensoutterlyunremarkable.Considerjustonecase,Walgreens.Forover

fortyyears,Walgreenshadbumpedalongasaveryaveragecompany,

moreorlesstrackingthegeneralmarket.Thenin1975,seeminglyoutof

nowhere-bang!-Walgreensbeganto

...andclimb...and

descriptionofhowthechartsonpages2and4werecreatedappearsinchapter1

notesattheendofthebook.

4

JimCollins

CumulativeStockReturnsof$1Invested,

1965-2000

Good-to-Great

Companies:$471

$100

$93

0

1970

1976

1982

1988

1994

2000

Notes:

1.$1dividedevenlyacrosscompaniesineachset,January1,1965.

2.Eachcompanyheldatmarketrateofreturn,untiltransitiondate.

3.CumulativevalueofeachfundshownasofJanuary

2000.

4.

reinvested,adjustedforallstocksplits.

climb...andclimb...anditjustkeptclimbing.FromDecember1,

1975,toJanuary1,2000,$1investedinWalgreensbeat$1investedin

technologysuperstarIntelbynearlytwotimes,GeneralElectricbynearly

fivetimes,Coca-Colabynearlyeighttimes,andthe

generalstockmarket

(includingtheNASDAQstockrun-upattheendof1999)

overfifteen

times.*

Howonearthdidacompanywithsuchalonghistoryofbeingnothing

specialtransformitselfintoanenterprisethatoutperformedsomeofthe

best-ledorganizationsintheworld?AndwhywasWalgreensabletomake

theleapwhenothercompaniesinthesameindustrywiththesameoppor-

tunitiesandsimilar

resources,suchasEckerd,didnotmaketheleap?

Thissinglecasecapturestheessenceofourquest.

ThisbookisnotaboutWalgreensperse,oranyofthespecific

*Calculationsofstockreturnsusedthroughoutthisbookreflectthetotalcumulative

returntoaninvestor,dividendsreinvestedandadjustedforstocksplits.The"general

stockmarket"(oftenreferredtoassimply"themarket")reflectsthetotalityofstocks

tradedontheNewYorkExchange,AmericanStockExchange,andNASDAQ.Seethe

notestochapter1fordetailsondatasourcesandcalculations.

GoodtoGreat

5

nieswestudied.Itisaboutthequestion-Canagoodcompanybecomea

greatcompanyand,ifso,how?-andoursearchfortimeless,universal

answersthatcanbeappliedbyanyorganization.

Thisbookisdedicatedto

teachingwhatwe'velearned.Theremainder

ofthisintroductorychaptertellsthestoryofourjourney,outlinesour

researchmethod,andpreviewsthekeyfindings.Inchapter2,welaunch

headlongintothefindingsthemselves,beginningwithoneofthemost

provocativeofthewholestudy:Level5leadership.

UNDAUNTEDCURIOSITY

Peopleoftenask,"Whatmotivatesyoutoundertakethesehugeresearch

projects?"It'sagoodquestion.Theansweris,"Curiosity."Thereisnoth-

ingIfindmoreexcitingthanpickingaquestionthatIdon'tknowthe

answertoandembarkingonaquestforanswers.It'sdeeplysatisfyingto

climbintotheboat,likeLewisandClark,andheadwest,saying,"We

don'tknowwhatwe'llfindwhenwegetthere,

we'llbesuretoletyou

knowwhenwegetback."

Hereistheabbreviatedstoryofthisparticularodysseyofcuriosity.

Phase1:TheSearch

Withthequestioninhand,Ibegantoassembleateamofresearchers.

(WhenIuse"we"throughoutthisbook,Iamreferringtotheresearch

team.Inall,twenty-onepeopleworkedontheprojectatkeypoints,usu-

allyinteamsoffourtosixatatime.)

Ourfirsttaskwastofindcompaniesthatshowedthegood-to-greatpat-

ternexemplifiedinthechartonpage2.Welaunchedasix-month"death

marchoffinancialanalysis,"lookingforcompaniesthatshowedthe

6

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lowingbasicpattern:fifteen-yearcumulativestockreturnsatorbelowthe

generalstockmarket,

punctuatedbyatransitionpoint,thencumulative

returnsatleastthreetimesthemarketoverthenextfifteenyears.We

pickedfifteenyearsbecauseitwouldtranscendone-hitwondersand

luckybreaks(youcan'tjustbeluckyforfifteenyears)andwouldexceed

theaveragetenureofmostchiefexecutiveofficers(helpingustoseparate

greatcompaniesfromcompaniesthatjusthappenedtohaveasingle

greatleader).Wepickedthreetimesthemarketbecauseitexceedsthe

performanceofmostwidelyacknowledgedgreat

companies.Forper-

spective,amutualfundofthefollowing"marquisset"ofcompaniesbeat

themarketbyonly2.5timesovertheyears1985to2000:

Boeing,

Coca-Cola,GE,Hewlett-Packard,Intel,Johnson

Johnson,Merck,

Motorola,Pepsi,Procter

Gamble,Wal-Mart,andWaltDisney.Nota

badsettobeat.

FromaninitialuniverseofcompaniesthatappearedontheFortune500

intheyears1965to1995,we

systematicallysearchedandsifted,eventually

findingelevengood-to-greatexamples.(I'veputadetaileddescriptionof

oursearchinAppendixl.A.)However,acoupleofpointsdeservebrief

mentionhere.First,acompanyhadtodemonstratethegood-to-greatpat-

ternindependentofitsindustry;ifthewholeindustryshowedthesamepat-

tern,wedroppedthecompany.Second,wedebatedwhetherweshould

useadditionalselectioncriteriabeyondcumulativestockreturns,suchas

impactonsocietyand

employeewelfare.Weeventuallydecidedtolimit

ourselectiontothegood-to-greatresultspattern,aswecouldnotconceive

ofanylegitimateandconsistentmethodforselectingontheseothervari-

ableswithoutintroducingourownbiases.Inthelastchapter,however,I

addresstherelationshipbetweencorporatevaluesandenduringgreatcom-

panies,butthefocusofthisparticularresearcheffortisontheveryspecific

questionofhowtoturnagoodorganizationintoonethatproducessus-

tainedgreatresults.

Atfirstglance,weweresurprisedbythelist.Whowouldhavethought

thatFannieMaewouldbeatcompanieslikeGEandCoca-Cola?Orthat

WalgreenscouldbeatIntel?Thesurprisinglist-adowdiergroupwould

behardtofind-taughtusakeylessonrightupfront.It

ispossibletoturn

goodintogreatinthemostunlikelyofsituations.Thisbecamethefirstof

manysurprisesthatledustoreevaluateourthinkingaboutcorporate

greatness.

GoodtoGreat

9

Phase3:InsidetheB

lackBox

Wethenturnedourattentiontoadeepanalysisofeachcase.Wecol-

lectedallarticlespublishedonthetwenty-eightcompanies,datingback

fiftyyearsormore.Wesystematicallycodedallthematerialintocate-

gories,suchasstrategy,technology,leadership,andsoforth.Thenwe

interviewedmostofthegood-to-greatexecutiveswhoheldkeypositionsof

responsibilityduringthetransitionera.Wealsoinitiatedawiderangeof

qualitativeandquantitativeanalyses,lookingat

everythingfromacquisi-

tionstoexecutivecompensation,frombusinessstrategytocorporatecul-

ture,fromlayoffstoleadershipstyle,fromfinancialratiostomanagement

turnover.Whenallwassaidanddone,thetotalprojectconsumed10.5

peopleyearsofeffort.Wereadandsystematicallycodednearly6,000arti-

cles,generatedmorethan2,000pagesofinterviewtranscripts,andcre-

ated384millionbytesofcomputerdata.(SeeAppendix1

foradetailed

listofallouranalysesandactivities.)

Wecametothinkofourresearcheffortasakintolookinginsideablack

box.Eachstepalongthewaywaslikeinstallinganotherlightbulbtoshed

lightontheinnerworkingsofthegood-to-greatprocess.

Withdatainhand,webeganaseriesofweeklyresearch-teamdebates.

Foreachofthetwenty-eightcompanies,membersoftheresearchteam

andIwouldsystematicallyreadallthearticles,analyses,interviews,and

theresearchcoding.Iwouldmakeapresentationtothe

teamonthatspe-

cificcompany,drawingpotentialconclusionsandaskingquestions.Then

wewoulddebate,disagree,poundontables,raiseourvoices,pauseand

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reflect,debatesomemore,pauseandthink,discuss,resolve,question,and

debateyetagainabout"whatitallmeans."

Thecoreofourmethodwasasystematicprocessofcontrastingthe

good-to-greatexamplestothecomparisons,alwaysasking,"What'sdiffer-

ent?"

Wealsomadeparticularnoteof"dogsthatdidnotbark."IntheSher-

lockHolmesclassic"TheAdventureofSilverBlaze,"Holmesidentified

"thecuriousincidentofthedoginthenight-time7'asthekeyclue.Itturns

outthatthedogdidnothinginthenighttimeandthat,accordingto

Holmes,wasthecuriousincident,whichledhimtotheconclusionthat

theprimesuspectmusthavebeensomeonewhoknewthe

dogwell.

Inourstudy,whatwedidn'tfind-dogsthatwemighthaveexpectedto

barkbutdidn't-

turnedouttobesomeofthebestcluestotheinnerwork-

ingsofgoodtogreat.Whenwesteppedinsidetheblackboxandturned

onthelightbulbs,wewerefrequentlyjustasastonishedatwhatwedidnot

seeaswhatwedid.Forexample:

Larger-than-life,celebrityleaderswhorideinfromtheoutsideare

negativelycorrelatedwithtakingacompanyfromgoodtogreat.Ten

ofelevengood-to-greatCEOscamefrominsidethecompany,

whereasthecomparisoncompaniestriedoutsideCEOssixtimes

moreoften.

Wefoundnosystematicpatternlinkingspecificformsofexecutive

compensationtotheprocessofgoingfromgoodtogreat.Theidea

thatthestructureofexecutivecompensationisakeydriverincorpo-

rateperformanceissimplynotsupportedbythedata.

Strategypersedidnotseparatethegood-to-greatcompaniesfromthe

comparisoncompanies.Bothsetsofcompanieshadwell-defined

strategies,andthereisnoevidencethatthegood-to-greatcompanies

spent

strategic

soncompanies.

GoodtoGreat

Thegood-to-greatcompaniesdidnotfocusprincipallyonwhattodo

tobecomegreat;theyfocusedequally

--

onwhatnottodoand

stopdoing.

.

Technologyandtechnology-drivenchangehasvirtuallynothingtodo

withignitingatransformationfromgoodtogreat.

accelerateatransformation,buttechnologycannotcause

atransfor-

mation.

--

Mergersandacquisitionsplayvirtuallynoroleinignitingatransfor-

mationfromgoodtogreat;twobigmediocritiesjoinedtogethernever

makeonegreatcompany.

Thegood-to-greatcompaniespaidscantattentiontomanaging

change,motivatingpeople,orcreatingalignment.Undertheright

conditions,theproblemsofcommitment,alignment,motivation,and

changelargelymeltaway.

Thegood-to-greatcompanieshadnoname,tagline,launchevent,or

programtosignifytheirtransformations.Indeed,somereportedbeing

unawareofthemagnitudeofthetransformationatthetime;only

later,inretrospect,diditbecomeclear.Yes,theyproducedatrulyrev-

olutionaryleapinresults,butnotbyarevolutionaryprocess.

Thegood-to-greatcompanieswerenot,byandlarge,ingreatindus-

tries,andsomewereinterribleindustries.Innocase

dowehavea

companythatjusthappenedtobesittingonthenoseconeofarocket

whenittookoff.Greatnessisnotafunctionofcircumstance.Great-

ness,itturnsout,islargelyamatterofconsciouschoice.

Phase4:ChaostoCo

ncept

I'vetriedtocomeupwithasimplewaytoconveywhatwasrequiredtogo

fromallthedata,analyses,debates,and"dogsthatdidnot

tothe

finalfindingsinthisbook.ThebestanswerIcangiveis

thatitwasan

of

backandforth,developingideasandtestingthem

againstthedata,revisingtheideas,buildingaframework,

undertheweightofevidence,andrebuilding

Thatprocess

wasrepeatedoverandover,untileverythinghungtogetherinacoherent

frameworkofconcepts.Weallhaveastrengthortwoinlife,andIsuppose

mineistheabilitytotakealumpofunorganizedinformation,seepat-

terns,andextractorderfromthemess-to

to

Thatsaid,however,Iwishtounderscoreagainthattheconceptsinthe

finalframeworkarenotmy"opinions."WhileIcannotextractmyown

12

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psychologyandbiasesentirelyfromtheresearch,eachfindinginthefinal

frameworkmetarigorousstandardbeforetheresearchteamwoulddeem

itsignificant.Everyprimaryconceptinthefinalframeworkshowedupas

achangevariablein100percentofthegood-to-greatcompaniesandin

lessthan

percentofthecomparisoncompaniesduringthepivotal

years.Anyinsightthatfailedthistestdidnotmakeitintothebookasa

chapter-levelconcept.

Here,then,isanoverviewoftheframeworkofconceptsandapreview

ofwhat'stocomeintherest

ofthebook.(Seethediagrambelow.)Think

ofthetransformationasaprocessofbuildupfollowedbybreakthrough,

brokenintothreebroadstages:

people,disciplinedthought,

anddisciplinedaction.Withineachofthesethree

stages,therearetwo

concepts,shownintheframeworkanddescribedbelow.Wrapping

aroundthisentireframeworkisaconceptwecametocalltheflywheel,

whichcapturesthegestaltoftheentireprocessofgoingfromgoodto

great.

Level5Leadership.Weweresurprised,shockedreally,todiscoverthe

typeofleadershiprequiredforturningagoodcompanyintoagreatone.

Comparedtohigh-profileleaderswithbigpersonalitieswhomakehead-

linesandbecomecelebrities,thegood-to-greatleadersseemtohavecome

fromMars.Self-effacing,quiet,reserved,evenshy-theseleadersarea

GoodtoGreat

paradoxicalblendofpersonal

andprofessionalwill.Theyare

morelikeLincolnand

than

orCaesar.

FirstWho...ThenWhat.Weexpectedthatgood-to-greatleaderswould

beginbysettinganewvisionandstrategy.Wefoundinsteadthat

first

gottherightpeopleonthebus,thewrongpeopleoffthebus,andtheright

peopleintherightseats-andthentheyfiguredoutwheretodriveit.The

oldadage"Peopleareyourmostimportantasset"turnsouttobewrong.

Peoplearenotyourmostimportantasset.Theright

peopleare.

I

the

Facts(YetNeverLoseFaith).Welearnedthatafor-

merprisonerofwarhadmoretoteachusaboutwhatittakestofindapath

togreatnessthanmostbooks

oncorporatestrategy.Everygood-to-great

companyembracedwhatwecametocalltheStockdaleParadox:Youmust

maintainunwaveringfaiththatyoucanandwillprevailintheend,regard-

lessofthedifficulties,ANDatthesametimehavethedisciplinetocon-

frontthemostbrutalfactsofyourcurrentreality,whatevertheymightbe.

TheHedgehogConcept(SimplicitywithintheThreeCircles).Togo

fromgoodtogreatrequires

curseofcompetence.Just

becausesomethingisyourcore

justbecause

beendoing

itforyearsorperhapsevendecades-doesnotnecessarilymeanyoucan

bethebestintheworldatit.Andifyoucannotbethebestintheworldat

yourcorebusiness,thenyourcorebusinessabsolutely

cannotformthe

basisofagreatcompany.Itmustbereplacedwithasimpleconceptthat

reflectsdeepunderstandingofthreeintersectingcircles.

ACultureofDiscipline.Allcompanieshaveaculture,somecompanies

havediscipline,butfew

companieshaveacultureofdiscipline.Whenyou

havedisciplinedpeople,youdon'tneedhierarchy.Whenyouhavedisci-

plinedthought,youdon'tneedbureaucracy.Whenyouhavedisciplined

action,youdon'tneedexcessivecontrols.Whenyoucombineacultureof

disciplinewithanethicofentrepreneurship,yougetthemagicalalchemy

ofgreatperformance.

.

TechnologyAccelerators.Good-to-greatcompaniesthinkdifferently

abouttheroleoftechnology.Theyneverusetechnologyas

theprimary

meansofignitingatransformation.Yet,paradoxically,theyarepioneers

intheapplicationofcarefullyselectedtechnologies.Welearnedthat

14

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technologybyitselfisneveraprimary,rootcauseofeithergreatnessor

decline.

TheFlywheelandtheDoomLoop.Thosewholaunchrevolutions,dra-

maticchangeprograms,andwrenchingrestructuringswill

almostcer-

tainlyfailtomaketheleapfromgoodtogreat.Nomatterhowdramatic

theendresult,thegood-to-greattransformationsneverhappenedinone

fellswoop.Therewasnosingledefiningaction,nograndprogram,no

onekillerinnovation,nosolitaryluckybreak,nomiraclemoment.

Rather,theprocessresembledrelentlesslypushingagiantheavyflywheel

inonedirection,turnuponturn,buildingmomentumuntilapointof

breakthrough,andbeyond.

FromGoodtoGreattoBuilttoLast.Inanironictwist,InowseeGoodto

notasasequeltoBuilttoLast,butasmoreofa

Thisbookis

abouthowtoturnagoodorganizationintoonethatproducessustainedgreat

results.BuilttoLastisabout

howyoutakeacompanywithgreatresultsand

turnitintoanenduringgreatcompanyoficonicstature.Tomakethatfinal

shiftrequirescorevaluesandapurposebeyondjustmakingmoneycom-

binedwiththekeydynamicofpreservethecorestimulateprogress.

Goodto

Sustained

Builtto

Enduring

Great

Great

+Last

Great

Concepts

Results

Concepts

Company

If

arealreadyastudentofBuilttoLast,pleasesetasideyourques-

tionsaboutthepreciselinksbetweenthetwostudiesasyouembarkupon

thefindingsinGoodtoGreat.Inthelastchapter,Ireturntothisquestion

andlinkthetwostudiestogether.

THETIMELESS"PHYSICS"OFGOODTOGREAT

IhadjustfinishedpresentingmyresearchtoasetofInternetexecutives

gatheredataconference,whenahandshotup."Willyourfindingscon-

tinuetoapplyintheneweconomy?Don'tweneedtothrowoutallthe

oldideasandstartfromscratch?"It'salegitimate

question,aswedolivein

atimeofdramaticchange,anditcomesupsooftenthatI'dliketodis-

pensewithitrightupfront,beforeheadingintothemeatofthebook.

GoodtoGreat

Yes,theworldischanging,andwillcontinuetodoso.Butthatdoesnot

meanweshouldstopthesearchfortimelessprinciples.Thinkofitthis

way:Whilethepracticesofengineeringcontinuallyevolveandchange,

thelawsofphysicsremainrelativelyfixed.Iliketo

thinkofourworkasa

searchfortimelessprinciples-theenduringphysicsofgreatorganiza-

tions-thatwillremaintrueandrelevantnomatterhowtheworld

changesaroundus.Yes,thespecificapplicationwillchange(theengi-

neering),butcertainimmutablelawsoforganizedhumanperformance

(thephysics)willendure.

Thetruthis,there'snothingnewaboutbeinginaneweconomy.Those

whofacedtheinventionofelectricity,thetelephone,theautomobile,the

radio,orthetransistor-didtheyfeelitwasanylessofaneweconomy

thanwefeeltoday?Andineachrenditionoftheneweconomy,thebest

leadershaveadheredtocertainbasicprinciples,withrigoranddiscipline.

Somepeoplewillpointoutthatthescaleandpaceof

changeisgreater

todaythananytimeinthepast.Perhaps.Evenso,someofthecompanies

inourgood-to-greatstudyfacedratesofchangethatrivalanythinginthe

neweconomy.Forexample,duringtheearly

thebankingindustry

wascompletelytransformedinaboutthreeyears,asthefullweightof

deregulationcamecrashingdown.Itwascertainlyaneweconomyforthe

bankingindustry!YetWells

appliedeverysinglefindinginthisbook

toproducegreatresults,right

smackinthemiddleofthefast-paced

changetriggeredbyderegulation.

Thismightcomeasasurprise,butIdon'tprimarilythinkofmyworkas

aboutthestudyofbusiness,nordoIseethisasfundamentallyabusiness

book.Rather,Iseemyworkasbeingaboutdiscoveringwhatcreates

enduringgreatorganizationsofanytype.I'mcurioustounderstandthe

16

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fundamentaldifferencesbetweengreatandgood,betweenexcellentand

mediocre.Ijusthappentousecorporationsasameansofgettinginside

theblackbox.Idothisbecausepubliclytraded

corporations,unlikeother

typesoforganizations,havetwohugeadvantagesforresearch:awidely

agreedupondefinitionofresults(sowecanrigorouslyselectastudyset)

andaplethoraof

accessibledata.

Thatgoodistheenemyofgreatisnotjustabusinessproblem.Itisa

humanproblem.Ifwehavecrackedthecodeonthequestionofgoodto

great,weshouldhavesomethingofvaluetoanytypeoforganization.

Goodschoolsmightbecomegreatschools.Good

newspapersmight

becomegreatnewspapers.Goodchurchesmightbecomegreatchurches.

Goodgovernmentagenciesmightbecomegreatagencies.Andgoodcom-

paniesmightbecomegreatcompanies.

So,Iinviteyoutojoinmeon

anintellectualadventuretodiscoverwhat

ittakestoturngoodintogreat.Ialsoencourageyoutoquestionandchal-

lengewhatyoulearn.Asoneofmyfavoriteprofessorsoncesaid,"Thebest

students

thosewhoneverquitebelieve

theirprofessors."Trueenough.

Buthealsosaid,"Oneoughtnottorejectthedatamerelybecauseone

doesnotlikewhatthedataimplies."Ioffereverythinghereinforyour

thoughtfulconsideration,notblindacceptance.You'rethejudgeand

jury.Lettheevidencespeak.

C

H

A

P

T

E

R

2

Youcanaccomplishanythinginlife,providedthatyoudonot

mindwhogetsthecredit.

1971,aseeminglyordinarymannamedDarwinE.Smithbecame

chiefexecutiveofKimberly-Clark,astodgyoldpapercompanywhose

stockhadfallen36percentbehindthegeneralmarketovertheprevious

twentyyears.

Smith,thecompany'smild-manneredin-houselawyer,wasn'tsosure

theboardhadmadetherightchoice-afeelingfurtherreinforcedwhena

directorpulledSmithasideandremindedhimthathelackedsomeofthe

qualificationsforthe

ButCEOhewas,andCEOheremained

fortwentyyears.

Whatatwentyyearsitwas.Inthatperiod,Smithcreatedastunning

transformation,turningKimberly-Clarkintotheleadingpaper-based

consumerproductscompanyintheworld.Underhisstewardship,Kim-

berly-Clarkgeneratedcumulativestockreturns4.1

timesthegeneralmar-

ket,handilybeatingitsdirectrivalsScottPaperandProcter&Gamble

is

JimCollins

andoutperformingsuchvenerablecompaniesasCoca-Cola,Hewlett-

Packard,3M,andGeneralElectric.

Itwasanimpressiveperformance,oneofthebestexamplesinthetwen-

tiethcenturyoftakingagoodcompanyandmakingitgreat.Yetfewpeo-

ple-evenardentstudentsofmanagementandcorporate

history-know

anythingaboutDarwinSmith.Heprobablywouldhavelikeditthatway.

Amanwhocarriednoairsofself-importance,Smithfoundhisfavorite

companionshipamongplumbersandelectriciansandspenthisvacations

rumblingaroundhisWisconsinfarminthecabofabackhoe,digging

holesandmoving

Henevercultivatedherostatusorexecutive

celebrity

Whenajournalistaskedhimtodescribehismanage-

mentstyle,Smith,dressedunfashionablylikeafarmboywearinghisfirst

suitboughtatJ.C.Penney,juststaredbackfromtheothersideofhis

nerdy-lookingblack-rimmedglasses.Afteralong,uncomfortablesilence,

hesaidsimply:

TheWallStreetJournaldidnotwritea

splashyfeatureonDarwinSmith.

ButifyouweretothinkofDarwinSmithassomehowmeekorsoft,you

wouldbeterriblymis!aken.Has.awkwardshynessandlackofpretensewas

:

coupledwithafief$

-evenstoic,resolvetowardlife.Smithgrewupasa

poorIndianafarm-townboy,puttinghimselfthroughcollegebyworking

thedayshiftatInternationalHarvesterandattendingIndianaUniversity

atnight.Oneday,helostpartofafingeronthejob.Thestorygoesthathe

wenttoclassthateveningandreturnedtoworkthenextday.Whilethat

mightbeabitofanexaggeration,heclearlydidnotletalostfingerslow

downhisprogresstowardgraduation.Hekeptworking

full-time,hekept

goingtoclassatnight,andheearnedadmissiontoHarvardLaw

Laterinlife,twomonthsafterbecomingCEO,doctorsdiagnosedSmith

withnoseandthroatcancer,predictinghehadlessthanayeartolive.He

informedtheboardbutmadeitclearthathewasnotdeadyetandhadno

planstodieanytimesoon.Smithheldfullytohisdemandingworksched-

ulewhilecommutingweeklyfromWisconsintoHoustonforradiation

therapyandlivedtwenty-fivemoreyears,mostofthemas

CEO.'

SmithbroughtthatsameferociousresolvetorebuildingKimberly-

Clark,especiallywhenhemadethemostdramaticdecisioninthecom-

pany'shistory:Sellthe

ShortlyafterhebecameCEO,Smithand

histeamhadconcludedthatthetraditionalcorebusiness-coated

paper-wasdoomedtomediocrity.Itseconomicswerebadandthecom-

petition

But,theyreasoned,ifKimberly-Clarkthrustitselfintothe

GoodtoGreat

is

BEFOREDARWINSMITH

Kimberly-Clark,CumulativeValueof$1Invested,

1951-1971

GeneralMarket:

58.30

DARWINSMITHTENURE

Kimberly-Clark,CumulativeValueof$1Invested,

1971-1991

Kimberly-Clark:

$39.87

GeneralMarket:

$9.81

20

JimCollins

E

oughaparadoxical

vandprofessional

will.

LEADER'

fireoftheconsumerpaper-productsindustry,world-

classcompetitionlike

Procter&Gamblewouldforceittoachievegreatnessorperish.

So,likethegeneralwhoburnedtheboatsuponlanding,leavingonly

oneoption(succeedordie),Smithannouncedthedecisiontosellthe

mills,inwhatoneboardmembercalledthegutsiestmovehe'deverseen

aCEOmake.SelleventhemillinKimberly,Wisconsin,andthrowall

theproceedsintotheconsumerbusiness,investinginbrandslikeHuggies

and

ThebusinessmediacalledthemovestupidandWallStreetanalysts

downgradedthestock."Smithneverwavered.Twenty-fiveyearslater,

Kimberly-ClarkownedScottPaperoutrightandbeatProcter&Gamble

insixofeightproduct

Inretirement,Smithreflectedonhis

exceptionalperformance,sayingsimply,"Ineverstoppedtryingto

becomequalifiedforthe

GoodtoGreat

21

NOTWHATWEEXPECTED

I

DarwinSmithstandsasaclassicexampleofwhatwecametocallaLevel

i

5leader-anindividualwhoblendsextremepersonalhumilitywith

intenseprofessionalwill.Wefoundleadersofthistypeatthehelmof

everygood-to-greatcompanyduringthetransitionera.LikeSmith,they

wereself-effacingindividualswhodisplayed

thefierceresolvetodowhat-

everneededtobedonetomakethecompanygreat.

ThetermLevel5referstothehighestlevelinahierarchyofexecutive

capabilitiesthatweidentifiedinourresearch.(Seethediagramonpage

20.)Whileyoudon'tneedto

moveinsequencefromLevel1toLevel

5-itmightbepossibletofillinsomeofthelowerlevelslater-fully

developedLevel5leadersembodyallfivelayersofthepyramid.Iamnot

goingtobelaborallfivelevelshere,asLevels1through4aresomewhat

self-explanatoryandarediscussedextensivelybyotherauthors.This

chapterwillfocusinsteadonthedistinguishingtraitsofthegood-to-great

leaders-namelylevel5traits-incontrasttothecomparisonleadersin

ourstudy.

Butfirst,pleasepermitabriefdigressiontosetanimportantcontext.

WewerenotlookingforLevel5leadershiporanythinglikeit.Infact,I

gavetheresearchteamexplicitinstructionstodownplaytheroleoftop

executivessothatwecouldavoidthesimplistic"credit

theleader"or

"blametheleader"thinkingcommontoday.

Touseananalogy,the"Leadershipistheanswertoeverything7'perspec-

tiveisthemodernequivalentofthe"Godistheanswertoeverything"per-

spectivethatheldbackour

scientificunderstandingofthephysicalworld

intheDarkAges.Inthe1500s,peopleascribedalleventstheydidn't

understandtoGod.Whydidthecropsfail?Goddidit.Whydidwehave

anearthquake?Goddidit.Whatholdstheplanetsinplace?God.Butwith

22

JimCollins

theEnlightenment,webeganthesearchforamorescientificunderstand-

ing-physics,chemistry,biology,andsoforth.Notthatwebecameathe-

ists,butwegaineddeeperunderstandingabouthowtheuniverseticks.

Similarly,everytimeweattributeeverythingto"Leadership,"we'reno

differentfrompeopleinthe1500s.We'resimplyadmittingourignorance.

Notthatweshouldbecomeleadershipatheists

(leadershipdoesmatter),

buteverytimewethrowourhandsupinfrustration-revertingbackto

"Well,theanswermustbeLeadership!"-wepreventourselvesfromgain-

ingdeeper,morescientificunderstandingaboutwhatmakesgreatcom-

paniestick.

So,earlyintheproject,Ikeptinsisting,"Ignoretheexecutives."Butthe

researchteamkeptpushingback,"No!Thereissomethingconsistently

unusualaboutthem.Wecan'tignorethem."AndI'drespond,"Butthe

comparisoncompaniesalsohadleaders,evensomegreatleaders.So,

what'sdifferent?"Backandforththedebateraged.

Finally-asshouldalwaysbethecase-thedatawon.

Thegood-to-greatexecutiveswereallcutfromthesamecloth.Itdidn't

matterwhetherthecompanywasconsumerorindustrial,incrisisor

steadystate,offeredservicesorproducts.Itdidn'tmatterwhenthetransi-

tiontookplaceorhowbigthecompany.Allthegood-to-greatcompanies

hadLevel5leadershipatthetimeoftransition.

Furthermore,theabsence

ofLevel5leadershipshowedupasaconsistentpatterninthecomparison

companies.GiventhatLevel5leadershipcutsagainstthegrainofcon-

ventionalwisdom,especiallythebeliefthatweneedlarger-than-lifesav-

iorswithbigpersonalitiestotransformcompanies,itisimportanttonote

thatLevel5isanempiricalfinding,notanideologicalone.

HUMILITY+WILL=LEVEL5

Level5leadersareastudyinduality:modestandwillful,humbleand

fearless.Toquicklygraspthisconcept,thinkofUnitedStatesPresident

AbrahamLincoln(oneofthefewLevel5presidentsinUnitedStateshis-

tory),whoneverlethisegogetinthewayofhisprimaryambitionforthe

largercauseofanenduringgreatnation.Yetthosewho

mistookMr.Lin-

coln'spersonalmodesty,shynature,andawkwardmannerassignsof

weaknessfoundthemselvesterriblymistaken,tothescaleof250,000Con-

federateand360,000Unionlives,includingLincoln's

GoodtoGreat

23

Whileitmightbeabitofastretchtocomparethegood-

to-greatCEOs

toAbrahamLincoln,theydiddisplaythesameduality.Considerthecase

ofColmanMockler,CEOofGillettefrom1975to1991.DuringMock-

ler7stenure,Gillettefacedthreeattacksthatthreatenedtodestroythe

company'sopportunityforgreatness.Twoattackscameashostiletakeover

bidsfromRevlon,ledbyRonaldPerelman,acigar-chompingraiderwith

areputationforbreakingapartcompaniestopaydownjunkbondsand

financemorehostile

ThethirdattackcamefromConistonPart-

ners,aninvestmentgroupthatbought5.9percentofGillettestockand

initiatedaproxybattletoseizecontroloftheboard,hopingtosellthe

companytothehighestbidderandpocketaquickgainontheir

HadGillettebeenflippedtoPerelmanatthepriceheoffered,shareown-

erswouldhavereapedaninstantaneous44percentgainontheirstock."

Lookingata$2.3billionshort-termstockprofitacross116millionshares,

mostexecutiveswouldhavecapitulated,pocketing

millionsfromflipping

theirownstockandcashinginongenerousgolden

ColmanMocklerdidnotcapitulate,choosinginsteadtofightforthe

futuregreatnessofGillette,eventhoughhehimselfwouldhavepocketed

asubstantialsumonhisown

shares.Aquietandreservedman,always

courteous,Mocklerhadthereputationofagracious,almostpatriciangen-

tleman.YetthosewhomistookMockler'sreservednatureforweakness

foundthemselvesbeatenintheend.Intheproxyfight,seniorGillette

executivesreachedouttothousandsofindividualinvestors-personby

person,phonecallbyphonecall-andwonthebattle.

Now,youmightbethinking,"Butthatjustsoundslikeself-serving

entrenchedmanagementfightingfortheirinterestsattheexpenseof

shareholderinterests."Onthesurface,itmightlookthatway,butconsider

twokeyfacts.

First,Mocklerandhisteamstakedthecompany'sfutureonhugeinvest-

mentsinradicallynewandtechnologicallyadvancedsystems(laterknown

asSensorandMach3).Hadthetakeoverbeensuccessful,theseprojects

wouldalmostcertainlyhavebeencurtailedoreliminated,andnoneofus

wouldbeshavingwithSensor,SensorforWomen,ortheMach3-leaving

hundredsofmillionsofpeopletoamorepainful

dailybattlewith

Second,atthetimeofthetakeoverbattle,Sensorpromisedsignificant

futureprofitsthatwerenotreflectedinthestockpricebecauseitwasin

secretdevelopment.WithSensorinmind,theboardandMockler

believedthatthefuturevalueofthesharesfarexceededthecurrentprice,

24

JimCollins

COLMAN

MOCKLER'S

TRIUMPH

CumulativeValueof$1Invested,1976-1996

GilletteversusTakeoverBidandMarket

Gillette:$95.68

44%PremiumOfferedin

Takeover

GeneralMarket$1492

Thischartshowshowaninvestorwouldhavefaredunderthefollowing

scenarios:

$1invested

Gillette,heldfromDecember31,1976throughDecember31,1996.

$1investedinGillette.heldfromDecember31,1976butthensoldtoRonald

fora44.44%premiumonOctober31,1986.the

proceedstheninvestedin

thegeneralstockmarket.

3.$1investedinGeneralMarketheld

December31.1976throughDecember31,1996.

evenwiththepricepremiumofferedbytheraiders.Toselloutwould

havemadeshort-termshareflippershappybutwouldhavebeenutterly

irresponsibletolong-termshareholders.

Intheend,Mocklerandtheboardwereprovedright,stunninglyso.Ifa

shareflipperhadacceptedthe44percentpricepremiumofferedby

RonaldPerelmanonOctober31,1986,andtheninvestedthefullamount

inthegeneralmarketfortenyears,throughtheendof1996,hewould

havecomeoutthreetimesworseoffthanashareholderwhohadstayed

withMocklerand

Indeed,thecompany,itscustomers,andthe

shareholderswouldhavebeenillservedhadMocklercapitulatedtothe

raiders,pocketedhismillions,andretiredtoalifeofleisure.

Sadly,Mocklerwasneverabletoenjoythefullfruitsofhiseffort.On

January25,1991,theGilletteteamreceivedanadvancecopyofthecover

ofForbesmagazine,whichfeaturedanartist'srenditionofMocklerstand-

ingatopamountainholdingagiantrazorabovehisheadinatriumphal

pose,whilethevanquishedlanguishonthehillsides

below.Theother

GoodtoGreat

25

executivesrazzedthepublicity-shyMockler,whohadlikelydeclined

requeststobephotographedforthecoverinthefirstplace,amusedatsee-

inghimportrayedasacorporateversionofConantheTriumphant.Walk-

ingbacktohisoffice,minutesafterseeingthispublicacknowledgmentof

hissixteenyearsofstruggle,Mocklercrumpledtothe

floor,struckdeadby

amassiveheart

IdonotknowwhetherMocklerwouldhavechosentodieinharness,

butIamquiteconfidentthathewouldnothavechangedhisapproachas

chiefexecutive.Hisplacidpersonahidaninner

intensity,adedicationto

makinganythinghetouchedthebestitcouldpossiblybe-notjust

becauseofwhathewouldget,butbecausehesimplycouldn'timagine

doingitanyotherway.Itwouldn'thavebeenanoptionwithinColman

Mockler'svaluesystemtotaketheeasypathandturnthecompanyoverto

thosewhowouldmilkitlikeacow,destroyingitspotentialtobecome

great,anymorethanitwouldhavebeenanoptionforLincolntosuefor

peaceandloseforeverthechanceofanenduringgreat

nation.

AmbitionfortheCompany:SettingUpSuccessors

forSuccess

WhenDavidMaxwellbecameCEOofFannieMaein1981,thecompany

waslosing$1millioneverysinglebusinessday.Overthe

nextnineyears,

MaxwelltransformedFannieMaeintoahigh-performanceculturethat

rivaledthebestWallStreetfirms,earning$4millioneverybusinessday

andbeatingthegeneralstockmarket3.8to1.Maxwellretiredwhilestillat

thetopofhisgame,feelingthatthecompanywouldbeillservedifhe

stayedontoolong,andturnedthecompanyovertoanequallycapablesuc-

cessor,JimJohnson.Shortlythereafter,Maxwell'sretirementpackage,

whichhadgrowntobeworth$20millionbasedonFannie

Mae'sspectac-

ularperformance,becameapointofcontroversyinCongress(FannieMae

operatesunderagovernmentcharter).Maxwellrespondedbywritingalet-

tertohissuccessor,inwhichheexpressedconcernthatthecontroversy

wouldtriggeranadversereactioninWashingtonthatcouldjeopardizethe

futureofthecompany.HetheninstructedJohnsonnottopayhimthe

remainingbalance-$5.5million-andaskedthattheentireamountbe

contributedtotheFannieMaefoundationforlow-

income

DavidMaxwell,likeDarwinSmithandColmanMockler,exemplifieda

keytraitofLevel5leaders:ambitionfirstandforemostforthecompany

andconcernforitssuccessratherthanforone'sownrichesandpersonal

26

JimCollins

renown.Level5leaderswanttoseethecompanyeven

moresuccessfulin

thenextgeneration,comfortablewiththeideathatmostpeoplewon'teven

knowthattherootsofthatsuccesstracebacktotheirefforts.AsoneLevel5

leadersaid,"Iwanttolookoutfrommyporchatoneofthegreatcompa-

niesintheworldsomedayandbeabletosay,'Iusedtoworkthere.'"

Incontrast,thecomparisonleaders,concernedmorewiththeirown

reputationforpersonalgreatness,oftenfailedtosetthecompanyupfor

successinthenextgeneration.Afterall,what

bettertestamenttoyourown

personalgreatnessthanthattheplacefallsapartafteryouleave?

Inoverthreequartersofthecomparisoncompanies,wefoundexecu-

tiveswhosettheirsuccessorsupforfailure

orchoseweaksucces-

sors,orboth.

Somehadthe"biggestdog"syndrome-theydidn'tmindotherdogsin

thekennel,aslongastheyremainedthebiggestone.Onecomparison

CEOwassaidtohavetreatedsuccessorcandidates"thewayHenrythe

VIIItreated

ConsiderthecaseofRubbermaid,anunsustainedcomparisoncom-

panythatgrewfromobscuritytonumberoneonForfune'sannuallistof

America'sMostAdmiredCompaniesandthen,justasquickly,disinte-

gratedintosuchsorryshapethatithadtobeacquiredbyNewelltosave

itself.Thearchitectofthisremarkablestory,acharismaticandbrilliant

leadernamedStanleyGault,becamesynonymousinthelate1980swith

thesuccessofthecompany.In312articlescollectedon

Rubbermaid,

Gaultcomesthroughasahard-driving,egocentricexecutive.Inone

article,herespondstotheaccusationofbeingatyrantwiththestate-

ment,"Yes,butI'masincere

Inanother,drawndirectlyfrom

hisowncommentsonleadingchange,thewordIappearsforty-fourtimes

("Icouldleadthecharge";"Iwrotethetwelveobjectives";"Ipresented

andexplainedtheobjectives"),whereasthewordweappearsjustsixteen

Gaulthadeveryreasontobeproudofhisexecutive

success.

Rubbermaidgeneratedfortyconsecutivequartersofearningsgrowth

underhisleadership-animpressiveperformance,andonethatdeserves

respect.

But-andthisisthekeypoint-Gaultdidnotleavebehinda

company

thatwouldbegreatwithouthim.Hischosensuccessorlastedonlyone

GoodtoGreat

27

yearonthejobandthenextinlinefacedamanagementteamsoshallow

thathehadtotemporarilyshoulderfourjobswhilescramblingtoidentify

anewnumbertwo

Gault'ssuccessorsfoundthemselvesstrug-

glingnotonlywitha

managementvoid,butalsowithstrategicvoidsthat

wouldeventuallybringthecompanytoits

Ofcourse,youmightsay,"Yes,RubbermaidfellapartafterGault,but

thatjustproveshispersonalgreatnessasaleader."Exactly!Gaultwas

indeedatremendousLevel4leader,perhapsoneofthebestinthelast

fiftyyears.ButhewasnotaLevel5leader,andthatisonekeyreasonwhy

Rubbermaidwentfromgoodtogreatforabriefshiningmomentand

then,justasquickly,wentfromgreattoirrelevant.

ACompellingModesty

IncontrasttotheveryI-centricstyleofthecomparisonleaders,wewere

struckbyhowthegood-to-greatleadersdidn'ttalkaboutthemselves.Dur-

inginterviewswiththegood-to-greatleaders,they'dtalkaboutthecom-

panyandthecontributionsofotherexecutivesaslongaswe'dlikebut

woulddeflectdiscussionabouttheirowncontributions.Whenpressedto

talkaboutthemselves,they'dsaythingslike,"IhopeI'mnotsoundinglike

abigshot."Or,"Iftheboard

hadn'tpickedsuchgreatsuccessors,you

probablywouldn'tbetalkingwithmetoday."Or,"DidIhavealottodo

withit?Oh,thatsoundssoself-serving.Idon'tthinkIcantakemuch

credit.Wewereblessedwithmarvelouspeople."Or,"Thereareplentyof

peopleinthiscompanywhocoulddomyjobbetterthanIdo."

Itwasn'tjustfalsemodesty.Thosewhoworkedwithorwroteaboutthe

good-to-greatleaderscontinuallyusedwordslikequiet,humble,modest,

reserved,shy,gracious,mild-mannered,self-effacing,

understated,didnot

believehisownclippings;andsoforth.BoardmemberJimHlavacek

describedKenIverson,theCEOwhooversawNucor'stransformation

fromnearbankruptcytooneofthemostsuccessfulsteelcompaniesinthe

world:

Kenisaverymodestandhumbleman.I'veneverknownapersonassuc-

cessfulindoingwhathe'sdonethat'sasmodest.And,Iworkforalotof

CEOsoflargecompanies.Andthat'strueinhisprivatelifeaswell.The

simplicityofhim.Imeanlittlethingslikehealwaysgetshisdogsatthe

localpound.Hehasasimplehousethat'she'slivedinforages.Heonly

hasacarportandhecomplainedtomeonedayabouthowhehadtouse

28

JimCollins

hiscreditcardtoscrapethefrostoffhiswindowsandhebrokethecredit

card."Youknow,Ken,there'sasolutionforit;encloseyourcarport."

Andhesaid,"Ah,heck,itisn'tthatbigofadeal...."He'sthathumble

and

Theelevengood-to-greatCEOsaresomeofthemostremarkable

CEOsofthecentury,giventhatonlyelevencompaniesfromtheFortune

500mettheexactingstandardsforentryintothisstudy.Yet,despitetheir

remarkableresults,almostnooneeverremarkedaboutthem!George

Cain,AlanWurtzel,DavidMaxwell,ColmanMockler,DarwinSmith,

JimHerring,LyleEveringham,JoeCullman,FredAllen,CorkWalgreen,

CarlReichardt-howmanyoftheseextraordinary

executiveshadyou

heardof?

Thegood-to-greatleadersneverwantedtobecomelarger-than-life

heroes.Theyneveraspiredtobeputonapedestalorbecomeunreach-

ableicons.Theywereseeminglyordinarypeople

quietlyproducingextra-

ordinaryresults.

Someofthecomparisonleadersprovideastrikingcontrast.ScottPaper,

thecomparisoncompanytoKimberly-Clark,hiredaCEOnamedAl

Dunlap,amancutfromaverydifferentcloththan

DarwinSmith.Dun-

laploudlybeatonhisownchest,tellinganyonewhowouldlisten(and

manywhowouldprefernotto)aboutwhathehadaccomplished.Quoted

inBusinessWeekabouthisnineteenmonthsatopScottPaper,heboasted,

"TheScottstorywillgodownintheannalsofAmericanbusinesshistory

asoneofthemostsuccessful,quickestturnaroundsever,[making]other

turnaroundspaleby

AccordingtoBusinessWeek,Dunlappersonallyaccrued$100million

for603daysofworkatScottPaper(that's$165,000perday),largelyby

slashingtheworkforce,cuttingtheR&Dbudgetinhalf,andputtingthe

companyongrowthsteroidsinpreparationfor

Aftersellingoffthe

GoodtoGreat

29

companyandpocketinghis

quickmillions,Dunlapwroteabookabout

himself,inwhichhetrumpetedhisnicknameRamboinPinstripes."I

lovetheRambomovies,"hewrote."Here'saguywhohaszerochanceof

successandalwayswins.Rambogoesintosituationsagainstallodds,

expectingtogethisbrainsblownout.Buthedoesn't.Attheendoftheday

hesucceeds,hegetsridofthebadguys.Hecreatespeaceoutofwar.

That'swhatIdo,

DarwinSmithmayhaveenjoyedthemindless

Rambomoviesaswell,butI

suspectheneverwalkedoutofatheaterand

saidtohiswife,"Youknow,IreallyrelatetothisRambocharacter;he

remindsmeofme."

Wefoundthispatternparticularlystrongintheunsustainedcompar-

isons-caseswherethe

companywouldshowaleapinperformance

underatalentedyetegocentricleader,onlytodeclineinlateryears.Lee

Iacocca,forexample,savedChryslerfromthebrinkofcatastrophe,per-

formingoneofthemostcelebrated(anddeservedlyso)turnaroundsin

Americanbusinesshistory.Chryslerrosetoaheightof2.9timesthemar-

ketatapointabouthalfwaythroughhistenure.Then,however,he

divertedhisattentiontomakinghimselfoneofthemostcelebratedCEOs

inAmerican

businesshistory.Investor'sBusinessDailyandtheWallStreet

JournalchronicledhowIacoccaappearedregularlyontalkshowslikethe

TodayshowandLarryKingLive,personallystarredinovereightycom-

mercials,entertainedtheideaofrunningforpresidentof

theUnited

States(quotedatonepoint,"RunningChryslerhasbeenabiggerjobthan

runningthecountry....Icouldhandlethenationaleconomyinsix

months"),andwidelypromotedhisautobiography.Thebook,lacocca,

soldsevenmillioncopiesandelevatedhimtorockstarstatus,leadinghim

tobemobbedbythousandsofcheeringfansuponhisarrivalin

Iacocca'spersonalstocksoared,butinthesecondhalfofhistenure,

Chrysler'sstockfell31percentbehindthegeneral

market.

Sadly,Iacoccahadtroubleleavingcenterstageandlettinggoofthe

perksofexecutivekingship.Hepostponedhisretirementsomanytimes

30

JimCollins

thatinsidersatChryslerbegantojokethatIacocca

stoodfor"IAmChair-

manofChryslerCorporation

Andwhenhedidfinallyretire,he

demandedthattheboardcontinuetoprovideaprivatejetandstock

Later,hejoinedforceswithnotedtakeoverartistKirkKerkorian

tolaunchahostiletakeoverbidfor

Chryslerexperiencedabriefreturntogloryinthefiveyearsafter

Iacocca'sretirement,butthecompany'sunderlyingweaknesseseventu-

allyledtoabuyoutbyGermancarmaker

Certainly,the

demiseofChryslerasastand-alonecompanydoesnotrestentirelyon

Iacocca'sshoulders(thenextgenerationofmanagementmadethefateful

decisiontosellthecompanytotheGermans),butthefactremains:

Iacocca7sbrilliantturnaroundintheearly1980sdidnotprovetobesus-

tainedandChryslerfailedtobecomeanenduringgreatcompany.

UnwaveringResolve...toDoWhatMustBeDone

ItisveryimportanttograspthatLevel5leadershipisnot

justabout

humilityandmodesty.Itisequallyaboutferociousresolve,analmost

stoicdeterminationtodowhateverneedstobedonetomakethecom-

panygreat.

Indeed,wedebatedforalongtimeontheresearchteam

abouthowto

describethegood-to-greatleaders.Initially,wepenciledintermslike

"selflessexecutive7'and"servantleader."Butmembersoftheteamvio-

lentlyobjectedtothesecharacterizations.

"Thoselabelsdon'tring

true,"saidAnthonyChirikos."Itmakesthem

soundweakormeek,butthat'snotatallthewayIthinkofDarwinSmith

orColmanMockler.Theywoulddoalmostanythingtomakethecom-

panygreat."

ThenEveLisuggested,"Why

don'twejustcallthemLevel5leaders?

Ifweputalabellike'selfless'or'servant'onthem,peoplewillgetentirely

thewrongidea.Weneedtogetpeopletoengagewiththewholeconcept,

toseebothsidesofthecoin.Ifyouonlygetthehumilityside,youmissthe

wholeidea."

Level5leadersarefanaticallydriven,infectedwithanincurableneed

toproduceresults.Theywillsellthemillsorfiretheirbrother,ifthat's

whatittakestomakethecompanygreat.

WhenGeorgeCainbecameC

EOofAbbottLaboratories,itsatinthe

bottomquartileofthepharmaceuticalindustry,adrowsyenterprisethat

GoodtoGreat

31

hadlivedforyearsoffitscashcow,erythromycin.Caindidn'thavean

inspiringpersonalitytogalvanizethecompany,buthehadsomething

muchmorepowerful:inspiredstandards.Hecould

notstandmediocrity

inanyformandwasutterlyintolerantofanyonewhowouldacceptthe

ideathatgoodisgoodenough.Cainthensetouttodestroyoneofthekey

causesofAbbott'smediocrity:nepotism.

Systematicallyrebuilding

both

theboardandtheexecutiveteamwiththebestpeoplehecouldfind,Cain

madeitclearthatneitherfamilytiesnorlengthoftenurewouldhaveany-

thingtodowithwhetheryouheldakeypositioninthecompany.Ifyou

didn'thavethecapacitytobecomethebestexecutiveintheindustryin

yourspanofresponsibility,thenyouwouldloseyour

Suchrigorousrebuildingmightbeexpectedfromanoutsider

broughtintoturnthecompanyaround,butCainwasaneighteen-year

veteraninsiderandafamilymember,thesonofapreviousAbbottpres-

ident.Holidaygatheringswereprobablytenseforafewyearsinthe

Cainclan.("SorryIhadtofireyou.Wantanothersliceofturkey?")In

theend,though,familymemberswerequitepleased

withtheperfor-

manceoftheirstock,forCainsetinmotionaprofitablegrowth

machinethat,fromitstransitiondatein1974to2000,createdshare-

holderreturnsthatbeatthemarket4.5to1,handilyoutperformingindus-

trysuperstarsMerckandPfizer.

thedirectcomparisoncompanytoAbbott,alsohad

leadershipduringthesameeraasGeorgeCain.UnlikeGeorgeCain,

Upjohn'sCEOnevershowedthesameresolvetobreakthemediocrityof

nepotism.BythetimeAbbotthadfilledallkeyseatswiththebestpeople,

regardlessoffamilybackground,UpjohnstillhadBlevelfamilymembers

holdingkey

Virtuallyidenticalcompanieswithidenticalstock

chartsuptothepointof

transition,Upjohnthenfell89percentbehind

Abbottoverthenexttwenty-oneyearsbeforecapitulatinginamergerto

Pharmaciain1995.

Asaninterestingaside,DarwinSmith,ColmanMockler,andGeorge

Caincamefrominsidethe

company.StanleyGault,AlDunlap,andLee

Iacoccarodeinassaviorsfromtheoutside,trumpetsblaring.Thisreflects

amoresystematicfindingfromourstudy.Theevidencedoesnotsupport

theideathatyouneedanoutsideleadertocomeinandshakeupthe

placetogofromgoodtogreat.Infact,goingforahigh-profileoutside

changeagentisnegativelycorrelatedwithasustainedtransformationfrom

goodtogreat.(SeeAppendix2.A.)

32

JimCollins

Asuperbexampleofinsider-drivenchangecomesfromCharlesR.

"Cork"Walgreen3d,whotransformeddowdyWalgreensintoacompany

thatoutperformedthestockmarketbyoverfifteentimesfromtheendof

1975toJanuary1,

Afteryearsofdialogueanddebatewithinhis

executiveteamaboutWalgreens'food-serviceoperations,Corksensed

thattheteamhadfinallyreachedawatershedpointofclarityandunder-

standing:Walgreens'brightestfuturelayinconvenientdrugstores,not

foodservice.DanJorndt,whosucceededWalgreenasCEOin1998,

describedwhathappenednext:

Corksaidatoneofourplanningcommitteemeetings,"Okay,nowIam

goingtodrawthelineinthesand.Wearegoingtobeoutoftherestau-

rantbusinesscompletelyinfiveyears."Atthetime,wehadoverfive

hundredrestaurants.Youcouldhaveheardapindrop.

Hesaid,"Iwant

toleteverybodyknowtheclockisticking...."Sixmonthslater,wewere

atournextplanningcommitteemeetingandsomeonementionedjust

inpassingthatweonlyhadfiveyearstobeoutoftherestaurantbusiness.

Corkwasnotarealvociferousfellow.Hesortoftappedonthetableand

said,"Listen,youhavefourandahalfyears.Isaidyouhadfiveyearssix

monthsago.Nowyou'vegotfourandahalfyears."Well,thatnextday,

thingsreallyclickedintogeartowindingdownour

restaurantbusiness.

Heneverwavered.Heneverdoubted;henever

LikeDarwinSmithsellingthemillsatKimberly-Clark,CorkWal-

green'sdecisionrequiredstoicresolve.Notthatfoodservicewasthe

largestpartofthebusiness

(althoughitdidaddsubstantialprofitstothe

bottomline).Therealproblemwasmoreemotional.Walgreenshad,after

all,inventedthemaltedmilkshakeandfoodservicewasalong-standing

familytraditiondatingbacktohisgrandfather.Some

food-serviceoutlets

wereevennamedaftertheCEOhimself-arestaurantchainnamed

Corky's.Butnomatter,ifWalgreenshadtoflyinthefaceoflong-standing

familytraditioninordertofocusitsresourceswhereitcouldbethebestin

GoodtoGreat

33

theworld(convenientdrugstores),Corkwoulddoit.Quietly,doggedly,

Thequiet,doggednatureofLevel5leadersshowedupnotonlyinbig

decisions,likesellingoffthefood-serviceoperationsorfightingcorpo-

rateraiders,butalsoinapersonalstyleofsheerworkmanlikediligence.

AlanWurtzel,asecond-generationfamilymember

whotookoverhis

family'ssmallcompanyandturneditintoCircuitCity,perfectlycap-

turedthegestaltofthistrait.Whenaskedaboutdifferencesbetween

himselfandhiscounterpartCEOatCircuitCity'scomparisoncompany,

Wurtzelsummedup:"Theshowhorseandtheplowhorse-hewasmore

ofashowhorse,whereasIwasmoreofaplow

TheWindowandtheMirror

AlanWurtzel'splowhorsecommentisfascinatinginlightoftwoother

facts.First,heholdsadoctorofjurisprudencedegreefromYale-clearly,

hisplowhorsenaturehadnothingtodowithalackofintelligence.Sec-

ond,hisplowhorseapproachsetthestagefortrulybestinshowresults.Let

meputitthisway:Ifyouhadtochoosebetween$1

investedinCircuit

Cityor$1investedinGeneralElectriconthedaythatthelegendaryJack

WelchtookoverGEin1981andheldtoJanuary1,2000,youwouldhave

beenbetteroffwithCircuitCity-bysix

Notabadperformance,

foraplowhorse.

YoumightexpectthatextraordinaryresultslikethesewouldleadAlan

Wurtzeltodiscussthebrilliantdecisionshemade.Butwhenweasked

himtolistthetopfivefactorsinhiscompany'stransformation,rankedby

importance,Wurtzelgaveasurprisinganswer:Thenumberonefactor

wasluck."Wewereinagreatindustry,withthewindatourbacks."

Wepushedback,pointingoutthatweselectedthegood-to-greatcom-

paniesbasedonperformancethatsurpassedtheirindustry's

average.Fur-

thermore,thecomparisoncompany(Silo)wasinthesameindustry,with

thesamewindandprobablybiggersails!Wedebatedthepointforafew

minutes,withWurtzelcontinuinghispreferenceforattributingmuchof

hissuccesstojustbeingintherightplaceattherighttime.Later,when

askedtodiscussthefactorsbehindtheenduringnatureofthetransforma-

tion,hesaid,"Thefirstthingthatcomestomindisluck....Iwasluckyto

findtheright

Luck.Whatanoddfactortotalkabout.Yetthegood-to-greatexecu-

tivestalkedalotaboutluckinourinterviews.Inoneinterviewwitha

34

JimCollins

Nucorexecutive,weaskedwhythecompanyhadsucharemarkable

trackrecordofgooddecisions;heresponded:"Iguesswewerejust

JosephF.Cullman3d,theLevel5transitionCEOofPhilip

Morris,flat-outrefusedtotakecreditforhiscompany'ssuccess,attribut-

inghisgoodfortunetohavinggreatcolleagues,successors,andpredeces-

sor~.~~

Even

thebookhewrote-abookheundertookattheurgingofhis

colleagues,whichheneverintendedtodistributewidelyoutsidethe

company-hadtheunusualtitleI'maLuckyGuy.Theopeningpara-

graphreads:"Iwasavery

luckyguyfromtheverybeginningofmylife:

marvelousparents,goodgenes,luckyinlove,luckyinbusiness,and

luckywhenaYaleclassmatehadmyorderschangedtoreporttoWash-

ington,D.C.,inearly1941,insteadoftoashipthatwassunkwithall

handslostintheNorthAtlantic,luckytobeintheNavy,andluckytobe

aliveat

Wewereatfirstpuzzledbythisemphasisongoodluck.Afterall,we

foundnoevidencethatthegood-to-greatcompanieswereblessedwith

moregoodluck(ormorebadluck,forthatmatter)thanthecomparison

companies.Thenwebegantonoticeacontrastingpatterninthecompar-

isonexecutives:Theycreditedsubstantialblametobadluck,frequently

bemoaningthedifficultiesoftheenvironmenttheyfaced.

CompareBethlehemSteeltoNucor.Bothcompaniesoperatedinthe

steelindustryandproducedhard-to-differentiateproducts.Bothcompa-

niesfacedthecompetitivechallengeofcheapimportedsteel.Yetexecu-

tivesatthetwocompanieshadcompletelydifferent

viewsofthesame

environment.BethlehemSteel'sCEOsummedupthecompany'sprob-

lemsin1983byblamingimports:"Ourfirst,second,andthirdproblems

are

KenIversonandhiscrewatNucorconsideredthesame

challengefromimportsablessing,astrokeofgoodfortune("Aren'twe

lucky;steelisheavy,andtheyhavetoshipitallthewayacrosstheocean,

givingusahugeadvantage!").Iversonsawthefirst,second,andthird

problemsfacingtheAmericansteelindustrynot

tobeimports,butman-

Heevenwentsofarastospeakoutpubliclyagainstgovern-

mentprotectionagainstimports,tellingastunnedgatheringoffellow

steelexecutivesin1977thattherealproblemsfacingtheAmericansteel

industrylayinthefactthatmanagementhadfailedtokeeppacewith

Theemphasisonluckturnsouttobepartofapatternthatwecameto

callthewindowandthemirror.

GoodtoGreat

35

Thecomparisonleadersdidjusttheopposite.They'dlookoutthewin-

dowforsomethingorsomeoneoutsidethemselvestoblameforpoor

results,butwouldpreen

,

infrontofthemirrorandcreditthemselveswhen

thingswentwell.Strangely,thewindowandthemirrordonotreflect

objectivereality.Everyoneoutsidethewindowpointsinside,directlyat

theLevel5leader,saying,"Hewasthekey;withouthisguidanceand

leadership,wewouldnothavebecomeagreatcompany."AndtheLevel5

leaderpointsrightbackoutthewindowandsays,"Lookatallthegreat

peopleandgoodfortunethatmadethispossible;I'maluckyguy."They're

bothright,ofcourse.ButtheLevel5swouldneveradmit

thatfact.

CULTIVATINGLEVEL5LEADERSHIP

Notlongago,IsharedtheLevel5findingwithagatheringofseniorexec-

utives.Awomanwhohadrecentlybecomechiefexecutiveofhercom-

panyraisedherhandandsaid,"Ibelievewhatyousayaboutthe

good-to-greatleaders.ButI'mdisturbedbecausewhenIlookinthemir-

ror,IknowthatI'mnotLevel5,notyetanyway.PartofthereasonIgot

thisjobisbecauseofmyegodrives.Areyoutellingme

thatIcan'tmake

thisagreatcompanyifI'mnotLevel5?"

"Idon'tknowforcertainthatyouabsolutelymustbeaLevel5leaderto

makeyourcompanygreat,"Ireplied."Iwillsimplypointbacktothedata:

Of1,435companiesthat

appearedontheFortune500inourinitialcan-

didatelist,onlyelevenmadetheverytoughcutintoourstudy.Inthose

eleven,allofthemhadLevel5leadershipinkeypositions,includingthe

CEO,atthepivotaltimeoftransition."

Shesatthere,quietformoment,andyoucouldtelleveryoneinthe

roomwasmentallyurginghertoaskthequestion.Finally,shesaid,"Can

youlearntobecomeLevel5?"

36

JimCollins

Summary:TheTwoSidesofLevel5Leadership

ProfessionalWill

PersonalHumility

Createssuperbresults,aclear

Demonstratesacompelling

catalystinthetransitionfrom

modesty,shunningpublic

goodtogreat.

adulation;neverboastful.

Demonstratesanunwavering

Actswithquiet,calm

resolvetodowhatevermustbe

determination;reliesprincipally

donetoproducethebestlong-

oninspiredstandards,not

termresults,nomatterhow

inspiringcharisma,tomotivate.

difficult.

Setsthestandardofbuildingan

Channelsambitionintothe

enduringgreatcompany;will

company,nottheself;setsup

settlefornothingless.

successorsforevengreatersuccess

inthenextgeneration.

Looksinthemirror,notout

Looksoutthewindow,notinthe

thewindow,toapportion

mirror,toapportioncreditforthe

responsibilityforpoorresults,

successofthecompany-toother

neverblamingotherpeople,

people,externalfactors,andgood

externalfactors,orbadluck.

luck.

Myhypothesisisthattherearetwocategoriesofpeople:

thosewhodo

nothavetheseedofLevel5andthosewhodo.Thefirstcategoryconsists

ofpeoplewhocouldneverinamillionyearsbringthemselvestosubju-

gatetheiregoisticneedstothegreaterambitionofbuildingsomething

largerandmorelastingthanthemselves.Forthesepeople,workwill

alwaysbefirstandforemostaboutwhattheyget-fame,fortune,adula-

tion,power,whatever-notwhattheybuild,create,andcontribute.

GoodtoGreat

37

thattheyneedtohirealarger-than-life,egocentricleadertomakean

organizationgreat,youcanquicklyseewhyLevel5leadersrarely

appearatthetopofourinstitutions.

Thesecondcategoryofpeople-andIsuspectthelargergroup-con-

sistsofthosewhohavethepotentialtoevolvetoLevel5;thecapability

resideswithinthem,perhapsburiedorignored,buttherenonetheless.

Andundertherightcircumstances-self-reflection,consciouspersonal

development,amentor,agreatteacher,lovingparents,asignificantlife

experience,aLevel5boss,oranynumberofotherfactors-theybeginto

develop.

Inlookingatthedata,wenoticedthatsomeoftheleadersinourstudy

hadsignificantlifeexperiencesthatmighthavesparkedorfurtheredtheir

maturation.DarwinSmithfullyblossomedafterhisexperiencewithcan-

cer.JoeCullmanwasprofoundlyaffectedbyhis

WorldWarIIexperi-

ences,particularlythelast-minutechangeofordersthattookhimoffa

doomedshiponwhichhesurelywouldhave

Astrongreligious

belieforconversionmightalsonurturedevelopmentofLevel5traits.Col-

manMockler,forexample,convertedtoevangelicalChristianitywhile

gettinghisMBAatHarvard,andlater,accordingtothebookCutting

Edge,becameaprimemoverinagroupofBostonbusinessexecutives

whometfrequentlyoverbreakfasttodiscussthe

carryoverofreligiousval-

uestocorporate

Otherleadersinourstudy,however,hadnoobvi-

ouscatalyticevent;theyjustlednormallivesandsomehowendedupatop

theLevel5hierarchy.

Ibelieve-althoughIcannot

prove-thatpotentialLevel5leadersare

highlyprevalentinoursociety.Theproblemisnot,inmyestimation,a

dearthofpotentialLevel5leaders.Theyexistallaroundus,ifwejustknow

whattolookfor.Andwhatisthat?Lookforsituationswhereextraordinary

resultsexistbutwherenoindividualstepsforthtoclaimexcesscredit.You

willlikelyfindapotentialLevel5leaderatwork.

Foryourowndevelopment,Iwouldlovetobeabletogiveyoualistof

stepsforbecomingLevel5,butwehavenosolidresearchdatathatwould

supportacrediblelist.OurresearchexposedLevel5asakeycomponent

insidetheblackboxofwhatittakestoshiftacompanyfromgoodtogreat.

Yetinsidethatblackboxisyetanotherblackbox-namely,theinner

developmentofapersontoLevel5.Wecouldspeculate

onwhatmightbe

38

JimCollins

insidethatinnerblackbox,butitwouldmostlybejustthat-speculation.

So,inshort,Level5isaverysatisfyingidea,apowerfulidea,and,topro-

ducethebesttransitionsfromgoodtogreat,perhapsanessentialidea.A

"Ten-StepListtoLevel5"wouldtrivializetheconcept.

Mybestadvice,basedontheresearch,istobeginpracticingtheother

good-to-greatdisciplineswediscovered.Wefoundasymbioticrelation-

shipbetweenLevel5andtheremainingfindings.Ontheonehand,Level

5traitsenableyoutoimplementtheotherfindings;ontheotherhand,

practicingtheotherfindingshelpsyoutobecomeLevel5.Thinkofitthis

way:ThischapterisaboutwhatLevel5sare;therestof

thebookdescribes

whattheydo.Leadingwiththeotherdisciplinescanhelpyoumoveinthe

rightdirection.Thereisnoguaranteethatdoingsowillturnyouintoa

full-fledgedLevel5,butitgivesyouatangibleplacetobegin.

Wecannotsayforsurewhatpercentageofpeoplehavetheseedwithin,

orhowmanyofthosecannurtureit.Eventhoseofuswhodiscovered

Level5ontheresearchteamdonotknowforourselveswhetherwewill

succeedinfullyevolvingtoLevel5.Andyet,allofus

whoworkedonthe

findinghavebeendeeplyaffectedandinspiredbytheidea.Darwin

Smith,ColmanMockler,AlanWurtzel,andalltheotherLevel5swe

learnedabouthavebecomemodelsforus,somethingworthytoaspire

toward.WhetherornotwemakeitallthewaytoLevel5,itisworththe

effort.Forlikeallbasictruthsaboutwhatisbestinhumanbeings,when

wecatchaglimpseofthattruth,weknowthatourownlivesandallthat

wetouchwillbethebetterfortheeffort.

40

JimCollins

C

H

A

P

T

E

R

3

Therearegoingtobetimes

whenwecan'twaitforsomebody.

Now,you'reeitheronthebusoroffthebus.

-KENKESEY,

fromTheElectricKool-AidAcidTest

byTomWolfe1

enwebegantheresearch

project,weexpectedtofindthatthe

firststepintakingacompanyfromgoodtogreatwouldbetosetanew

direction,anewvisionandstrategyforthecompany,andthentogetpeo-

plecommittedandalignedbehindthatnewdirection.

Wefoundsomethingquitetheopposite.

Theexecutiveswhoignitedthetransformationsfromgoodtogreatdid

notfirstfigureoutwheretodrivethebusandthengetpeopletotakeit

there.No,theyfirstgottherightpeopleonthebus(andthewrongpeople

offthebus)andthenfiguredoutwheretodriveit.Theysaid,inessence,

"Look,Idon'treallyknowwhereweshouldtakethisbus.ButIknowthis

much:Ifwegettherightpeopleonthebus,therightpeopleintheright

seats,andthewrongpeopleoffthebus,thenwe'llfigure

outhowtotakeit

someplacegreat."

42

JimCollins

Thegood-to-greatleadersunderstoodthreesimpletruths.First,ifyou

beginwith"who,"ratherthan"what,"youcanmoreeasilyadapttoa

changingworld.Ifpeoplejointhebusprimarilybecauseofwhereitis

going,whathappensifyougettenmilesdowntheroadandyouneedto

changedirection?You'vegotaproblem.Butifpeopleare

onthebus

becauseofwhoelseisonthebus,thenit'smucheasiertochangedirec-

tion:"Hey,Igotonthisbusbecauseofwhoelseisonit;ifweneedto

changedirectiontobemoresuccessful,finewithme."Second,ifyou

havetherightpeopleonthebus,theproblemofhowtomotivateand

managepeoplelargelygoesaway.Therightpeopledon'tneedtobe

tightlymanagedorfiredup;theywillbeself-motivatedbytheinnerdrive

toproducethebestresultsandtobepartofcreating

somethinggreat.

Third,ifyouhavethewrongpeople,itdoesn'tmatterwhetheryoudis-

covertherightdirection;youstillwon'thaveagreatcompany.Great

visionwithoutgreatpeopleisirrelevant.

ConsiderthecaseofWells

Fargo.WellsFargobeganitsfifteen-year

stintofspectacularperformancein1983,butthefoundationfortheshift

datesbacktotheearly1970s,whenthen-CEODickCooleybeganbuild-

ingoneofthemosttalentedmanagementteamsintheindustry(thebest

team,accordingtoinvestorWarren

Cooleyforesawthatthe

bankingindustrywouldeventuallyundergowrenchingchange,buthe

didnotpretendtoknowwhatformthatchangewouldtake.Soinsteadof

mappingoutastrategyfor

change,heandchairmanErnieArbuckle

focusedon"injectinganendlessstreamoftalent"directlyintotheveinsof

thecompany.Theyhiredoutstandingpeoplewheneverandwherever

theyfoundthem,oftenwithoutanyspecificjobinmind."That'showyou

buildthefuture,"hesaid."IfI'mnotsmartenoughtoseethechangesthat

arecoming,theywill.Andthey'llbeflexibleenoughtodealwith

Cooley'sapproachprovedprescient.Noonecouldpredictallthechanges

thatwouldbewroughtbybankingderegulation.Yet

whenthesechanges

came,nobankhandledthosechallengesbetterthanWellsFargo.Atatime

whenitssectorofthebankingindustryfell59percentbehindthegeneral

stockmarket,WellsFargooutperformedthemarketbyoverthreetimes.4

CarlReichardt,whobecameCEOin1983,attributedthebank'ssuc-

cesslargelytothepeoplearoundhim,mostofwhomheinheritedfrom

Cooley.5

AshelistedmembersoftheWellsFargoexecutiveteamthathad

joinedthecompanyduringtheCooley-Reichardtera,wewerestunned.

NearlyeverypersonhadgoneontobecomeCEOofamajorcompany:

GoodtoGreat

43

BillAldingerbecametheCEOofHouseholdFinance,JackGrundhofer

becameCEOofU.S.Bancorp,FrankNewmanbecameCEOofBankers

Trust,RichardRosenbergbecameCEOofBankofAmerica,BobJoss

becameCEOofWestpacBanking(oneofthelargest

banksinAustralia)

andlaterbecamedeanoftheGraduateSchoolofBusinessatStanford

University-notexactlyyourgardenvarietyexecutiveteam!ArjayMiller,

anactiveWellsFargoboardmemberforseventeenyears,toldusthatthe

WellsFargoteamremindedhimofthefamed"WhizKids"recruitedto

FordMotorCompanyinthelate1940s(ofwhichMillerwasamember,

eventuallybecomingpresidentofFord).6

WellsFargo'sapproachwassim-

ple:Yougetthebestpeople,youbuildthemintothebestmanagersinthe

industry,andyouacceptthefactthatsomeofthemwillberecruitedto

becomeCEOsofothercompanies.'

BankofAmericatookaverydifferentapproach.WhileDickCooley

systematicallyrecruitedthebestpeoplehecouldgethishandson,Bankof

America,accordingtothebookBreakingtheBank,followedsomething

calledthe"weakgenerals,stronglieutenants7'model.8Ifyoupickstrong

generalsforkeypositions,theircompetitorswillleave.

Butifyoupick

weakgenerals-placeholders,ratherthanhighlycapableexecutives-

thenthestronglieutenantsaremorelikelytostickaround.

TheweakgeneralsmodelproducedaclimateverydifferentatBankof

AmericathantheoneatWellsFargo.WhereastheWellsFargocrewacted

asastrongteamofequalpartners,ferociouslydebatingeyeball-to-eyeball

insearchofthebestanswers,theBankofAmericaweakgeneralswould

waitfordirectionsfromabove.SamArmacost,who

inheritedtheweak

generalsmodel,describedthemanagementclimate:"Icameawayquite

distressedfrommyfirstcoupleofmanagementmeetings.Notonly

couldn'tIgetconflict,Icouldn'tevengetcomment.Theywereallwait-

ingtoseewhichwaythewindblew."9

AretiredBankofAmericaexecutivedescribedseniormanagersinthe

1970sas"PlasticPeople"who'dbeentrainedtoquietlysubmittothedic-

tatesofadomineering

Later,afterlosingover$1

billioninthemid-

1980s,BankofAmericarecruitedagangofstronggeneralstoturnthebank

around.Andwherediditfindthosestronggenerals?Fromrightacrossthe

streetatWellsFargo.Infact,BankofAmericarecruitedsomanyWells

Fargoexecutivesduringitsturnaroundthatpeopleinsidebegantoreferto

themselvesas"WellsofAmerica.""Atthatpoint,BankofAmericabeganto

climbupwardagain,butitwastoolittletoolate.From1973to1998,while

44

JimCollins

WellsFargowentfrombuilduptobreakthroughresults,BankofAmerica's

cumulativestockreturnsdidn'tevenkeeppacewiththegeneralmarket.

WELLSFARCOVERSUSBANKOFAMERICA

CumulativeValueof$1Invested,

January1,1973-January1,1998

$80

WellsFargo:$74.47

$40

WellsFargo

Point

$20

Now,youmightbethinking,"That'sjustgoodmanagement-theidea

ofgettingtherightpeoplearoundyou.What'snewaboutthat?"Onone

level,wehavetoagree;itisjustplainold-fashionedgood

management.

Butwhatstandsoutwithsuchdistinctioninthegood-to-greatcompanies

aretwokeypointsthatmadethemquitedifferent.

"Firstwho"isaverysimpleideatograsp,andaverydifficultideato

do-andmostdon'tdoitwell.

It'seasytotalkaboutpayingattentionto

GoodtoGreat

45

peopledecisions,buthowmanyexecutiveshavethe

disciplineofDavid

Maxwell,whoheldoffondevelopingastrategyuntilhegottherightpeo-

pleinplace,whilethecompanywaslosing$1millioneverysinglebusiness

daywith$56billionofloansunderwater?WhenMaxwellbecameCEO

ofFannieMaeduringitsdarkestdays,theboarddesperatelywantedto

knowhowhewasgoingtorescuethecompany.Despitetheimmense

pressuretoact,todosomethingdramatic,toseizethewheelandstartdri-

ving,Maxwellfocusedfirstongettingtherightpeopleon

theFannieMae

managementteam.Hisfirstactwastointerviewalltheofficers.Hesat

themdownandsaid,"Look,thisisgoingtobeaveryhardchallenge.I

wantyoutothinkabouthowdemandingthisisgoingtobe.Ifyoudon't

thinkyou'regoingtolikeit,that'sfine.Nobody'sgoingtohateyou."12

MaxwellmadeitabsolutelyclearthattherewouldonlybeseatsforA

playerswhoweregoingtoputforthanA+effort,andifyouweren'tupfor

it,youhadbettergetoffthebus,andgetoffnow.13One

executivewho

hadjustuprootedhislifeandcareertojoinFannieMaecametoMaxwell

andsaid,"Ilistenedtoyouverycarefully,andIdon'twanttodothis."He

leftandwentbacktowherehecamefrom.14Inall,fourteenoftwenty-six

executivesleftthecompany,replacedbysomeofthebest,smartest,and

hardest-workingexecutivesintheentireworldof

Thesame

standardappliedupanddowntheFannieMaeranksasmanagersatevery

levelincreasedthecaliberof

theirteamsandputimmensepeerpressure

uponeachother,creatinghighturnoveratfirst,whensomepeoplejust

didn'tpan

"Wehadasaying,'Youcan'tfakeitatFannieMae,'"said

oneexecutiveteammember."Eitheryouknewyourstuff

oryoudidn't,

andifyoudidn't,you'djustblowoutof

WellsFargoandFannieMaebothillustratetheideathat"who"ques-

tionscomebefore"what"questions-

beforevision,beforestrategy,before

tactics,beforeorganizationalstructure,beforetechnology.DickCooley

andDavidMaxwellbothexemplifiedaclassicLevel5stylewhenthey

said,"Idon'tknowwhereweshouldtakethiscompany,butIdoknowthat

ifIstartwiththerightpeople,askthemtheright

questions,andengage

theminvigorousdebate,wewillfindawaytomakethiscompanygreat."

NOTA"GENIUSWITHATHOUSANDHELPERS"

Incontrasttothegood-to-greatcompanies,whichbuiltdeepandstrong

executiveteams,manyofthecomparisoncompaniesfolloweda"genius

46

JimCollins

withathousandhelpers"

model.Inthismodel,thecompanyisaplatform

forthetalentsofanextraordinaryindividual.Inthesecases,thetowering

genius,theprimarydrivingforceinthecompany'ssuccess,isagreatasset-

aslongasthegeniussticksaround.Thegeniusesseldombuildgreatman-

agementteams,forthesimplereasonthattheydon'tneedone,andoften

don'twantone.Ifyou'reagenius,youdon'tneedaWellsFargo-caliber

managementteamofpeoplewhocouldruntheirownshowselsewhere.

No,youjustneedanarmyofgoodsoldierswhocanhelp

implementyour

greatideas.However,whenthegeniusleaves,thehelpersareoftenlost.Or,

worse,theytrytomimictheirpredecessorwithbold,visionarymoves(trying

toactlikeagenius,withoutbeingagenius)thatproveunsuccessful.

EckerdCorporationsufferedtheliabilityofaleaderwhohadan

uncannygeniusforfiguringout"what"todobutlittleabilitytoassemble

theright"who"ontheexecutiveteam.JackEckerd,blessedwithmonu-

mentalpersonalenergy(hecampaignedforgovernorof

Floridawhile

runninghiscompany)andageneticgiftformarketinsightandshrewd

dealmaking,acquiredhiswayfromtwolittlestoresinWilmington,

Delaware,toadrugstoreempireofoverathousandstoresspreadacross

thesoutheasternUnitedStates.Bythelate1970s,Eckerd'srevenues

equaledWalgreens',anditlookedlikeEckerdmighttriumphasthegreat

companyintheindustry.ButthenJackEckerdlefttopursuehispassion

forpolitics,runningforsenatorandjoiningtheFord

administrationin

Washington.Withouthisguidinggenius,Eckerd7scompanybeganalong

decline,eventuallybeingacquiredbyJ.C.

ThecontrastbetweenJackEckerdandCorkWalgreenisstriking.

WhereasJackEckerdhada

geniusforpickingtherightstorestobuy,

CorkWalgreenhadageniusforpickingtherightpeopleto

WhereasJackEckerdhadagiftforseeingwhichstoresshouldgoinwhat

locations,CorkWalgreenhadagiftforseeingwhichpeopleshouldgoin

whatseats.WhereasJackEckerdfailedutterlyatthesinglemostimpor-

tantdecisionfacinganyexecutive-theselectionofasuccessor-Cork

Walgreendevelopedmultipleoutstandingcandidatesandselecteda

superstarsuccessor,whomayprovetobeevenbetterthan

Corkhim-

WhereasJackEckerdhadnoexecutiveteam,butinsteadabunch

ofcapablehelpersassembledtoassistthegreatgenius,CorkWalgreen

builtthebestexecutiveteamintheindustry.Whereastheprimaryguid-

ancemechanismforEckerdCorporation'sstrategylayinsideJackEck-

erd'shead,theprimaryguidancemechanismforWalgreens'corporate

GoodtoGreat

47

LEVEL5+

A"GENIUSWITHA

MANAGEMENTTEAM

THOUSANDHELPERS"

(Good-to-GreatCompanies)

(ComparisonCompanies)

FIRSTWHO

Gettherightpeopleonthebus.

Setavisionforwheretodrive

Buildasuperiorexecutive

team.

thebus.Developaroadmap

fordrivingthebus.

Onceyouhavetherightpeople

Enlistacrewofhighlycapable

inplace,figureoutthebestpath

"helpers"tomakethevision

togreatness.

happen.

strategylayinthegroupdialogueandsharedinsightsofthetalented

executiveteam.

The"geniuswithathousandhelpers"modelisparticularly

prevalentin

theunsustainedcomparisoncompanies.Themostclassiccasecomes

fromamanknownastheSphinx,HenrySingletonofTeledyne.Single-

tongrewuponaTexasranch,withthechildhooddreamofbecominga

greatbusinessmaninthemodeloftheruggedindividualist.Armedwitha

Ph.D.fromMIT,hefounded

ThenameTeledynederives

fromGreekandmeans"forceappliedatadistance7'-anaptname,asthe

centralforceholdingthefar-flungempiretogetherwas

HenrySingleton

himself.

Throughacquisitions,Singletonbuiltthecompanyfromasmallenter-

prisetonumber293ontheFortune500listinsix

Withinten

years,he'dcompletedmore

than100acquisitions,eventuallycreatinga

far-flungenterprisewith130profitcentersineverythingfromexoticmet-

alsto

Amazingly,thewholesystemworked,withSingleton

48

JimCollins

TELEDYNECORPORATION

AClassic"GeniuswithaThousandHelpers"

RatioofCumulativeStockReturnstoGeneralMarket,

January1,1967-January1,

1996

EndofSingletonEra

7

5

RiseunderaGenius,

HenrySingleton

3

1

himselfactingasthegluethatconnectedallthemovingpartstogether.At

onepoint,hesaid,"Idefinemyjobashavingthefreedomtodowhat

seemstometobeinthebestinterestofthecompanyatany

A

1978Forbesfeaturestorymaintained,"Singletonwillwinnoawardsfor

humility,butwhocanavoidstandinginaweofhisimpressiverecord?"

Singletoncontinuedtorunthecompanywellintohisseventies,withno

seriousthoughtgiventosuccession.Afterall,why

worryaboutsuccession

whentheverypointofthewholethingistoserveasaplatformtoleverage

thetalentsofyourremarkablegenius?"Ifthereisasingleweaknessinthis

otherwisebrilliantpicture,"thearticlecontinued,"itisthis:Teledyneis

notsomuchasystemasitisthereflectionofoneman'ssingulardisci-

Whataweaknessitturnedouttobe.OnceSingletonsteppedaway

fromday-to-daymanagementinthemid-1980s,thefar-flungempire

begantocrumble.Fromtheendof1986untilitsmerger

withAllegheny

in1995,Teledyne'scumulativestockreturnsimploded,falling66percent

behindthegeneralstockmarket.Singletonachievedhischildhooddream

ofbecomingagreatbusinessman,buthefailedutterlyatthetaskofbuild-

ingagreatcompany.

GoodtoGreat

49

IT'SWHOYOUPAY,NOTHOWYOUPAYTHEM

Weexpectedtofindthat

changesinincentivesystems,especiallyexecu-

tiveincentives,wouldbehighlycorrelatedwithmakingtheleapfrom

goodtogreat.Withalltheattentionpaidtoexecutivecompensation-the

shifttostockoptionsandthehugepackagesthathavebecomecommon-

place-surely,wethought,theamountandstructureofcompensation

mustplayakeyroleingoingfromgoodtogreat.Howelsedoyougetpeo-

pletodotherightthingsthatcreategreatresults?

Weweredeadwronginourexpectations.

Wespentweeksinputtingcompensationdatafromproxystatements

andperformed112separateanalyseslookingforpatternsandcorrela-

tions.Weexaminedeverythingwecouldquantifyforthetopfiveoffi-

cers-cashversusstock,long-termversusshort-term

incentives,salary

versusbonus,andsoforth.Somecompaniesusedstockextensively;oth-

ersdidn't.Somehadhighsalaries;othersdidn't.Somemadesignificant

useofbonusincentives;othersdidn't.Mostimportantly,whenweana-

lyzedexecutivecompensationpatternsrelativetocomparisoncompanies,

wefoundnosystematicdifferencesontheuseofstock(ornot),high

salaries(ornot),bonusincentives(ornot),orlong-termcompensation

(ornot).Theonly

significantdifferencewefoundwasthatthegood-to-

greatexecutivesreceivedslightlylesstotalcashcompensationtenyears

afterthetransitionthantheircounterpartsatthestill-mediocrecompari-

son

Notthatexecutive

compensationisirrelevant.Youhavetobebasically

rationalandreasonable(IdoubtthatColmanMockler,DavidMaxwell,or

DarwinSmithwouldhaveworkedforfree),andthegood-to-greatcompa-

niesdidspendtimethinkingabouttheissue.Butonceyou'vestructured

somethingthatmakesbasicsense,executivecompensationfallsawayasa

distinguishingvariableinmovinganorganizationfromgoodtogreat.

50

JimCollins

Whymightthatbe?Itissimplyamanifestationofthe"firstwho"prin-

ciple:It'snothowyoucompensateyourexecutives,it'swhichexecutivesyou

havetocompensateinthefirstplace.Ifyouhavetherightexecutiveson

thebus,theywilldoeverythingwithintheirpowertobuildagreatcom-

pany,notbecauseofwhattheywill"get"forit,butbecausetheysimply

cannotimaginesettlingforanythingless.Theirmoralcoderequires

buildingexcellenceforitsownsake,andyou'renomore

likelytochange

thatwithacompensationpackagethanyou'relikelytoaffectwhetherthey

breathe.Thegood-to-greatcompaniesunderstoodasimpletruth:The

rightpeoplewilldotherightthingsanddeliverthebestresultsthey're

capableof,regardlessoftheincentivesystem.

Wewerenotabletolookasrigorouslyatnonexecutivecompensation;

suchdataisnotavailableinassystematicaformatasproxystatementsfor

topofficers.Nonetheless,evidencefromsourcedocumentsandarticles

suggeststhatthesameideaappliesatalllevelsofan

AparticularlyvividexampleisNucor.Nucorbuiltitsentiresystemon

theideathatyoucanteachfarmershowtomakesteel,butyoucan'tteach

afarmerworkethictopeoplewhodon'thaveitinthefirstplace.So,

insteadofsettingupmillsintraditionalsteeltownslikePittsburghand

Gary,itlocateditsplantsinplaceslikeCrawfordsville,Indiana;Norfolk,

Nebraska;andPlymouth,Utah-placesfullofrealfarmerswhogotobed

early,riseatdawn,andgetrighttoworkwithoutfanfare.

"Gottamilkthe

cows"and"Gonnaplowthenorthfortybeforenoon"translatedeasilyinto

"Gottarollsomesheetsteel"and"Gonnacastfortytonsbeforelunch."

Nucorejectedpeoplewhodidnotsharethisworkethic,generatingas

highas50percentturnoverinthefirstyearofaplant,followedbyverylow

turnoverastherightpeoplesettledinforthelong

Toattractandkeepthebestworkers,Nucorpaiditssteelworkersmore

thananyothersteelcompanyintheworld.Butitbuiltitspaysystem

aroundahigh-pressureteam-bonusmechanism,withover50percentofa

GoodtoGreat

51

worker'scompensationtieddirectlytotheproductivityofhisworkteamof

twentytoforty

Nucorteammemberswouldusuallyshowupfor

workthirtyminutesearlytoarrangetheirtoolsandpreparetoblastoffthe

startinglinetheinstanttheshiftgun

"Wehavethehardestworking

steelworkersintheworld,"saidoneNucorexecutive."Wehirefive,work

themliketen,andpaythemlike

TheNucorsystemdidnot

aimtoturnlazypeopleintohardworkers,

buttocreateanenvironmentwherehardworkingpeoplewouldthriveand

lazyworkerswouldeitherjumporgetthrownrightoffthebus.Inone

extremecase,workerschasedalazyteammaterightoutoftheplantwith

anangle

Nucorrejectedtheoldadagethatpeopleareyourmostimportant

asset.Inagood-to-greattransformation,peoplearenotyourmost

importantasset.Therightpeopleare.

Nucorillustratesakeypoint.

Indetermining"therightpeople,"the

good-to-greatcompaniesplacedgreaterweightoncharacterattributes

thanonspecificeducationalbackground,practicalskills,specialized

knowledge,orworkexperience.Notthatspecificknowledgeorskillsare

unimportant,buttheyviewedthesetraitsasmoreteachable(oratleast

learnable),whereastheybelieveddimensionslikecharacter,workethic,

basicintelligence,dedicationtofulfillingcommitments,andvaluesare

moreingrained.AsDaveNassefofPitneyBowesputit:

IusedtobeintheMarines,andtheMarinesgetalotof

creditforbuild-

ingpeople'svalues.Butthat'snotthewayitreallyworks.TheMarine

Corpsrecruitspeoplewhosharethecorps'values,thenprovidesthem

withthetrainingrequiredtoaccomplishtheorganization'smission.We

lookatitthesamewayatPitneyBowes.Wehavemorepeoplewhowant

todotherightthingthanmostcompanies.Wedon'tjustlookatexperi-

ence.Wewanttoknow:Whoarethey?Whyarethey?Wefindoutwho

theyarebyaskingthemwhytheymadedecisionsintheir

life.The

answerstothesequestionsgiveusinsightintotheircore

Onegood-to-greatexecutivesaidthathisbesthiringdecisionsoften

camefrompeoplewithnoindustryorbusinessexperience.Inonecase,

52

JimCollins

hehiredamanagerwho'dbeencapturedtwiceduringtheSecondWorld

Warandescapedbothtimes."Ithoughtthatanyonewhocoulddothat

shouldn'thavetroublewith

RIGOROUS,NOTRUTHLESS

Thegood-to-greatcompaniesprobablysoundliketoughplacestowork-

andtheyare.Ifyoudon'thavewhatittakes,youprobablywon'tlastlong.

Butthey'renotruthlesscultures,they'rerigorouscultures.Andthedis-

tinctioniscrucial.

Toberuthlessmeanshackingandcutting,especiallyindifficulttimes,

orwantonlyfiringpeoplewithoutanythoughtfulconsideration.Toberig-

orousmeansconsistentlyapplyingexactingstandardsatalltimesandatall

levels,especiallyinuppermanagement.Toberigorous,notruthless,

meansthatthebestpeopleneednotworryabouttheir

positionsandcan

concentratefullyontheirwork.

In1986,WellsFargoacquiredCrockerBankandplannedtoshedgobs

ofexcesscostintheconsolidation.There'snothingunusualaboutthat-

everybankmergerintheera

ofderegulationaimedtocutexcesscostout

ofabloatedandprotectedindustry.However,whatwasunusualaboutthe

Wells-CrockerconsolidationisthewayWellsintegratedmanagementor,

tobemoreaccurate,thewayitdidn'teventrytointegratemostCrocker

managementintotheWellsculture.

TheWellsFargoteamconcludedrightupfrontthatthevastmajorityof

Crockermanagerswouldbethewrongpeopleonthebus.Crockerpeople

hadlongbeensteepedinthetraditionsandperksofold-stylebankercul-

ture,completewithamarbledexecutivediningroomwithitsownchef

and$500,000worthof

Quiteacontrasttothespartancultureat

/-

WellsFargo,wheremanagementatefoodpreparedbyacollege

dormitory

food

WellsFargomadeitcleartotheCrockermanagers:"Look,

thisisnotamergerofequals;it'sanacquisition;weboughtyourbranches

andyourcustomers;wedidn'tacquireyou."

WellsFargoterminatedmost

oftheCrockermanagementteam-

1,600Crockermanagersgoneonday

one-

includingnearlyallthetop

Acriticmightsay,"That'sjusttheWellspeople

protectingtheirown."

Butconsiderthefollowingfact:WellsFargoalsosentsomeofitsown

managerspackingincaseswheretheCrockermanagerswerejudgedas

betterqualified.Whenitcametomanagement,theWellsFargostan-

GoodtoGreat

53

dardswereferociousandconsistent.Likeaprofessionalsportsteam,only

thebestmadetheannualcut,regardlessofpositionortenure.Summed

uponeWellsFargoexecutive:"Theonlywaytodelivertothepeople

whoareachievingistonot

burdenthemwiththepeoplewhoarenot

Onthesurface,thislooksruthless.Buttheevidencesuggeststhatthe

averageCrockermanagerwasjustnotthesamecaliberastheaverage

WellsmanagerandwouldhavefailedintheWellsFargoperformance

culture.Iftheyweren'tgoingtomakeitonthebusinthelongterm,why

letthemsufferintheshortterm?OneseniorWellsFargoexecutivetold

us:"Weallagreedthiswasanacquisition,notamerger,andthere'sno

sensebeatingaroundthebush,notbeing

straightforwardwithpeople.We

decideditwouldbebesttosimplydoitondayone.Weplannedour

effortssothatwecouldsay,rightupfront,'Sorry,wedon'tseearolefor

you,'or'Yes,wedoseearole;youhaveajob,sostopworryingaboutit.'

Wewerenotgoingtosubjectourculturetoadeathbyathousand

cuts.'

Toletpeoplelanguishinuncertaintyformonthsoryears,stealingpre-

cioustimeintheirlivesthattheycouldusetomoveontosomethingelse,

whenintheendtheyaren'tgoingtomakeitanyway-thatwouldberuth-

less.Todealwithitrightupfrontandletpeoplegetonwiththeirlives-

thatisrigorous.

NotthattheCrockeracquisitioniseasytoswallow.It'sneverpleasant

toseethousandsofpeoplelosetheirjobs,buttheeraofbankderegulation

sawhundredsofthousandsoflostjobs.Giventhat,it'sinterestingtonote

twopoints.First,WellsFargodidfewerbiglayoffsthanitscomparison

company,Bankof

Second,uppermanagement,including

someseniorWellsFargouppermanagement,sufferedmoreonapercent-

agebasisthanlower-levelworkersinthe

Rigorinagood-

to-greatcompanyappliesfirstatthetop,focusedon

thosewhoholdthe

largestburdenofresponsibility.

Toberigorousinpeopledecisionsmeansfirstbecomingrigorousabout

topmanagementpeopledecisions.Indeed,Ifearthatpeoplemightuse

"firstwhorigor"asanexcuse

formindlesslychoppingoutpeopleto

improveperformance."It'shardtodo,butwe'vegottoberigorous,"Ican

hearthemsay.AndIcringe.Fornotonlywillalotofhardworking,good

peoplegethurtintheprocess,buttheevidencesuggeststhatsuchtactics

arecontrarytoproducingsustainedgreatresults.Thegood-to-greatcom-

paniesrarelyusedhead-countloppingasatacticandalmostneverusedit

54JimCollins

asaprimarystrategy.EvenintheWellsFargocase,thecompanyusedlay-

offshalfasmuchasBankofAmericaduringthetransitionera.

Sixoftheelevengood-to-greatcompaniesrecordedzerolayoffsfrom

tenyearsbeforethebreakthroughdateallthewaythrough

1998,and

fourothersreportedonlyoneortwolayoffs.

Incontrast,wefoundlayoffsusedfivetimesmorefrequentlyinthe

comparisoncompaniesthan

inthegood-to-greatcompanies.Someofthe

comparisoncompanieshadanalmostchronicaddictiontolayoffsand

Itwouldbeamistake-atragicmistake,indeed-tothinkthattheway

youigniteatransitionfromgoodtogreatisbywantonlyswingingtheax

onvastnumbersofhardworkingpeople.Endlessrestructuringandmind-

lesshackingwereneverpartofthegood-to-greatmodel.

HowtoBeRigorous

We'veextractedthreepracticaldisciplinesfromtheresearchforbeingrig-

orousratherthanruthless.

PracticalDiscipline#1:Whenindoubt,don'thire-keeplooking.

Oneoftheimmutablelawsofmanagementphysicsis"Packard'sLaw."

(Socalledbecausewefirstlearneditinapreviousresearchprojectfrom

DavidPackard,cofounderoftheHewlett-Packard

Company.)Itgoeslike

this:Nocompanycangrowrevenuesconsistentlyfasterthanitsabilityto

getenoughoftherightpeopletoimplementthatgrowthandstillbecome

agreatcompany.Ifyourgrowthrateinrevenuesconsistentlyoutpaces

yourgrowthrateinpeople,yousimplywillnot-indeedcannot-builda

greatcompany.

GoodtoGreat

55

ThemanagementteamatCircuitCityinstinctivelyunderstood

Packard'sLaw.Driving

aroundSantaBarbarathedayafterChristmasa

fewpearsago,InoticedsomethingdifferentabouttheCircuitCitystore.

Otherstoreshadsignsandbannersreachingouttocustomers:"Alwaysthe

BestPrices"or"GreatAfter-HolidayDeals"or"BestAfter-Christmas

Selection,"andsoforth.ButnotCircuitCity.Ithadabannerthatread:

"AlwaysLookingforGreatPeople."

ThesignremindedmeofourinterviewwithWalterBruckart,vicepres-

identduringthegood-to-greatyears.Whenaskedtonamethetopfive

factorsthatledtothetransitionfrommediocritytoexcellence,Bruckart

said,"Onewouldbepeople.Twowouldbepeople.Threewouldbepeo-

ple.Fourwouldbepeople.Andfivewouldbepeople.Ahugepartofour

transitioncanbeattributedtoourdisciplineinpickingthe

rightpeople."

BruckartthenrecalledaconversationwithCEOAlanWurtzelduringa

growthspurtatCircuitCity:"'Alan,I'mreallywearingdowntryingto

findtheexactrightpersontofillthispositionorthatposition.Atwhat

pointdoIcompromise?'Withouthesitation,Alansaid,Youdon'tcom-

promise.Wefindanotherwaytogetthroughuntilwefindtheright

people.'

OneofthekeycontrastsbetweenAlanWurtzelatCircuitCityandSid-

neyCooperatSiloisthatWurtzelspentthebulkofhistimeintheearly

yearsfocusedongettingtherightpeopleonthebus,whereasCooper

spent80percentofhistimefocusingontherightstoresto

Wurtzel's

firstgoalwastobuildthebest,mostprofessionalmanagementteaminthe

industry;Cooper'sfirstgoalwassimplytogrowasfastaspossible.Circuit

Cityputtremendousemphasisongettingtherightpeopleallupand

downtheline,fromdeliverydriverstovicepresidents;

Silodevelopeda

reputationfornotbeingabletodothebasics,likemakinghomedeliveries

withoutdamagingthe

AccordingtoCircuitCity'sDan

Rexinger,"Wemadethebesthomedeliverydriversintheindustry.We

toldthem,'YouarethelastcontactthecustomerhaswithCircuitCity.

Wearegoingtosupplyyouwithuniforms.Wewillrequirethatyoushave,

thatyoudon'thaveB.O.You'regoingtobeprofessionalpeople.'The

changeinthewaywehandledcustomerswhen

makingadeliverywas

absolutelyincredible.Wewouldgetthank-younotesbackonhowcourte-

ousthedrivers

FiveyearsintoWurtzel'stenure,CircuitCityand

Silohadessentiallythesamebusinessstrategy(thesameanswerstothe

"what"questions),yetCircuitCitytookofflikearocket,beatingthegen-

eralstockmarket18.5to1inthefifteenyearsafteritstransition,whileSilo

56

JimCollins

bumpedalonguntilitwasfinallyacquiredbyaforeign

Same

strategy,differentpeople,differentresults.

PracticalDiscipline#2:Whenyouknowyouneedtomakeapeople

change,act.

Themomentyoufeeltheneedtotightlymanagesomeone,you'vemade

ahiringmistake.Thebestpeopledon'tneedtobemanaged.Guided,

taught,led-yes.Butnottightlymanaged.We'veallexperiencedor

observedthefollowingscenario.Wehaveawrong

persononthebusand

weknowit.Yetwewait,wedelay,wetryalternatives,wegiveathirdand

fourthchance,wehopethatthesituationwillimprove,weinvesttimein

tryingtoproperlymanagetheperson,webuildlittlesystemstocompen-

sateforhisshortcomings,andsoforth.Butthesituationdoesn'timprove.

Whenwegohome,wefindourenergydivertedbythinking(ortalkingto

ourspouses)aboutthatperson.Worse,allthetimeandenergywespend

onthatonepersonsiphonsenergyawayfromdeveloping

andworking

withalltherightpeople.Wecontinuetostumblealonguntiltheperson

leavesonhisown(toourgreatsenseofrelief)orwefinallyact(alsotoour

greatsenseofrelief).Meanwhile,ourbestpeoplewonder,"Whattook

yousolong?"

Lettingthewrongpeoplehangaroundisunfairtoalltherightpeople,

astheyinevitablyfindthemselvescompensatingfortheinadequaciesof

thewrongpeople.Worse,itcandriveawaythebestpeople.Strongper-

formersareintrinsicallymotivatedbyperformance,andwhentheysee

theireffortsimpededbycarryingextraweight,theyeventuallybecome

frustrated.

Waitingtoolongbeforeactingisequallyunfairtothepeoplewho

needtogetoffthebus.Foreveryminuteyouallowapersontocontinue

holdingaseatwhenyouknowthatpersonwillnotmakeitintheend,

you'restealingaportionofhislife,timethathecouldspendfindinga

betterplacewherehecouldflourish.Indeed,ifwe're

honestwithour-

selves,thereasonwewaittoolongoftenhaslesstodowithconcernfor

thatpersonandmoretodowithourownconvenience.He'sdoingan

okayjobanditwouldbeahugehassletoreplacehim,soweavoidthe

issue.Orwefindthewholeprocessofdealingwiththeissuetobestress-

fulanddistasteful.So,tosaveourselvesstressanddiscomfort,wewait.

Andwait.Andwait.Meanwhile,allthebestpeoplearestillwondering,

"Whenaretheygoingtodosomethingaboutthis?How

longisthisgoing

togoon?"

GoodtoGreat

57

UsingdatafromMoody'sCompanyInformationReports,wewereable

toexaminethepatternofturnoverinthetopmanagementlevels.We

foundnodifferenceintheamountof"churn"(turnoverwithinaperiodof

time)betweenthegood-to-greatandthecomparisoncompanies.Butwe

didfinddifferencesinthepatternof

Thegood-to-greatleadersdidnotpursueanexpedient"tryalotofpeo-

pleandkeepwhoworks"modelofmanagement.Instead,theyadopted

thefollowingapproach:"Let'stakethetimetomakerigorousA+selec-

tionsrightupfront.Ifwegetitright,we'lldoeverythingwecantotryto

keepthemonboardforalongtime.Ifwemakeamistake,thenwe'llcon-

frontthatfactsothatwecangetonwithourworkand

theycangetonwith

theirlives."

Thegood-to-greatleaders,however,wouldnotrushtojudgment.

Often,theyinvestedsubstantialeffortindeterminingwhethertheyhad

someoneinthewrongseat

beforeconcludingthattheyhadthewrong

persononthebusentirely.WhenColmanMocklerbecameCEOof

Gillette,hedidn'tgoonarampage,wantonlythrowingpeopleoutthewin-

dowsofamovingbus.Instead,hespentfully55percentofhistimeduring

hisfirsttwoyearsinofficejiggeringaroundwiththemanagementteam,

changingormovingthirty-eightofthetopfiftypeople.SaidMockler,

"Everyminutedevotedtoputtingtheproperpersonintheproperslotis

worthweeksoftime

Similarly,AlanWurtzelofCircuitCitysentus

aletterafterreadinganearlydraftofthischapter,whereinhecommented:

Yourpointabout"gettingtherightpeopleonthebus"ascomparedto

othercompaniesisdeadon.Thereisonecorollarythatisalsoimportant.

Ispentalotoftimethinkingandtalkingaboutwhositswhereonthe

bus.Icalledit"puttingsquarepegsinsquareholesandroundpegsin

roundholes."...Insteadoffiringhonestandablepeoplewhoarenot

performingwell,itisimportanttotrytomove

themonceoreventwoor

threetimestootherpositionswheretheymightblossom.

58

JimCollins

Buthowdoyouknowwhenyouknow?Twokeyquestionscanhelp.

First,ifitwereahiringdecision(ratherthana"shouldthispersongetoff

thebus?"decision),wouldyouhirethepersonagain?Second,iftheper-

soncametotellyouthatheorsheisleavingtopursueanexcitingnew

opportunity,wouldyoufeelterriblydisappointedorsecretlyrelieved?

PracticalDiscipline#3:Putyourbestpeopleonyour

biggestopportunities,not

yourbiggestproblems.

Intheearly1960s,R.J.ReynoldsandPhilipMorrisderivedthevastmajor-

ityoftheirrevenuesfromthedomesticarena.R.J.Reynolds'approachto

internationalbusinesswas,"Ifsomebodyoutthereinthe

worldwantsa

Camel,letthemcall

JoeCullmanatPhilipMorrishadadifferent

view.Heidentifiedinternationalmarketsasthesinglebestopportunityfor

long-termgrowth,despitethefactthatthecompanyderivedlessthan1

percentofitsrevenuesfromoverseas.

Cullmanpuzzledoverthebest"strategy"fordevelopinginternational

operationsandeventuallycameupwithabrilliantanswer:Itwasnota

"what"answer,buta"who."Hepulledhisnumberoneexecutive,George

Weissman,offtheprimarydomesticbusiness,andputhiminchargeof

international.Atthetime,internationalamountedtoalmostnothing-a

tinyexportdepartment,astrugglinginvestmentinVenezuela,anotherin

Australia,andatinyoperationinCanada."When

JoeputGeorgein

chargeofinternational,alotofpeoplewonderedwhatGeorgehaddone

wrong,"quippedoneofWeissman's

"Ididn'tknowwhether

Iwasbeingthrownsideways,downstairsoroutthewindow,"saidWeiss-

man."HereIwasrunning99%ofthecompanyandthenextdayI'dbe

running1%or

Yet,asForbesmagazineobservedtwentyyearslater,Cullman'sdecision

tomoveWeissmantothesmallestpartofthebusinesswasastrokeof

genius.Urbaneandsophisticated,Weissmanwastheperfectpersonto

developmarketslikeEurope,andhebuiltinternationalintothelargest

andfastest-growingpartofthecompany.Infact,underWeissman'sstew-

GoodtoGreat

59

ardship,Marlborobecamethebest-sellingcigaretteintheworldthree

yearsbeforeitbecamenumberoneintheUnited

TheRJRversusPhilipMorriscaseillustratesacommonpattern.The

good-to-greatcompaniesmadeahabitofputtingtheirbestpeopleontheir

bestopportunities,nottheirbiggestproblems.Thecomparisoncompa-

nieshadapenchantfordoingjusttheopposite,failingtograspthefact

thatmanagingyourproblemscanonlymakeyougood,whereasbuilding

youropportunitiesistheonlywaytobecomegreat.

Forinstance,whenKimberly-Clarksoldthemills,DarwinSmithmade

itclear:Thecompanymightbegettingridofthepaperbusiness,butit

wouldkeepitsbestpeople."Manyofourpeoplehadcomeupthroughthe

paperbusiness.Then,allofasudden,thecrownjewelsare

beingsoldoff

andthey'reasking,'Whatismyfuture?'"explainedDickAuchter."And

Darwinwouldsay,'Weneedallthetalentedmanagerswecanget.We

keepthem.'

Despitethefactthattheyhadlittleornoconsumerexpe-

rience,Smithmovedallthebestpaperpeopletotheconsumerbusiness.

WeinterviewedDickAppert,aseniorexecutivewhospentthemajority

ofhiscareerinthepapermakingdivisionatKimberly-Clark,thesame

divisionsoldofftocreatefundsforthecompany'sbig

moveintoconsumer

products.Hetalkedwithprideandexcitementaboutthetransformation

ofKimberly-Clark,howithadthegutstosellthepapermills,howithad

theforesighttoexitthepaperbusinessandthrowtheproceedsintothe

consumerbusiness,andhowithadtakenonProcter&Gamble."Inever

hadanyargumentwithourdecisiontodissolvethepaperdivisionofthe

company,"hesaid."Wedidgetridofthepapermillsatthattime,andI

wasinabsoluteagreementwith

Stopandthinkaboutthatfora

moment.Therightpeoplewanttobepartofbuildingsomethinggreat,

andDickAppertsawthatKimberly-Clarkcouldbecomegreatbyselling

thepartofthecompanywherehehadspentmostofhisworkinglife.

ThePhilipMorrisandKimberly-Clarkcasesillustrateafinalpoint

60

JimCollins

about"therightpeople."WenoticedaLevel5atmosphereatthetop

executivelevelofeverygood-to-greatcompany,especiallyduringthekey

transitionyears.Notthateveryexecutiveontheteambecameafully

evolvedLevel5leadertothesamedegreeasDarwinSmithorColman

Mockler,buteachcorememberoftheteamtransformedpersonalambi-

tionintoambitionforthecompany.Thissuggeststhattheteammembers

hadLevel5potential-oratleasttheywerecapableof

operatingina

mannerconsistentwiththeLevel5leadershipstyle.

Youmightbewondering,"What'sthedifferencebetweenaLevel5

executiveteammemberandjustbeingagoodsoldier?"ALevel5execu-

tiveteammemberdoesnot

blindlyacquiescetoauthorityandisastrong

leaderinherownright,sodrivenandtalentedthatshebuildsherarena

intooneoftheverybestintheworld.Yeteachteammembermustalso

havetheabilitytomeldthatstrengthintodoingwhateverittakestomake

thecompanygreat.

AnarticleonPhilipMorrissaidoftheCullmanera,"Theseguysnever

agreedonanythingandtheywouldargueabouteverything,andthey

wouldkilleachotherandinvolveeveryone,highandlow,talentedpeo-

ple.Butwhentheyhadtomakeadecision,thedecisionwouldemerge.

ThismadePhilip

Nomatterhowmuchtheyargued,saida

PhilipMorrisexecutive,"theywerealwaysinsearchofthebestanswer.In

theend,everybodystood

behindthedecision.Allofthedebateswerefor

thecommongoodofthecompany,notyourown

FIRSTWHO,GREATCOMPANIES,

ANDAGREATLIFE

WheneverIteachthegood-to-greatfindings,someonealmostalways

raisestheissueofthepersonalcostinmakingatransitionfromgoodto

GoodtoGreat

61

great.Inotherwords,isitpossibletobuildagreatcompanyandalsobuild

agreatlife?

Yes.

Thesecrettodoingsoliesrightinthischapter.

IspentafewshortdayswithaseniorGilletteexecutiveandhiswifeat

anexecutiveconferenceinHongKong.Duringthecourseofourconver-

sations,IaskedthemiftheythoughtColmanMockler,theCEOmost

responsibleforGillette'stransitionfromgoodtogreat,hadagreatlife.

Colman'sliferevolvedaroundthreegreatloves,theytoldme:hisfamily,

Harvard,andGillette.Evenduringthedarkestandmost

intensetimesof

thetakeovercrisesofthe1980sanddespitetheincreasinglyglobalnature

ofGillette'sbusiness,Mocklermaintainedremarkablebalanceinhislife.

Hedidnotsignificantlyreducetheamountoftimehespentwithhisfam-

ily,rarelyworkingeveningsorweekends.Hemaintainedhisdisciplined

worshippractices.Hecontinuedhisactiveworkonthegoverningboard

ofHarvard

WhenIaskedhowMockleraccomplishedallofthis,theexecutive

said,"Oh,itreallywasn'tthathardforhim.Hewassogoodatassem-

blingtherightpeoplearoundhim,andputtingtherightpeopleinthe

rightslots,thathejustdidn'tneedtobethereallhoursofthedayand

night.ThatwasColman'swholesecrettosuccessand

balance."The

executivewentontoexplainthathewasjustaslikelytomeetMockler

inthehardwarestoreasattheoffice."Hereallyenjoyedputtering

aroundthehouse,fixingthingsup.Healwaysseemedtofindtimeto

relaxthatway."Thentheexecutive'swifeadded,"WhenColmandied

andweallwenttothefuneral,Ilookedaroundandrealizedhowmuch

lovewasintheroom.Thiswasamanwhospentnearlyallhiswaking

hourswithpeoplewholovedhim,wholovedwhatthey

weredoing,

andwholovedoneanother-atwork,athome,inhischaritablework,

wherever."

Andthestatementrangabellforme,astherewassomethingaboutthe

good-to-greatexecutiveteamsthatIcouldn'tquite

describe,butthat

clearlysetthemapart.InwrappingupourinterviewwithGeorgeWeiss-

manofPhilipMorris,Icommented,"Whenyoutalkaboutyourtimeat

thecompany,it'sasifyouaredescribingaloveaffair."Hechuckledand

said,"Yes.Otherthanmymarriage,itwasthepassionateloveaffairof

mylife.Idon'tthinkmanypeoplewouldunderstandwhatI'mtalking

about,butIsuspectmycolleagueswould."Weissmanandmanyofhis

executivecolleagueskeptofficesatPhilipMorris,

cominginonaregu-

62

JimCollins

larbasis,longafterretirement.AcorridoratthePhilipMorrisworld

headquartersiscalled"thehallofthewizardsof

It'sthecorridor

whereWeissman,Cullman,Maxwell,andotherscontinuetocomeinto

theoffice,inlargepartbecausetheysimplyenjoyspendingtime

together.Similarly,Dick

AppertofKimberly-Clarksaidinhisinterview,

"IneverhadanyoneinKimberly-Clarkinallmyforty-oneyearssayany-

thingunkindtome.IthankGodthedayIwashiredbecauseI'vebeen

associatedwithwonderfulpeople.Good,goodpeoplewhorespected

andadmiredone

Membersofthegood-to-greatteamstendedtobecomeandremain

friendsforlife.Inmanycases,theyarestillinclosecontactwitheach

otheryearsordecadesafterworkingtogether.Itwasstrikingtohearthem

talkaboutthetransitionera,fornomatterhowdarkthedaysorhowbig

thetasks,thesepeoplehadfun!Theyenjoyedeachother'scompanyand

actuallylookedforwardtomeetings.Anumberoftheexecutivescharac-

terizedtheiryearsonthegood-to-greatteamsasthe

highpointoftheir

lives.Theirexperienceswentbeyondjustmutualrespect(whichtheycer-

tainlyhad),tolastingcomradeship.

Adherencetotheideaof"firstwho"mightbetheclosestlinkbetweena

greatcompanyandagreat

life.Fornomatterwhatweachieve,ifwedon't

spendthevastmajorityofourtimewithpeopleweloveandrespect,we

cannotpossiblyhaveagreatlife.Butifwespendthevastmajorityofour

timewithpeopleweloveandrespect-peoplewereallyenjoybeingonthe

buswithandwhowillneverdisappointus-thenwewillalmostcertainly

haveagreatlife,nomatterwherethebusgoes.Thepeopleweinter-

viewedfromthegood-to-greatcompaniesclearlylovedwhattheydid,

largelybecausetheylovedwhotheydiditwith.

64

JimCollins

C

H

A

P

T

E

R

4

Thereisnoworsemistakeinpublicleadershipthantohold

outfalsehopessoontobesweptaway.

-WINSTONS.CHURCHILL,

TheHingeofFate1

ntheearly1950s,theGreatAtlanticandPacificTea

Company,com-

monlyknownasA&P,stoodasthelargestretailingorganizationinthe

worldandoneofthelargestcorporationsintheUnitedStates,atone

pointrankingbehindonlyGeneralMotorsinannual

Kroger,in

contrast,stoodasanunspectaculargrocerychain,lessthanhalfthesizeof

A&P,withperformancethatbarelykeptpacewiththegeneralmarket.

Theninthe1960s,A&PbegantofalterwhileKrogerbegantolaythe

foundationsforatransitionintoagreatcompany.From

1959to1973,

bothcompanieslaggedbehindthemarket,withKrogerpullingjustabit

aheadofA&P.Afterthat,thetwocompaniescompletelydiverged,and

overthenexttwenty-fiveyears,Krogergeneratedcumulativereturnsten

timesthemarketandeightytimesbetterthanA&P.

Howdidsuchadramaticreversaloffortuneshappen?Andhowcoulda

companyasgreatasA&Pbecomesoawful?

66

JimCollins

KROGER,A&P,ANDTHEMARKET

CumulativeValueof$1Invested,

1959-1973

GeneralMarket

$342

Notes:

1.Krogertransitionpointoccurredin1973.

2Chartshowsvalueof$1investedonJanuary1,1959.

3.Cumulativereturns,dividendsreinvested,toJanuary1,1973.

KROGER,A&P,ANDTHEMARKET

CumulativeValueof$1Invested,

1973-1998

Kroger:$198.47

Notes:

1Krogertransitionpointoccurredin1973

2Chartshowsvalueof$1tnvestedonJanuary1.1973

3.Cumulativereturns,dividendsreinvested,toJanuary1,1998.

GoodtoGreat

67

A&Phadaperfectmodelforthefirsthalfofthetwentieth

century,

whentwoworldwarsandadepressionimposedfrugalityuponAmeri-

cans:cheap,plentifulgroceriessoldinutilitarianstores.Butintheafflu-

entsecondhalfofthetwentiethcentury,Americanschanged.They

wantednicerstores,biggerstores,morechoicesinstores.Theywanted

fresh-bakedbread,flowers,healthfoods,coldmedicines,freshproduce,

forty-fivechoicesofcereal,andtentypesofmilk.Theywantedoffbeat

items,likefivedifferenttypesofexpensivesprouts

andvariousconcoc-

tionsofproteinpowderandChinesehealingherbs.Oh,andtheywanted

tobeabletodotheirbankingandgettheirannualflushotswhileshop-

ping.Inshort,theynolongerwantedgrocerystores.TheywantedSuper-

stores,withabigblock"S"onthechest-offeringalmosteverything

underoneroof,withlotsofparking,cheapprices,cleanfloors,anda

gazillioncheckoutlines.

Now,rightoffthebat,youmightbethinking:"Okay,sothestoryof

A&Pisoneofanagingcompanythathadastrategythatwasrightforthe

times,butthetimeschangedandtheworldpasseditbyasyounger,better-

attunedcompaniesgavecustomersmoreofwhattheywanted.What'sso

interestingaboutthat?"

Here'swhat'sinteresting:BothKrogerandA&Pwereoldcompanies

(Krogerat82years,A&Pat111years)headingintothe1970s;bothcom-

panieshadnearlyalltheirassetsinvestedintraditionalgrocerystores;both

companieshadstrongholdsoutsidethemajorgrowth

areasoftheUnited

States;andbothcompanieshadknowledgeofhowtheworldaroundthem

waschanging.Yetoneofthesetwocompaniesconfrontedthebrutalfacts

ofrealityhead-onandcompletelychangeditsentiresysteminresponse;

theotherstuckitsheadinthesand.

In1958,ForbesmagazinedescribedA&Pas"theHermitKingdom,"

runasanabsolutemonarchybyanaging

RalphBurger,thesuc-

cessortotheHartfordbrotherswhohadbuiltthe

A&Pdynasty,soughtto

preservetwothingsaboveallelse:cashdividendsforthefamilyfounda-

tionandthepastgloryoftheHartfordbrothers.AccordingtooneA&P

director,Burger"consideredhimselfthereincarnationofoldJohnHart-

ford,eventothepointofwearingaflowerinhislapeleverydayfrom

Hartford'sgreenhouse.Hetriedtocarryout,againstallopposition,what

hethoughtMr.John[Hartford]wouldhave

Burgerinstilleda

"whatwouldMr.Hartford

do?"approachtodecisions,livingbythemotto

"Youcan'targuewithahundredyearsof

Indeed,through

68

JimCollins

Burger,Mr.Hartfordcontinuedtobethedominantforceontheboard

fornearlytwentyyears.

Nevermindthefactthathewasalready

Asthebrutalfactsaboutthemismatchbetweenitspastmodelandthe

changingworldbegantopileup,A&Pmountedanincreasinglyspirited

defenseagainstthosefacts.Inoneseriesofevents,thecompanyopeneda

newstorecalledTheGoldenKey,aseparatebrandwhereinitcould

experimentwithnewmethodsandmodelstolearnwhatcustomers

wanted.:ItsoldnoA&P-brandedproducts,itgavethestoremanagermore

freedom,itexperimentedwithinnovativenew

departments,anditbegan

toevolvetowardthemodernsuperstore.Customersreallylikedit.Here,

rightundertheirnoses,theybegantodiscovertheanswertothequestions

ofwhythe!werelosingmarketshareandwhattheycoulddoaboutit.

WhatdidA&PexecutivesdowithTheGoldenKey?

Theydidn'tliketheanswersthatitgave,sotheyclosed

A&Pthenbeganapatternoflurchingfromonestrategytoanother,

alwayslookingforasingle-strokesolutiontoitsproblems.Itheldpepral-

lies,launchedprograms,grabbedfads,firedCEOs,hiredCEOs,andfired

themyetagain.Itlaunchedwhatoneindustryobservercalleda"scorched

earthpolicy,"aradicalprice-cuttingstrategytobuildmarketshare,but

neverdealtwiththebasicfactthatcustomerswanted

notlowerprices,but

different

Thepricecuttingledtocostcutting,whichledtoeven

drabberstoresandpoorerservice,whichinturndrovecustomersaway,

furtherdrivingdownmargins,resultinginevendirtierstoresandworse

service."Afterawhilethecrudkeptmounting,"saidoneformerA&P

manager."Wenotonlyhaddirt,wehaddirty

Meanwhile,overatKroger,acompletelydifferentpatternarose.Kroger

alsoconductedexperimentsinthe1960stotestthesuperstore

By1970,theKrogerexecutiveteamcametoaninescapableconclusion:

Theold-modelgrocerystore(whichaccountedfornearly100percentof

Kroger'sbusiness)wasgoingtobecomeextinct.UnlikeA&P,however,

Krogerconfrontedthisbrutaltruthandactedonit.

TheriseofKrogerisremarkablysimpleandstraightforward,almost

maddeninglyso.Duringtheirinterviews,LyleEveringhamandhisprede-

cessorJimHerring(CEOsduringthepivotaltransitionyears)werepolite

andhelpful,butabitexasperatedbyourquestions.

Tothem,itjust

seemedsoclear.WhenweaskedEveringhamtoallocateonehundred

pointsacrossthetopfivefactorsinthetransition,hesaid:"Ifindyour

questionabitperplexing.Basically,wedidextensiveresearch,andthe

datacamebackloudandclear:Thesupercombinationstoreswerethe

GoodtoGreat

69

wayofthefuture.Wealsolearnedthatyouhadtobenumberoneornum-

bertwoineachmarket,oryouhadtoexit.*Sure,therewassomeskepti-

cismatfirst.Butoncewelookedatthefacts,therewasreallynoquestion

aboutwhatwehadtodo.Sowejustdid

Krogerdecidedtoeliminate,change,orreplaceeverysinglestoreand

departeveryregionthatdidnotfitthenewrealities.Thewholesystem

wouldbeturnedinsideout,storebystore,blockbyblock,citybycity,

,

statebystate.Bytheearly1990s,Krogerhadrebuiltitsentiresystemon

thenewmodelandwaswellonthewaytobecomingthenumberonegro-

cerychaininAmerica,apositionitwouldattainin

Meanwhile,

A&Pstillhadoverhalfitsstoresintheold1950ssizeandhaddwindledto

asadremnantofaonce-greatAmerican

FACTSAREBETTERTHANDREAMS

Oneofthedominantthemesfromourresearchisthatbreakthrough

resultscomeaboutbyaseriesofgooddecisions,diligentlyexecutedand

accumulatedoneontopofanother.Ofcourse,thegood-to-greatcompa-

niesdidnothaveaperfecttrackrecord.Butonthewhole,theymade

manymoregooddecisionsthanbadones,andtheymade

manymore

gooddecisionsthanthecomparisoncompanies.Evenmoreimportant,on

thereallybigchoices,suchasKroger7sdecisiontothrowallitsresources

intothetaskofconvertingitsentiresystemtothesuperstoreconcept,they

wereremarkablyontarget.

This,ofcourse,begsaquestion.Arewemerelystudyingasetofcom-

paniesthatjusthappenedbylucktostumbleintotherightsetofdeci-

sions?Orwastheresomethingdistinctiveabouttheirprocessthat

dramaticallyincreasedthelikelihoodofbeingright?Theanswer,itturns

out,isthattherewassomethingquitedistinctiveabouttheirprocess.

Thegood-to-greatcompaniesdisplayedtwodistinctiveformsofdisci-

plinedthought.Thefirst,andthetopicofthischapter,

isthattheyinfused

theentireprocesswiththebrutalfactsofreality.(Thesecond,whichwe

*Keepinmind,thiswastheearly1970s,afulldecadebeforethe"numberone,num-

bertwo,orexit"ideabecamemainstream.Kroger,likeallgood-to-greatcompanies,

developeditsideasbypayingattentiontothedatarightinfrontofit,notbyfollowing

trendsandfadssetbyothers.Interestingly,overhalfthegood-to-greatcompanieshad

someversionofthe"numberone,numbertwo"conceptinplaceyearsbeforeit

becameamanagementfad.

70

Jim

Collins

I

willdiscussinthenextchapter,isthattheydevelopedasimple,yetdeeply

insightful,frameofreferenceforalldecisions.)When,asintheKroger

case,youstartwithanhonestanddiligentefforttodeterminethetruthof

thesituation,therightdecisionsoftenbecomeself-evident.Notalways,of

course,butoften.Andevenifalldecisionsdonotbecome

self-evident,

onethingiscertain:Youabsolutelycannotmakeaseriesofgooddecisions

withoutfirstconfrontingthebrutalfacts.Thegood-to-greatcompanies

operatedinaccordancewiththisprinciple,andthecomparisoncompa-

niesgenerallydidnot.

ConsiderPitneyBowesversusAddressograph.Itwouldbehardtofind

twocompaniesinmoresimilarpositionsataspecificmomentinhistory

thatthendivergedsodramatically.Until1973,theyhadsimilarrevenues,

profits,numbersofemployees,andstockcharts.Bothcompaniesheld

near-monopolymarketpositionswithvirtuallythesamecustomerbase-

PitneyBowesinpostagemetersandAddressographinaddress-duplicating

machines-andbothfacedtheimminentrealityoflosing

theirmonopo-

By2000,however,PitneyBoweshadgrowntoover30,000employ-

eesandrevenuesinexcessof$4billion,comparedtothesorryremnants

ofAddressograph,whichhadlessthan$100millionandonly670employ-

Fortheshareholder,PitneyBowesoutperformedAddressograph

3,581to1(yes,threethousandfivehundredandeighty-onetimesbetter).

In1976,acharismaticvisionaryleadernamedRoyAshbecameCEO

ofAddressograph.Aself-described"conglomerateur,"

Ashhadpreviously

builtLittonbystackingacquisitionstogetherthathadsincefaltered.

AccordingtoFortune,hesoughttouseAddressographasaplatformto

reestablishhisleadershipprowessintheeyesofthe

Ashsetforthavisionto

dominatethelikesofIBM,Xerox,andKodakin

theemergingfieldofofficeautomation-aboldplanforacompanythat

hadpreviouslyonlydominatedtheenvelope-address-duplicationbusi-

Thereisnothingwrongwithaboldvision,butAshbecamesowed-

dedtohisquixoticquestthat,accordingtoBusinessWeek,herefusedto

confrontthemountingevidencethathisplanwasdoomedtofailand

mighttakedowntherestofthecompanywith

Heinsistedonmilking

cashfromprofitablearenas,

erodingthecorebusinesswhilethrowing

moneyafteragambitthathadlittlechanceof

Later,afterAshwasthrownoutofofficeandthecompanyhadfiledfor

bankruptcy(fromwhichitdidlateremerge),hestillrefusedtoconfront

reality,saying:"Welostsomebattles,butwewerewinningthe

But

GoodtoGreat

71

PITNEYBOWESVERSUSADDRESSOGRAPH

AnnualRevenues,1963-1998

Constant1998Dollars,inMillions

PitneyBowes

Addressographwasnoteven

closetowinningthewar,andpeoplethrough-

outthecompanyknewitatthetime.Yetthetruthwentunhearduntilit

wastoo

Infact,manyofAddressograph'skeypeoplebailedoutof

thecompany,dispiritedby

theirinabilitytogettopmanagementtodeal

withthe

PerhapsweshouldgiveMr.Ashsomecreditforbeingavisionarywho

triedtopushhiscompanytogreaterheights.(And,tobefair,theAddress-

ographboardfiredAsh

beforehehadachancetofullycarryouthis

Buttheevidencefromaslewofrespectablearticleswrittenatthe

timesuggeststhatAshturnedablindeyetoanyrealityinconsistentwith

hisownvisionoftheworld.

72

JimCollins

"Whenyouturnoverrocksandlookatallthesquigglythingsunder-

neath,youcaneitherputtherockdown,oryoucansay,'Myjobistoturn

overrocksandlookatthesquigglythings,'evenifwhatyouseecanscare

thehelloutof

Thatquote,fromPitneyBowesexecutiveFredPur-

due,couldhavecomefromanyofthePitneyBowesexecutivesweinter-

viewed.Theyallseemedabit,well,tobeblunt,neuroticandcompulsive

aboutPitney'spositionintheworld."Thisisaculturethatisveryhostile

tocomplacency,"saidone

"Wehaveanitchthatwhatwejust

accomplished,nomatterhowgreat,isnevergoingtobegoodenoughto

sustainus,"said

Pitney'sfirstmanagementmeetingofthenewyeartypicallyconsisted

ofaboutfifteenminutes

discussingthepreviousyear(almostalways

superbresults)andtwohourstalkingaboutthe"scarysquigglythings"that

mightimpedefuture

PitneyBowessalesmeetingswerequitedif-

ferentfromthe"aren'twegreat"rah-rahsales

conferencestypicalatmost

companies:Theentiremanagementteamwouldlayitselfopentosearing

questionsandchallengesfromsalespeoplewhodealtdirectlywithcus-

tomer~.~~

The

companycreatedalong-standingtraditionofforumswhere

peoplecouldstandupandtellseniorexecutiveswhatthecompanywas

doingwrong,shovingrockswithsquigglythingsintheirfaces,andsaying,

"Look!You'dbetterpayattentionto

TheAddressographcase,especiallyincontrasttoPitneyBowes,illus-

tratesavitalpoint.Strong,charismaticleaderslikeRoyAshcanalltoo

easilybecomethedefactorealitydrivingacompany.Throughoutthe

study,wefoundcomparisoncompanieswherethetop

leaderledwith

suchforceorinstilledsuchfearthatpeopleworriedmoreaboutthe

leader-whathewouldsay,whathewouldthink,whathewoulddo-

thantheyworriedaboutexternalrealityandwhatitcoulddotothecom-

pany.RecalltheclimateatBankofAmerica,describedintheprevious

chapter,whereinmanagerswouldnotevenmakeacommentuntilthey

knewhowtheCEOfelt.Wedidnotfindthispatternatcompanieslike

WellsFargoandPitneyBowes,wherepeoplewere

muchmoreworried

aboutthescarysquigglythingsthanaboutthefeelingsoftopmanage-

ment.

Themomentaleaderallowshimselftobecometheprimaryrealitypeo-

pleworryabout,ratherthanrealitybeingtheprimary

reality,youhavea

recipeformediocrity,orworse.Thisisoneofthekeyreasonswhyless

charismaticleadersoftenproducebetterlong-termresultsthantheirmore

charismaticcounterparts.

GoodtoGreat

73

WinstonChurchillunderstoodtheliabilitiesofhisstrongpersonality,

andhecompensatedforthembeautifullyduringtheSecondWorldWar.

Churchill,asyouknow,maintainedaboldandunwaveringvisionthat

Britainwouldnotjustsurvive,butprevailasagreatnation-despitethe

wholeworldwonderingnotifbutwhenBritainwouldsueforpeace.Dur-

ingthedarkestdays,withnearlyallofEuropeandNorthAfricaunder

Nazicontrol,theUnitedStateshopingtostayoutof

theconflict,and

Hitlerfightingaone-frontwar(hehadnotyetturnedonRussia),

Churchillsaid:"WeareresolvedtodestroyHitlerandeveryvestigeofthe

Naziregime.Fromthis,nothingwillturnus.Nothing!Wewillneverpar-

ley.WewillnevernegotiatewithHitleroranyofhisgang.Weshallfight

himbyland.Weshallfighthimbysea.Weshallfighthimintheair.

Until,withGod'shelp,wehaveridtheearthofhis

Armedwiththisboldvision,Churchillneverfailed,however,tocon-

frontthemostbrutalfacts.Hefearedthathistowering,charismatic

personalitymightdeterbadnewsfromreachinghiminitsstarkestform.

So,earlyinthewar,hecreatedanentirelyseparatedepartmentoutside

thenormalchainofcommand,calledthe

StatisticalOffice,withtheprin-

cipalfunctionoffeedinghim-continuouslyupdatedandcompletely

unfiltered-themostbrutalfactsof

Hereliedheavilyonthisspe-

cialunitthroughoutthewar,repeatedlyaskingforfacts,

justthefacts.As

theNazipanzerssweptacrossEurope,Churchillwenttobedandslept

soundly:"I...hadnoneedforcheeringdreams,"hewrote."Factsare

betterthan

ACLIMATEWHERETHETRUTHISHE

ARD

Now,youmightbewondering,"Howdoyoumotivatepeoplewithbrutal

facts?Doesn'tmotivationflowchieflyfromacompellingvision?"The

74

Collins

answer,surprisingly,is,"No."Notbecausevisionisunimportant,but

becauseexpendingenergytryingtomotivatepeopleislargelyawasteof

time.Oneofthedominantthemesthatrunsthroughoutthisbookisthat

ifyousuccessfullyimplementitsfindings,youwillnotneedtospendtime

andenergy"motivating7'people.Ifyouhavetherightpeopleonthebus,

theywillbeself-motivated.Therealquestionthen

becomes:Howdoyou

manageinsuchawayasnottode-motivatepeople?Andoneofthesingle

mostde-motivatingactionsyoucantakeistoholdoutfalsehopes,soonto

besweptawaybyevents.

Howdoyoucreateaclimatewherethetruthisheard?We

offerfour

basicpractices:

1.Leadwithquestions,notanswers.

In1973,oneyearafterheassumedCEOresponsibilityfromhisfather,

AlanWurtzel'scompanystoodatthebrinkofbankruptcy,dangerously

closetoviolationofitsloanagreements.Atthetime,thecompany

(thennamedWards,nottobeconfusedwithMontgomeryWard)wasa

hodgepodgeofapplianceandhi-fistoreswithnounifyingconcept.

Overthenexttenyears,Wurtzelandhisteamnot

onlyturnedthecom-

panyaround,butalsocreatedtheCircuitCityconceptandlaidthe

foundationsforastunningrecordofresults,beatingthemarkettwenty-

twotimesfromitstransitiondatein1982toJanuary1,2000.

WhenAlanWurtzelstartedthelongtraversefromnearbankruptcy

tothesestellarresults,hebeganwitharemarkableanswertotheques-

tionofwheretotakethecompany:Idon'tknow.Unlikeleaderssuchas

RoyAshofAddressograph,Wurtzelresistedtheurgeto

walkinwith

"theanswer."Instead,onceheputtherightpeopleonthebus,he

begannotwithanswers,butwithquestions."Alanwasarealspark,"

saidaboardmember."Hehadanabilitytoaskquestionsthatwerejust

GoodtoGreat

75

marvelous.Wehadsomewonderfuldebatesintheboardroom.Itwas

neverjustadogandponyshow,whereyouwouldjustlistenandthen

goto

Indeed,WurtzelstandsasoneofthefewCEOsina

largecorporationwhoputmorequestionstohisboardmembersthan

theyputtohim.

Heusedthesameapproachwithhisexecutiveteam,constantly

pushingandprobingandproddingwithquestions.Eachstepalongthe

way,Wurtzelwouldkeepaskingquestionsuntilhehadaclearpicture

ofrealityanditsimplications."Theyusedto

callmetheprosecutor,

becauseIwouldhomeinonaquestion,"saidWurtzel."Youknow,like

abulldog,Iwouldn'tletgountilIunderstood.Why,why,why?"

LikeWurtzel,leadersineachofthegood-to-greattransitionsoper-

atedwithasomewhatSocraticstyle.Furthermore,theyusedquestions

foroneandonlyonereason:togainunderstanding.Theydidn'tuse

questionsasaformofmanipulation("Don'tyouagreewithmeon

that?...")orasawaytoblameorputdownothers

("Whydidyoumess

thisup?...").Whenweaskedtheexecutivesabouttheirmanagement

teammeetingsduringthetransitionera,theysaidthattheyspentmuch

ofthetime"justtryingtounderstand."

Thegood-to-greatleaders

madeparticularlygooduseofinformal

meetingswherethey'dmeetwithgroupsofmanagersandemployees

withnoscript,agenda,orsetofactionitemstodiscuss.Instead,they

wouldstartwithquestionslike:"So,what'sonyourmind?""Canyou

tellmeaboutthat?""Canyouhelpmeunderstand?""Whatshouldwe

beworriedabout?"Thesenon-agendameetingsbecameaforumwhere

currentrealitiestendedtobubbletothesurface.

2.Engageindialogueanddebate,notcoercion.

In1965,youcouldhardlyfindacompanymoreawfulthanNucor.It

hadonlyonedivisionthatmademoney.Everythingelsedrainedcash.

Ithadnoculturetobeproudof.Ithadnoconsistentdirection.Itwas

76

Collins

onthevergeofbankruptcy.Atthetime,Nucorwasofficiallyknownas

theNuclearCorporationofAmerica,reflectingitsorientationto

nuclearenergyproducts,includingtheScintillationProbe(yes,they

reallynameditthat),usedforradiationmeasurement.Ithadacquireda

seriesofunrelatedbusinessesinsucharenasassemiconductorsupplies,

rareearthmaterials,electrostaticofficecopiers,

androofjoists.Atthe

startofitstransformationin1965,Nucordidnotmanufactureone

ounceofsteel.Nordiditmakeapennyofprofit.Thirtyyearslater,

Nucorstoodasthefourth-largeststeelmakerinthe

andby1999

madegreaterannualprofitsthananyotherAmericansteel

HowdidNucortransitionfromtheutterlyawfulNuclearCorpora-

tionofAmericaintoperhapsthebeststeelcompanyinAmerica?First,

NucorbenefitedfromtheemergenceofaLevel5

leader,KenIverson,

promotedtoCEOfromgeneralmanagerofthejoistdivision.Second,

Iversongottherightpeopleonthebus,buildingaremarkableteamof

peoplelikeSamSiegel(describedbyoneofhiscolleaguesas"thebest

moneymanagerintheworld,amagician")andDavidAycock,anoper-

ations

Andthenwhat?

LikeAlanWurtzel,Iversondreamedofbuildinga.greatcompany,

butrefusedtobeginwith"theanswer"forhowtogetthere.

Instead,he

playedtheroleofSocraticmoderatorinaseriesofragingdebates."We

establishedanongoingseriesofgeneralmanagermeetings,andmyrole

wasmoreasamediator,"commentedIverson."Theywerechaos.We

wouldstaythereforhours,ironingouttheissues,untilwecameto

something....Attimes,themeetingswouldgetsoviolentthatpeople

almostwentacrossthetableateachother....Peopleyelled.They

wavedtheirarmsaroundandpoundedontables.Faces

wouldgetred

andveinsbulged

Iverson'sassistanttellsofascenerepeatedovertheyears,wherein

colleagueswouldmarchintoIverson'sofficeandyellandscreamat

eachother,butthenemergewitha

Argueanddebate,

thensellthenuclearbusiness;argueanddebate,thenfocusonsteel

joists;argueanddebate,thenbegintomanufacturetheirownsteel;

argueanddebate,theninvestintheirownmini-mill;argueand

debate,thenbuildasecondmini-mill,andsoforth.Nearlyallthe

Nucorexecutiveswespokewithdescribedaclimateofdebate,

whereinthecompany'sstrategy"evolvedthroughmanyagonizing

argumentsand

GoodtoGreat

77

3.Conductautopsies,withoutblame.

In1978,PhilipMorrisacquiredtheSeven-UpCompany,onlytosell

iteightyearslaterata

Thefinanciallosswasrelativelysmall

comparedtoPhilipMorris'stotalassets,butitwasa

highlyvisible

blackeyethatconsumedthousandsofhoursofpreciousmanagement

time.

InourinterviewswiththePhilipMorrisexecutives,wewerestruck

byhowtheyallbroughtupthedebacleontheirownand

discussedit

openly.Insteadofhidingtheirbig,uglymistake,theyseemedtofeelan

almosttherapeuticneedtotalkaboutit.Inhisbook,I'maLuckyGuy,

JoeCullmandedicatesfivepagestodissectingthe7UPdisaster.He

doesn'tholdbacktheembarrassingtruthabouthowflawedthedeci-

sionwas.Itisafive-pageclinicalanalysisofthemistake,itsimplica-

tions,anditslessons.

Hundreds,ifnotthousands,ofpeoplehourshadbeenspentinautop-

siesofthe7UPcase.Yet,asmuchastheytalkedaboutthisconspicuous

failure,noonepointedfingerstosingleoutblame.Thereisonlyone

exceptiontothispattern:JoeCullman,standinginfrontofthemirror,

pointingthefingerrightathimself."[It]...became

apparentthatthis

wasanotherJoeCullmanplanthatdidn'twork,"he

Hegoes

evenfurther,implyingthatifhe'donlylistenedbettertothepeople

whochallengedhisideaatthetime,thedisastermighthavebeen

averted.Hegoesoutofhiswaytogivecredittothosewhowererightin

retrospect,namingthosespecificindividualswhoweremoreprescient

thanhimself.

Inanerawhenleadersgotogreatlengthstopreservetheimageof

theirowntrackrecord-steppingforthtoclaimcreditabouthowthey

werevisionarywhentheircolleagueswerenot,butfindingothersto

blamewhentheirdecisionsgoawry-itisquiterefreshingtocome

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JimCollins

acrossCullman.Hesetthetone:"Iwilltakeresponsibilityforthisbad

decision.Butwewillalltakeresponsibilityforextractingthemaximum

learningfromthetuitionwe'vepaid."

4.Build"redflag"

mechanisms.

Weliveinaninformationage,whenthosewithmoreandbetterinfor-

mationsupposedlyhaveanadvantage.Ifyoulookacrosstheriseand

falloforganizations,however,youwillrarelyfindcompaniesstumbling

becausetheylackedinformation.

BethlehemSteelexecutiveshadknownforyearsaboutthethreat

ofmini-millcompanieslikeNucor.Theypaidlittleattentionuntil

theywokeuponedaytodiscoverlargechunksofmarketsharetaken

Upjohnhadplentyofinformationthatindicatedsomeofitsforth-

comingproductswouldfailtodeliveranticipatedresultsor,worse,had

potentiallyserioussideeffects.Yetitoftenignoredthoseproblems.With

Halcion,forexample,aninsiderwasquotedin

Newsweeksaying,"dis-

missingsafetyconcernsaboutHalcionhadbecomevirtualcompany

policy."InanothercasewhenUpjohnfounditselfunderfire,itframed

itsproblemsas"adversepublicity,"ratherthanconfrontingthetruthof

itsown

ExecutivesatBankofAmericahadplentyofinformationaboutthe

realitiesofderegulation,yettheyfailedtoconfronttheonebigimplica-

tionofthoserealities:Inaderegulatedworld,bankingwouldbeacom-

modity,andtheoldperksandgenteeltraditionsofbankingwouldbe

goneforever.Notuntilithadlost$1.8billiondidBankofAmericafully

acceptthisfact.Incontrast,CarlReichardtofWellsFargo,calledthe

ultimaterealistbyhispredecessor,hitthebrutal

factsofderegulation

Sorry,fellowbankers,butwecanpreservethebankerclass

nomore.We'vegottobebusinessmenwithasmuchattentiontocosts

andeffectivenessasMcDonald's.

GoodtoGreat

79

Oneparticularlypowerfulwaytoaccomplishthisisthroughredflag

mechanisms.Allowmetouseapersonalexampleto

illustratetheidea.

WhenteachingbythecasemethodatStanfordBusinessSchool,I

issuedtoeachMBAstudentan8.5"x11"brightredsheetofpaper,

withthefollowinginstructions:"Thisisyourredflagforthequarter.If

youraiseyourhandwithyourredflag,theclassroomwillstopforyou.

Therearenorestrictionsonwhenandhowtouseyourredflag;the

decisionrestsentirelyinyourhands.Youcanuseittovoiceanobserva-

tion,shareapersonalexperience,presentan

analysis,disagreewiththe

professor,challengeaCEOguest,respondtoafellowstudent,aska

question,makeasuggestion,orwhatever.Therewillbenopenalty

whatsoeverforanyuseofaredflag.Yourredflagcanbeusedonlyonce

duringthequarter.Yourredflagisnontransferable;youcannotgiveor

sellittoanotherstudent."

Withtheredflag,Ihadnoideapreciselywhatwouldhappeneachday

inclass.Inonesituation,astudentusedherredflagtostate,"Professor

Collins,Ithinkyouaredoingaparticularlyineffectivejobofrunning

classtoday.Youareleadingtoomuchwithyourquestionsandstiflingour

independentthinking.Letusthinkforourselves."Theredflagcon-

frontedmewiththebrutalfactthatmyownquestioning

stylestoodinthe

wayofpeople'slearning.Astudentsurveyattheendofthequarterwould

havegivenmethatsameinformation.Buttheredflag-realtime,in

frontofeveryoneintheclassroom-turnedinformationabouttheshort-

comingsoftheclassintoinformationthatIabsolutelycouldnotignore.

IgottheideaforredflagmechanismsfromBruceWoolpert,who

institutedaparticularlypowerfuldevicecalledshortpayathiscompany

Graniterock.Shortpaygivesthecustomerfull

discretionarypowerto

decidewhetherandhowmuchtopayonaninvoicebaseduponhis

ownsubjectiveevaluationofhowsatisfiedhefeelswithaproductorser-

vice.Shortpayisnotarefundpolicy.Thecustomerdoesnotneedto

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JimCollins

returntheproduct,nordoesheneedtocallGraniterockforpermis-

sion.Hesimplycirclestheoffendingitemontheinvoice,deductsit

fromthetotal,andsendsacheckforthebalance.WhenIasked

Woolperthisreasonsforshortpay,hesaid,"Youcan

getalotofinfor-

mationfromcustomersurveys,buttherearealwayswaysofexplaining

awaythedata.Withshortpay,youabsolutelyhavetopayattentionto

thedata.Youoftendon'tknowthatacustomerisupsetuntilyoulose

thatcustomerentirely.Shortpayactsasanearlywarningsystemthat

forcesustoadjustquickly,longbeforewewouldlosethatcustomer."

Tobeclear,wedidnotgenerallyfindredflagmechanismsasvivid

anddramaticasshortpayinthegood-to-greatcompanies.

Nonetheless,

I'vedecidedtoincludethisideahere,attheurgingofresearchassistant

LaneHornung.Hornung,whohelpedmesystematicallyresearchand

collatemechanismsacrosscompaniesforadifferentresearchproject,

makesthecompellingargumentthatifyou'reafullydevelopedLevel5

leader,youmightnotneedredflagmechanisms.Butifyouarenotyet

aLevel5leader,orifyousuffertheliabilityofcharisma,redflagmech-

anismsgiveyouapracticalandusefultoolforturning

informationinto

informationthatcannotbeignoredandforcreatingaclimatewhere

thetruthisheard.*

UNWAVERINGFAITHAMIDTHEBRUTALFACTS

WhenProcter&Gambleinvadedthepaper-based

consumerbusinessin

thelate1960s,ScottPaper(thentheleader)simplyresigneditselftosec-

ondplacewithoutafightandbeganlookingforwaysto

"The

companyhadameetingforanalystsin1971thatwasoneofthemost

depressingI'veeverattended,"saidoneanalyst."Managementessentially

threwinthetowelandsaid,'We'vebeenhad.'

Theonce-proudcom-

panybegantolookatitscompetitionandsay,"Here'showwestackup

againstthebest,"andsigh,

"Oh,well...atleasttherearepeopleinthe

businessworsethanwe

Insteadoffiguringouthowtogetbackon

theoffensiveandwin,Scottjusttriedtoprotectwhatithad.Conceding

thetopendofthemarkettoP&G,Scotthopedthat,by

hidingawayin

"Foramorecompletediscussionofmechanisms,seethearticle"TurningGoalsinto

Results:ThePowerofCatalyticMechanisms,"

BusinessReview,July-August,

1999.

GoodtoGreat

81

theBcategory,itwouldbeleftalonebythebigmonsterthathadinvaded

its

Kimberly-Clark,ontheotherhand,viewedcompetingagainstProcter

&Gamblenotasaliability,butasanasset.DarwinSmith

andhisteam

feltexhilaratedbytheideaofgoingupagainstthebest,seeingitasan

opportunitytomakeKimberly-Clarkbetterandstronger.Theyalso

vieweditasawaytostimulatethecompetitivejuicesofKimberlypeople

atalllevels.Atoneinternalgathering,DarwinSmithstoodupandstarted

histalkbysaying,"Okay,Iwanteveryonetoriseinamomentofsilence."

Everyonelookedaround,wonderingwhatDarwinwasupto.Didsome-

onedie?Andso,afteramomentofconfusion,they

allstoodupandstared

attheirshoesinreverentsilence.Afteranappropriatepause,Smith

lookedoutatthegroupandsaidinasombertone,"Thatwasamomentof

silenceforP&G."

Theplacewentbananas.BlairWhite,adirectorwho

witnessedthe

incident,said,"Hehadeveryonewoundupinthisthing,allupanddown

thecompany,rightdowntotheplantfloor.Weweretakingon

Later,WayneSanders(Smith'ssuccessor)describedtoustheincredible

benefitofcompetingagainstthebest:"Couldwehaveabetteradversary

thanP&G?Notachance.Isaythatbecausewerespectthemsomuch.

Theyarebiggerthanweare.Theyareverytalented.Theyaregreatat

marketing.Theybeatthehelloutofeveryoneoftheir

competitors,except

one,Kimberly-Clark.Thatisoneofthethingsthatmakesusso

RobertAdersofKrogersummedthisupnicelyattheendofhisinter-

view,describingthepsychologyoftheKrogerteamasitfacedthedaunting

twenty-yeartaskofmethodicallyturningovertheentireKrogersystem.

"TherewasacertainChurchilliancharactertowhatweweredoing.We

hadaverystrongwilltolive,thesensethatweareKroger,Krogerwashere

beforeandwillbeherelongafterwearegone,and,by

god,wearegoing

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JimCollins

towinthisthing.Itmighttakeusahundredyears,butwewillpersistfora

hundredyears,ifthat'swhatit

Throughoutourresearch,we

werecontinuallyremindedofthe"hardi-

ness"researchstudiesdonebytheInternationalCommitteefortheStudy

ofVictimization.Thesestudieslookedatpeoplewhohadsufferedserious

adversity-cancerpatients,prisonersofwar,accidentvictims,andso

forth-andsurvived.Theyfoundthatpeoplefellgenerallyintothreecat-

egories:thosewhowerepermanentlydispiritedbytheevent,thosewho

gottheirlifebacktonormal,andthosewhousedtheexperienceasa

definingeventthatmadethem

Thegood-to-greatcompanies

werelikethoseinthethirdgroup,withthe"hardinessfactor."

WhenFannieMaebeganitstransitionintheearly1980s,almostno

onegaveithighoddsforsuccess,muchlessforgreatness.FannieMae

had$56billionofloansthatwerelosingmoney.Itreceivedabout9per-

centinterestonitsmortgageportfoliobuthadtopayupto15percenton

thedebtitissued.Multiplythatdifferencetimes$56billion,andyouget

averylargenegativenumber!Furthermore,by

charter,FannieMaecould

notdiversifyoutsidethemortgagefinancebusiness.Mostpeopleviewed

FannieMaeastotallybeholdentoshiftsinthedirectionofinterest

rates-theygoupandFannieMaeloses,theygodownandFannieMae

wins-andmanybelievedthatFannieMaecouldsucceedonlyifthegov-

ernmentsteppedintoclampdownoninterest

"That'stheironly

hope,"saidone

Butthat'snotthewayDavidMaxwellandhisnewlyassembledteam

viewedthesituation.Theyneverwaveredintheirfaith,consistently

emphasizingintheirinterviewswithusthattheyneverhadthegoalto

merelysurvivebuttoprevailintheendasagreatcompany.Yes,theinter-

estspreadwasabrutalfactthatwasnotgoingto

magicallydisappear.Fan-

nieMaehadnochoicebuttobecomethebestcapitalmarketsplayerin

theworldatmanagingmortgageinterestrisk.Maxwellandhisteamset

outtocreateanewbusinessmodelthatwoulddependmuchlessoninter-

estrates,involvingtheinventionofverysophisticatedmortgagefinance

instruments.Mostanalystsrespondedwithderision."Whenyou'vegot

$56billionworthofloansinplaceandunderwater,talkingaboutnewpro-

gramsisajoke,"saidone.

"That'slikeChrysler[thenaskingforfederal

loanguaranteestostaveoffbankruptcy]goingintotheaircraft

AftercompletingmyinterviewwithDavidMaxwell,Iaskedhowhe

andhisteamdealtwiththenaysayersduringthosedarkdays."Itwasnever

anissueinternally,"hesaid."Ofcourse,wehadtostopdoingalotofstu-

GoodtoGreat

83

pidthings,andwehadto

inventacompletelynewsetoffinancialdevices.

Butweneverentertainedthepossibilitythatwewouldfail.Weweregoing

tousethecalamityasanopportunitytoremakeFannieMaeintoagreat

Duringaresearchmeeting,ateammembercommentedthatFannie

Maeremindedherofanoldtelevisionshow,TheSixMillionDollarMan

withLeeMajors.Thepretextoftheseriesisthatanastronautsuffersaseri-

ouscrashwhiletestingamoonlandingcraftoverasouthwesterndesert.

Insteadofjusttryingtosavethepatient,doctors

completelyredesignhim

intoasuperhumancyborg,installingatomic-poweredroboticdevicessuch

asapowerfullefteyeandmechanical

Similarly,DavidMaxwell

andhisteamdidn'tusethefactthatFannieMaewasbleedingandnear

deathasapretexttomerelyrestructurethecompany.Theyuseditasan

opportunitytocreatesomethingmuchstrongerandmorepowerful.Step

bystep,daybyday,monthbymonth,theFannieMaeteamrebuiltthe

entirebusinessmodelaroundriskmanagementand

reshapedthecorpo-

ratecultureintoahigh-performancemachinethatrivaledanythingon

WallStreet,eventuallygeneratingstockreturnsnearlyeighttimesthe

marketoverfifteenyears.

THESTOCKDALEPARADOX

Ofcourse,notallgood-to-greatcompaniesfacedadirecrisislikeFannie

Mae;fewerthanhalfdid.Buteverygood-to-greatcompanyfacedsignifi-

cantadversityalongthewaytogreatness,ofonesortoranother-Gillette

andthetakeoverbattles,Nucorandimports,Wells

Fargoandderegula-

tion,PitneyBoweslosingitsmonopoly,AbbottLabsandahugeproduct

recall,Krogerandtheneedtoreplacenearly100percentofitsstores,and

soforth.Ineverycase,themanagementteamrespondedwithapowerful

psychologicalduality.Ontheonehand,theystoicallyacceptedthebrutal

factsofreality.Ontheotherhand,theymaintainedanunwaveringfaith

intheendgame,andacommitmenttoprevailasagreatcompanydespite

thebrutalfacts.WecametocallthisdualitytheStockdale

Paradox.

ThenamereferstoAdmiralJimStockdale,whowasthehighest-

rankingUnitedStatesmilitaryofficerinthe"HanoiHilton"prisoner-of-

warcampduringtheheightoftheVietnamWar.Torturedovertwenty

timesduringhiseight-yearimprisonmentfrom1965to1973,Stockdale

livedoutthewarwithoutanyprisoner'srights,nosetreleasedate,andno

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JimCollins

certaintyastowhetherhewouldevensurvivetoseehisfamilyagain.He

shoulderedtheburdenofcommand,doingeverythinghecouldtocreate

conditionsthatwouldincreasethenumberofprisonerswhowouldsur-

viveunbroken,whilefighting

aninternalwaragainsthiscaptorsandtheir

attemptstousetheprisonersforpropaganda.Atonepoint,hebeathimself

withastoolandcuthimselfwitharazor,deliberatelydisfiguringhimself,

sothathecouldnotbeputonvideotapeasanexampleofa"well-treated

prisoner."Heexchangedsecretintelligenceinformationwithhiswife

throughtheirletters,knowingthatdiscoverywouldmeanmoretorture

andperhapsdeath.Heinstitutedrulesthatwouldhelppeopletodeal

withtorture(noonecanresisttortureindefinitely,so

hecreatedastep-

wisesystem-afterxminutes,youcansaycertainthings-thatgavethe

menmilestonestosurvivetoward).Heinstitutedanelaborateinternal

communicationssystemtoreducethesenseofisolationthattheircaptors

triedtocreate,whichusedafive-by-fivematrixoftapcodesforalpha

characters.(Tap-tapequalsthelettera,tap-pause-tap-tapequalstheletter

b,tap-tap-pause-tapequalstheletterf;andsoforth,fortwenty-fiveletters,

cdoublinginfork.)Atonepoint,duringanimposed

silence,theprison-

ersmoppedandsweptthecentralyardusingthecode,swish-swashingout

"Weloveyou"toStockdale,onthethirdanniversaryofhisbeingshot

down.Afterhisrelease,Stockdalebecamethefirstthree-starofficerinthe

historyofthenavytowearbothaviatorwingsandtheCongressional

Medalof

Youcanunderstand,then,myanticipationattheprospectofspending

partofanafternoonwithStockdale.Oneofmystudentshadwrittenhis

paperonStockdale,whohappenedtobeaseniorresearchfellowstudying

theStoicphilosophersattheHooverInstitutionrightacrossthestreetfrom

myoffice,andStockdaleinvitedthetwoofusforlunch.Inpreparation,I

readInLoveandWar,thebookStockdaleandhiswife

hadwritteninalter-

natingchapters,chroniclingtheirexperiencesduringthoseeightyears.

AsImovedthroughthebook,Ifoundmyselfgettingdepressed.Itjust

seemedsobleak-

theuncertaintyofhisfate,thebrutalityofhiscaptors,

andsoforth.Andthen,itdawnedonme:"HereIamsittinginmywarm

andcomfortableoffice,lookingoutoverthebeautifulStanfordcampus

onabeautifulSaturdayafternoon.I'mgettingdepressedreadingthis,and

Iknowtheendofthestory!Iknowthathegetsout,

reuniteswithhisfam-

ily,becomesanationalhero,andgetstospendthelateryearsofhislife

studyingphilosophyonthissamebeautifulcampus.Ifitfeelsdepressing

GoodtoGreat

85

forme,howonearthdidhedealwithitwhenhewasactuallythereand

didnotknowtheendofthestory?"

"Ineverlostfaithintheendofthestory,"hesaid,whenIaskedhim."I

neverdoubtednotonlythatI

wouldgetout,butalsothatIwouldprevail

intheendandturntheexperienceintothedefiningeventofmylife,

which,inretrospect,Iwouldnottrade."

Ididn'tsayanythingformanyminutes,andwecontinuedtheslowwalk

towardthefacultyclub,Stockdalelimpingandarc-swinginghisstiffleg

thathadneverfullyrecoveredfromrepeatedtorture.Finally,afterabouta

hundredmetersofsilence,Iasked,"Whodidn'tmakeitout?"

"Oh,that'seasy,"hesaid."Theoptimists."

"Theoptimists?Idon'tunderstand,"Isaid,nowcompletelyconfused,

givenwhathe'dsaidahundredmetersearlier.

"Theoptimists.Oh,theyweretheoneswhosaid,'We'regoingtobeout

byChristmas.'AndChristmaswouldcome,andChristmaswouldgo.

Thenthey'dsay,'We'regoingtobeoutbyEaster.'AndEasterwould

come,andEasterwouldgo.AndthenThanksgiving,andthenitwouldbe

Christmasagain.Andtheydiedofabrokenheart."

Anotherlongpause,andmorewalking.Thenheturnedtomeandsaid,

"Thisisaveryimportantlesson.Youmustneverconfusefaiththatyou

willprevailintheend-whichyoucanneveraffordtolose-withthedis-

ciplinetoconfrontthemostbrutalfactsofyourcurrentreality,whatever

theymightbe."

Tothisday,IcarryamentalimageofStockdaleadmonishingtheopti-

mists:"We'renotgettingoutbyChristmas;dealwithit!"

ThatconversationwithAdmiralStockdalestayedwithme,andinfacthad

aprofoundinfluenceonmyowndevelopment.Lifeisunfair-sometimes

toouradvantage,sometimestoourdisadvantage.Wewillallexperience

disappointmentsandcrushingeventssomewherealongtheway,setbacks

forwhichthereisno"reason,"noonetoblame.Itmightbedisease;it

mightbeinjury;itmightbeanaccident;itmightbe

losingalovedone;it

mightbegettingsweptawayinapoliticalshake-up;itmightbegetting

shotdownoverVietnamandthrownintoaPOWcampforeightyears.

Whatseparatespeople,Stockdaletaughtme,isnotthepresenceor

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JimCollins

absenceofdifficulty,buthowtheydealwiththeinevitabledifficultiesof

life.Inwrestlingwithlife'schallenges,theStockdale

Paradox(youmust

retainfaiththatyouwillprevailintheendandyoumustalsoconfrontthe

mostbrutalfactsofyourcurrentreality)hasprovedpowerfulforcoming

backfromdifficultiesnotweakened,butstronger-notjustforme,butfor

allthosewho'velearnedthelessonandtriedtoapplyit.

IneverreallyconsideredmywalkwithStockdaleaspartofmyresearch

intogreatcompanies,categorizingitmoreasapersonalratherthancor-

poratelesson.Butasweunraveledtheresearchevidence,Ikeptcoming

backtoitinmyownmind.Finally,onedayduringaresearch-teammeet-

ing,IsharedtheStockdalestory.Therewassilencearoundthetablewhen

Ifinished,andIthought,"TheymustthinkI'mreallyoutinleftfield."

ThenDuaneDuffy,aquietandthoughtfulteammember

whohad

donetheA&PversusKrogeranalysis,said,"That'sexactlywhatI'vebeen

strugglingwith.I'vebeentryingtogetmyhandsaroundtheessentialdif-

ferencebetweenA&PandKroger.Andthat'sit.KrogerwaslikeStock-

dale,andA&Pwasliketheoptimistswhoalwaysthoughtthey'dbeoutby

Christmas."

Thenotherteammembersbegantochimein,notingthesamediffer-

encebetweentheircomparisonsets-WellsFargoversusBankofAmerica

bothfacingderegulation,Kimberly-ClarkversusScottPaperbothfacing

theterriblemightofProcter&Gamble,PitneyBowesversusAddresso-

graphbothfacingthelossoftheirmonopolies,NucorversusBethlehem

Steelbothfacingimports,andsoforth.Theyall

demonstratedthispara-

doxicalpsychologicalpattern,andwedubbedittheStockdaleParadox.

TheStockdaleParadoxisasignatureofallthosewhocreategreatness,

beitinleadingtheirownlivesorinleadingothers.Churchillhaditdur-

ingtheSecondWorldWar.AdmiralStockdale,likeViktorFranklbefore

him,liveditinaprisoncamp.Andwhileourgood-to-greatcompanies

cannotclaimtohaveexperiencedeitherthegrandeurofsavingthefree

GoodtoGreat

87

worldorthedepthofpersonalexperienceoflivinginaPOWcamp,they

allembracedtheStockdaleParadox.Itdidn'tmatterhowbleakthesitua-

tionorhowstultifyingtheirmediocrity,theyallmaintainedunwavering

faiththattheywouldnotjustsurvive,butprevailasagreatcompany.And

yet,atthesametime,theybecamerelentlesslydisciplinedatconfronting

themostbrutalfactsoftheircurrentreality.

Likemuchofwhatwefoundinourresearch,thekeyelementsofgreat-

nessaredeceptivelysimpleandstraightforward.Thegood-to-greatleaders

wereabletostripawaysomuchnoiseandclutterandjustfocusonthefew

thingsthatwouldhavethegreatestimpact.Theywereabletodosoin

largepartbecausetheyoperatedfrombothsidesof

theStockdaleParadox,

neverlettingonesideovershadowtheother.Ifyouareabletoadoptthis

dualpattern,youwilldramaticallyincreasetheoddsofmakingaseriesof

gooddecisionsandultimatelydiscoveringasimple,yetdeeplyinsightful,

conceptformakingthereallybigchoices.Andonceyouhavethatsimple,

unifyingconcept,youwillbeveryclosetomakingasustainedtransitionto

breakthroughresults.Itistothecreationofthatconceptthatwenowturn.

GoodtoGreat

89

C

H

A

P

T

E

R

5

Knowthyself.

-SCRIBESOFDELPHI,

viaPlatol

eyouahedgehogorafox?

famousessay"TheHedgehog

andtheFox,"IsaiahBerlindivided

theworldintohedgehogsandfoxes,baseduponanancientGreekpara-

ble:"Thefoxknowsmanythings,butthehedgehogknowsonebig

Thefoxisacunningcreature,abletodeviseamyriadofcomplex

strategiesforsneakattacksuponthehedgehog.Dayinanddayout,thefox

circlesaroundthehedgehog'sden,waitingfortheperfectmomentto

pounce.Fast,sleek,beautiful,fleetoffoot,andcrafty-thefoxlookslike

thesurewinner.Thehedgehog,ontheotherhand,

isadowdiercreature,

lookinglikeageneticmix-upbetweenaporcupineandasmallarmadillo.

Hewaddlesalong,goingabouthissimpleday,searchingforlunchand

takingcareofhishome.

Thefoxwaitsincunningsilenceatthejunctureinthe

trail.Thehedge-

hog,mindinghisownbusiness,wandersrightintothepathofthefox.

GoodtoGreat

91

"Aha,I'vegotyounow!"thinksthefox.Heleapsout,boundingacrossthe

ground,lightningfast.Thelittlehedgehog,sensingdanger,looksupand

thinks,"Herewegoagain.Willheeverlearn?"Rollingupintoaperfect

littleball,thehedgehogbecomesasphereofsharp

spikes,pointingout-

wardinalldirections.Thefox,boundingtowardhisprey,seesthehedge-

hogdefenseandcallsofftheattack.Retreatingbacktotheforest,thefox

beginstocalculateanewlineofattack.Eachday,someversionofthisbat-

tlebetweenthehedgehogandthefoxtakesplace,anddespitethegreater

cunningofthefox,thehedgehogalwayswins.

Berlinextrapolatedfromthislittleparabletodividepeopleintotwo

basicgroups:foxesandhedgehogs.Foxespursuemany

thesame

time

see

complexity.Theyare"scatteredordiffused,

movingonmanylevels,"saysBerlin,neverintegratingtheirthinkinginto

oneoverallconceptor

unifyingvision.

ontheotherhand,

simplifyacomplexworldintoa

abasicprinciple-or

conceptthatunifies

everything.Itdoesn'tmatterhowcomplex

theworld,ahedgehogreducesallchallengesanddilemmasto

indeedalmostsimplistic-hedgehogideas.Forahedgehog,anythingthat

doesnotsomehowrelatetothehedgehogideaholdsnorelevance.

PrincetonprofessorMarvinBresslerpointedoutthe

powerofthe

hedgehogduringoneofourlongconversations:"Youwanttoknowwhat

separatesthosewhomakethebiggestimpactfromalltheotherswhoare

justassmart?They'rehedgehogs."Freudandtheunconscious,Darwin

andnaturalselection,Marxandclassstruggle,Einsteinandrelativity,

AdamSmithanddivisionoflabor-theywereallhedgehogs.Theytooka

complexworldandsimplifiedit."Thosewholeavethebiggestfootprints,"

saidBressler,"havethousandscallingafterthem,

'Goodidea,butyou

wenttoofar!'

Tobeclear,hedgehogsarenotstupid.Quitethecontrary.Theyunder-

standthattheessenceofprofoundinsightissimplicity.Whatcouldbe

moresimplethane=mc2?Whatcouldbesimplerthan

theideaofthe

unconscious,organizedintoanid,ego,andsuperego?Whatcouldbe

moreelegantthanAdamSmith'spinfactoryand"invisiblehand"?No,

thehedgehogsaren'tsimpletons;theyhaveapiercinginsightthatallows

themtoseethroughcomplexityanddiscernunderlyingpatterns.Hedge-

hogsseewhatisessential,andignoretherest.

Whatdoesallthistalkofhedgehogsandfoxeshavetodowithgoodto

great?Everything.

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Collins

ConsiderthecaseofWalgreensversusEckerd.RecallhowWalgreens

generatedcumulativestockreturnsfromtheendof1975to2000that

exceededthemarketbyoverfifteentimes,handilybeatingsuchgreat

companiesasGE,Merck,Coca-Cola,andIntel.Itwasaremarkableper-

formanceforsuchananonymous-somemighteven

say

pany.WheninterviewingCorkWalgreen,Ikeptaskinghimtogodeeper,

tohelpusunderstandtheseextraordinaryresults.Finally,inexasperation,

hesaid,"Look,itjustwasn'tthatcomplicated!Onceweunderstoodthe

concept,wejustmovedstraight

Whatwastheconcept?Simplythis:thebest,mostconvenientdrugstores,

withhighprofitpercustomervisit.That'sit.That'sthebreakthroughstrat-

egythatWalgreensusedtobeatIntel,GE,Coca-Cola,andMerck.

Inclassichedgehogstyle,Walgreenstookthissimpleconceptandimple-

menteditwithfanaticalconsistency.Itembarkedonasystematicprogram

toreplaceallinconvenientlocationswithmoreconvenientones,preferably

cornerlotswherecustomerscouldeasilyenterandexit

frommultipledirec-

tions.Ifagreatcornerlocationwouldopenupjusthalfablockawayfroma

profitableWalgreensstoreinagoodlocation,thecompanywouldclosethe

goodstore(evenatacostof$1milliontogetoutofthelease)toopenagreat

newstoreonthe

Walgreenspioneereddrive-throughpharmacies,

foundcustomerslikedtheidea,andbuilthundredsofthem.Inurbanareas,

thecompanyclustereditsstorestightlytogether,onthepreceptthatnoone

shouldhavetowalkmore

thanafewblockstoreach

Indown-

townSanFrancisco,forexample,Walgreensclusteredninestoreswithina

one-mileradius.Nine

Ifyoulookclosely,youwillseeWalgreens

storesasdenselypackedin

somecitiesasStarbuckscoffeeshopsinSeattle.

Walgreensthenlinkeditsconvenienceconcepttoasimpleeconomic

idea,profitpercustomervisit.Tightclustering(ninestorespermile!)

leadstolocaleconomiesofscale,whichprovidesthecashformoreclus-

tering,whichinturndrawsmorecustomers.Byaddinghigh-marginser-

GoodtoGreat

93

VERSUSSELECTEDGREATCOMPANIES

CumulativeStockReturnsof$1Invested,

December31,1975-January1,2000

Walgreens:$562

vices,likeone-hourphoto

developing,Walgreensincreaseditsprofitper

customervisit.Moreconvenienceledtomorecustomervisits,which,

whenmultipliedtimesincreasedprofitpercustomervisit,threwcash

backintothesystemtobuildevenmoreconvenientstores.Storebystore,

blockbyblock,citybycity,regionbyregion,Walgreensbecamemoreand

moreofahedgehogwiththisincrediblysimpleidea.

Inaworldoverrunbymanagementfaddists,brilliantvisionaries,rant-

ingfuturists,fearmongers,motivationalgurus,andalltherest,it'srefresh-

ingtoseeacompanysucceedsobrilliantlybytakingonesimpleconcept

andjustdoingitwithexcellenceandimagination.Becomingthebestin

theworldatconvenientdrugstores,steadilyincreasingprofitpercustomer

visit-whatcouldbemore

obviousandstraightforward?

Yet,ifitwassoobviousandstraightforward,why

Eckerdseeit?

WhileWalgreensstuckonlytocitieswhereitcouldimplementthecon-

concept,wefoundnoevidenceofasimilarlycoher-

entconceptforgrowthatEckerd.Dealmakerstothecore,Eckerd's

executivescompulsivelyleaptatopportunitiestoacquireclumpsof

stores-forty-twounitshere,thirty-sixunitsthere-inhodgepodgefash-

ion,withnoobviousunifyingtheme.

94

Collins

WhileWalgreensexecutivesunderstoodthatprofitablegrowthwould

comebypruningawayallthatdidnotfitwiththeHedgehogConcept,

Eckerdexecutiveslurchedaftergrowthforgrowth'ssake.Intheearly

justasWalgreensbecamereligiousaboutcarryingoutitsconve-

nientdrugstoreconcept,Eckerdthrewitselfintothehomevideomarket

withitspurchaseofAmericanHomeVideo

Corporation.Eckerd'sCEO

toldForbesmagazinein1981,"Somefeelthepurerwearethebetterwe'll

be.ButIwantgrowth,andthehomevideoindustryisonly

unlike,say,drugstore

Eckerd'shomevideoforayproduced$31

millioninlossesbeforeEckerdsoldittoTandy,whichcrowedthatitgot

thedealfor$72millionbelowbook

InthepreciseyearofEckerd'sAmericanHomeVideoacquisition,

WalgreensandEckerdhadvirtuallyidenticalrevenues($1.7billion).Ten

yearslater,WalgreenshadgrowntoovertwicetherevenuesofEckerd,

accumulatingnetprofits$1billiongreaterthanEckerdoverthedecade.

Twentyyearslater,Walgreenswasgoingstrong,asoneofthemost

sustainedtransformationsinourstudy.Meanwhile,

Eckerdceasedtoexist

asanindependent

THETHREECIRCLES

ThenotionofaHedgehogConceptoriginatedinourresearchteam

meetingswhenweweretryingtomakesenseofWalgreens'spectacular

returns.

"Aren'twejusttalkingaboutstrategy?"Iasked."Convenientdrugstores,

profitpercustomervisit-isn'tthatjustbasicstrategy?What'ssointerest-

ingaboutthat?"

"ButEckerdalsohadstrategy,"saidJenniCooper,

whoanalyzedthe

contrastbetweenthetwocompanies."Wecan'tsaythatit'sjustabouthav-

ingstrategy.Theybothhadstrategy."Jenniwascorrectinherobservation.

Strategypersedidnotdistinguishthegood-to-greatcompaniesfromthe

comparisoncompanies.Bothsetsofcompanieshad

plans,and

thereisabsolutelynoevidencethatthegood-to-greatcompaniesinvested

moretimeandenergyinstrategydevelopmentandlong-rangeplanning.

"Okay,soarewejusttalking

aboutgoodstrategyversusbadstrategy?"

Theteamsatthereforaminute,thinking.ThenLeighWilbanks

observed,"ButwhatIfindsostrikingistheirincrediblesimplicity.Imean,

lookatKrogerwiththesuperstoreconcept,orKimberly-Clarkwiththe

GoodtoGreat

95

movetopaper-basedconsumerproducts,orWalgreenswithconvenient

drugstores.Theseweresimple,simple,simpleideas."

Theresearch-teammembersalljumpedintothefray,banteringabout

thecompaniestheywerestudying.Itsoonbecameabundantlyclearthat

allthegood-to-greatcompaniesattainedaverysimpleconceptthatthey

usedasaframeofreferenceforalltheirdecisions,andthisunderstanding

coincidedwithbreakthroughresults.Meanwhile,the

comparisoncompa-

nieslikeEckerdgotalltrippedupbytheirsnazzystrategiesforgrowth.

"Okay,"Ipushedback,"butissimplicityenough?Justbecauseit'ssimple

doesn'tmeanit'sright.Theworldisfilledwithfailedcompaniesthathad

simplebutwrongideas."

Thenwedecidedtoundertakeasystematiclookattheconceptsthat

guidedthegood-to-greatcompaniesincontrasttothecomparisoncompa-

nies.Afterafewmonthsofsiftingandsorting,consideringpossibilities

andtossingthemout,wefinallycametoseethattheHedgehogConcept

ineachgood-to-greatcompanywasn'tjustanyrandomsimpleidea.

Moreprecisely,aHedgehogConceptisasimple,crystallineconcept

thatflows

deepunderstandingabouttheintersectionofthefollowing

threecircles:

1.Whatyoucanbethebestintheworldat(and,equallyimprtant,what

youcannotbethebestintheworldat).Thisdiscerningstandardgoes

farbeyondcorecompetence.

Justbecauseyoupossessacorecompe-

tencedoesn'tnecessarilymeanyou

bethebestintheworldatit.

Conversely,whatyoucanbethebestatmightnotevenbesomething

inwhichyouarecurrentlyengaged.

2.Whatdrivesyoureconomicengine.Allthegood-to-greatcompanies

attainedpiercinginsightintohowtomosteffectivelygeneratesustained

96

Collins

androbustcashflowandprofitability.Inparticular,theydiscoveredthe

singledenominator-profitperx-thathadthegreatestimpactontheir

economics.(Itwouldbecashflowperxinthesocial

sector.)

3.Whatyouaredeeplypassionateabout.Thegood-to-greatcompanies

focusedonthoseactivitiesthatignitedtheirpassion.Theideahereis

nottostimulatepassionbuttodiscoverwhatmakesyoupassionate.

WHATYOUAREDEEPLY

PASSIONATEABOUT

BETHEBESTIN

THEWORLDAT

Toquicklygraspthethreecircles,considerthefollowingpersonalanal-

ogy.Supposeyouwereabletoconstructaworklifethat

meetsthefollowing

threetests.First,youaredoingworkforwhichyouhaveageneticor

giventalent,andperhapsyoucouldbecomeoneofthebestintheworldin

applyingthattalent.("IfeelthatIwasjustborntobedoingthis.")

youarewellpaidforwhatyoudo.("Igetpaidtodothis?AmIdreaming?")

Third,youaredoingworkyouarepassionateaboutandabsolutelyloveto

do,enjoyingtheactualprocessforitsownsake.("Ilookforwardtogetting

upandthrowingmyselfintomydailywork,andIreally

believeinwhatI'm

doing.")Ifyoucoulddrivetowardtheintersectionofthesethreecirclesand

translatethatintersectionintoasimple,crystallineconceptthatguided

yourlifechoices,thenyou'dhaveaHedgehogConceptforyourself.

GoodtoGreat

97

TohaveafullydevelopedHedgehogConcept,youneedallthreecircles.

Ifyoumakealotofmoneydoingthingsatwhichyoucouldneverbethe

best,you'llonlybuildasuccessfulcompany,notagreatone.Ifyoubecome

thebestatsomething,you'llneverremainontopifyou

don'thaveintrinsic

passionforwhatyouaredoing.Finally,youcanbepassionateallyouwant,

butifyoucan'tbethebestatitoritdoesn'tmakeeconomicsense,thenyou

mighthavealotoffun,butyouwon'tproducegreatresults.

UNDERSTANDINGWHATYOUCAN

(ANDCANNOT)BETHEBESTAT

"Theystickwithwhattheyunderstandandlettheirabilities,nottheiregos,

determinewhattheyattempt.""SowroteWarrenBuffettabouthis$290

millioninvestmentinWells

despitehisseriousreservationsabout

thebanking

PriortoclarifyingitsHedgehogConcept,Wells

hadtriedtobeaglobalbank,operatinglikeamini-Citicorp,anda

mediocreoneatthat.Then,atfirstunderDick

andthenunder

CarlReichardt,Wells

executivesbegantoaskthemselvesapiercing

setofquestions:Whatcanwepotentiallydobetterthananyothercom-

pany,and,equallyimportant,whatcanwenotdobetterthananyother

company?Andifwe

bethebestatit,thenwhyarewedoingitatall?

Puttingasidetheiregos,theWells

teampulledtheplugonthevast

majorityofitsinternationaloperations,acceptingthetruththatitcouldnot

bebetterthanCiticorpinglobal

Wells

thenturnedits

attentiontowhatitcouldbethebestintheworldat:runningabanklikea

business,withafocusonthewesternUnitedStates.That'sit.Thatwasthe

essenceoftheHedgehogConceptthatturnedWells

fromamediocre

Citicorpwanna-betooneofthebest-performingbanksintheworld.

CarlReichardt,CEOof

Wells

atthetimeoftransition,standsas

aconsummatehedgehog.WhilehiscounterpartsatBankofAmerica

wentintoareaction-revolutionpanicmodeinresponsetoderegulation,

hiringchangeguruswhoused

sophisticatedmodelsandtime-consusing

encountergroups,Reichardtstrippedeverythingdowntoitsessential

"It'snotspacesciencestuff,"hetoldusinourinterview."What

wedidwassosimple,andwekeptitsimple.Itwassostraightforwardand

obviousthatitsoundsalmostridiculoustotalkaboutit.Theaveragebusi-

nessmancomingfromahighlycompetitiveindustrywithnoregulations

wouldhavejumpedonthislikeagooseonaJune

98

JimCollins

Reichardtkeptpeoplerelentlesslyfocusedonthesimplehedgehog

idea,continuallyremindingthemthat"there'smoremoneytobemadein

than

ThosewhoworkedwithReichardtmarveledat

hisgeniusforsimplicity."If

CarlwereanOlympicdiver,"saidoneofhis

colleagues,"hewouldnotdoafive-fliptwistingthing.Hewoulddothe

bestswandiveintheworld,anddoitperfectlyoverandoveragain.""

TheWells

focusonitsHedgehog

Conceptwassointensethatit

became,initsexecutives'ownwords,"amantra."Throughoutourinter-

views,Wells

peopleechoedthesamebasictheme-"Itwasn'tthat

complicated.Wejusttookahard-nosedlookatwhatweweredoingand

decidedtofocusentirelyonthosefewthingsweknewwecoulddobetter

thananyoneelse,notgettingdistractedintoarenasthatwouldfeedour

egosandatwhichwecouldnotbethebest."

Everycompanywouldliketobethebestatsomething,butfewactually

understand-withpiercinginsightand

clarity-whattheyactually

havethepotentialtobethebestatand,justasimportant,whattheycannot

bethebestat.Anditisthisdistinctionthatstandsasoneoftheprimarycon-

trastsbetweenthegood-to-

greatcompaniesandthecomparisoncompanies.

ConsiderthecontrastbetweenAbbottLaboratoriesand

In

1964,thetwocompanieswerealmostidenticalintermsofrevenues,prof-

its,andproductlines.Both

companieshadthebulkoftheirbusinessin

pharmaceuticals,principallyantibiotics.Bothcompanieshadfamily

management.Bothcompanieslaggedbehindtherestofthepharmaceuti-

calindustry.Butthen,in1974,Abbotthadabreakthroughinperfor-

mance,producingcumulativereturnsof4.0timesthemarketand5.5

times

overthenextfifteenyears.Onecrucialdifference

thetwocompaniesisthatAbbottdevelopedaHedgehogConceptbased

onwhatitcouldbethebest

atand

didnot.

Abbottbeganbyconfrontingthebrutalfacts.By1964,Abbotthadlost

theopportunitytobecomethebestpharmaceuticalcompany.While

GoodtoGreat

99

Abbotthaddrowsilylumberedalonginthe1940sand

livingoffits

cashcow,erythromycin,companieslikeMerckhad

builtresearchengines

thatrivaledHarvardandBerkeley.By1964,GeorgeCainandhisAbbott

teamrealizedthatMerckandothershadsuchahugeresearchleadthat

tryingtobethebestpharmaceuticalcompanywouldbelikeahighschool

footballteamtryingtotakeontheDallasCowboys.

EventhoughAbbott'sentirehistorylayinpharmaceuticals,becoming

thebestpharmaceuticalcompanywasnolongeraviableoption.So,

guidedbyaLevel5leaderandtappingintothefaithsideoftheStockdale

Paradox(Theremustbeawayforustoprevailasagreatcompany,andwe

willfindit!),theAbbottteamsoughttounderstandwhatitcouldbethe

bestat.Around1967,akeyinsightemerged:We'velostthechancetobe

thebestpharmaceuticalcompany,butwehavean

opportunitytoexcelat

creatingproductsthatcontributetocost-effectivehealthcare.Abbotthad

experimentedwithhospitalnutritionalproducts,designedtohelppatients

quicklyregaintheirstrengthaftersurgery,anddiagnosticdevices(oneof

theprimarywaystoreducehealthcarecostsisthroughproperdiagnosis).

Abbotteventuallybecamethenumberonecompanyinbothoftheseare-

nas,whichmoveditfardownthepathofbecomingthebestcompanyin

theworldatcreatingproductsthatmakehealth

caremore

neverconfrontedthesamebrutalrealityandcontinuedtolive

withthedelusionthatitcouldbeat

Later,whenitfellevenfur-

therbehindthepharmaceuticalleaders,itdiversifiedintoarenaswhere

it

definitelycouldnotbethebestintheworld,suchasplasticsandchemi-

cals.As

fellevenfurtherbehind,itreturnedtoafocusonethical

drugs,yetneverconfrontedthefactthatitwasjusttoosmalltowininthe

big-stakespharmaceutical

Despiteconsistentlyspendingnearly

twicethepercentageofsaleson

asAbbott,

sawitsprofits

dwindletolessthanhalfthoseofAbbottbeforebeing

acquiredin

roo

Collins

Clearly,aHedgehogConceptisnotthesameasacorecompetence.

Youcanhavecompetenceatsomethingbutnotnecessarilyhavethe

potentialtobethebestintheworldatit.Tousean

analogy,considerthe

youngpersonwhogetsstraightA'sinhighschoolcalculusandscoreshigh

onthemathpartoftheSAT,demonstratingacorecompetenceatmathe-

matics.Doesthatmeanthepersonshouldbecomeamathematician?Not

necessarily.Supposenowthatthisyoungpersongoesofftocollege,

enrollsinmathcourses,andcontinuestoearnA's,yetencounterspeople

whoaregeneticallyencodedformath.Asonesuchstudentsaidafterthis

experience,"Itwouldtakemethreehourstofinishthe

final.Thenthere

werethosewhofinishedthesamefinalinthirtyminutesandearnedan

A+.Theirbrainsarejustwireddifferently.Icouldbeaverycompetent

mathematician,butIsoonrealizedIcouldneverbeoneofthebest."That

youngpersonmightstillgetpressurefromparentsandfriendstocontinue

withmath,saying,"Butyou'resogoodatit."Justlikeouryoungperson,

manypeoplehavebeenpulledorhavefallenintocareerswheretheycan

neverattaincompletemasteryandfulfillment.

Sufferingfromthecurseof

competencebutlackingaclearHedgehogConcept,theyrarelybecome

greatatwhattheydo.

TheHedgehogConceptrequiresaseverestandardofexcellence.It'snot

justaboutbuildingonstrengthandcompetence,but

aboutunderstanding

whatyourorganizationtrulyhasthepotentialtobetheverybestatand

stickingtoit.Like

thecomparisoncompaniesstucktobusinesses

atwhichtheywere"good"butcouldneverbethebest,orworse,launched

offinpursuitofeasygrowthandprofitsinarenaswheretheyhadnohope

ofbeingthebest.Theymademoneybutneverbecamegreat.

Everygood-to-greatcompanyeventuallygaineddeepunderstandingof

thisprincipleandpinnedtheirfuturesonallocating

resourcestothose

GoodtoGreat

fewarenaswheretheycouldpotentiallybethebest.(Seethetablebelow.)

Thecomparisoncompanies

rarelyattainedthisunderstanding.

THEGOOD-TO-GREATCOMPANIESANDTHE''BESTINTHE

WORLDAT"CIRCLEOFTHEHEDGEHOGCONCEPT

Thistableshowstheunderstandingthegood-to-

greatcompaniesattained

thatformedthefoundationoftheirshiftfromgoodtogreat.Note:Thislist

doesnotshowwhatthecompanieswerealreadybestintheworldatwhen

theybegantheirtransitions(mostofthesecompaniesweren'tthebestat

anything);rather,itshowswhattheycametounderstandtheycouldbecome

bestintheworldat.

AbbottLaboratories:

Notes:Abbottconfrontedthereality

Couldbecomethebestat

thatitcouldnotbecomethe

best

creatingaproductportfolio

maceuticalcompanyintheworld,

thatlowersthecostof

despitethefactthatpharmaceuticals

healthcare.

atthetimeaccountedfor99percentof

its

Itshifteditsfocustocreat-

ingaportfolioofproductsthatcon-

tributetolower-costhealthcare,

principallyhospital

nutritionals,diagnos-

tics,andhospitalsupplies.

CircuitCity:Could

Notes:CircuitCitysawthatitcould

becomethebestat

become"theMcDonald's"ofbig-ticket

mentingthe"4-S"model

retailing,abletooperatea

(service,selection,savings,

dispersedsystembyremote

satisfaction)appliedtobig-

trol.Itsdistinctionlaynotinthe"4-s''

ticketconsumersales.

becomethebestcapital

see(1)thatitcouldbeafullcapital

marketsplayerinanything

marketsplayerasgoodasanyon

thatpertainstomortgages.

WallStreetand(2)thatitcoulddevelop

auniquecapabilitytoassessriskin

102

Collins

Gillette:Couldbecome

Notes:Gillettesawthatithadanunusual

thebestatbuildingpremier

combinationoftwoverydifferentskills:

globalbrandsofdaily

(1)theabilitytomanufacturebillionsof

necessitiesthatrequire

low-cost,super-high-toleranceproducts

sophisticatedmanufacturing

razorblades)and(2)theabilityto

technology.

buildglobalconsumerbrands-the

"Coke"ofbladesor

toothbrushes.

Kimberly-Clark:Could

Notes:Kimberly-Clarkrealizedthatit

becomethebestinthe

hadalatentskillatcreating

worldatpaper-based

killer"brands-brandswhere

thename

consumerproducts.

oftheproductissynonymouswiththe

nameofthecategory

Kleenex)-

inpaper-basedproducts.

Kroger:Couldbecomethe

Notes:Krogeralwayshadastrengthin

bestatinnovative

grocerystoreinnovation.Ittookthisskill

combostores.

andappliedittothequestionofhowto

createacombinationstore

withmany

innovative,high-margin"mini-stores"

underoneroof.

Nucor:Couldbecomethe

Notes:Nucorcametoseethatithad

bestatharnessingculture

tremendousskillintwoactivities:

andtechnologytoproduce

(1)creatingaperformanceculture

low-coststeel.

and(2)makingfarsightedbetsonnew

manufacturingtechnologies.

Bycombiningthesetwo,itwasableto

becomethelowest-coststeel

producerintheUnitedStates.

PhilipMorris:Could

Notes:Earlyintransition,PhilipMorris

becomethebestinthe

sawthatitcouldbecomesimplythe

worldatbuildingbrand

besttobaccocompanyintheworld.

loyaltyincigarettesand,

Later,itbegantodiversifyinto

later,otherconsumables.

tobaccoarenas(asteptakenbyalltobacco

companies,asadefensivemeasure),but

stayedclosetoitsbrand-buildingstrengths

in"sinful"products(beer,tobacco,

chocolate,coffee)andfoodproducts.

GoodtoGreat

PitneyBowes:Could

Notes:AsPitneywrestledwiththe

becomethebestinthe

questionofhowtoevolvebeyond

worldatmessagingthat

postagemeters,ithadtwokey

requiressophisticated

insightsaboutitsstrengths:

that

officeequipment.

itwasnotapostage

company,butcould

haveabroaderdefinition(messaging)

and(2)thatithadparticularstrengthin

supplyingthebackroomswithsophisti-

catedmachines.

Walgreens:Couldbecome

Notes:Walgreenssawthatitwas

thebestatconvenientdrug-

notjustadrugstorebutalsoaconven-

stores.

iencestore.Itbegansystematicallyseek-

ingthebestsitesfor

teringmanystoreswithinasmallradius

andpioneeringdrive-throughpharma-

cies.Italsomadeextensiveinvestments

intechnology(includingrecentWeb

sitedevelopments),linkingWalgreen

storesworldwidetocreateonegiant

"cornerpharmacy."

Wells

Couldbecome

Notes:Wellscametotwoessential

thebestatrunningabank

insights.First,mostbanksthoughtof

likeabusiness,withafocus

themselvesasbanks,actedlikebanks,

onthewesternUnitedStates.

andprotectedthebankerculture.Wells

sawitselfasabusinessthat

happenedto

beinbanking."Runitlikeabusiness"

and"Runitlikeyouownit"became

mantras.Second,Wellsrecognizedthat

itcouldnotbethebestintheworldasa

superglobalbank,butthatitcouldbe

thebestinthewesternUnitedStates.

104

Collins

INSIGHTINTOYOURECONOMIC

WHATISYOURDENOMINATOR?

Thegood-to-greatcompaniesfrequentlyproducedspectacularreturnsin

veryunspectacularindustries.Thebanking

industryrankedinthebottom

quartileofindustries(intotal

duringthesameperiodthat

Wells

beatthemarketbyfourtimes.Evenmoreimpressive,both

PitneyBowesandNucorwereinbottom5percent

industries;yetboth

thesecompaniesbeatthemarketbywelloverfivetimes.Onlyoneofthe

good-to-greatcompanieshadthebenefitofbeinginagreatindustry

(definedasatop10percentindustry);fivewereingoodindustries;five

wereinbadtoterribleindustries.(SeeAppendix5.Aforasummaryof

industryanalysis.)

Thisisnotabookonmicroeconomics.Eachcompanyandeachindus-

tryhaditsowneconomicrealities,andI'mnotgoingtobelaborthemall

here.Thecentralpointisthateachgood-to-greatcompanyattaineda

deepunderstandingofthekeydriversinitseconomicengineandbuiltits

systeminaccordancewiththisunderstanding.

Thatsaid,however,wedidnoticeoneparticularlyprovocativeformof

economicinsightthateverygood-to-greatcompanyattained,thenotionof

asingle"economicdenominator."Thinkaboutitintermsofthefollow-

ingquestion:Ifyoucouldpickoneandonlyoneratio-profitperx(or,in

the

sector,cash

perx)-tosystematicallyincreaseovertime,what

xwouldhavethegreatestandmostsustainableimpactonyoureconomic

engine?Welearnedthatthissinglequestionleadstoprofoundinsightinto

theinnerworkingsofan

organization'seconomics.

RecallhowWalgreensswitcheditsfocusfromprofitperstoretoprofit

percustomervisit.Convenientlocationsareexpensive,butbyincreasing

profitpercustomervisit,Walgreenswasabletoincreaseconvenience

(ninestoresinamile!)andsimultaneouslyincreaseprofitabilityacrossits

GoodtoGreat

entiresystem.Thestandardmetricofprofitperstorewouldhaveruncon-

trarytotheconvenienceconcept.(Thequickestwaytoincreaseprofitper

storeistodecreasethenumberofstoresandputtheminlessexpensive

locations.Thiswouldhavedestroyedtheconvenienceconcept.)

OrconsiderWells

WhentheWellsteamconfrontedthebrutal

factthatderegulationwould

transformbankingintoacommodity,they

realizedthatstandardbankermetrics,likeprofitperloanandprofitper

deposit,wouldnolongerbethekeydrivers.Instead,theygraspedanew

denominator:profitperemployee.Followingthislogic,Wells

becameoneofthefirstbankstochangeitsdistributionsystemtorelypri-

marilyonstripped-downbranchesand

Thedenominatorcanbequitesubtle,sometimesevenunobvious.The

keyistousethequestionofthedenominatortogain

andinsightintoyoureconomicmodel.

Forexample,FannieMaegraspedthesubtledenominatorofprofitper

mortgagerisklevel,notpermortgage(whichwouldbethe"obvious"

choice).It'sabrilliantinsight.TherealdriverinFannieMae'seconomics

istheabilitytounderstandriskofdefaultinapackageofmortgagesbetter

thananyoneelse.Thenitmakesmoneysellinginsuranceandmanaging

thespreadonthatrisk.Simple,insightful,unobvious-andright.

Nucor,forexample,madeitsmarkintheferociouslyprice

competitive

steelindustrywiththedenominatorprofitpertonoffinishedsteel.Atfirst

glance,youmightthinkthatperemployeeorperfixedcostmightbethe

properdenominator.ButtheNucorpeopleunderstoodthatthedriving

forceinitseconomicenginewasacombinationofastrong-work-ethic

cultureandtheapplicationofadvancedmanufacturingtechnology.Profit

peremployeeorperfixedcostwouldnotcapturethisdualityaswellas

profitpertonoffinishedsteel.

Doyouneedtohaveasingledenominator?No,butpushingforasin-

gledenominatortendstoproducebetterinsightthanlettingyourselfoff

thehookwiththreeorfourdenominators.Thedenominatorquestion

servesasamechanismtoforcedeeperunderstanding

ofthekeydriversin

youreconomicengine.Asthedenominatorquestionemergedfromthe

research,wetestedthequestiononanumberofexecutiveteams.We

foundthatthequestionalwaysstimulatedintensedialogueanddebate.

Collins

Furthermore,evenincaseswheretheteamfailed(orrefused)toidentify

asingledenominator,thechallengeofthequestiondrovethemtodeeper

insight.Andthatis,afterall,thepoint-tohaveadenominatornotforthe

sakeofhavingadenominator,butforthe

sakeofgaininginsightthatulti-

matelyleadstomorerobustandsustainableeconomics.

Thistableshowstheeconomicdenominatorinsightattainedbythegood-to-

greatcompaniesduringthepivotaltransitionyears.

peremployee

Keyinsight:Shiftfromprofitper

uctlinetoprofitperemployeefitwith

theideaofcontributingtocost-effective

healthcare.

CircuitCity:per

Keyinsight:Shiftfromprofitpersingle

geographicregion

storetoprofitperregionreflectedlocal

economiesofscale.Whileper-storeper-

formanceremainedvital,regional

groupingwasakeyinsightthatdrove

CircuitCity'seconomicsbeyondSilo's.

FannieMae:permortgage

Keyinsight:Shiftfromprofitper

risklevel

gagetoprofitpermortgage

risklevel

reflectedthefundamentalinsightthat

managinginterestriskreducesdepen-

denceonthedirectionofinterestrates.

percustomer

Keyinsight:Shiftfrom

profitper

siontoprofitpercustomerreflectedthe

economicpowerofrepeatablepurchases

razorcartridges)timeshighprofit

perpurchase

notdisposable

Kimberly-Clark:per

Keyinsight:Shiftfromprofitperfixed

consumerbrand

asset(themills)toprofitperconsumer

brand;wouldbelesscyclicalandmore

profitableingoodtimesand

bad.

GoodtoGreat107

Kroger:perlocal

Keyinsight:Shiftfromprofitper

population

storetoprofitperlocalpopulation

reflectedtheinsightthat

localmarket

sharedrovegroceryeconomics.Ifyou

can'tattainnumberoneornumbertwo

inlocalshare,youshouldnotplay.

Nucor:pertonoffinished

Keyinsight:Shiftfromprofit

per

steel

divisiontoprofitpertonoffinishedsteel

reflectedNucor'suniqueblendof

productivityculturemixedwith

milltechnology,ratherthan

focusingonvolume.

brandcategory

salesregiontoprofitperglobalbrand

categoryreflectedtheunderstanding

thattherealkeytogreatnesslayin

brandsthatcouldhaveglobal

power,

PitneyBowes:percustomer

Keyinsight:Shiftfromprofitper

postagemetertoprofitpercustomer

reflectedtheideathatPitneyBowes

coulduseitspostagemeters

asa

jumping-offpointtobringarangeof

sophisticatedproductsintotheback

officesofcustomers.

Walgreens:per

Keyinsight:Shiftfromprofitper

customervisit

store

profitpercustomervisitreflected

asymbioticrelationshipbetweenconve-

nient(andexpensive)storesitesand

perloantoprofitper

employee

reflectedunderstandingofthebrutal

factofderegulation:Bankingis

acommodity.

Collins

Allthegood-to-greatcompaniesdiscoveredakeyeconomicdenomina-

tor(seethetableonpage

whilethecomparisoncompaniesusually

didnot.Infact,wefoundonlyonecomparisoncasethatattainedapro-

foundinsightintoitseconomics.Hasbrobuiltitsupswingontheinsight

thataportfolioofclassictoysandgames,suchasG.I.JoeandMonopoly,

producesmoresustainablecashflowthanbigonetime

Infact,

broistheonecomparisoncompanythatunderstoodallthreecirclesofthe

HedgehogConcept.Itbecamethebestintheworldatacquiringand

renewingtried-and-truetoys,

reintroducingandrecyclingthematjustthe

righttimetoincreaseprofitperclassicbrand.Anditspeoplehadgreatpas-

sionforthebusiness.Systematicallybuildingfromallthreecircles,

brobecamethebest-performingcomparisoninourstudy,lendingfurther

credencetothepoweroftheHedgehogConcept.

Hasbrobecameanunsustainedtransitioninpartbecauseitlostthedis-

ciplinetostaywithinthethreecircles,aftertheunexpecteddeathofCEO

StephenHassenfeld.TheHasbrocasereinforcesavitallesson.Ifyousuc-

cessfullyapplytheseideas,butthenstopdoingthem,youwillslideback-

ward,fromgreattogood,orworse.Theonlywaytoremaingreatistokeep

applyingthe

principlesthatmadeyougreat.

UNDERSTANDING

YOURPASSION

WheninterviewingthePhilipMorrisexecutives,weencounteredan

intensityandpassionthatsurprisedus.Recallfromchapter3howGeorge

Weissmandescribedworkingatthecompanyasthegreatloveaffairofhis

life,secondonlytohismarriage.Evenwithamostsinfulcollectionof

consumerproducts(Marlborocigarettes,Millerbeer,67percentfat-filled

Velveeta,MaxwellHousecoffeeforcaffeineaddicts,Tobleroneforchoco-

holics,andsoforth),wefoundtremendouspassionfor

thebusiness.Most

ofthetopexecutivesatPhilipMorriswerepassionateconsumersoftheir

ownproducts.In1979,RossMillhiser,thenvicechairmanofPhilipMor-

risandadedicatedsmoker,said,"Ilovecigarettes.It'soneofthethings

thatmakeslifereallyworth

ThePhilipMorrispeopleclearlylovedtheircompanyandhadpassion

forwhattheyweredoing.It'sasiftheyviewedthemselvesasthelone,

fiercelyindependentcowboydepictedintheMarlborobillboards."We

havearighttosmoke,andwewillprotectthatright!"Aboardmember

toldmeduringmyresearchforapreviousproject,"Ireally

beingon

GoodtoGreat

theboardofPhilipMorris.It'slikebeingpartofsomethingreallyspecial."

Shesaidthisassheproudlypuffed

Now,youmightsay,"Butthatisjustthedefensivenessofthetobacco

industry.Ofcoursethey'd

feelthatway.Otherwise,howcouldtheysleep

atnight?"ButkeepinmindthatR.J.Reynoldswasalsointhetobacco

businessandundersiegefromsociety.Yet,unlikePhilipMorris,R.J.

Reynoldsexecutivesbegantodiversifyawayfromtobaccointoanyarena

whereitcouldgetgrowth,regardlessofwhethertheyhadpassionforthose

acquisitionsorwhetherthecompanycouldbethebestintheworldat

them.ThePhilipMorrispeoplestuckmuchclosertothetobaccobusi-

ness,inlargepartbecausetheylovedthatbusiness.In

contrast,theR.J.

Reynoldspeoplesawtobaccoasjustawaytomakemoney.Asvividly

portrayedinthebookBarbariansattheGate,R.J.Reynoldsexecutives

eventuallylostpassionforanythingexceptmakingthemselvesrich

throughaleveraged

Itmayseemoddtotalkaboutsomethingassoftandfuzzyas"passion"as

anintegralpartofastrategicframework.Butthroughoutthegood-to-

greatcompanies,passionbecameakeypartoftheHedgehogConcept.

Youcan'tmanufacturepassionor"motivate"peopletofeelpassionate.You

canonlydiscoverwhatignitesyourpassionandthepassionsofthose

aroundyou.

WhenGilletteexecutivesmadethechoicetobuildsophisticated,rela-

tivelyexpensiveshavingsystemsratherthanfightalow-marginbattlewith

disposables,theydidsoinlargepartbecausetheyjustcouldn'tgetexcited

aboutcheapdisposablerazors."Zeientalksaboutshavingsystemswith

thesortoftechnicalgustooneexpectsfromaBoeingor

Hughesengi-

neer,"wroteonejournalistaboutGillette'sCEOin

Gillettehas

alwaysbeenatitsbestwhenitstickstobusinessesthatfititsHedgehog

Collins

Concept."Peoplewhoaren'tpassionateaboutGilletteneednotapply,"

wroteaWallStreetJournalreporter,whowentontodescribehowatop

businessschoolgraduatewasn'thiredbecauseshedidn'tshowenough

passionfor

Perhapsyou,too,can'tgetpassionateaboutdeodorant.Perhapsyou

mightfindithardtoimaginebeingpassionateaboutpharmacies,grocery

stores,tobacco,orpostagemeters.Youmightwonderaboutwhattypeof

persongetsalljazzedupaboutmakingabankasefficientasMcDonald's,

orwhoconsidersadiapercharismatic.Intheend,it

doesn'treallymatter.

Thepointisthattheyfeltpassionateaboutwhattheyweredoingandthe

passionwasdeepandgenuine.

Thisdoesn'tmean,however,thatyouhavetobepassionateaboutthe

mechanicsofthebusiness

perse(althoughyoumightbe).Thepassion

circlecanbefocusedequallyonwhatthecompanystandsfor.Forexam-

ple,theFannieMaepeoplewerenotpassionateaboutthemechanical

processofpackagingmortgagesintomarketsecurities.Buttheywere

terrificallymotivatedbythewholeideaofhelpingpeopleofallclasses,

backgrounds,andracesrealizetheAmericandreamofowningtheirhome.

LindaKnight,whojoinedFannieMaein1983,justasthecompanyfaced

itsdarkestdays,toldus:"Thiswasn'tjustanyold

companygettinginto

trouble;thiswasacompanyatthecoreofmakinghomeownershipareal-

ityforthousandsofAmericans.It'sarolethatisfarmoreimportantthan

justmakingmoney,andthat'swhywefeltsuchdepthofcommitmentto

preserve,protect,andenhancethe

AsanotherFannieMae

executivesummedup,"Iseeusasakeymechanismforstrengtheningthe

wholesocialfabricofAmerica.WheneverIdrivethroughdifficultneigh-

borhoodsthatarecoming

backbecausemorefamiliesowntheirhomes,I

returntoworkreenergized."

THETRIUMPHOFUNDERSTANDING

OVERBRAVADO

Ontheresearchteam,wefrequentlyfoundourselvestalkingaboutthedif-

ferencebetween"prehedgehog"and"posthedgehog"states.Inthe

hedgehogstate,it'slikegropingthroughthefog.You'remakingprogress

onalongmarch,butyoucan'tseeallthatwell.Ateachjunctureinthe

trail,youcanonlyseealittlebitaheadandmustmoveata

deliberate,

slowcrawl.Then,withtheHedgehogConcept,youbreakintoaclearing,

GoodtoGreat

thefoglifts,andyoucanseeformiles.Fromthenon,eachjuncture

requireslessdeliberation,andyoucanshiftfromcrawltowalk,andfrom

walktorun.Intheposthedgehogstate,milesoftrailmoveswiftlybeneath

yourfeet,forksintheroadflypastasyouquicklymakedecisionsthatyou

couldnothaveseensoclearlyinthefog.

What'ssostrikingaboutthecomparisoncompaniesisthat-foralltheir

changeprograms,franticgesticulations,andcharismaticleaders-they

rarelyemergedfromthefog.Theywouldtrytorun,makingbaddecisions

atforksintheroad,andthenhavetoreversecourselater.Ortheywould

veeroffthetrailentirely,bangingintotreesand

tumblingdown

buttheyweresuredoingitwithspeedandpanache!)

Nowhereisthismoreevidentthaninthecomparisoncompanies'

mindlesspursuitofgrowth:Overtwothirdsofthecomparisoncompanies

displayedanobsessionwith

growthwithoutthebenefitofaHedgehog

Statementssuchas"We'vebeenagrowthatanyprice

pany"and"Bettingthatsizeequalssuccess7'pepperthematerialsonthe

i

comparisoncompanies.Incontrast,notoneofthegood-

to-greatcompa-

niesfocusedobsessivelyongrowth.Yettheycreatedsustained,profitable

growthfargreaterthanthecomparisoncompaniesthatmadegrowththeir

mantra.

ConsiderthecaseofGreatWesternandFannieMae.

"GreatWesternis

amiteunwieldy,"wrotetheWallStreetTranscript."Itwantstogrow

it

Thecompanyfounditselfinfinance,leasing,insur-

ance,andmanufacturedhouses,continuallyacquiringcompaniesinan

expansion

Bigger!More!In1985,GreatWestern'sCEOtolda

gatheringofanalysts,"Don'tworryaboutwhatyoucallus-abank,an

ora

QuiteacontrasttoFannieMae,whichhadasimple,crystallineunder-

standingthatitcouldbethebestcapitalmarketsplayerinanything

112

Collins

relatedtomortgages,bettereventhan

SachsorSalomonBroth-

ersinopeningupthefullcapitalmarketstothemortgageprocess.Itbuilt

apowerfuleconomicmachinebyreframingitsbusinessmodelonrisk

management,ratherthanmortgageselling.Anditdrovethemachine

withgreatpassion,theFannieMaepeopleinspiredbyitsvitalrolein

democratizinghomeownership.

Until1984,thestockchartstrackedeachotherlikemirrorimages.Then

in1984,oneyearafteritclarifieditsHedgehogConcept,FannieMae

explodedupward,whileGreatWesternkeptlollygaggingalonguntiljust

beforeitsacquisitionin1997.Byfocusingonits

simple,elegantconcep-

tion-andnotjustfocusingon"growth"-FannieMaegrewrevenues

nearlythreefoldfromitstransitionyearin1984through1996.GreatWest-

ern,forallofitsgobblingofgrowthsteroids,grewrevenuesandearnings

only25percentoverthesameperiod,thenlostitsindependencein1997.

TheHedgehogConceptisaturningpointinthejourneyfromgood

togreat.Inmostcases,thetransitiondatefollowswithinafewyearsof

theHedgehogConcept.Furthermore,everything

fromhereonoutin

thebookhingesuponhavingtheHedgehogConcept.Aswillbecome

abundantlyclearinthefollowingchapters,disciplinedaction-the

thirdbigchunkintheframeworkafterdisciplinedpeopleanddisci-

plinedthought-onlymakessenseinthecontextoftheHedgehog

Concept.

Despiteitsvitalimportance(or,rather,becauseofitsvitalimportance),

itwouldbeaterriblemistaketothoughtlesslyattempttojumprighttoa

HedgehogConcept.You

justgooff-sitefortwodays,pullouta

bunchofflipcharts,dobreakoutdiscussions,andcomeupwithadeep

understanding.Well,youcandothat,butyouprobablywon'tgetitright.

ItwouldbelikeEinstein

saying,"Ithinkit'stimetobecomeagreatscien-

tist,soI'mgoingtogoofftotheFourSeasonsthisweekend,pulloutthe

flipcharts,andunlockthesecretsoftheuniverse."Insightjustdoesn't

GoodtoGreat113

MAE,GREATWESTERN,ANDTHEGENERALMARKET

CumulativeValueof$1Invested,

1970-1984

GeneralMarket:

$356

GreatWestern

$235

Mae

$177

01970

1977

1984

Notes:

1.Showscumulativevalueof$1investedDecember31.1970-January

1984

2.Dividendsreinvested.

MAE,GREATWESTERN,ANDTHEGENERALMARKET

CumulativeValueof$1Invested,

1984-2000

FannieMae:$64.17

GeneralMarket

$1153

01984

1992

2000

Notes:

1.FannieMaetransitionpointoccurredin1984.

2.

valueof$1invested

December31,1984-January1,2000

3.Dividendsreinvested.

114

Collins

happenthatway.IttookEinsteintenyearsofgropingthroughthefogto

getthetheoryofspecialrelativity,andhewasabright

Ittookaboutfouryearsonaverageforthegood-to-greatcompaniesto

clarifytheirHedgehog

Concepts.Likescientificinsight,aHedgehog

Conceptsimplifiesacomplexworldandmakesdecisionsmucheasier.

Butwhileithascrystallineclarityandelegantsimplicityonceyouhaveit,

gettingtheconceptcanbedevilishlydifficultandtakestime.Recognize

thatgettingaHedgehogConceptisaninherentlyiterativeprocess,notan

event.

Theessenceoftheprocessistogettherightpeopleengagedinvigorous

dialogueanddebate,infusedwiththebrutalfactsandguidedbyquestions

formedbythethreecircles.Dowereallyunderstandwhatwecanbethe

bestintheworldat,asdistinctfromwhatwecanjustbesuccessfulat?Do

wereallyunderstandthedriversinoureconomicengine,includingour

economicdenominator?Dowereallyunderstandwhat

bestignitesour

passion?

Oneparticularlyusefulmechanismformovingtheprocessalongisa

ASKQUESTIONS,

GUIDEDBYTHETHREECIRCLES

AUTOPSIESAND

ANALYSIS,

DIALOGUEANDDEBATE,

EXECUTIVEDECISIONS,

GUIDEDBYTHETHREECIRCLES

GETTINGTHEHEDGEHOGCONCEPT

ANITERATIVEPROCESS

GoodtoGreat

devicethatwecametocalltheCouncil.TheCouncilconsistsofagroup

oftherightpeoplewhoparticipateindialogueanddebateguidedbythe

threecircles,iterativelyandovertime,aboutvitalissuesanddecisionsfac-

ingtheorganization.(See"Characteristicsofthe

Council,"below.)

Inresponsetothequestion,"Howshouldwegoaboutgettingour

HedgehogConcept?"I'wouldpointtothediagramonpage114andsay:

"BuildtheCouncil,andusethatasamodel.Asktherightquestions,

engageinvigorousdebate,makedecisions,autopsytheresults,and

learn-allguidedwithinthecontextofthethreecircles.Justkeepgoing

throughthatcycleofunderstanding."

Whenasked,"HowdoweacceleratetheprocessofgettingaHedgehog

Concept?"Iwouldrespond:"Increasethenumberoftimesyougoaround

thatfullcycleinagivenperiodoftime."Ifyougothroughthiscycle

enoughtimes,guidedresolutelybythethreecircles,youwilleventually

gainthedepthofunderstandingrequiredfora

HedgehogConcept.Itwill

nothappenovernight,butitwilleventuallyhappen.

Collins

Doeseveryorganizationhave

aHedgehogConcepttodiscover?What

ifyouwakeup,lookaroundwithbrutalhonesty,andconclude:"We're

notthebestatanything,andweneverhavebeen."Thereinliesoneofthe

mostexcitingaspectsoftheentirestudy.Inthemajorityofcases,thegood-

to-greatcompanieswerenotthebestintheworldatanythingandshowed

noprospectsofbecomingso.InfusedwiththeStockdaleParadox("There

mustbesomethingwecanbecomethebestat,andwewillfindit!We

mustalsoconfrontthebrutalfactsofwhatwecannotbe

thebestat,and

wewillnotdeludeourselves!"),everygood-to-greatcompany,nomatter

howawfulatthestartoftheprocess,prevailedinitssearchforaHedgehog

Concept.

Asyousearchforyourownconcept,keepinmindthat

whenthegood-

to-greatcompaniesfinallygraspedtheirHedgehogConcept,ithadnone

ofthetiresome,irritatingblastsofmindlessbravadotypicalofthecompar-

isoncompanies."Yep,wecouldbethebestatthat"wasstatedasthe

recognitionofafact,nomorestartlingthanobservingthattheskyisblue

orthegrassisgreen.WhenyougetyourHedgehogConceptright,ithas

thequietpingoftruth,likeasingle,clear,perfectlystrucknotehangingin

theairinthehushedsilenceofafullauditoriumatthe

endofaquiet

movementofaMozartpianoconcerto.Thereisnoneedtosaymuchof

anything;thequiettruthspeaksforitself.

I'mremindedofapersonalexperienceinmyownfamilythatillustrates

thevitaldifferencebetween

bravadoandunderstanding.Mywife,Joanne,

beganracingmarathonsandtriathlonsintheearly1980s.Assheaccumu-

latedexperience-tracktimes,swimsplits,raceresults-shebegantofeel

GoodtoGreat117

themomentumofsuccess.Oneday,sheenteredaracewithmanyofthe

bestwomantriathletesintheworld,and-despiteaweakswimwhereshe

cameoutofthewaterhundredsofplacesbehindthetopswimmersand

havingtopushaheavy,nonaerodynamicbikeupa

longhill-sheman-

agedtocrossthefinishlineinthetopten.

Then,afewweekslaterwhilesittingatbreakfast,Joannelookedup

fromhermorningnewspaperandcalmly,quietlysaid,"IthinkIcould

wintheIronman."

The

theworldchampionshipoftriathlons,involves2.4miles

ofoceanswimmingand112milesofcycling,cappedoffwitha26.2-mile

marathonfootraceonthehot,lava-bakedKonacoastofHawaii.

"Ofcourse,I'dhavetoquit

myjob,turndownmyofferstograduate

school(shehadbeenadmittedtograduatebusinessschoolatanumberof

thetopschools),andcommittofull-timetraining.But..

Herwordshadnobravadointhem,nohype,noagitation,nopleading.

Shedidn'ttrytoconvinceme.Shesimplyobservedwhatshehadcometo

understandwasafact,atruthnomoreshockingthanstatingthatthewalls

werepaintedwhite.Shehadthepassion.Shehadthegenetics.Andifshe

wonraces,she'dhavetheeconomics.Thegoaltowin

the

flowed

fromearlyunderstandingofherHedgehogConcept.

And,so,shedecidedtogoforit.Shequitherjob.Sheturneddown

graduateschools.Shesoldthemills!(Butshedidkeepmeonherbus.)

Andthreeyearslater,onahotOctoberdayin1985,shecrossedthefinish

lineattheHawaii

infirstplace,worldchampion.WhenJoanne

setouttowinthe

shedidnotknowifshewouldbecomethe

world'sbesttriathlete.Butsheunderstoodthatshecould,thatitwasinthe

realmofpossibility,thatshewasnotlivinginadelusion.Andthatdistinc-

tionmakesallthedifference.Itisadistinctionthatthosewhowanttogo

fromgoodtogreatmustgrasp,andonethatthosewho

failtobecome

GoodtoGreat119

C

H

A

P

T

E

R

6

Freedomisonlypartofthestoryandhalfthetruth....That

iswhyIrecommendthattheStatueofLibertyontheEast

CoastbesupplantedbyaStatueofResponsibilityontheWest

Coast,

E.FRANKL,

Man'sSearchforMeaning1

In1980,GeorgeRathmanncofoundedthebiotechnologycompany

Amgen.Overthenexttwentyyears,Amgengrewfromastrugglingentre-

preneurialenterpriseintoa$3.2billioncompanywith6,400employees,

creatingbloodproductstoimprovethelivesofpeoplesufferingthrough

chemotherapyandkidney

UnderRathmann,Amgenbecame

oneofthefewbiotechnology

companiesthatdeliveredconsistentprof-

itabilityandgrowth.Itbecamesoconsistentlyprofitable,infact,thatits

stockpricemultipliedover150timesfromitspublicofferinginJune1983

toJanuary2000.Aninvestorwhoboughtaslittleas$7,000

stock

wouldhaverealizedacapitalgainofover$1million,thirteentimesbetter

thanthesameinvestmentinthegeneralstockmarket.

Fewsuccessfulstart-upsbecomegreatcompanies,inlargepartbecause

Goodto

theyrespondtogrowthandsuccessinthewrongway.Entrepreneurial

successisfueledbycreativity,imagination,boldmovesintouncharted

I

waters,andvisionaryzeal.Asacompanygrowsand

becomesmorecom-

plex,itbeginstotripoveritsownsuccess-toomanynewpeople,too

manynewcustomers,toomanyneworders,toomanynewproducts.

Whatwasoncegreatfunbecomesanunwieldyballofdisorganizedstuff.

I

Lackofplanning,lackofaccounting,lackofsystems,andlackofhiring

constraintscreatefriction.Problemssurface-withcustomers,withcash

flow,withschedules.

Inresponse,someone(oftenaboardmember)says,"It's

timetogrowup.

Thisplaceneedssomeprofessionalmanagement."Thecompanybeginsto

hire

andseasonedexecutivesfromblue-chipcompanies.Processes,

procedures,checklists,andalltherestbegintosproutup

likeweeds.What

wasonceanegalitarianenvironmentgetsreplacedwithahierarchy.

Chainsofcommandappearforthefirsttime.Reportingrelationships

I

becomeclear,andanexecutiveclasswithspecial

perksbeginstoappear.

"We"and"they"segmentations

justlikeinarealcompany.

Theprofessionalmanagersfinallyreininthemess.Theycreateorder

outofchaos,buttheyalsokilltheentrepreneurialspirit.Membersofthe

foundingteambegintogrumble,"Thisisn'tfunanymore.Iusedtobe

abletojustgetthingsdone.NowIhavetofilloutthesestupidformsand

followthesestupidrules.Worstofall,Ihavetospendahorrendous

amountoftimeinuselessmeetings."Thecreative

magicbeginstowane

assomeofthemostinnovativepeopleleave,disgustedbytheburgeoning

bureaucracyandhierarchy.Theexcitingstart-uptransformsintojust

anothercompany,withnothingspecialtorecommendit.Thecancerof

mediocritybeginstogrowinearnest.

GeorgeRathmannavoidedthisentrepreneurialdeathspiral.Heunder-

stoodthatthepurposeofbureaucracyistocompensateforincompetence

andlackofdiscipline-aproblemthatlargelygoesawayifyouhavethe

rightpeopleinthefirstplace.Mostcompaniesbuildtheirbureaucratic

rulestomanagethesmallpercentageofwrongpeopleonthebus,which

inturndrivesawaytherightpeopleonthebus,whichthenincreasesthe

percentageofwrongpeopleonthebus,whichincreases

theneedfor

morebureaucracytocompensateforincompetenceandlackofdisci-

pline,whichthenfurtherdrivestherightpeopleaway,andsoforth.

mannalsounderstoodanalternativeexists:Avoidbureaucracyand

hierarchyandinsteadcreateacultureofdiscipline.Whenyouputthese

twocomplementaryforcestogether-acultureofdisciplinewithanethic

122

Collins

ofentrepreneurship-yougetamagicalalchemyofsuperiorperformance

andsustainedresults.

TheGood-to-GreatMatrixofCreativeDiscipline

High

Hierarchical

Great

Organization

Organization

Cultureof

Discipline

Bureaucratic

Start-up

Organization

Organization

Low

Low

Ethicof

High

Entrepreneurship

Whystartthischapterwithabiotechnologyentrepreneurratherthan

oneofourgood-to-greatcompanies?BecauseRathmanncreditsmuchof

hisentrepreneurialsuccesstowhathelearnedwhileworkingatAbbott

LaboratoriesbeforefoundingAmgen:

WhatIgotfromAbbottwastheideathatwhenyousetyourobjectivesfor

theyear,yourecordtheminconcrete.Youcanchangeyourplans

throughtheyear,butyouneverchangewhatyoumeasureyourself

against.Youarerigorousattheendoftheyear,adhering

exactlytowhat

yousaidwasgoingtohappen.Youdon'tgetachancetoeditorialize.You

don'tgetachancetoadjustandfinagle,anddecidethatyoureallydidn't

intendtodothatanyway,andreadjustyourobjectivestomakeyourself

lookbetter.Youneverjustfocusonwhatyou'veaccomplishedforthe

year;youfocusonwhatyou'veaccomplishedrelativetoexactlywhatyou

saidyouweregoingtoaccomplish-nomatterhowtoughthemeasure.

ThatwasadisciplinelearnedatAbbott,andthatwecarried

into

GoodtoGreat123

ManyoftheAbbottdisciplinestracebackto1968,whenithireda

remarkablefinancialofficernamedBernardH.Semler.Semlerdidnotsee

hisjobasatraditionalfinancialcontrolleroraccountant.Rather,hesetout

toinventmechanismsthatwoulddriveculturalchange.

Hecreatedawhole

newframeworkofaccountingthathecalledResponsibilityAccounting,

whereineveryitemofcost,income,andinvestmentwouldbeclearlyidenti-

fiedwithasingleindividualresponsibleforthat

Theidea,radicalfor

the

wastocreateasystemwhereineveryAbbottmanagerineverytype

ofjobwasresponsibleforhisorherreturnoninvestment,withthesame

rigorthataninvestorholdsanentrepreneurresponsible.Therewouldbeno

hidingbehindtraditionalaccountingallocations,nosloppingfundsabout

tocoverupineffectivemanagement,noopportunitiesfor

ButthebeautyoftheAbbottsystem

notjustinitsrigor,butinhowit

usedrigoranddiscipline-toenablecreativityandentrepreneurship.

"Abbottdevelopedaverydisciplinedorganization,butnotinalinearway

ofthinking,"saidGeorgeRathmann."[It]wasexemplaryathavingboth

financialdisciplineandthedivergentthinkingofcreative

work.Weused

financialdisciplineasawaytoprovideresourcesforthereallycreative

Abbottreduceditsadministrativecostsasapercentageofsalesto

thelowestintheindustry(byasignificantmargin)andatthesametime

becameanewproductinnovationmachinelike

derivingupto65per-

centofrevenuesfromnewproductsintroducedinthepreviousfour

ThiscreativedualityranthrougheveryaspectofAbbottduringthetran-

sitionera,wovenintothe

veryfabricofthecorporateculture.Ontheone

hand,Abbottrecruitedentrepreneurialleadersandgavethemfreedomto

determinethebestpathtoachievingtheirobjectives.Ontheotherhand,

individualshadtocommitfullytotheAbbottsystemandwereheldrigor-

ouslyaccountablefortheirobjectives.Theyhadfreedom,butfreedom

withinaframework.Abbottinstilledtheentrepreneur'szealforoppor-

tunisticflexibility.("Werecognizedthatplanningispriceless,butplans

areuseless,"saidoneAbbott

ButAbbottalsohadthedisci-

I

plinetosaynotoopportunitiesthatfailedthethreecirclestest.While

encouragingwide-ranginginnovationwithinitsdivisions,Abbottsimulta-

neouslymaintainedfanatical

adherencetoitsHedgehogConceptofcon-

tributingtocost-effectivehealthcare.

AbbottLaboratoriesexemplifiesakeyfindingofourstudy:acultureof

discipline.Byitsnature,"culture"isasomewhatunwieldytopictodiscuss,

lesspronetocleanframeworkslikethethreecircles.Themainpointsof

thischapter,however,boildowntoonecentralidea:Buildaculture

of

I

124

Collins

II

whotakedisciplinedactionwithinthethreecircles,fanatically

sistentwiththeHedgehogConcept.

Moreprecisely,thismeansthefollowing:

1.Buildaculturearoundtheideaoffreedomand

withina

I

framework.

2.Fillthatculturewithself-disciplinedpeoplewhoarewillingtogoto

extremelengthstofulfilltheirresponsibilities.Theywill"rinsetheir

I

I

cottagecheese."

I

3.Don'tconfuseacultureofdisciplinewithatyrannicaldisciplinarian.

4.AdherewithgreatconsistencytotheHedgehogConcept,exercisingan

almostreligiousfocusontheintersectionofthethreecircles.Equally

important,createa"stopdoinglist"andsystematicallyunpluganything

extraneous.

FREEDOM(ANDRESPONSIBILITY)

AFRAMEWORK

Pictureanairlinepilot.Shesettlesintothecockpit,surroundedbydozens

ofcomplicatedswitchesandsophisticatedgauges,sittingatopamassive

$84millionpieceofmachinery.Aspassengersthumpandstufftheirbags

intooverheadbinsandflightattendantsscurryabouttryingtogetevery-

onesettledin,shebeginsherpreflightchecklist.Stepby

methodicalstep,

shesystematicallymovesthrougheveryrequireditem.

Clearedfordeparture,shebeginsworkingwithairtrafficcontrol,fol-

lowingpreciseinstructions-whichdirectiontotakeoutofthegate,which

waytotaxi,whichrunwayto

use,whichdirectiontotakeoff.Shedoesn't

throttleupandhurtlethejetintotheairuntilshe'sclearedfortakeoff.

Oncealoft,shecommunicatescontinuallywithflight-controlcentersand

stayswithinthetightboundariesofthe

commercialairtrafficsystem.

Onapproach,however,shehitsaferociousthunder-and-hailstorm.Blast-

ingwinds,crosswaysandunpredictable,tiltthewingsdowntotheleft,then

downtotheright.Lookingoutthewindows,passengerscan'tseetheground,

onlythethinningandthickeningglobsofgraycloudsandthespatterofrain

onthewindows.Theflightattendantsannounce,"Ladiesandgentlemen,

we'vebeenaskedtoremainseatedfortheremainderoftheflight.Pleaseput

yourseatsintheuprightandlockedpositionandplaceall

yourcarry-onbag-

gageundertheseatinfrontofyou.Weshouldbeonthegroundshortly."

GoodtoGreat125

"Nottooshortly,Ihope,"thinkthelessexperiencedtravelers,unnerved

bytheroilingwindandmomentaryflashesof

lightning.Buttheexperi-

encedtravelersjustgoonreadingmagazines,chattingwithseatmates,and

preparingfortheirmeetingsontheground."I'vebeenthroughallthis

before,"theythink."She'llonlylandifit'ssafe."

Sureenough,onfinal

approach-wheelsdownasaquarterofamillion

poundsofsteelglidesdownat

milesperhour-passengerssuddenly

heartheengineswhineandfeelthemselvesthrustbackintotheirseats.

Theplaneacceleratesback

intothesky.Itbanksaroundinabigarcback

towardtheairport.Thepilottakesamomenttoclickontheintercom:

"Sorry,folks.Weweregettingsomebadcrosswindsthere.We'regoingto

giveitanothertry."Onthenextgo,thewindscalmjustenoughandshe

bringstheplanedown,safely.

Nowtakeastepbackandthinkaboutthemodelhere.Thepilotoper-

ateswithinaverystrictsystem,andshedoesnothavefreedomtogoout-

sideofthatsystem.(Youdon'twantairlinepilotssaying,"Hey,Ijustread

inamanagementbookaboutthevalueofbeingempowered-freedomto

experiment,tobecreative,tobeentrepreneurial,totryalotofstuffand

keepwhatworks!")Yetatthesametime,thecrucialdecisions-whether

totakeoff,whethertoland,whethertoabort,whetherto

landelse-

where-restwiththepilot.Regardlessofthestricturesofthesystem,one

centralfactstandsoutaboveallothers:Thepilothasultimateresponsibil-

ityfortheairplaneandthelivesofthepeopleonit.

Thepointhereisnotthata

companyshouldhaveasystemasstrictand

inflexibleastheairtrafficsystem.Afterall,ifacorporatesystemfails,peo-

pledon'tdiebythehundredsinburning,twistedhunksofsteel.Cus-

tomerserviceattheairlinesmightbeterrible,butyouarealmostcertain

togetwhereyouaregoinginonepiece.Thepointofthisanalogyisthat

whenwelookedinsidethegood-to-greatcompanies,wewereremindedof

thebestpartoftheairlinepilotmodel:freedomandresponsibilitywithin

theframeworkofahighlydevelopedsystem.

126

Jim

"Thiswasthesecrettohowwewereabletorunstoresfromagreatdis-

tance,byremotecontrol,"saidBillRivasofCircuitCity."Itwasthecom-

binationofgreatstoremanagerswhohadultimateresponsibilityfortheir

individualstores,operatingwithinagreatsystem.You've

gottohaveman-

agementandpeoplewhobelieveinthesystemandwhodowhateveris

necessarytomakethesystemwork.Butwithintheboundariesofthatsys-

tem,storemanagershadalotofleeway,tocoincidewiththeir

Inasense,CircuitCitybecametoconsumerelectronicsretailing

whatMcDonald'sbecametorestaurants-notthemostexquisiteexperi-

ence,butanenormouslyconsistentone.Thesystemevolvedovertimeas

CircuitCityexperimented

addingnewitemslikecomputersandvideo

players(justlikeMcDonald'saddedbreakfastEgg

Butatany

givenmoment,everyoneoperatedwithintheframeworkofthesystem.

"That'soneofthemajordifferencesbetweenusand

alltheotherswho

wereinthissamebusinessintheearly

saidBillZierden."They

justcouldn'troll

further,andwecould.Wecouldstampthesestores

outalloverthecountry,withgreat

Thereinliesoneofthe

reasonswhyCircuitCitytookoffintheearly1980sandbeatthegen-

eralstockmarketbymorethaneighteentimesoverthenextfifteenyears.

Inasense,muchofthisbookisaboutcreatingacultureofdiscipline.It

allstartswithdisciplinedpeople.Thetransitionbeginsnotbytryingtodis-

ciplinethewrongpeopleintotherightbehaviors,butbygettingself-

disciplinedpeopleonthebusinthefirstplace.Nextwehavedisciplined

thought.Youneedthedisciplinetoconfrontthe

brutalfactsofreality,

whileretainingresolutefaiththatyoucanandwillcreateapathtogreat-

ness.Mostimportantly,youneedthedisciplinetopersistinthesearchfor

understandinguntilyougetyourHedgehogConcept.Finally,wehave

disciplinedaction,theprimarysubjectofthischapter.Thisorderis

important.Thecomparisoncompaniesoftentriedtojumprighttodisci-

plinedaction.Butdisciplinedactionwithoutself-disciplinedpeopleis

impossibletosustain,anddisciplinedactionwithout

disciplinedthought

isarecipefordisaster.

Indeed,disciplinebyitselfwillnotproducegreatresults.Wefind

plentyoforganizationsinhistorythathadtremendousdisciplineandthat

marchedrightintodisaster,withprecisionandinnicely

formedlines.No,

thepointistofirstgetself-disciplinedpeoplewhoengageinveryrigorous

thinking,whothentakedisciplinedactionwithintheframeworkofacon-

sistentsystemdesignedaroundtheHedgehogConcept.

GoodtoGreat

DISCIPLINED

DISCIPLINED

DISCIPLINED

PeopleThoughtAction

RINSINGYOURCOTTAGECHEESE

Throughoutourresearch,we

werestruckbythecontinualuseofwords

likedisciplined,rigorous,dogged,determined,diligent,precise,fastidious,

systematic,methodical,workmanlike,demanding,consistent,focused,

accountable,andresponsible.Theypepperedarticles,interviews,and

sourcematerialsonthegood-to-greatcompanies,andwerestrikingly

absentfromthematerialsonthedirectcomparisoncompanies.Peoplein

thegood-to-greatcompaniesbecamesomewhatextremeinthefulfillment

oftheirresponsibilities,borderinginsomecaseson

fanaticism.

Wecametocallthisthe"rinsingyourcottagecheese"factor.Theanal-

ogycomesfromadisciplinedworld-classathletenamedDaveScott,who

wontheHawaii

Triathlonsixtimes.Intraining,Scottwouldride

hisbike75miles,swim20,000meters,andrun17miles-onaverage,

everysingleday.DaveScottdidnothaveaweightproblem!Yethe

believedthatalow-fat,high-carbohydratedietwouldgivehimanextra

edge.So,DaveScott-amanwhoburnedatleast5,000

caloriesaday

intraining-wouldliterallyrinsehiscottagecheesetogettheextrafat

off.Now,thereisnoevidencethatheabsolutelyneededtorinsehis

cottagecheesetowinthe

that'snotthepointofthestory.The

pointisthatrinsinghiscottage

wassimplyonemoresmallstep

thathebelievedwouldmakehimjustthatmuchbetter,onemoresmall

stepaddedtoalltheothersmallstepstocreateaconsistentprogram

ofsuperdiscipline.I'vealwayspicturedDaveScottrunningthe26miles

ofthemarathon-hammeringawayinhundred-degreeheatontheblack,

bakedlavafieldsoftheKonacoastafterswimming2.4milesintheocean

andcycling112milesagainstferociouscrosswinds-and

thinkingto

128

Collins

himself:"Comparedtorinsingmycottagecheeseeveryday,thisjustisn't

thatbad."

Irealizethatit'sabizarre

analogy.Butinasense,thegood-to-greatcom-

paniesbecamelikeDaveScott.Muchoftheanswertothequestionof

"goodtogreat"liesinthedisciplinetodowhateverittakestobecomethe

bestwithincarefullyselectedarenasandthentoseekcontinualimprove-

mentfromthere.It'sreallyjustthatsimple.Andit'sreallyjustthatdifficult.

ConsiderWells

incontrasttoBankofAmerica.CarlReichardt

neverdoubtedthatWells

couldemergefrombankderegulationasa

strongercompany,notaweakerone.Hesawthatthekeytobecominga

greatcompanyrestednotwithbrilliantnewstrategiesbut-withthesheer

determinationtoripahundredyearsofbankermentalityoutofthesys-

tem."There'stoomuchwasteinbanking,"saidReichardt.

"Gettingridof

ittakestenacity,notbrilliance.""

Reichardtsetacleartoneatthetop:We'renotgoingtoaskeveryoneelse

tosufferwhilewesitonhigh.Wewillstart

rinsingourowncottagecheese,

righthereintheexecutivesuite.Hefrozeexecutivesalariesfortwoyears

(despitethefactthatWells

wasenjoyingsomeofthemostprofitable

yearsinits

Heshuttheexecutivediningroomandreplacedit

withacollegedormfood-service

Heclosedtheexecutiveelevator,

soldthecorporatejets,andbannedgreenplantsfromtheexecutivesuiteas

tooexpensiveto

Heremovedfreecoffeefromtheexecutivesuite.

HeeliminatedChristmastreesfor

Hethrewreportsbackat

peoplewho'dsubmittedtheminfancybinders,withtheadmonishment:

"Wouldyouspendyourownmoneythisway?Whatdoesabinderaddto

Reichardtwouldsitthrough

meetingswithfellowexecutives,

inabeat-upoldchairwiththestuffinghangingout.Sometimeshewould

justsitthereandpickatthestuffingwhilelisteningtoproposalstospend

money,saidonearticle,"[and]alotofmust-doprojectsjustmelted

AcrossthestreetatBankofAmerica,executivesalsofacedderegulation

andrecognizedtheneedtoeliminatewaste.However,unlikeWells

GoodtoGreat

BofAexecutivesdidn'thavethedisciplinetorinsetheirowncottage

cheese.Theypreservedtheirposhexecutivekingdominitsimposingtower

indowntown

Francisco,theCEO'sofficedescribedinthebook

BreakingtheBankas"anortheastcornersuitewithalargeattachedconfer-

enceroom,orientalrugs,andfloor-to-ceilingwindowsthatofferedasweep-

ingpanoramaoftheSan

FranciscoBayfromtheGoldenGatetotheBay

(Wefoundnoevidence

executivechairswiththestuffing

hangingout.)Theelevatormadeitslaststopattheexecutivefloorand

descendedallthewaytothegroundinonequietwhoosh,

unfetteredby

theintrusionsoflesserbeings.Thevastopenspaceintheexecutivesuite

madethewindowslookeventallerthantheyactuallywere,creatinga

senseoffloatingabovethefoginanelevatedcityofalieneliteswhoruled

theworldfrom

Whyrinseourcottagecheesewhenlifeissogood?

Afterlosing$1.8billionacrossthreeyearsinthe

BofAeven-

tuallymadethenecessarychangesinresponsetoderegulation(largelyby

hiringex-Wells

Buteveninthedarkestdays,B

couldnot

bringitselftogetridoftheperksthatshieldeditsexecutivesfromthereal

world.AtoneboardmeetingduringBankofAmerica'scrisisperiod,one

membermadesensiblesuggestionslike"Sellthecorporatejet."Other

directorslistenedtotherecommendations,thenpassedthem

ACULTURE,NOTATYRANT

Wealmostdidn'tincludethischapterinthebook.Ontheonehand,the

good-to-greatcompaniesbecamemoredisciplinedthanthedirect

parisoncompanies,aswithWells

incontrasttoBankofAmerica.

Ontheotherhand,theunsustainedcomparisonsshowedthemselvestobe

justasdisciplinedasthegood-to-greatcompanies,

"Basedonmyanalysis,Idon'tthinkwecanputdisciplineinthebook

asafinding,"saidEric

afterhecompletedaspecialanalysisunit

lookingattheleadershipculturesacrossthe

companies."Itisabsolutely

clearthattheunsustainedcomparison

broughttremendousdisci-

plinetotheircompanies,andthatiswhytheygotsuchgreatinitialresults.

So,disciplinejustdoesn'tpassmusterasadistinguishingvariable."

Curious,wedecidedtolookfurtherintotheissue,andEricundertook

amorein-depthanalysis.Aswefurtherexaminedtheevidence,itbecame

clearthat-despitesurfaceappearances-therewasindeedahuge

encebetweenthetwosetsofcompaniesintheirapproach

todiscipline.

Collins

ConsiderRayMacDonald,whotookcommandofBurroughsin1964.

Abrilliantbutabrasiveman,MacDonaldcontrolledtheconversations,

I

toldallthejokes,andcriticizedthosenotassmart

ashe(whichwas

prettymucheveryonearoundhim).Hegotthingsdonethroughsheer

forceofpersonality,usingaformofpressurethatcametobeknownas

I

"TheMacDonald

MacDonaldproducedremarkableresults

duringhisreign.Everydollarinvestedin1964,theyearhebecamepres-

ident,andtakenoutattheendof1977,whenheretired,produced

returns6.6timesbetterthanthegeneral

However,thecom-

panyhadnocultureofdisciplinetoendurebeyondhim.Afterhe

retired,hishelperminionswerefrozenbyindecision,leavingthecom-

pany,accordingtoBusinessWeek,"withaninabilitytodo

Burroughsthenbeganalongslide,withcumulativereturnsfalling93

percentbelowthemarketfromtheendoftheMacDonalderato2000.

WefoundasimilarstoryatRubbermaidunderStanleyGault.Recall

CORPORATION,ACLASSIC

TRANSITION

Ratioof

StockReturnstoGeneralMarket,

Setto1.0atStartofRayMacDonald

14

RayMacDonaldEra

Pre-Ray

Post-Ray

6

2

GoodtoGreat

fromtheLevel5chapterthatGaultquippedinresponsetotheaccusation

ofbeingatyrant,"Yes,butI'masinceretyrant."Gaultbroughtstrictdis-

ciplinestoRubbermaid-rigorousplanningandcompetitoranalysis,sys-

tematicmarketresearch,profitanalysis,hard-nosedcostcontrol,andso

on."Thisisanincrediblydisciplinedorganization,"wroteoneanalyst.

"ThereisanincrediblethoroughnessinRubbermaid'sapproachto

Preciseandmethodical,Gaultarrivedatworkby

androutinely

workedeighty-hourweeks,expectinghismanagerstodothe

Aschiefdisciplinarian,Gaultpersonallyactedasthecompany'snumber

onequalitycontrolmechanism.WalkingdownthestreetinManhattan,he

noticedadoormanmutteringandswearingashesweptdirtintoaRubber-

maiddustpan."Stanwhirledaroundandstartinggrillingthemanonwhy

hewasunhappy,"saidRichardGates,whotoldthestorytoFortune.Gault,

convincedthatthelipofthedustpanwastoothick,

promptlyissuedadic-

tatetohisengineerstoredesigntheproduct."Onquality,I'ma

abitch,"saidGault.Hischiefoperatingofficerconcurred:"Hegets

Rubbermaidrosedramaticallyunderthetyrannyofthissingularlydis-

ciplinedleaderbutthenjustasdramaticallydeclinedwhenhedeparted.

UnderGault,Rubbermaidbeatthemarket3.6to

AfterGault,Rubber-

maidlost59percentofitsvaluerelativetothemarket,beforebeing

boughtoutby

Oneparticularlyfascinatingexampleofthedisciplinariansyndrome

wasChryslerunderLeeIacocca,whomBusinessWeekdescribedsimply

as,"TheMan.TheDictator.

Iacoccabecamepresidentof

Chryslerin1979andimposedhistowering

personalitytodisciplinethe

organizationintoshape."RightawayIknewtheplacewasinastateof

anarchy[and]neededadoseoforderanddiscipline-andquick,"wrote

Iacoccaofhisearly

Inhisfirstyear,heentirelyoverhauledthe

managementstructure,institutedstrictfinancialcontrols,improvedqual-

itycontrolmeasures,rationalizedtheproductionschedule,andcon-

ductedmasslayoffstopreserve

"IfeltlikeanArmySurgeon....

Wehadtodoradicalsurgery,vingwhatwe

Indealingwiththe

unions,hesaid,"Ifyoudothelpmeout,

goingtoblowyourbrains

out.

declarebankrucy

themorning,andyou'llallbeoutof

produedspectacularresultsandChryslerbecameone

ofthemostcelebratedturnaroundsinindustrialhistory.

Aboutmidwaythroughhistenure,however,Iacoccaseemedtolose

focusandthecompanybegantodeclineonceagain.TheWallStreet

nalwrote:"Mr.IacoccaheadedtheStatueofLibertyrenovation,joineda

132

Collins

RUBBERMAIDCORPORATION,ACLASSIC

TRANSITION

RatioofCumulativeStockReturnstoGeneralMarket,

Setto1.0atStartofStanley

Reign

5

Ends

4

3

2

1

\

Company

Acquired

congressionalcommissiononbudgetreductionandwroteasecondbook.

Hebeganasyndicatednewspapercolumn,boughtanItalianvillawhere

hestartedbottlinghisownwineandoliveoil....Criticscontenditalldis-

tractedhim,andwasarootcauseofChrysler'scurrentproblems....Dis-

tractingornot,it'sclearthatbeingafolkheroisademanding

Worsethanhismoonlightcareerasanationalhero,hislackofdisci-

plinetostaywithinthearenasinwhichChrysler

couldbethebestinthe

worldledtoabingeofhighlyundisciplineddiversifications.In1985,he

wasluredintothesexyaerospacebusiness.Whereasmost

wouldbe

contentwithasingleGulfstreamjet,Iacocca

decidedtobuythewhole

Gulfstream

Alsointhe

heembarkedonacostly

andultimatelyunsuccessfuljointventurewithItaliansportscarmaker

Maserati."IacoccahadasoftspotforItalians,"saidone

retired

executive."Iacocca,whoownsamodestestateinTuscany,wassointent

onanItalianalliancethatcommercialrealitieswereignored,suggest

industryinsiders,"wroteBusinessWee

Someestimatesputtheloss

of

thefailed

ventureat$200

which,accordingtoForbes,

was"anenormoussumtoloseonaigh-price,low-volumeroadster.After

all,nomorethanafewthousandilleverbe

Duringthefirsthalfofhis

Iacoccaproducedremarkableresults,

takingthecompanyfromnearbankruptcytonearlythreetimesthegen-

eralmarket.DuringthesecondhalfofIacocca'stenure,thecompanyslid

GoodtoGreat133

31percentbehindthemarketandfacedanotherpotential

"Likesomanypatientswithaheartcondition,"wroteaChryslerexecu-

tive,"we'dsurvivedsurgeryseveralyearsbeforeonlyto

reverttoour

unhealthy

Theabovecasesillustrateapatternwefoundineveryunsustainedcom-

parison:aspectacularriseunderatyrannicaldisciplinarian,followedby

anequallyspectaculardeclinewhenthe

disciplinariansteppedaway,

leavingbehindnoenduringcultureofdiscipline,orwhenthedisciplinar-

ianhimselfbecameundisciplinedandstrayedwantonlyoutsidethethree

circles.Yes,disciplineisessentialforgreatresults,butdisciplinedaction

withoutdisciplinedunderstandingofthethreecirclescannotproduce

sustainedgreatresults.

FANATICALADHERENCETO

THEHEDGEHOGCONCEPT

Fornearlyfortyyears,PitneyBoweslivedinsidethewarm

andprotective

cocoonofamonopoly.WithitscloserelationshiptotheU.S.PostalSer-

viceanditspatentsonpostagemetermachines,Pitneyattained100per-

centofthemeteredmail

Bytheendofthe

nearlyhalfof

allU.S.mailpassedthroughPitneyBowes

Withgrossprofit

marginsinexcessof80percent,nocompetition,ahugemarket,anda

recession-proofbusiness,PitneyBoweswasn'tsomuchagreatcompanyas

itwasacompanywithagreatmonopoly.

Then,asalmostalwayshappenstomonopolieswhentheprotective

cocoonisrippedaway,PitneyBowesbeganalongslide.Firstcameacon-

sentdecreethatrequiredPitneyBowestolicenseitspatentstocompetitors,

royalty

Withinsixyears,PitneyBoweshadsixteen

Pit-

neyfellintoareactionary"Chicken

skyisfalling"diversification

frenzy,throwingcashafterill-fatedacquisitionsand

jointventures,

includinga$70milionbloodbath(54percentofnetstockholders'equity

atthetime)fromacomputerretailforay.In1973,thecompanylost

moneyforthefirstimeinitshistory.Itwasshapinguptobejustanother

typicalcaseofamonopoly-protectedcompanygraduallyfallingapart

once

theharshrealityofcompetition.

Fortunately,aLevel5leadernamedFredAllensteppedinandasked

hardquestionsthatledto

deeperunderstandingofPitney'sroleinthe

world.Insteadofviewingitselfasa"postagemeter"company,Pitney

134

Collins

cametoseethatitcouldbethebestintheworldatservicingtheback

roomsofbusinesseswithinthebroaderconceptof"messaging."Italso

cametoseethatsophisticatedback-officeproducts,likehigh-endfaxes

andspecializedcopiers,playedrightintoitseconomicengineofprofitper

customer,buildingoffitsextensivesalesandservicenetwork.

Allenandhissuccessor,GeorgeHarvey,instituteda

modelofdisciplined

diversification.Forexample,Pitneyeventuallyattained45percentofthe

high-endfaxmarketforlargecompanies,ahugelyprofitablecash

Harveybeganasystematicprocessofinvestmentinnewtechnologiesand

products,suchastheParagonmailprocessorthatsealsandsendsletters,and

bythelate

Pitneyconsistentlyderivedoverhalfitsrevenuesfrom

productsintroducedinthepreviousthree

Later,PitneyBowes

becameapioneeratlinking

machinestotheInternet,yet

anotheropportunityfordisciplineddiversification.Thekeypointisthat

everystepofdiversificationandinnovationstayedwithinthethreecircles.

Afterfalling77percentbehindthemarketfromthe

consentdecreeto

itsdarkestdaysin1973,PitneyBowesreversedcourse,eventuallyrisingto

overeleventimesthemarketbythestartof1999.From1973to2000,Pit-

neyBowesoutperformedCoca-Cola,

Johnson&Johnson,Merck,

Motorola,Procter

Gamble,Hewlett-Packard,WaltDisney,andeven

GeneralElectric.Canyouthinkofanyothercompanythatemergedfrom

theprotectivecomfortofamonopolycocoontodeliverthislevelof

results?

didn't.Xerox

EvenIBMdidn't.

PitneyBowesillustrateswhatcanhappenwhenacompanylacksthe

disciplinetostaywithinthethreecirclesand,conversely,whatcanhap-

penwhenitregainsthatdiscipline.

Incontrast,wefoundalackofdisciplinetostaywithinthethreecircles

asakeyfactorinthedemiseofnearlyallthecomparisoncompanies.

Everycomparisoneither

lackedthedisciplinetounderstanditsthree

circlesor(2)lackedthe

disciplinetostaywithinthethreecircles.

GoodtoGreat

R.J.Reynoldsisaclassiccase.Untilthe

R.J.Reynoldshada

simpleandclearconcept,builtaroundbeingthebesttobaccocompany

intheUnitedStates-apositionithadheldforatleasttwenty-five

Thenin1964,theSurgeonGeneral'sOfficeissueditsreportthatlinked

cigaretteswithcancer,andR.J.Reynoldsbegantodiversifyawayfrom

tobaccoasadefensivemeasure.Ofcourse,alltobaccocompaniesbegan

todiversifyatthattimeforthesamereason,includingPhilipMorris.But

R.J.Reynolds'wanderingsoutsideitsthreecircles

defiedalllogic.

R.J.Reynoldsspentnearlyathirdoftotalcorporateassetsin1970to

buyashippingcontainercompanyandanoilcompany(Sea-Landand

Aminoil),theideabeingtomakemoneybyshippingitsown

Okay,

notaterribleideaonitsown.ButwhatonearthdidithavetodowithR.J.

Reynolds'HedgehogConcept?Itwasawhollyundisciplinedacquisition

thatcameaboutinpartbecauseSea-Land'sfounderwasaclosefriendof

R.J.Reynolds'

Afterpouringmorethan$2billionintoSea-Land,thetotalinvestment

nearlyequaledtheentireamountofnetstockholders'

Finally,

afteryearsofstarvingthetobaccobusinesstofunnelfundsintothesink-

ingshipbusiness,RJRacknowledgedfailureandsold

One

Reynoldsgrandsoncomplained:"Look,theseguysaretheworld'sbestat

makingandsellingtobaccoproducts,butwhatdotheyknowaboutships

oroil?I'mnotworriedaboutthemgoingbroke,buttheylooklikecountry

boyswithtoomuchcashintheir

Tobefair,PhilipMorrisdidnothaveaperfectdiversificationrecord

either,asevidenced

itsfailedpurchaseof7UP.

However,instarkcon-

trasttoR.J.Reynolds,PhilipMorrisdisplayedgreaterdisciplinein

responsetothe1964surgeongeneral'sreport.Insteadofabandoningits

HedgehogConcept,PhilipMorrisredefineditsHedgehogConceptin

termsofbuildingglobalbrandsinnot-so-healthyconsumables(tobcco,

beer,softdrinks,coffee,chocolate,processedcheese,etc.).PhilipMois'

superiordisciplinetostaywithinthethreecirclesisonekeyreasonwh

theresultsofthetwocompaniesdivergedso

dramaticallyafterthe1964,

report,despitethefactthattheybothfacedtheexactsameindustryoppor-

tunitiesandthreats.From1964to1989(whenR.J.Reynoldsdisappeared

frompublictradinginaleveragedbuyout),$1investedinPhilipMorris

beat$1investedinR.J.Reynoldsbyoverfourtimes.

FewcompanieshavethedisciplinetodiscovertheirHedgehogCon-

cept,muchlessthedisciplinetobuildconsistentlywithinit.Theyfailto

graspasimpleparadox:Themoreanorganizationhasthedisciplineto

136

JimCollins

staywithinitsthreecircles,

themoreitwillhaveattractiveopportuni-

tiesforgrowth.Indeed,agreatcompanyismuchmorelikelytodieof

indigestionfromtoomuchopportunitythanstarvationfromtoolittle.

Thechallengebecomesnotopportunitycreation,butopportunityselec-

tion.

ThisnotionoffanaticalconsistencyrelativetotheHedgehogConcept

doesn'tjustconcerntheportfolioofstrategicactivities.Itcanrelatetothe

entirewayyoumanageandbuildanorganization.Nucorbuiltitssuccess

aroundtheHedgehogConceptofharnessingcultureandtechnologyto

producesteel.CentraltotheNucorconceptwastheideaofaligning

workerinterestswithmanagementandshareholderintereststhroughan

egalitarianmeritocracylargelydevoidofclass

distinctions.WroteKen

Iverson,inhis1998bookPlainTalk:

Inequalitystillrunsrampantinmostbusinesscorporations.I'mreferring

nowtohierarchicalinequalitywhichlegitimizesandinstitutionalizes

theprincipleof"We"vs.

"They."...Thepeopleatthetopofthecorpo-

ratehierarchygrantthemselvesprivilegeafterprivilege,flauntthose

privilegesbeforethemenandwomenwhodotherealwork,thenwon-

derwhyemployeesareunmovedbymanagement'sinvocationstocut

costsandboostprofitability....WhenIthinkofthemillionsofdollars

spentbypeopleatthetopofthemanagementhierarchyoneffortsto

motivatepeoplewhoarecontinuallyputdownbythathierarchy,Ican

onlyshakemyheadin

WhenweinterviewedKenIverson,hetoldusthatnearly100percentof

thesuccessofNucorwasduetoitsabilitytotranslateitssimpleconcept

intodisciplinedactionconsistentwiththatconcept.Itgrewintoa$3.5bil-

lionFortune500companywithonlyfourlayersof

managementanda

corporateheadquartersstaffoffewerthantwenty-fivepeople-executive,

financial,secretarial,thewholeshebang-crammedintoarentedoffice

thesizeofasmalldental

Cheapveneerfurnitureadornedthe

GoodtoGreat137

distinctionsandcreating

anegalitarianmeritocracythat

alignsmanagement,labor,and

financialinterests

Couldbecomethe

bestintheworldat

denominatorof

harnessingculture

Nucor'sTHREECIRCLES

1970-1995

lobby,whichitselfwasnotmuchlargerthanacloset.Insteadofacorpo-

ratediningroom,executiveshostedvisitingdignitariesatPhil'sDiner,a

stripmallsandwichshopacrossthe

Executivesdidnotreceivebetterbenefitsthanfrontlineworkers.Infact,

executiveshadfewerperks.Forexample,allworkers(butnotexecutives)

wereeligibletoreceive$2,000peryearforeachchildforuptofouryearsof

post-highschool

Inoneincident,amancametoMarvin

Pohlmanandsaid,"Ihaveninekids.Areyoutellingmethatyou'llpayfor

fouryearsofschool-college,tradeschool,whatever-foreverysingleone

ofmykids?"Pohlman

acknowledgedthat,yes,that'sexactlywhatwould

happen."Themanjustsatthereandcried,"saidPohlman.

neverforget

it.Itjustcapturesinonemomentsomuchofwhatweweretryingto

WhenNucorhadahighly

profitableyear,everyoneinthecompany

wouldhaveaveryprofitableyear.Nucorworkersbecamesowellpaidthat

onewomantoldherhusband,"IfyougetfiredfromNucor,

divorce

ButwhenNucorfaceddifficulttimes,everyone

fromtoptobot-

tomsuffered.Butpeopleatthetopsufferedmore.Inthe1982recession,

forexample,workerpaywentdown25percent,officerpaywentdown60

.

percent,andtheCEO'spaywentdown75

138

JimCollins

Nucortookextraordinarystepstokeepatbaytheclassdistinctionsthat

eventuallyencroachonmostorganizations.All7,000employees'names

appearedintheannualreport,notjustofficers'and

Every-

oneexceptsafetysupervisors

andvisitorsworethesamecolorhardhats.

Thecolorofhardhatsmightsoundtrivial,butitcausedquiteastir.Some

foremencomplainedthatspecial-coloredhardhatsidentifiedthemas

higherinthechain,animportantstatussymbolthattheycouldputonthe

backshelvesoftheircarsortrucks.Nucorrespondedbyorganizinga

seriesofforumstoaddressthepointthatyourstatusandauthorityin

Nucorcomefromyourleadershipcapabilities,notyourposition.Ifyou

don'tlikeit-ifyoureallyfeelyouneedthatclass

distinction-well,then,

Nucorisjustnottherightplacefor

IncontrasttoNucor'sdentalsuite-sizedheadquarters,Bethlehem

Steelbuiltatwenty-one-storyofficecomplextohouseitsexecutivestaff.At

extraexpense,itdesignedthe

buildingmorelikeacrossthanarectan-

gle-adesignthataccommodatedthelargenumberofvicepresidents

whoneededcorneroffices."Thevicepresidents...[hadtohave]win-

dowsintwodirections,soitwasoutofthatdesirethatwecameupwith

thedesign,"explainedaBethlehem

InhisbookCrisisin

Bethlehem,JohnStrohmeyerdetailsacultureasfartotheotherendofthe

continuumfromNucorasyoucanimagine.Hedescribesafleetofcorpo-

rateaircraft,usedevenfor

takingexecutives'childrentocollegeandflit-

tingawaytoweekendhideaways.Hedescribesaworld-classeighteen-hole

executivegolfcourse,anexecutivecountryclubrenovatedwithBethle-

hemcorporatefunds,andevenhowexecutiverankdeterminedshower

priorityatthe

WecametotheconclusionthatBethlehemexecutivessawthevery

purposeoftheiractivitiesastheperpetuationofaclasssystemthatele-

vatedthemtoelitestatus.Bethlehemdidnotdeclineinthe1970s

and1980sprimarilybecauseofimprtsortechnology-Bethlehem

declinedfirstandforemostbecauseiwasaculturewhereinpeople

focusedtheireffortsonnegotiatingthnuancesofanintricatesocial

hierarchy,notoncustomers,competitrs,orchangesinthe

external

world.

From1966(atthestartofitsbuildup)to1999,Nucorpostedthirty-four

consecutiveyearsofpositiveprofitability,whileoverthosesamethirty-four

years,Bethlehemlostmoneytwelvetimesandits

cumulativeprofitability

addeduptolessthanzero.Bythe

Nucor'sprofitabilitybeatBeth-

lehem'severysingleyear,andattheendofthecentury,Nucor-which

GoodtoGreat

hadbeenlessthanathirdthesizeofBethlehemonlyadecade

finallysurpassedBethlehemintotal

Evenmoreastounding,

Nucor'saveragefive-year

profitperemployeeexceededBethlehemby

almostten

Andfortheinvestor,$1investedinNucorbeat$1

investedinBethlehemSteelbyover200times.

Tobefair,BethlehemhadonegiantproblemnotfacedbyNucor:

adversariallaborrelationsandentrenchedunions.Nucorhadnounion

andenjoyedremarkablygoodrelationswithitsworkers.Infact,when

unionorganizersvisitedoneplant,workersfeltsoferociouslyloyalto

Nucorthatmanagementhadtoprotecttheunion

organizersfromworkers

whobeganshoutingandthrowingsandat

Buttheunionargumentbegsacrucialquestion:WhydidNucorhave

suchabetterrelationshipwithitsworkersinthefirstplace?BecauseKen

Iversonandhisteamhada

simple,crystallineHedgehogConceptabout

aligningworkerinterestswithmanagementinterestsand-mostimpor-

tantly-

becausetheywerewillingtogotoalmostextremelengthstobuild

theentireenterprise

consistentwiththatconcept.Callthemabitfanati-

califyouwant,buttocreategreatresultsrequiresanearlyfanaticaldedi-

cationtotheideaofconsistencywithintheHedgehogConcept.

STARTA"STOPDOING"

Doyouhavea"to

list?

Doyoualsohavea"stopdoing"list?

Mostofusleadbusybutundisciplinedlives.Wehaveever-expanding

"to

lists,tryingtobuild

momentumbydoing,doing,doing-anddoing

more.Anditrarelyworks.Thosewhobuiltthegood-to-greatcompanies,

however,madeasmuchuseof"stopdoing"listsas"todo"lists.Theydis-

playedaremarkabledisciplinetounplugallsortsofextraneousjunk.

WhenDarwinSmithbecameCEOofKimberly-Clark,hemadegreat

useof"stopdoing"lists.Hesawthatplayigtheannualforecastgame

withWallStreetfocusedpeopletoomucontheshortterm,sohejust

stoppeddoingit."Onbalance,Iseenont

advantagetoourstockholders

whenweannuallyforecastfutureearnigs,"saidSmith."Wewillnotdo

Hesaw"titlecreep"asasignofclass-consciousnessandbureaucratic

layering,sohesimplyunpluggedtitles.Nooneatthecompanywould

haveatitle,unlessitwasforapositionwheretheoutsideworlddemanded

atitle.Hesawincreasinglayersasthenaturalresultofempirebuilding.

140

Collins

Sohesimplyunpluggedahugestackoflayerswithasimpleelegant

mechanism:Ifyoucouldn't

justifytoyourpeerstheneedforatleastfif-

teenpeoplereportingtoyoutofulfillyourresponsibilities,thenyou

wouldhavezeropeoplereportingto

(Keepinmindthathedidthis

inthe

longbeforeitbecamefashionable.)Toreinforcetheidea

thatKimberly-Clarkshouldbeginthinkingofitselfasaconsumercom-

pany,notapapercompany,heunpluggedKimberlyfromallpaperindus-

trytrade

Thegood-to-greatcompaniesinstitutionalizedthedisciplineof"stop

doingthroughtheuseofauniquebudgetmechanism.Stopandthinkfor

amoment:Whatisthepurposeofbudgeting?Mostanswerthatbudgeting

existstodecidehowmuchtoapportiontoeachactivity,or

tomanagecosts,

orboth.Fromagood-to-greatperspective,bothoftheseanswersarewrong.

Kimberly-Clarkdidn'tjustreallocateresourcesfromthepaperbusiness

totheconsumerbusiness.Itcompletelyeliminatedthepaperbusiness,

soldthemills,andinvestedallthemoneyintotheemergingconsumer

business.

Ihadaninterestingconversationwithsomeexecutivesfromacompany

inthepaperbusiness.It'sagoodcompany,notyetagreatone,andthey

hadcompeteddirectlywithKimberly-ClarkbeforeKimberlytransformed

itselfintoaconsumercompany.Outofcuriosity,Iaskedthemwhatthey

thoughtofKimberly-Clark."WhatKimberdidisnotfair,"theysaid.

"Notfair?"Ilookedquizzical.

"Oh,sure,they'vebecomeamuc

oresuccessfulcompany.But,you

know,ifwe'dsoldourpaperbus'essandbecomeapowerfulconsumer

company,wecouldhavebeengreat,too.Butwejusthavetoomuch

investedinit,andwecouldn'thavebroughtourselvestodoit."

Ifyoulookbackonthegood-to-greatcompanies,theydisplayed

remarkablecouragetochanneltheirresourcesintoonlyoneorafeware-

GoodtoGreat

nas.Oncetheyunderstoodtheirthreecircles,theyrarelyhedgedtheir

bets.RecallKroger'scommitmenttooverturnitsentiresystemtocreate

superstores,while

clungtothe"safety"ofitsolderstores.Recall

Abbott'scommitmenttoputthebulkofitsresourcesintobecomingnum-

beroneindiagnosticsandhospitalnutritionals,while

clungtoits

corepharmaceuticalbusiness(whereitcouldneverbethebestinthe

world).RecallhowWalgreensexitedtheprofitablefood-servicebusiness

andfocusedallitsmightintooneidea:thebest,mostconvenientdrug-

stores.RecallGilletteand

Sensor,Nucorandthemini-mills,

Clarkandsellingthemillstochannelallitsresourcesintotheconsumer

business.Theyallhadthegutstomakehugeinvestments,oncethey

understoodtheirHedgehogConcept.

Themosteffectiveinvestmentstrategyisahighlyundiversifiedport-

foliowhenyouareright.Asfacetiousasthatsounds,that'sessentiallythe

approachthegood-to-greatcompaniestook."Beingright"meansgetting

theHedgehogConcept;"highlyundiversified7'

meansinvestingfullyin

thosethingsthatfitsquarelywithinthethreecirclesandgettingridof

everythingelse.

Ofcourse,thekeyhereisthelittlecaveat,"Whenyouareright."But

howdoyouknowwhenyou'reright?Instudyingthe

companies,we

learnedthat"beingright"justisn'tthathardifyouhaveallthepiecesin

place.IfyouhaveLevel5leaderswhogettherightpeopleonthebus,

ifyouconfrontthebrutalfactsofreality,ifyoucreateaclimatewhere

thetruthisheard,ifyouhaveaCouncilandworkwithinthethreecircles,

ifyouframealldecisionsinthecontextofacrystallineHedgehogCon-

cept,ifyouactfromunderstanding,notbravado-ifyoudoallthese

things,thenyouarelikelytoberightonthebigdecisions.

Therealques-

tionis,onceyouknowtherightthing,doyouhavethedisciplinetodothe

rightthingand,equallyimportant,tostopdoingthewrongthings?

GoodtoGreat

nJuly28,1999,

ofthefirstInternetpharma-

cies-soldsharesofitsstocktothepublic.Withinsecondsoftheopening

bell,thestockmultipliednearlythreefoldto$65pershare.Fourweeks

later,thestockclosedashighas$69,creatingamarketvaluationofover

$3.5billion.Notbadforanenterprisethathadsold

productsforlessthan

ninemonths,hadfewerthan500employees,offerednohopeofinvestor

dividendsforyears(ifnotdecades),anddeliberatelyplannedtolosehun-

dredsofmillionsofdollarsbeforeturningasingledollarof

Whatrationaledidpeopleusetojustifytheseratherextraordinary

,

bers?"Newtechnologywillchangeeverything,"thelogicwent."The

Internetisgoingtocompletelyrevolutionizeallbusinesses,"thegurus

chanted."It'sthegreatInternetlandgrab:Betherefirst,betherefast,

buildmarketshare-nomatterhowexpensive-andyouwin,"

the

entrepreneurs.

Weenteredaremarkablemomentinhistorywhenthewholeideaof

tryingtobuildagreatcompanyseemedquaintandoutdated."Builtto

GoodtoGreat

Flip"becamethemantraof

theday.Justtellpeopleyouweredoingsome-

thing,anything,connectedtotheInternet,and-presto!-youbecame

rich

flippingsharestothepublic,evenifyouhadnoprofits(orevena

realcompany).Whytakeall

thehardstepstogofrombuilduptobreak-

through,creatingamodelthatactuallyworks,whenyoucouldyell,"New

technology!"or"Neweconomy!''andconvincepeopletogiveyouhun-

dredsofmillionsofdollars?

Someentrepreneursdidn't

evenbothertosuggestthattheywouldbuild

arealcompanyatall,muchlessagreatone.Oneevenfiledtogopublic

inMarchof2000withanenterprisethatconsistedsolelyofaninforma-

tionalWebsiteandabusinessplan,nothingmore.Theentrepreneur

admittedtotheIndustryStandardthatitseemedstrangetogopublic

beforestartingabusiness,butthatdidn'tstophimfromtryingtopersuade

investorstobuy1.1millionsharesat$7to$9pershare,despitehavingno

revenues,noemployees,nocustomers,no

Withthenewtech-

nologyoftheInternet,whoneedsallthosearchaicrelicsoftheoldecon-

omy?Orsothelogicwent.

Atthehighpointofthisfrenzy,drugstore.comissueditschallengeto

Walgreens.Atfirst,Walgreens'stocksuffered

fromtheinvasionofthedot-

losingover40percentofitspriceinthemonthsleadinguptothe

drugstore.compublicoffering.WroteForbesinOctober1999:"Investors

seemtothinkthattheWebracewillbewonbycompetitorswhohitthe

groundrunning-companieslikedrugstore.com,whichtradesat398

timesrevenue,ratherthanWalgreen,tradingat1.4times

Ana-

lystsdowngradedWalgreens'stock,andthepressureonWalgreenstoreact

totheInternetthreatincreasedasnearly$15billioninmarketvalueevap-

Walgreens'responseinthemidstofthisfrenzy?

"We'reacrawl,walk,runcompany,"DanJorndttoldForbesindescrib-

inghisdeliberate,methodicalapproachtotheInternet.Insteadofreacting

likeChickenLittle,Walgreensexecutivesdidsomethingquiteunusual

forthetimes.Theydecidedtopauseandreflect.Theydecidedtouse

theirbrains.Theydecidedtothink!

Slowatfirst(crawl),WalgreensbeganexperimentingwithaWeb

site

whileengaginginintenseinternaldialogueanddebateaboutitsimplica-

tions,withinthecontextofitsownpeculiarHedgehogConcept."How

willtheInternetconnecttoourconvenienceconcept?Howcanwetieit

tooureconomicdenominatorofcashflowpercustomervisit?Howcan

weusetheWebtoenhancewhatwedobetterthananyothercompanyin

146

Collins

theworldandinawaythat

we'repassionateabout?"Throughout,

greensexecutivesembracedtheStockdaleParadox:"Wehavecomplete

faiththatwecanprevailinanInternetworldasagreatcompany;yet,we

mustalsoconfrontthebrutalfactsofrealityabouttheInternet."One

greensexecutivetoldusafunlittlestoryaboutthisremarkablemomentin

history.AnInternetleadermadeastatementaboutWalgreensalongthe

linesof,"Oh,Walgreens.They'retoooldandstodgyfortheInternet

world.They'llbeleftbehind."TheWalgreens

people,whileirkedbythis

arrogantcommentfromtheInternetelite,neverseriouslyconsidereda

publicresponse.Saidoneexecutive,"Let'squietlygoaboutdoingwhat

weneedtodo,andit'llbecomeclearsoonenoughthattheyjustpulled

thetailofthewrong

Thenalittlefaster(walk),WalgreensbegantofindwaystotietheInter-

netdirectlytoitssophisticatedinventory-and-distributionmodel

ultimately-itsconvenienceconcept.Fillyourprescriptionon-line,pop

intoyourcarandgotoyourlocalWalgreensdrive-through(inwhatever

cityyouhappentobeinatthemoment),zoompastthewindowwith

hardlyamoment'spausepickingupyourbottleofwhatever.Orhaveit

shippedtoyou,ifthat'smoreconvenient.Therewasno

maniclurching

about,nohype,nobravado-justcalm,deliberatepursuitofunderstand-

ing,followedbycalm,deliberatestepsforward.

Then,finally(run!),Walgreensbetbig,launchinganInternetsiteas

sophisticatedandwell

designedasmostpure

Justbeforewriting

thischapter,inOctober2000,wewenton-linetouseWalgreens.com.We

founditaseasytouseandthesystemofdeliveryasreliableandwell

thoughtoutasAmazon.com(thereigningchampionofe-

commerceat

thetime).PreciselyoneyearaftertheForbesarticle,Walgreenshadfig-

uredouthowtoharnesstheInternettoacceleratemomentum,makingit

justthatmuchmoreunstoppable.Itannounced(onitsWebsite)asignif-

icantincreaseinjobopenings,tosupportitssustainedgrowth.Fromits

lowpointin1999atthedepthsofthedot-comscare,Walgreens'stock

pricenearlydoubledwithinayear.

Andwhatof

Continuingtoaccumulatemassivelosses,

itannouncedalayofftoconservecash.Atitshighpoint,littlemorethana

yearearlier,drugstore.comtradedatapricetwenty-six

timeshigherthan

atthetimeofthiswriting.Ithadlostnearlyallofitsinitial

While

Walgreenswentfromcrawltowalktorun,drugstore.comwentfromrun

towalktocrawl.

GoodtoGreat

Perhapsdrugstore.comwillfigureoutasustainablemodelthatworks

andbecomeagreatcompany.Butitwillnotbecomegreatbecauseof

snazzytechnology,hype,andanirrationalstockmarket.It

willonly

becomeagreatcompanyifitfiguresouthowtoapplytechnologytoa

coherentconceptthatreflectsunderstandingofthethreecircles.

TECHNOLOGYANDTHEHEDGEHOGCONCEPT

Now,youmightbethinking:"ButtheInternetfrenzyisjustaspeculative

bubblethatburst.Sowhat?Everybodyknewthatthebubblewas

tainable,thatitjustcouldn'tlast.Whatdoesthatteachusaboutgoodto

great?"

Tobeclear:Thepointofthischapterhaslittletodowiththespecifics

oftheInternetbubble,perse.Bubblescomeandbubblesgo.Ithappened

withtherailroads.Ithappenedwithelectricity.Ithappenedwithradio.It

happenedwiththepersonalcomputer.Ithappenedwith

theInternet.

Anditwillhappenagainwithunforeseennewtechnologies.

Yetthroughallofthischange,greatcompanieshaveadaptedand

endured.Indeed,mostofthetrulygreatcompaniesofthelasthundred

Wal-MarttoWalgreens,

fromProcter

GambletoKimberly-

Clark,fromMercktoAbbott-tracetheirrootsbackthroughmultiplegen-

erationsoftechnologychange,beitelectricity,thetelevision,orthe

Internet.They'veadaptedbeforeandemergedgreat.

Thebestoneswill

adaptagain.

WecouldhavepredictedthatWalgreenswouldeventuallyfigureout

theInternet.Thecompanyhadahistoryofmakinghugeinvestmentsin

technologylongbeforeothercompaniesinitsindustry

becametech

Intheearly

itpioneeredamassivenetworksystemcalled

Intercom.Theideawassimple:BylinkingallWalgreensstoreselectroni-

callyandsendingcustomerdatatoacentralsource,itturnedevery

JimCollins

greensoutletinthecountryintoacustomer'slocalpharmacy.Youlivein

Florida,butyou'revisitingPhoenixandneedaprescriptionrefill.No

problem,thePhoenixstoreislinkedtothecentralsystem,andit'sjustlike

goingdowntoyourhometownWalgreensstore.

Thismightseemmundanebytoday'sstandards.ButwhenWalgreens

madetheinvestmentinIntercominthelate

nooneelseinthe

industryhadanythinglikeit.Eventually,Walgreensinvestedover$400

millioninIntercom,including$100millionforitsownsatellite

TouringtheIntercomheadquarters-dubbed"EarthStation

"isliketakingatripthroughaNASAspacecenterwithitsstunningarray

ofsophisticatedelectronicgadgetry,"wroteatrade

Walgreens'

technicalstaffbecameskilledatmaintainingeverypieceoftechnology,

ratherthanrelyingonoutside

Itdidn'tstopthere.Walgreens

pioneeredtheapplicationofscanners,robotics,computerizedinventory

control,andadvancedwarehousetrackingsystems.TheInternetisjust

onemorestepinacontinuouspattern.

Walgreensdidn'tadoptallofthisadvancedtechnologyjustforthesake

ofadvancedtechnologyorinfearfulreactiontofallingbehind.No,itused

technologyasatooltoacceleratemomentumafterhittingbreakthrough,

andtiedtechnologydirectlytoitsHedgehogConceptof

convenient

drugstoresincreasingprofitpercustomervisit.Asaninterestingaside,as

technologybecameincreasinglysophisticatedinthelate

Wal-

greens'CIO(chiefinformationofficer)wasa

registeredpharmacistby

training,notatechnology

Walgreensremainedresolutelyclear:Its

HedgehogConceptwoulddriveitsuseoftechnology,nottheotherway

around.

TheWalgreenscasereflects

ageneralpattern.Ineverygood-to-great

case,wefoundtechnologicalsophistication.However,itwasnevertech-

nologyperse,butthepioneeringapplicationofcarefullyselectedtechnolo-

gies.Everygood-to-greatcompanybecameapioneerintheapplicationof

technology,butthetechnologiesthemselvesvariedgreatly.(Seethetable

onpage150.)

Kroger,forexample,wasanearlypioneerintheapplicationofbarcode

scanners,whichhelpeditacceleratepast

bylinkingfrontlinepur-

chasesto

inventorymanagement.Thismightnotsoundvery

exciting(inventorymanagementisnotsomethingthattendstorivetread-

ers),butthinkofitthisway:Imaginewalkingbackintothewarehouseand

insteadofseeingboxesofcerealandcratesofapples,youseestacksand

toGreat

stacksofdollarbills-hundredsofthousandsandmillionsoffreshly

minted,crispandcrinklydollarbillsjustsittingthereonpallets,piled

hightotheceiling.That'sexactlyhowyoushouldthink

ofinventory.

Everysinglecaseofcannedcarrotsisnotjustacaseofcannedcarrots,it's

cash.Andit'scashjustsittingthereuseless,untilyousellthatcaseof

cannedcarrots.

NowrecallhowKrogersystematicallysheditsdreary

oldandsmall

grocerystores,replacingthemwithnice,big,shinysuperstores.Toaccom-

plishthistaskultimatelyrequiredmorethan$9billionofinvestment-

cashthatwouldsomehowhavetobepulledoutofthelow-margingrocery

business.Toputthisinperspective,Krogerputmorethantwiceitstotal

annualprofitsintocapitalexpendituresonaverageeveryyearforthirty

Evenmoreimpressive,despitetakingon$5.5billionofjunkbond

debttopayaonetime$40-per-sharecashdividendplus

an$8junior

debenturetofightoffcorporateraidersin1988,Krogercontinuedits

cash-intensiverevampingthroughoutthe1980sand

Kroger

modernizedandturnedoverallitsstores,improvedthecustomer'sshop-

pingexperience,radicallyexpandedthevarietyofproductsoffered,and

paidoffbillionsofdollarsofdebt.Kroger'suseofscanningtechnologyto

takehundredsofmillionsofcrispandcrinklydollarbillsoutoftheware-

houseandputthemtobetterusebecamea

elementinitsabilityto

pulloffitsmagictrick-pullingnotone,nottwo,butthreerabbitsoutof

ahat.

Gillettealsobecameapioneerintheapplicationoftechnology.But

Gillette'stechnologyacceleratorslaylargelyin

manufacturingtechnol-

ogy.Thinkaboutthetechnologyrequiredtomakebillions-literallybil-

lions-oflow-cost,high-tolerancerazorblades.WhenyouandIpickupa

Gilletterazor,weexpectthebladetobeperfectandweexpectittobe

inexpensivepershave.Forexample,tocreatetheSensor,Gilletteinvested

over$200millionindesignanddevelopment,mostofitfocusedonman-

ufacturingbreakthroughs,andearnedtwenty-nine

Itpioneered

theapplicationoflaser

weldingonamassscaletoshavingsystems-a

technologynormallyusedforexpensiveandsophisticatedproductslike

heart

ThewholekeytoGillette'sshavingsystemslayin

manufacturingtechnologysouniqueandproprietarythat

Gillettepro-

tecteditthewayCoca-Colaprotectsitssecretformula,completewith

armedguardsandsecurity

150

Collins

TECHNOLOGYACCELERATORSINTHE

0-GREATC

TechnologyAcceleratorsLinkedtoHedgehogConcept

TransitionEra

Abbott

Pioneeredapplicationofcomputertechnologyto

increaseeconomicdenominatorofprofitper

employee.Notaleaderinpharmaceutical

andinventory-tracking

technologies-linkedtothe

conceptofbeingthe"McDonald's"ofbig-ticketretail-

ing,abletooperateageographicallydispersedsystem

withgreatconsistency.

FannieMae

Pioneeredapplicationofsophisticatedalgorithmsand

computeranalysistomoreaccuratelyassessmortgage

risk,therebyincreasingeconomicdenominatorofprofit

perrisklevel."Smarter"systemofriskanalysisincreases

accesstohomemortgagesforlower-incomegroups,

uctsatlowcostwithfantasticconsistency.Protects

manufacturingtechnologysecretswiththesame

fanaticismthatCoca-Colaprotectsitsformula.

Kimberly-Clark

Pioneeredapplicationofmanufacturing-processtech-

nology,especiallyinnonwovenmaterials,tosupport

theirpassionatepursuitofproductsuperiority.Sophis-

ticated

labs;"babiescrawlaboutwithtempera-

tureandhumiditysensorstrailingfromtheirtails."

Kroger

Pioneeredapplicationofcomputerandinformation

technologytothecontinuousmodernizationofsuper-

stores.Firsttoseriouslyexperimentwithscanners,

whichitlinkedtotheentirecash-flowcycle,thereby

providingfundsforthemassivestore-revampingprocess.

GoodtoGreat

Nucor

Pioneeredapplicationofthemostadvanced

millsteelmanufacturingtechnology."Shopthe

worldover"forthemostadvancedtechnology.Will-

ingtomakehugebets(upto50percentofcorporate

networth)onnewtechnologiesthatothers

viewedas

risky,suchascontinuousthinslabcasting.

PhilipMorris

Pioneeredapplicationofbothpackagingandmanufac-

turingtechnology.Betontechnologytomakeflip-top

boxes-thefirstpackaging

innovationintwentyyears

intheindustry.Firsttousecomputer-basedmanufac-

turing.Hugeinvestmentinmanufacturingcenterto

experimentwith,test,andrefineadvancedmanufac-

turingandqualitytechniques.

PitneyBowes

Pioneeredapplicationofadvancedtechnologytothe

mailroom.Atfirst,ittooktheformofmechanical

postagemeters.Later,Pitneyinvestedheavilyinelec-

trical,software,communications,andInternetengi-

neeringforthemost

sophisticatedback-office

machines.Madehuge

investmenttoreinvent

basicpostagemetertechnologyinthe1980s.

Walgreens

Pioneeredapplicationofsatellitecommunicationsand

technology,linkedtoitsconceptof

convenientcornerdrugstores,tailoredtotheunique

needsofspecificdemographicsandlocations.A"swal-

lowyourtonsils"biginvestmentonasatellitesystem

thatlinksallstorestogether,likeonegiantwebofasin-

glecornerpharmacy."LikeatripthroughNASAspace

center."Ledtherestoftheindustrybyatleastadecade.

Wells

Pioneeredapplicationoftechnologiesthatwould

increaseeconomicdenominatorofprofitper

employee.Earlyleaderintwenty-four-hourbanking

byphone,earlyadopterof

firsttoallowpeople

tobuyandsellmutualfundsatanATM,pioneerin

Internetandelectronic

banking.Pioneeredsophisti-

catedmathematicstoconductbetterriskassessment

inlending.

Collins

TechnologyasanAccelerator,NotaCreator,

ofMomentum

WhenJimJohnsonbecameCEOofFannieMae,followingDavid

Maxwell,heandhisleadershipteamhiredaconsultingfirmtoconducta

technologyaudit.Theleadconsultant,BillKelvie,usedafour-levelrank-

ing,withfourbeingcuttingedgeandonebeingStone

Age.FannieMae

rankedonlyatwo.So,followingtheprincipleof"firstwho,"Kelviewas

hiredtomovethecompany

WhenKelviecametoFannieMaein

1990,thecompanylaggedabouttenyearsbehindWallStreetintheuseof

technology.

Overthenextfiveyears,KelviesystematicallytookFannieMaefroma

2toa3.8onthefour-point

Heandhisteamcreatedover300

computerapplications,includingsophisticatedanalyticalprogramsto

controlthe$600billionmortgageportfolio,on-linedatawarehouses

60millionpropertiesandstreamlinedworkflows,significantly

reducingpaperandclericaleffort."Wemovedtechnologyoutoftheback

officeandharnessedittotransformeverypartofthe

business,"said

Kelvie."Wecreatedanexpertsystemthatlowersthecostofbecominga

homeowner.Lendersusingourtechnologyreducedtheloan-approval

timefromthirtydaystothirtyminutesandloweredtheassociatedcostsby

over$1,000perloan."Todate,thesystemhassavedhomebuyersnearly

$4

NoticethattheFannieMaetransitionbeganin1981,withthearrivalof

DavidMaxwell,yetthecompanylaggedbehindintheapplicationof

technologyuntiltheearly1990s.Yes,technologybecameofprimeimpor-

tance

FannieMae,butafteritdiscovereditsHedgehogConceptand

afteritreachedbreakthrough.TechnologywasakeypartofwhatFannie

Maeleaderscalled"thesecondwind"ofthetransformationandactedas

anaccelerating

ThesamepatternholdsforKroger,Gillette,

greens,andallthegood-to-greatcompanies-thepioneeringapplication

oftechnologyusuallycame

lateinthetransitionandneveratthestart.

GoodtoGreat

useofrechnologyuntilyouknowwhichtechnologiesarerelevant.

Anawnicharethose?Those-and

those-thatlinkdirectlytothe

threeintersectingcirclesoftheHedgenogConcept.

Tomaketechnologyproductiveina

transformationfromgoodtogreat

meansaskingthefollowingquestions.Doesthetechnologyfitdirectly

withyourHedgehogConcept?yes,thenyouneedtobecomeapioneerin

theapplicationofthattechnology.Ifno,thenask,doyouneedthistech-

nologyatall?Ifyes,thenallyouneedisparity.(Youdon'tnecessarilyneed

theworld'smostadvancedphonesystemtobeagreatcompany.)Ifno,

thenthetechnologyisirrelevant,andyoucanignoreit.

Wecametoseethepioneeringapplicationof

technologyasjustone

morewayinwhichthegood-to-greatcompaniesremaineddisciplined

withintheframeoftheirHedgehogConcept.Conceptually,theirrelation-

shiptotechnologyisnodifferentfromtheirrelationshiptoanyothercategory

ofdecisions:disciplinedpeople,whoengageindisciplinedthought,and

whothentakedisciplinedaction.Ifatechnologydoesn'tfitsquarelywithin

theirthreecircles,theyignoreallthehypeandfearandjustgoabouttheir

businesswitharemarkabledegreeofequanimity.

However,oncethey

understandwhichtechnologiesarerelevant,theybecomefanaticaland

creativeintheapplicationofthosetechnologies.

Inthecomparisoncompanies,bycontrast,wefoundonlythreecasesof

pioneeringintheapplication

oftechnology.Thosethreecases-Chrysler

(computer-aideddesign),Harris(electronicsappliedtoprinting),and

Rubbermaid(advancedmanufacturing)-wereallunsustainedcompar-

isons,whichdemonstratesthattechnologyalonecannotcreatesus-

tainedgreatresults.Chrysler,forinstance,madesuperbuseofadvanced

computer-aidedandotherdesigntechnologiesbutfailedtolinkthosetech-

nologiestoaconsistentHedgehogConcept.AsChryslerstrayedoutside

thethreecirclesinthe

fromGulfstreamjetsto

sports,

cars,noadvancedtechnologybyitselfcouldsavethecompanyfrom

anothermassivedownturn.TechnologywithoutaclearHedgehogCon-

cept,andwithoutthedisciplinetostaywithinthe

threecircles,cannot

makeacompanygreat.

154

Collins

THETECHNOLOGYTRAP

TwoincidentsstandoutinmymindasIwritethischapter.Thefirstis

Timemagazine'sselectionin1999ofAlbertEinsteinas"Personofthe

20thCentury."Ifyouframetheperson-of-the-centuryselectionaround

thequestion,Howdifferentwouldtheworldbetodayifthatpersonhad

notexisted?thechoiceofEinsteinissurprising,comparedtoleaderslike

Churchill,Hitler,Stalin,andGandhi-peoplewhotruly

changedthe

courseofhumanhistory,forbetterorworse.Physicistspointoutthatthe

scientificcommunitywouldhavereachedanunderstandingofrelativity

withorwithoutEinstein,perhapsfiveyearslater,certainlyten,butnot

TheNazisnevergotthebomb,andtheAllieswouldhavewonthe

SecondWorldWarwithoutit(althoughitwouldhavecostmoreAllied

lives).WhydidTimepickEinstein?

Inexplainingtheirselection,Timeeditorswrote:"It'shardtocom-

paretheinfluenceofstatesmenwiththatofscientists.Nevertheless,we

cannotethattherearecertainerasthatweremostdefinedbytheirpol-

itics,othersbytheirculture,andothersbytheirscientificadvances....

So,howwillthe20thcenturyberemembered?Yes,for

democracy.

And,yes,forcivilrights.Butthe20thcenturywillbemostremembered

foritsearthshakingadvancesinscienceandtechnology...[which]...

advancedthecauseoffreedom,insomewaysmorethananystatesman

did.Inacenturythatwillberememberedforemostforitsscienceand

technology...onepersonstandsoutastheparamounticonofour

age...Albert

Inessence,theTimeeditorsdidn'tpickthepersonofthecenturyso

muchastheypickedthethemeofthecentury-

technologyandscience-

andattachedthemostfamouspersontoit.Interestingly,justafewdays

beforetheEinsteinannouncement,Timeannounceditspersonoftheyear

for1999.Whodiditpick?Noneotherthantheposterchildofe-commerce,

JeffBezosof

yetagainourculturalobsession

with,technology-drivenchange.Letmebeclear.Ineitheragreenordis-

agreewithTime'schoices.I

simplyfindtheminterestingandilluminat-

ing,becausetheygiveusawindowintoourmodernpsyche.Clearly,akey

itemonourcollectivemindistechnology,anditsimplications.

Whichbringsmetothesecondincident.Takingashortbreakfromthe

rigorsofwritingthisbook,ItraveledtoMinnesotatoteachsessionsatthe

MastersForum.TheMastersForumhasheldexecutiveseminarsfor

nearlyfifteenyears,andIwascurioustoknowwhichthemesappeared

GoodtoGreat

repeatedlyoverthoseyears."Oneoftheconsistentthemes,"saidJim

sonandPattyGriffinJensen,

programdirectors,"istechnology,

andtheconnectionbetweenthetwo."

"Whydoyousupposethatis?"Iasked.

"Peopledon'tknowwhattheydon'tknow,"theysaid."Andthey're

afraidthatsomenew

technologyisgoingtosneakuponthemfrom

behindandknockthemonthehead.Theydon'tunderstandtechnology,

andmanyfearit.Alltheyknowforsureisthattechnologyisanimportant

forceofchange,andthatthey'dbetterpayattentiontoit."

Givenourculture'sobsessionwithtechnology,andgiventhepioneer-

ingapplicationoftechnologyinthegood-to-greatcompanies,youmight

expectthat"technology"wouldabsorbasignificantportionofthediscus-

sioninourinterviewswithgood-to-greatexecutives.

Iftechnologyissovitallyimportant,whydidthegood-to-greatexecu-

tivestalksolittleaboutit?Certainlynotbecausetheyignoredtechnology:

Theyweretechnologicallysophisticatedandvastlysuperiortotheircom-

parisons.Furthermore,anumberofthegood-to-great

companiesreceived

extensivemediacoverageandawardsfortheirpioneeringuseoftechnol-

ogy.Yettheexecutiveshardlytalkedabouttechnology.It'sasifthemedia

articlesandtheexecutiveswerediscussingtwototallydifferentsetsof

companies!

Nucor,forexample,becamewidelyknownasoneofthemostaggres-

sivepioneersintheapplicationofmini-millsteelmanufacturing,with

dozensofarticlesandtwobooksthatcelebrateditsboldinvestmentsin

continuousthinslabcastingandelectricarc

Nucorbecamea

cornerstonecaseatbusinessschoolsasanexampleofunseatingtheold

orderthroughtheadvancedapplicationofnewtechnologies.

ButwhenweaskedKen

Iverson,CEOofNucorduringitstransition,to

namethetopfivefactorsintheshiftfromgoodtogreat,whereonthelist

Collins

doyouthinkheputtechnology?First?No.Second?No.Third?Nope.

Fourth?Noteven.Fifth?Sorry,butno."Theprimaryfactors,"saidKen

Iverson,"weretheconsistencyofthecompany,andourabilitytoproject

itsphilosophiesthroughoutthewholeorganization,enabled

ourlack

oflayersand

Stopandthinkaboutthatforamoment.Herewehavea

consummate

casestudyofupendingtheoldorderwithnewtechnology,andtheCEO

whomadeithappendoesn'tevenlisttechnologyinthetopfivefactorsin

theshiftfromgoodtogreat.

ThissamepatterncontinuedthroughouttheNucor

interviews.Ofthe

sevenkeyexecutivesandboardmembersthatweinterviewed,onlyone

pickedtechnologyasthenumberonefactorintheshift,andmostfocused

onotherfactors.AfewexecutivesdidtalkaboutNucor'sbigbetsontech-

nologysomewhereintheinterview,buttheyemphasizedotherfactors

evenmore-gettingpeoplewithafarmerworkethiconthebus,getting

therightpeopleinkeymanagementpositions,thesimplestructureand

lackofbureaucracy,therelentlessperformance

culturethatincreases

profitpertonoffinishedsteel.TechnologywaspartoftheNucorequa-

tion,butasecondarypart.OneNucorexecutivesummedup,"Twenty

percentofoursuccessisthenewtechnologythatweembrace...[but]

eightypercentofoursuccessisinthecultureofour

Indeed,youcouldhavegiventheexactsametechnologyattheexact

sametimetoanynumberofcompanieswiththeexactsameresourcesas

Nucor-andevenstill,theywouldhavefailedtodeliverNucor'sresults.

LiketheDaytona500,theprimaryvariableinwinningisnotthecar,but

thedriverandhisteam.Notthatthecarisunimportant,butitissec-

ondary.

Mediocrityresultsfirstandforemostfrommanagementfailure,not

technologicalfailure.BethlehemSteel'sdifficultieshadlesstodowiththe

mini-milltechnologyandmoretodowithitshistoryofadversariallabor

relations,whichultimatelyhaditsrootsinunenlightenedandineffective

management.Bethlehemhadalreadybegunitslongslide

beforeNucor

andtheothermini-millshadtakensignificantmarket

Infact,

thetimeNucormadeitstechnologicalbreakthroughwithcontinuous

thinslabcastingin1986,Bethlehemhadalreadylostmorethan80per-

centofitsvaluerelativetothemarket.Thisisnottosaythattechnology

playednoroleinBethlehem'sdemise;technologydidplayarole,and

ultimatelyasignificantone.Buttechnology'srolewasasanacceleratorof

IBethlehem'sdemise,notthecauseofit.Again,it'sthesameprincipleat

work-technologyasanaccelerator,notacause-onlyinthiscomparison

Icaseitisoperatinginreverse.BETHLEHEMSTEEL'SLONGDECLINE

RatioofCumulativeStockReturnstoGeneralMarket,

June1966-December2000

-Indeed,whenweexamined

thecomparisoncompanies,wedidnotfind

asingleexampleofacomparisoncompany'sdemisecomingprimarily

fromatechnologytorpedothatblewitoutofthewater.R.J.Reynoldslost

itspositionasthenumberonetobaccocompanyintheworldnotbecause

oftechnology,butbecauseRJRmanagementthrashedaboutwithundisci-

plineddiversificationand,later,wentona"let'smakemanagementrichat

theexpenseofthecompany"buyoutbinge.

fellfromthe

largestcompanyinAmerica

toirrelevancenotbecauseitlaggedbehind

Krogerinscanningtechnology,butbecauseitlackedthedisciplinetocon-

frontthebrutalfactsofrealityaboutthechangingnatureofgrocerystores.

Jim

Throughoutbusinesshistory,earlytechnologypioneersrarelyprevailin

theend.VisiCalc,forexample,wasthefirstmajorpersonalcomputer

WhereisVisiCalctoday?Doyouknowanyonewhousesit?

Andwhatofthecompanythatpioneeredit?Gone;itdoesn'tevenexist.

VisiCalceventuallylostouttoLotus1-2-3,whichitselflostoutto

Lotusthenwentintoatailspin,savedonlyby

sellingoutto

Simi-

larly,thefirstportablecomputerscamefromnow-deadcompanies,such

asOsborne

Today,weprimarilyuseportablesfromcompa-

niessuchasDellandSony.

Thispatternofthesecond(orthirdorfourth)followerprevailingover

theearlytrailblazersshowsupthroughtheentirehistoryoftechnological

andeconomicchange.IBMdidnothavetheearlyleadincomputers.It

laggedsofarbehindRemingtonRand(whichhad

theUNIVAC,thefirst

commerciallysuccessfullarge-scalecomputer)thatpeoplecalleditsfirst

computer

Boeingdidnotpioneerthecommercial

jet.DeHavillanddidwiththeComet,butlostgroundwhenoneofits

earlyjetsexplodedinmidair,notexactlyabrand-buildingmoment.

ing,slowertomarket,investedinmakingthesafest,mostreliablejetsand

dominatedtheairwaysforoverthree

Icouldgoonforpages.

GEdidnotpioneertheAC

electricalsystem;Westinghouse

Palm

Computingdidnotpioneerthepersonaldigitalassistant;Appledid,with

itshigh-profile

AOLdidnotpioneertheconsumerInternet

community;

andProdigy

Wecouldmakealonglistofcompaniesthatweretechnologyleaders

butthatfailedtoprevailintheendasgreatcompanies.Itwouldbeafas-

cinatinglistinitself,butalltheexampleswould

underscoreabasictruth:

Technologycannotturnagoodenterpriseintoagreatone,norbyitself

preventdisaster.

Historyteachesthislessonrepeatedly.ConsidertheUnitedStatesdeba-

cleinVietnam.TheUnitedStateshadthemost

technologicallyadvanced

fightingforcetheworldhaseverknown.Superjetfighters.Helicopter

gunships.Advancedweapons.Computers.Sophisticatedcommunications.

Milesofhigh-techbordersensors.Indeed,therelianceontechnologycre-

atedafalsesenseofinvulnerability.TheAmericanslackednottechnol-

ogy,butasimpleandcoherentconceptforthewar,onwhichtoattach

thattechnology.Itlurchedbackandforthacrossavarietyofineffective

strategies,nevergettingthe

upperhand.

Meanwhile,thetechnologicallyinferiorNorthVietnameseforces

GoodtoGreat159

adheredtoasimple,coherentconcept:aguerrillawarofattrition,aimed

atmethodicallywearingdownpublicsupportforthewarathome.What

littletechnologytheNorth

Vietnamesedidemploy,suchastheAK47

rifle(muchmorereliableandeasiertomaintaininthefieldthanthe

complicated

linkeddirectlytothatsimpleconcept.Andinthe

end,asyouknow,theUnitedStates-despiteallits

technologicalsophis-

tication-didnotsucceedinVietnam.Ifyoueverfindyourselfthink-

ingthattechnologyaloneholdsthekeytosuccess,thenthinkagainof

Vietnam.

Indeed,thoughtlessrelianceontechnologyisaliability,

notanasset.

Yes,whenusedright-whenlinkedtoasimple,clear,andcoherentcon-

ceptrootedindeepunderstanding-technologyisanessentialdriverin

acceleratingforwardmomentum.Butwhenusedwrong-whengrasped

asaneasysolution,withoutdeepunderstandingofhowitlinkstoaclear

andcoherentconcept-technologysimplyacceleratesyourownself-

createddemise.

TECHNOLOGYANDTHEFEAROF

BEINGLEFTBEHI

ND

Theresearchteamferociouslydebatedwhetherthistopicmeriteditsown

chapter.

"Theremustbeatechnologychapter,"saidScottJones."We'rebom-

bardedbytheimportanceoftechnologythesedaysatthe

businessschool.

Ifwedon'taddressit,we'llleaveahugeholeinthebook."

"Butitseemstome,"counteredBrianLarsen,"thatourtechnology

findingisjustaspecialcaseofdisciplinedaction,anditbelongsinthe

previouschapter.Disciplinedactionmeansstayingwithinthethreecir-

cles,andthat'stheessenceofourtechnologyfinding."

"True,butitisaveryspecialcase,"pointedoutScottCederberg."Every

oneofthecompaniesbecameextremepioneersintheapplicationoftech-

nologylongbeforetherestoftheworldbecametechnologyobsessed."

"ButcomparedtootherfindingslikeLevel5,theHedgehogConcept,

and'firstwho,'technologyfeelslikeamuchsmallerissue,"retorted

AmberYoung."IagreewithBrian:Technologyis

important,butasasub-

setofdisciplineorperhapstheflywheel."

Wearguedthroughoutthesummer.ThenChrisJones,inhertypically

160

Collins

quietandthoughtfulway,askedakeyquestion:"Whydidthegood-to-

greatcompaniesmaintainsuchabalancedperspectiveontechnology,

whenmostcompaniesbecomereactionary,lurching

andrunningabout

likeChickenLittle,aswe'reseeingwiththeInternet?"

indeed.

Chris'squestionledustoanessentialdifferencebetweengreatcompa-

niesandgoodcompanies,adifferencethatultimatelytippedthebalance

infavorofincludingthischapter.

Ifyouhadtheopportunitytositdownandreadall

pagesoftran-

scriptsfromthegood-to-greatinterviews,you'dbestruckbytheutter

absenceoftalkabout"competitivestrategy."Yes,

theydidtalkaboutstrat-

egy,andtheydidtalkaboutperformance,and

didtalkaboutbecom-

ingthebest,and

eventalkedaboutwinning.Buttheynevertalkedin

reactionarytermsandneverdefinedtheirstrategies

principallyin

responsetowhatothersweredoing.Theytalkedintermsofwhat

weretryingtocreateandhowtheyweretryingtoimproverelativetoan

absolutestandardofexcellence.

WhenweaskedGeorge

Harveytodescribehismotivationforbringing

changetoPitneyBowesinthe

hesaid:"I'vealwayswantedtosee

PitneyBowesasagreatcompany.Let'sstartwiththat,allright?Let'sjust

startthere.That'sagiventhat

needsnojustificationorexplanation.We're

nottheretoday.Wewon'tbetheretomorrow.Thereisalwayssomuch

moretocreateforgreatnessinanever-changing

OrasWayne

Sanderssummedupabouttheethosthatcametotypify

theinnerwork-

ingsofKimberly-Clark:"We'rejustneversatisfied.Wecanbedelighted,

butnever

Thosewhobuiltthegood-to-greatcompaniesweren'tmotivatedby

fear.Theyweren'tdrivenbyfearofwhattheydidn't

understand.

weren'tdrivenbyfearoflookinglikeachump.Theyweren'tdrivenby

fearofwatchingothershititbigwhiletheydidn't.Theyweren'tdrivenby

thefearofbeinghammeredbythecompetition.

GoodtoGreat

Neverwasthereabetterexampleofthisdifferencethanduringthe

technologybubbleofthelate

whichhappenedtotakeplaceright

smackinthemiddleoftheresearchongoodtogreat.It

asan

almostperfectstagetowatchthedifferencebetweengreatandgoodplay

itselfout,asthegreatonesrespondedlikeWalgreens-withcalmequa-

nimityandquietdeliberatestepsforward-whilethemediocreones

lurchedaboutinfearful,franticreaction.

Indeed,thebigpointofthischapterisnotabouttechnologyperse.No

technology,nomatterhowamazing-notcomputers,nottelecommuni-

cations,notrobotics,nottheInternet-canbyitselfigniteashiftfrom

goodtogreat.NotechnologycanmakeyouLevel5.Notechnologycan

turnthewrongpeopleintotherightpeople.No

technologycaninstillthe

disciplinetoconfrontbrutalfactsofreality,norcanitinstillunwavering

faith.Notechnologycansupplanttheneedfordeepunderstandingofthe

threecirclesandthetranslationofthatunderstandingintoasimple

HedgehogConcept.Notechnologycancreateacultureofdiscipline.No

technologycaninstillthesimpleinnerbeliefthatleavingunrealized

potentialonthetable-lettingsomethingremaingoodwhenitcan

becomegreat-isasecularsin.

Thosethatstaytruetothesefundamentalsandmaintaintheirbalance,

evenintimesofgreatchangeanddisruption,willaccumulatethe

momentumthatcreatesbreakthroughmomentum.Those

not,

thosethatfallintoreactionarylurchingabout,willspiraldownwardor

remainmediocre.Thisisthebig-picturedifferencebetweengreatand

good,thegestaltofthewholestudycapturedinthemetaphorofthefly-

wheelversusthedoomloop.Anditistothatoverarching

contrastthatwe

nowturn.

GoodtoGreat163

CHAPTE-R

Revolutionmeansturningthe

wheel.

tureahuge,heavyflywheel-amassivemetaldiskmountedhori-

zontallyonanaxle,about30feetindiameter,2feetthick,andweighing

about5,000pounds.Nowimaginethatyourtaskistogettheflywheel

rotatingontheaxleasfastandlongaspossible.

Pushingwithgreateffort,yougettheflywheeltoinchforward,moving

almostimperceptiblyatfirst.Youkeeppushingand,aftertwoorthree

hoursofpersistenteffort,yougettheflywheeltocompleteoneentireturn.

Youkeeppushing,andtheflywheelbeginstomoveabitfaster,andwith

continuedgreateffort,youmoveitaroundasecondrotation.Youkeep

pushinginaconsistentdirection.Threeturns...four...five...six...

theflywheelbuildsupspeed...seven...eight...youkeep

pushing...

nine...ten...itbuildsmomentum...eleven...twelve...moving

fasterwitheachturn...twenty...thirty...fifty...ahundred.

Then,atsomepoint-breakthrough!Themomentumofthething

kicksininyourfavor,hurlingtheflywheelforward,turnafterturn...

whoosh!...itsownheavyweightworkingforyou.You'repushingno

GoodtoGreat

harderthanduringthefirstrotation,buttheflywheelgoesfasterand

faster.Eachturnoftheflywheelbuildsuponworkdoneearlier,com-

poundingyourinvestmentofeffort.Athousandtimesfaster,thenten

thousand,thenahundredthousand.Thehugeheavydiskfliesforward,

withalmostunstoppablemomentum.

Nowsupposesomeonecamealongandasked,"Whatwastheonebig

pushthatcausedthisthingtogosofast?"

Youwouldn'tbeabletoanswer;it'sjustanonsensicalquestion.Wasit

thefirstpush?Thesecond?Thefifth?Thehundredth?No!Itwasallof

themaddedtogetherinanoverallaccumulationofeffortappliedinacon-

sistentdirection.Somepushesmayhavebeenbiggerthanothers,butany

singleheave-nomatterhowlarge-reflectsasmallfractionoftheentire

cumulativeeffectupontheflywheel.

BUILDUPANDBREAKTHROUGH*

Theflywheelimagecapturestheoverallfeelofwhatitwaslikeinsidethe

companiesastheywentfromgoodtogreat.Nomatterhowdramaticthe

endresult,thegood-to-greattransformationsneverhappenedinonefell

swoop.Therewasnosingledefiningaction,nograndprogram,noone

killerinnovation,nosolitaryluckybreak,nowrenchingrevolution.Good

togreatcomesaboutbyacumulativeprocess-stepbystep,actionby

action,decisionbydecision,turnbyturnoftheflywheel-

thataddsupto

sustainedandspectacularresults.

Yettoreadmediaaccountsofthecompanies,youmightdrawan

entirelydifferentconclusion.Often,themediadoesnotcoveracompany

untiltheflywheelisalready

turningatathousandrotationsperminute.

Thisentirelyskewsourperceptionofhowsuchtransformationshappen,

makingitseemasiftheyjumpedrighttobreakthroughassomesortofan

overnightmetamorphosis.

fortheterms

andbreakthroughshouldgotoDavidS.Landesandhis

book,TheWealthandPovertyofNations:WhySomeAreSoRichandSomeSoPoor

(NewYork:W.W.Norton

Company,1998).Onpage200,Landeswrites:"The

questionisreallytwofold.

First,whyandhowdidanycountrybreakthroughthecrust

of

andconventionalknowledgetothisnewmodeofproduction?Turningtothe

first,Iwouldstressbuildup-the

ofknowledgeandknow-how;

and

breakthrough-reachingandpassingthresholds."Whenwereadthisparagraph,we

noteditsapplicabilitytoourstudyanddecidedtoadoptthesetermsindescribingthe

good-to-greatcompanies.

166

Collins

Forexample,onAugust27,

1984,Forbesmagazinepublishedanarticle

onCircuitCity.Itwasthefirstnational-levelprofileeverpublishedonthe

company.Itwasn'tthatbigofanarticle,justtwopages,anditquestioned

whetherCircuitCity'srecentgrowthcould

Still,thereitwas,

thefirstpublicacknowledgmentthatCircuitCityhadbrokenthrough.

Thejournalisthadjustidentifiedahotnewcompany,almostlikean

overnightsuccessstory.

Thisparticularovernightsuccessstory,however,had

beenmorethana

decadeinthemaking.AlanWurtzelhadinheritedCEOresponsibility

fromhisfatherin1973,withthefirmclosetobankruptcy.First,herebuilt

hisexecutiveteamandundertookanobjectivelookatthebrutalfactsof

reality,bothinternalandexternal.In1974,stillstrugglingwithacrushing

debtload,Wurtzelandhisteambegantoexperimentwithawarehouse

showroomstyleofretailing(largeinventoriesofnamebrands,discount

pricing,andimmediatedelivery)andbuilta

prototypeofthismodelin

Richmond,Virginia,tosellappliances.In1976,thecompanybeganto

experimentwithsellingconsumerelectronicsinthewarehouseshowroom

format,andin1977,ittransformedtheconceptintothefirst-everCircuit

Citystore.

Theconceptmetwithsuccess,andthecompanybegansystematically

convertingitsstereostoresintoCircuitCitystores.In1982-withnine

yearsofaccumulatedturnsontheflywheel-Wurtzelandhisteamcom-

mittedfullytotheconceptoftheCircuitCitysuperstore.Overthenext

fiveyears,asitshiftedentirelytothisconcept,CircuitCitygeneratedthe

highesttotalreturntoshareholdersofanycompanyontheNewYork

Stock

From1982to1999,CircuitCitygeneratedcumulative

stockreturnstwenty-twotimesbetterthanthemarket,handilybeating

Intel,Wal-Mart,GE,Hewlett-Packard,andCoca-Cola.

Notsurprisingly,CircuitCitythenfounditselfaprimesubjectfor

mediaattention.Whereaswefoundnoarticlesofanysignificanceinthe

decadeleadingupthetransition,wefoundninety-sevenarticles'worth

examininginthedecadeafterthetransition,twenty-twoofthemsignifi-

cantpieces.It'sasifthecompanyhadn'tevenexisted

priortothat,despite

havingtradedonamajorstockexchangesince1968,anddespitethe

remarkableprogressmadebyWurtzelandhisteaminthedecadeleading

uptothebreakthroughpoint.

TheCircuitCityexperiencereflectsacommonpattern.In

caseafter

case,wefoundfewerarticlesinthedecadeleadinguptothepointoftran-

sitionthaninthedecadeafter,byanaveragefactorofnearlythree

GoodtoGreat167

CIRCUITCITY

Valueof$1Invested,

Numberof

Found

December31,1972-December31,1992

$31I64

$300

$200

$100

GeneralMarket$835

0

1972

1982

1992

Forexample,KenIversonandSam

beganturningtheNucor

flywheelin1965.Fortenyears,noonepaidanyattention,certainlynot

thefinancialpressortheothersteelcompanies.Ifyouhadaskedexecu-

tivesatBethlehemSteelorU.S.Steelabout"TheNucorThreat"in

1970,theywouldhavelaughed,iftheyeven

recognizedthecompany

nameatall(whichisdoubtful).By1975,theyearofitstransitionpoint

onthestockchart,Nucorhadalreadybuiltitsthirdmini-mill,longestab-

lisheditsuniquecultureofproductivity,andwaswellonitswayto

becomingthemostprofitablesteelcompanyin

Yetthefirst

majorarticleinBusinessWeekdidnotappearuntil1978,thirteenyears

afterthestartofthetransition,andnotinFortuneuntilsixteenyearsout.

From1965through1975,we

found

elevenarticlesonNucor,none

ofthemsignificant.Thenfrom1976through1995,wecollected

sixarticlesonNucor,fortyofthembeingmajorprofilesornationally

prominentfeatures.

Now,youmightbethinking,"Butweshouldexpectthat.Ofcourse

thesecompanieswouldgetmorecoverageaftertheybecomewildlysuc-

cessful.What'ssoimportantaboutthat?"

168

Collins

Pictureaneggjustsitting

there.Noonepaysitmuchattentionuntil,

oneday,theeggcracksopenandoutjumpsachicken!Allthemajormag-

azinesandnewspapersjumpontheevent,writingfeaturestories-"The

TransformationofEggtoChicken!""TheRemarkableRevolutionofthe

Egg!""StunningTurnaroundatEgg!"-asiftheegghadundergonesome

overnightmetamorphosis,radicallyalteringitselfintoachicken.

Butwhatdoesitlooklikefromthechicken'spointofview?It'sacom-

pletelydifferentstory.Whiletheworldignoredthis

dormant-lookingegg,

thechickenwasevolving,growing,developing,incubating.Fromthe

chicken'spointofview,crackingtheeggissimplyonemorestepinalong

chainofstepsleadinguptothatmoment-abigstep,tobesure,but

hardlytheradical,single-steptransformationitlooksliketothosewatch-

ingfromoutsidetheegg.

It'sasillyanalogy,granted.ButI'musingittohighlightaveryimpor-

tantfindingfromourresearch.Wekeptthinkingthatwe'dfind"theone

bigthing,"themiraclemomentthatdefinedbreakthrough.Weeven

pushedforitinourinterviews.Butthegood-to-greatexecutivessimply

couldnotpinpointasinglekeyeventormomentintimethatexemplified

thetransition.Frequently,theychafedagainstthewhole

ideaofallocating

pointsandprioritizingfactors.Ineverygood-to-greatcompany,atleast

oneoftheintervieweesgaveanunpromptedadmonishment,sayingsome-

thingalongthelinesof,"Look,youcan'tdissectthisthingintoaseriesof

nicelittleboxesandfactors,oridentifythemomentof'Aha!'orthe'one

bigthing.'Itwasawholebunchofinterlockingpiecesthatbuiltoneupon

another."

Eveninthemostdramaticcaseinourstudy-Kimberly-Clarkselling

themills-theexecutivesdescribedanorganic,cumulativeprocess."Dar-

windidnotchangethedirectionofthecompanyovernight,"saidone

Kimberly-Clarkexecutive."Heevolveditover

"Thetransition

wasn'tlikenightandday,"

saidanother."Itwasgradual,andIdon'tthink

GoodtoGreat

Iitwasentirelycleartoeverybodyuntilafewyearsintoit."'Ofcourse,selling

themillswasagiganticpushontheflywheel,butitwasonlyonepush.

Aftersellingthemills,thefulltransformationintothenumberonepaper-

basedconsumerproductscompanyrequiredthousandsofadditional

pushesontheflywheel,bigandsmall,accumulatedoneontopof

another.Ittookyearstogainenoughmomentumforthe

presstoopenly

heraldKimberly-Clark'sshiftfromgoodtogreat.Forbeswrote,"When...

Kimberly-Clarkdecidedtogoheadtoheadagainst

...thismaga-

zinepredicteddisaster.Whatadumbidea.Asitturnsout,itwasn'ta

dumbidea.Itwasasmart

Theamountoftimebetweenthetwo

Forbesarticles?Twenty-oneyears.

Whileworkingontheproject,wemadeahabitofaskingexecutives

whovisitedourresearchlaboratorywhattheywould

wanttoknowfrom

theresearch.OneCEOasked,"Whatdidtheycallwhattheyweredoing?

Didtheyhaveanameforit?Howdidtheytalkaboutitatthetime?"It'sa

greatquestion,andwewentbacktolook.Theastoundinganswer:They

didn'tcallitanything.

Thenitbegantodawnonus:Therewasnomiraclemoment.(Seethe

tableonpage170.)Althoughitmayhavelookedlikeasingle-strokebreak-

throughtothosepeeringinfromtheoutside,itwasanythingbutthatto

peopleexperiencingthetransformationfromwithin.Rather,itwasa

quiet,deliberateprocessoffiguringoutwhatneededtobedonetocreate

thebestfutureresultsandthensimplytakingthosesteps,oneafterthe

other,turnbyturnoftheflywheel.Afterpushingon

thatflywheelina

consistentdirectionoveranextendedperiodoftime,

inevitablyhit

apointofbreakthrough.

170

Collins

"NOMIRACLEMOMENT"INGOODTOGREAT

Quotesfrom

Abbott

"Itwasn'tablindingflashorsuddenrevelationfrom

"Ourchangewasamajorchange,andyetin

manyrespectssimplyaseriesofincremental

changes-thisiswhatmadethatchangesuccessful.

Wedidthisinanice

wayandtherewere

alwaysalotofcommondenominatorsbetweenwhat

wehadalreadymasteredandwhatwewereembarking

CircuitCity

"Thetransitiontofocusonthesuperstoredidn't

penovernight.Wefirst

consideredtheconceptin

1974,butwedidn'tconvertfullytoCircuitCitysuper-

storesuntilabouttenyearslater,afterwe'drefinedthe

conceptandbuiltenoughmomentumtobetour

whole

onit.""

FannieMae

"Therewasnoonemagicalevent,nooneturningpoint.

Itwasacombinationofthings.Moreofanevolution,

thoughtheendresultswere

Gillette

"Wedidn'treallymakeabigconsciousdecisionor

launchabigprogramtoinitiateamajorchangeor

transition.Individuallyandcollectivelywewerecom-

ingtoconclusionsaboutwhatwecoulddoto

Kimberly-Clark

"Idon'tthinkitwasdoneasbluntlyasitsounds.These

thingsdon'thappenovernight.Theygrow.Theideas

growandmushroomandcomeinto

Kroger

"Itwasn'taflashfromtheblue.Wehadallbeen

watchingexperimentalsuperstoresdevelop,andwe

wereprettywellpersuadedthattheindustrywouldgo

thatway.ThemajorthingthatLyledidwastosaythat

we'regoingtochangebeginningnow,onaverydelib-

erate

GoodtoGreat

Nucor

"Wedidnotmakeadecision

thatthiswaswhatwe

stoodforatanyspecificmoment.Itevolvedthrough

manyagonizingargumentsandfights.Iamnotsure

thatweknewexactlywhatwewerefightingforuntil

welookedbackandsaidthatwewerefightingtoestab-

lishwhoweweregoingto

PhilipMorris

"It'simpossibletothinkofonebigthingthatwould

exemplifyashiftfromgoodtogreatbecauseoursuc-

cesswasevolutionaryasopposedtorevolutionary,

buildingsuccessupon

success.Idon'tknowthatthere

wasanysingleevent.""

PitneyBowes

"Wedidn'ttalksomuchofchange.Werecognized

earlyonnotsomuchthatweneededtochange,but

thatweneededtoevolve,

whichrecognizesthatwe've

gottodothingsdifferently.Werealizedthatevolution

Walgreens

"Therewasnoseminalmeetingorepiphanymoment,

noonebigbrightlightthatcameonlikealightbulb.It

wassortofanevolution

Wells

"Itwasn'tasingleswitchthatwasthrownatonetime.

Littlebylittle,thethemesbecamemoreapparentand

stronger.WhenCarlbecameCEO,therewasn'tany

greatwrenching.Dickled

onestageofevolutionand

Carlthenext,anditjustproceededsmoothly,rather

thananabrupt

Whenteachingthispoint,Isometimesuseanexamplefromoutside

myresearchthatperfectlyillustratestheidea:the

Bruinsbasketball

dynastyofthe1960sandearly1970s.Mostbasketballfansknowthatthe

BruinswontenNCAAChampionshipsintwelveyears,atonepoint

assemblingasixty-one-gamewinningstreak,underthelegendarycoach

John

ButdoyouknowhowmanyyearsWoodencoachedtheBruinsbefore

hisfirstNCAAChampionship?Fifteen.From1948to1963,Wooden

workedinrelativeobscuritybeforewinninghisfirstchampionshipin

1964.Yearbyyear,CoachWoodenbuilttheunderlyingfoundations,

172

Collins

velopingarecruitingsystem,implementingaconsistentphilosophy,and

refiningthefull-court-pressstyleofplay.Noonepaidtoomuchattention

tothequiet,soft-spokencoachandhisteam

hit

breakthroughand

systematicallycrushedeveryseriouscompetitorfor

morethanadecade.

LiketheWoodendynasty,lastingtransformationsfromgoodtogreat

followageneralpatternofbuildupfollowedbybreakthrough.Insome

cases,thebuildup-to-

breakthroughstagetakesalongtime,inothercases,

ashortertime.AtCircuitCity,thebuildupstagelastednineyears,at

Nucortenyears,whereasatGilletteittookonlyfiveyears,atFannieMae

threeyears,andatPitneyBowesabouttwoyears.But,nomatterhow

shortorlongittook,everygood-to-greattransformationfollowedthesame

basicpattern-accumulatingmomentum,turnbyturnofthe

untilbuilduptransformedintobreakthrough.

NOTJUSTALUXURYOFCIRCUMSTANCE

It'simportanttounderstandthatfollowingthebuildup-breakthrough

flywheelmodelisnotjustaluxuryofcircumstance.Peoplewhosay,

"Hey,butwe'vegotconstraintsthatpreventusfromtakingthis

termapproach,"shouldkeepinmindthatthegood-to-

greatcompanies

followedthismodelnomatterhowdiretheshort-term

deregulationinthecaseofWells

loomingbankruptcyinthe

casesofNucorandCircuitCity,potentialtakeoverthreatsinthecases

ofGilletteandKroger,ormillion-dollar-a-daylossesinthecaseof

nieMae.

Thisalsoappliestomanagingtheshort-termpressuresofWallStreet."I

just

agreewiththosewhosayyoucan'tbuildanenduringgreat

com-

panybecauseWallStreetwon'tletyou,"saidDavidMaxwellofFannie

Mae."Wecommunicatedwithanalysts,toeducatethemonwhatwewere

doingandwhereweweregoing.Atfirst,alotofpeopledidn'tbuyinto

that-youjusthavetoacceptthat.Butoncewegotthroughthedarkdays,

werespondedbydoingbettereverysingleyear.Afterafewyears,because

ofouractualresults,webecameahotstockandneverlooked

And

ahotstockitwas.DuringMaxwell'sfirsttwoyears,thestocklagged

behindthemarket,butthenittookoff.Fromtheendof1984totheyear

2000,$1investedinFannieMaemultipliedsixty-fourtimes,beatingthe

Thekey,welearned,istoharnesstheflywheeltomanagetheseshort-

termpressures.Oneparticularlyelegantmethodfordoingsocamefrom

AbbottLaboratories,usingamechanismitcalledtheBluePlans.Each

year,AbbottwouldtellWallStreetanalyststhatit

expectedtogrowearn-

ingsaspecifiedamount-say,15percent.Atthesametime,itwouldset

aninternalgoalofamuchhighergrowthrate-say,25percent,oreven30

percent.Meanwhile,itkeptarank-orderedlistofproposedentrepreneur-

ialprojectsthathadnotyetbeenfunded-theBluePlans.Towardthe

endoftheyear,Abbottwouldpickanumberthatexceededanalystexpec-

tationsbutthatfellshortofitsactualgrowth.Itwouldthentakethediffer-

i

encebetweenthe"maketheanalystshappy"growthandtheactual

growthandchannelthosefundsintotheBluePlans.Itwasabrilliant

mechanismformanagingshort-termpressureswhilesystematicallyinvest-

inginthe

WefoundnoevidenceofanythingliketheBluePlansatAbbott'scom-

parisoncompany.Instead,

executiveswouldpumpupthestock

withasalesjob("Buyintoourfuture7'),reverentlyintoningthephrase

"investingforthelong-term,"

especiallywhenthecompanyfailedto

delivercurrent

continuallythrewmoneyafterhare-

brainedprojectslikeitsRogainebaldnesscure,attemptingtocircumvent

buildupandjumprighttobreakthroughwithabighit.

Indeed,

remindedusofagambler,puttingalotofchipsonredatLasVegasand

saying,"See,we'reinvestingforthefuture."Ofcourse,whenthefuture

I

arrived,thepromisedresultsrarelyappeared.

Notsurprisingly,Abbottbecameaconsistentperformerandafavorite

holdingonWallStreet,while

becameaconsistentdisappoint-

Collins

ment.From1959toAbbott'spointofbreakthroughin1974,thetwo

stocksroughlytrackedeachother.Thentheydramaticallydiverged,with

fallingmorethansixtimesbehindAbbottbeforebeingacquired

in1995.

VERSUS

CumulativeValueof$1Invested,

1959-1995

Abbott:$271

LikeFannieMaeandAbbott,allthegood-to-greatcompanieseffec-

tivelymanagedWallStreetduringtheirbuildup-breakthroughyears,and

theysawnocontradictionbetweenthetwo.Theysimplyfocusedonaccu-

mulatingresults,oftenpracticingthetime-honored

disciplineof

promisingandoverdelivering.Andastheresultsbegantoaccumulate-as

theflywheelbuiltmomentum-theinvestingcommunitycamealong

withgreatenthusiasm.

THE"FLYWHEELE

FFECT"

Thegood-to-greatcompaniesunderstoodasimpletruth:Tremendous

powerexistsinthefactofcontinuedimprovementandthedeliveryof

results.Pointtotangible

howeverincrementalat

andshowhowthesestepsfitintothecontextofanoverallconceptthat

willwork.Whenyoudothisinsuchawaythatpeopleseeandfeelthe

GoodtoGreat

buildupofmomentum,they

willlineupwithenthusiasm.Wecameto

callthistheflywheeleffect,anditappliesnotonlytooutsideinvestors

alsotointernalconstituentgroups.

Letmeshareastoryfromtheresearch.Atapivotalpointinthestudy,

membersoftheresearchteamnearlyrevolted.Throwingtheirinterview

notesonthetable,theyasked,"Dowehavetokeepaskingthatstupid

question?"

"Whatstupidquestion?"Iasked.

"Theoneaboutcommitment,

alignment,andhowtheymanaged

change."

"That'snotastupidquestion,"Ireplied."It'soneofthemostim-

portant."

"Well,"saidoneteammember,"alotoftheexecutiveswhomadethe

transition-well,theythinkit'sastupidquestion.Somedon'tevenunder-

standthequestion!"

"Yes,weneedtokeepaskingit,"Isaid."Weneedtobeconsistentacross

theinterviews.And,besides,it'sevenmoreinterestingthattheydon't

176

Collins

understandthequestion.So,keepprobing.We'vegottounderstandhow

theyovercameresistancetochangeandgotpeoplelinedup."

Ifullyexpectedtofindthatgettingeveryonelinedup-"creatingalign-

ment,"tousethejargon-wouldbeoneofthetopchallengesfacedby

executivesworkingtoturngoodintogreat.Afterall,nearlyeveryexecutive

who'dvisitedthelaboratory

hadaskedthisquestioninoneformor

another."Howdowegettheboatturned?""Howdowegetpeoplecom-

mittedtothenewvision?""Howdowemotivatepeopletolineup?""How

dowegetpeopletoembracechange?"

Tomygreatsurprise,wedidnotfindthequestionofalignmenttobea

challengefacedbythegood-to-greatleaders.

ConsiderKroger.Howdoyougetacompanyofover50,000

cashiers,baggers,shelfstockers,producewashers,andsoforth-to

embracearadicalnewstrategythatwilleventuallychangevirtuallyevery

aspectofhowthecompanybuildsandrunsgrocerystores?Theansweris

thatyoudon't.Notinonebigeventorprogram,anyway.

JimHerring,theLevel5leaderwhoinitiatedthetransformationof

Kroger,toldusthatheavoidedanyattemptsathooplaandmotivation.

Instead,heandhisteambeganturningtheflywheel,creatingtangibleevi-

dencethattheirplansmadesense."Wepresentedwhatweweredoingin

suchawaythatpeoplesawouraccomplishments,"said

Herring."We

triedtobringourplanstosuccessfulconclusionstepbystep,sothatthe

massofpeoplewouldgainconfidencefromthesuccesses,notjustthe

Herringunderstoodthatthewaytogetpeoplelinedupbehinda

boldnewvisionistoturntheflywheelconsistentwiththatvision-from

twoturnstofour,thenfourtoeight,theneighttosixteen-andthento

say,"Seewhatwe'redoing,andhowwellitisworking?Extrapolatefrom

that,andthat'swherewe'regoing."

Thegood-to-greatcompaniestendednottopubliclyproclaimbiggoals

GoodtoGreat177

attheoutset.Rather,they

begantospintheflywheel-understandingto

action,stepafterstep,turnafterturn.Aftertheflywheelbuiltupmomen-

tum,they'dlookupandsay,"Hey,ifwejustkeeppushingonthisthing,

there'snoreasonwecan'taccomplishX."

Forexample,Nucorbeganturningtheflywheelin1965,atfirstjust

Iingtoavoidbankruptcy,thenlaterbuildingitsfirststeelmillsbecauseit

couldnotfindareliablesupplier.Nucorpeoplediscoveredthattheyhad

aknackformakingsteelbetterandcheaperthan

anyoneelse,sotheybuilt

two,andthenthree,additionalmini-mills.Theygainedcustomers,then

morecustomers,thenmore

whoosh!-

theflywheelbuilt

momentum,turnbyturn,monthbymonth,yearby

year.Then,around

1975,itdawnedontheNucorpeoplethatiftheyjustkeptpushingonthe

flywheel,theycouldbecomethenumberone,mostprofitablesteelcom-

panyinAmerica.ExplainedMarvinPohlman:"Iremembertalkingwith

KenIversonin1975,andhesaid,'Marv,Ithinkwecanbecomethenum-

beronesteelcompanyinthe

AndIsaidtohim,'Now,Ken,

whenareyougoingtobenumberone?''Idon'tknow,'hesaid.'Butifwe

justkeepdoingwhatwe'redoing,there'snoreasonwhy

wecan'tbecome

numberone.'

Ittookovertwodecades,butNucorkeptpushingthefly-

wheel,eventuallygeneratinggreaterprofitsthananyothersteelcompany

ontheFortune

Stopandthinkaboutitfora

minute.Whatdotherightpeoplewant

morethanalmostanythingelse?Theywanttobepartofawinningteam.

Theywanttocontributetoproducingvisible,tangibleresults.Theywant

tofeeltheexcitementofbeinginvolvedinsomethingthatjust

works.Whentherightpeopleseeasimpleplanbornofconfrontingthe

brutalfacts-aplandevelopedfromunderstanding,notbravado-they

arelikelytosay,"That711work.Countmein."Whentheyseethemono-

lithicunityoftheexecutiveteambehindthesimpleplan

andtheselfless,

Collins

dedicatedqualitiesofLevel5leadership,they'lldroptheircynicism.

Whenpeoplebegintofeelthemagicofmomentum-whentheybeginto

seetangibleresults,whentheycanfeeltheflywheelbeginningtobuild

speed-that'swhenthebulkofpeoplelineuptothrowtheirshoulders

againstthewheelandpush.

THEDOOMLOOP

Wefoundaverydifferentpatternatthecomparisoncompanies.Insteadof

aquiet,deliberateprocessoffiguringoutwhatneededto

bedoneand

thensimplydoingit,thecomparisoncompaniesfrequentlylaunchednew

programs-oftenwithgreatfanfareandhooplaaimedat"motivatingthe

troops7'-onlytoseetheprogramsfailtoproducesustainedresults.

soughtthesingledefiningaction,thegrandprogram,theonekillerinno-

vation,themiraclemomentthatwouldallowthemtoskipthearduous

buildupstageandjumprighttobreakthrough.Theywouldpushthefly-

wheelinonedirection,thenstop,changecourse,and

throwitinanew

direction-andthentheywouldstop,changecourse,andthrowitintoyet

anotherdirection.Afteryearsoflurchingbackandforth,thecomparison

companiesfailedtobuildsustainedmomentumandfellinsteadintowhat

wecametocallthedoomloop.

ConsiderthecaseofWarner-Lambert,thedirectcomparisoncompany

toGillette.

In1979,Warner-LamberttoldBusinessWeekthatitaimedtobealead-

ingconsumerproducts

Oneyearlater,in1980,itdidanabruptabout-faceandturneditssights

onhealthcare,saying,"Ourflat-outaimistogoafterMerck,

-

everybodyandhis

In1981,thecompanyreversedcourseyetagainand

returnedtodiversi-

ficationandconsumer

Sixyearslater,in1987,Warner-LambertdidanotherU-turn,awayfrom

consumergoods,totryonceagaintobelikeMerck.(Atthesametime,the

companyspentthreetimesasmuchonconsumer-goods

advertisingason

somewhatpuzzlingstrategy,foracompanytryingtobeat

Intheearly

reactingtoClinton-erahealthcarereform,thecom-

panythrewitselfintoreverseyetagainandreembraceddiversificationand

consumer

GoodtoGreat

RESULTS

REACTION,WITHOUT

UNDERSTANDING

NoBUILDUP;

NoACCUMULATED

MOMENTUM

NEWDIRECTION,

ROGRAM,LEADER,

EVENT,FAD,

EachnewWarner-LambertCEObroughthisownnewprogramand

haltedthemomentumofhispredecessor.Ward

triedtocreatea

breakthroughwithanexpensiveacquisitioninthe

hospitalsupplybusi-

nessin1982.Threeyearslater,hissuccessor,JoeWilliams,extracted

Warner-Lambertfromthehospitalsupplybusinessandtooka$550mil-

lion

HetriedtofocusthecompanyonbeatingMerck,

buthis

successorthrewthecompanybacktodiversificationandconsumergoods.

Andsoitwent,backandforth,lurchandthrash,witheachCEOtryingto

makeamarkwithhisownprogram.

From1979through1998,

Warner-Lambertunderwentthreemajor

restructurings-

oneperCEO-

hackingaway20,000peopleinsearchof

quickbreakthroughresults.Timeandagain,thecompanywouldattaina

burstofresults,thenslacken,neverattainingthesustainedmomentumof

abuildup-breakthroughflywheel.Stockreturnsflattenedrelativetothe

marketandWarner-Lambertdisappearedasanindependentcompany,

swallowedupby

Collins

TheWarner-Lambertcaseisextreme,butwefoundsomeversionofthe

doomloopineverycomparisoncompany.(SeeAppendix8.Aforasum-

mary.)Whilethespecific

permutationsofthedoomloopvariedfrom

companytocompany,thereweresomehighlyprevalentpatterns,twoof

whichdeserveparticularnote:themisguideduseofacquisitionsandthe

selectionofleaderswhoundidtheworkofpreviousgenerations.

TheMisguidedUseofAcquisitions

PeterDruckeronceobservedthatthedriveformergersandacquisitions

comeslessfromsoundreasoningandmorefromthefactthatdoingdeals

isamuchmoreexcitingwaytospendyourdaythandoingactual

Indeed,thecomparisoncompanieswouldhavewellunderstoodthepop-

ularbumperstickerfromthe

"Whenthegoinggetstough,wego

shopping!"

Tounderstandtheroleofacquisitionsintheprocessofgoingfromgood

togreat,weundertookasystematicqualitativeandquantitativeanalysisof

allacquisitionsanddivestituresinallthecompaniesinourstudy,from

tenyearsbeforethetransitiondatethrough1998.Whilewenoticedno

particularpatternintheamountorscaleof

acquisitions,wedidnoteasig-

nificantdifferenceinthesuccessrateoftheacquisitionsinthegood-to-

greatcompaniesversusthecomparisons.(SeeAppendix

Incontrast,thecomparisoncompaniesfrequentlytriedtojumprightto

breakthroughviaanacquisitionormerger.Itneverworked.Oftenwith

theircorebusinessundersiege,thecomparisoncompanieswoulddive

intoabigacquisitionasawaytoincreasegrowth,diversifyawaytheirtrou-

bles,ormakeaCEOlookgood.Yettheynever

addressedthefundamen-

talquestion:"Whatcanwedobetterthananyothercompanyinthe

GoodtoGreat

I

world,thatfitsoureconomicdenominatorandthatwehavepassionfor?"

Theyneverlearnedthesimpletruththat,whileyoucanbuyyourwayto

growth,youabsolutelycannotbuyyourwaytogreatness.Twobigmedi-

ocritiesjoinedtogethernevermakeonegreatcompany.

I

LeadersWhoStopth

eFlywheel

Theotherfrequentlyobserveddoomlooppatternisthatofnewleaders

whosteppedin,stoppedanalreadyspinningflywheel,andthrewitin

anentirelynewdirection.ConsiderHarrisCorporation,whichapplied

manyofthegood-to-greatconceptsintheearly1960sandbeganaclas-

sicbuildupprocessthatledtobreakthroughresults.GeorgeDivelyand

hissuccessor,RichardTullis,identifiedaHedgehogConcept,basedon

theunderstandingthatHarriscouldbethebestintheworld

atapplying

technologytoprintingandcommunications.Althoughitdidnot

adheretothisconceptwithperfectdiscipline(Tullishadapenchant

forstrayingabitoutsidethethreecircles),thecompanydidmake

enoughprogresstoproducesignificantresults.Itlookedlikeapromis-

ingcandidateforagood-to-greattransformation,hittingbreakthrough

in1975.

Thentheflywheelcametoagrindinghalt.

In1978,JosephBoydbecame

chiefexecutive.Boydhadpreviouslybeen

withRadiation,Inc.,acorporationacquiredbyHarrisyearsearlier.Hisfirst

keydecisionasCEOwastomovethecompanyheadquartersfromCleve-

landtoMelbourne,Florida-Radiation'shometown,andthelocationof

Boyd'shouseandforty-seven-footpowerboat,theLazy

In1983,Boydthrewagiantwrenchintotheflywheelbydivestingthe

printingbusiness.Atthetime,Harriswasthenumberoneproducerof

printingequipmentintheworld.Theprintingbusiness

wasoneofthe

mostprofitablepartsofthecompany,generatingnearlyathirdoftotal

operating

WhatdidBoyddowiththeproceedsfromsellingoff

thiscorporategem?Hethrewthecompanyheadlongintotheoffice

automationbusiness.

ButcouldHarrisbecomethebestintheworldinofficeautomation?

Notlikely."Horrendous"sofhvare-developmentproblemsdelayed

ofHarris'firstworkstationasthecompanystumbledontothe

tlefieldtoconfrontIBM,DEC,and

Then,inanattempttojump

righttoanewbreakthrough,Harrisspentathirdofitsentirecorporatenet

182

Collins

worthtobuyLanierBusiness

Products,acompanyinthelow-endword

processing

Computenvorldmagazinewrote:"Boydtargetedthe

automatedofficeasakey....Unfortunately,forHarris,thecompanyhad

everythingbutanofficeproduct.Theattemptto

designandmarketa

wordprocessingsystemmetwithdismalfailure...outoftunewiththe

market,andhadtobescrappedbefore

Theflywheel,whichhadbeenspinningwithgreatmomentumafter

DivelyandTullis,came

detachedfromtheaxle,wobbledintotheair,and

thencrashedtoagrindinghalt.Fromtheendof1973totheendof1978,

Harrisbeatthemarketbymorethanfivetimes.Butfromtheendof1978

totheendof1983,Harrisfell39percentbehindthemarket,andby1988

ithadfallenover70percentbehind.Thedoomloopreplacedthefly-

wheel.

THEFLYWHEELASAWRAPAROUNDIDEA

WhenIlookoverthegood-to-greattransformations,theonewordthat

keepscomingtomindisconsistency.Anotherwordofferedtomeby

physicsprofessorR.J.Petersoniscoherence."Whatisoneplusone?"he

asked,thenpausedforeffect."Four!Inphysics,wehavebeentalking

abouttheideaofcoherence,themagnifyingeffectofone

factorupon

another.Inreadingabouttheflywheel,Icouldn'thelpbutthinkofthe

principleofcoherence."Howeveryouphraseit,thebasicideaisthe

same:Eachpieceofthesystemreinforcestheotherpartsofthesystemto

formanintegratedwholethatismuchmorepowerfulthanthesumofthe

parts.Itisonlythroughconsistencyovertime,throughmultiplegenera-

tions,thatyougetmaximumresults.

Inasense,

inthisbookisanexploration

anddescriptionof

thepiecesofthebuildup-to-breakthroughflywheelpattern.(Seethetable

onpage

Instandingbacktosurveytheoverallframework,wesee

thateveryfactorworkstogethertocreatethis

pattern,andeachcompo-

nentproducesapushontheflywheel.

Good

Great

HOWTOTELLIFYOU'REONTHE

SignsThatYou'reontheFlywheel

SignsThatYou'reinthe

Loop

(Good-to-GreatCompanies)

(ComparisonCompanies)

Followapatternofbuildup

Skipbuildupandjumprightto

leadingtobreakthrough.

breakthrough.

Reachbreakthroughbyan

Implementbigprograms,radi-

accumulationofsteps,oneafter

calchangeefforts,dramatic

theother,turnbyturnofthe

revolutions;chronic

flywheel;feelslikeanorganic

restructuring-alwayslooking

evolutionaryprocess.

foramiraclemomentornewsav-

ior.

Confrontthebrutalfactstosee

Embracefadsandengagein

clearlywhatstepsmustbetaken

managementhoopla,rather

tobuildmomentum.

thanconfrontthebrutalfacts.

Attainconsistencywithaclear

Demonstratechronicinconsis-

HedgehogConcept,resolutely

tency-lurchingbackandforth

stayingwithinthethreecircles.

andstrayingfaroutsidethethree

circles.

Followthepatternofdisciplined

Jumprighttoaction,without

people("firstwho"),disciplined

disciplinedthoughtand

without

thought,disciplinedaction.

firstgettingtherightpeopleonthe

bus.

Harnessappropriatetech-

RunaboutlikeChickenLittle

nologiestoyourHedgehog

inreactiontotechnology

Concept,toaccelerate

change,fearfulofbeingleft

momentum.

behind.

Makemajoracquisitions

Makemajoracquisitionsbefore

breakthrough(ifatall)to

breakthrough,inadoomed

acceleratemomentum.

attempttocreatemomentum.

Spendlittleenergytryingto

Spendalotofenergytryingto

motivateoralignpeople;the

alignandmotivatepeople,

momentumoftheflywheelis

ingthemaroundnewvisions.

infectious.

184

JimCollins

SignsThatYou'reontheFlywheel

SignsThatYou'reinthe

Loop

(Good-to-GreatCompanies)

(ComparisonCompanies)

Letresultsdomostofthe

Sellthefuture,tocompensate

forlackofresults.

Demonstrateinconsistencyover

time;eachgenerationbuilds

time;eachnewleaderbringsa

ontheworkofpreviousgener-

radicalnewpath;the

flywheel

ations;theflywheelcontinues

grindstoahalt,andthedoom

tobuildmomentum.

loopbeginsanew.

ItallstartswithLevel5leaders,whonaturallygravitatetowardthefly-

wheelmodel.They'relessinterestedinflashyprogramsthatmakeitlook

like

areLeading!withacapitalL.They'remoreinterestedinthe

quiet,deliberateprocessofpushingontheflywheeltoproduceResults!

withacapitalR.

Gettingtherightpeopleonthebus,thewrongpeopleoffthebus,and

therightpeopleintherightseats-theseareallcrucialstepsintheearly

stagesofbuildup,veryimportantpushesontheflywheel.Equallyimpor-

tantistoremembertheStockdaleParadox:"We'renotgoingtohitbreak-

through

Christmas,butifwekeeppushingintherightdirection,we

willeventuallyhitbreakthrough."Thisprocessofconfrontingthebrutal

factshelpsyouseetheobvious,albeitdifficult,stepsthatmustbetakento

turntheflywheel.Faithintheendgamehelpsyoulivethroughthe

monthsoryearsofbuildup.

Next,whenyouattaindeepunderstandingaboutthethreecirclesof

yourHedgehogConceptandbegintopushinadirectionconsistentwith

thatunderstanding,youhitbreakthroughmomentumandacceleratewith

keyaccelerators,chiefamongthempioneeringtheapplicationoftech-

nologytieddirectlybacktoyourthreecircles.

Ultimately,toreachbreak-

throughmeanshavingthedisciplinetomakeaseriesofgooddecisions

consistentwithyourHedgehogConcept-disciplinedaction,following

fromdisciplinedpeoplewhoexercisedisciplinedthought.That'sit.

That'stheessenceofthebreakthroughprocess.

Inshort,ifyoudiligentlyandsuccessfullyapplyeachconceptinthe

framework,andyoucontinuetopushinaconsistentdirectiononthefly-

wheel,accumulatingmomentumstepbystepandturnbyturn,youwill

I

GoodtoGreat

eventuallyreachbreakthrough.Itmightnothappentoday,ortomorrow,

ornextweek.Itmightnotevenhappennextyear.Butitwillhappen.

Andwhenitdoes,youwillfaceanentirelynewsetofchallenges:how

toacceleratemomentuminresponsetoever-risingexpectations,andhow

toensurethattheflywheelcontinuestoturnlongintothefuture.Inshort,

yourchallengewillnolongerbehowtogofromgoodto

great,buthowto

gofromgreattoenduringgreat.Andthatisthesubjectofthelastchapter.

GoodtoGreat

C

H

A

P

T

E

R

9

ItisyourWorkinlifethatistheultimateseduction.

henwebegantheGoodto

Greatresearchproject,weconfronted

a:HowshouldwethinkabouttheideasinBuilttoLastwhile

doingtheGoodtoGreatresearch?

Briefly,BuilttoLast,basedonasix-yearresearchprojectconductedat

StanfordBusinessSchoolintheearly

answeredthequestion,What

doesittaketostartandbuildanenduringgreatcompanyfromtheground

up?MyresearchmentorandcoauthorJerryI.PorrasandIstudiedeigh-

teenenduringgreat

companies-institutionsthatstoodthetestoftime,

tracingtheirfoundinginsomecasesbacktothe

whilebecoming

theiconicgreatcompaniesofthelatetwentiethcentury.Weexamined

companieslikeProcter&Gamble(foundedin

AmericanExpress

(foundedin

Johnson

Johnson(foundedin

andGE

(foundedin1892).Oneofthecompanies,Citicorp(nowCitigroup),was

foundedin1812,thesameyearNapoleonmarchedintoMoscow!The

"youngest"companiesinthestudywereWal-MartandSony,whichtrace

theiroriginsbackto1945.Similartothisbook,weuseddirectcomparison

GoodtoGreat

companies-

3MversusNorton,WaltDisneyversusColumbiaPictures,

MarriottversusHoward

Johnson,andsoforth-foreighteenpairedcom-

parisons.Inshort,wesoughttoidentifytheessentialdistinctionsbetween

greatcompaniesandgoodcompaniesastheyendureoverdecades,even

centuries.

WhenIhadthefirstsummer

researchteamassembledforthegood-to-

greatproject,Iasked,"WhatshouldbetheroleofBuilttoLastindoing

thisstudy?"

"Idon'tthinkitshouldplayanyrole,"saidBrianBagley."Ididn'tjoin

thisteamtodoaderivative

pieceofwork."

"Neitherdid

addedAlysonSinclair.

excitedaboutanewpro-

jectandanewquestion.Itwouldn'tbeveryfulfillingtojustfillinthe

piecesofyourotherbook."

"Butwaitaminute,"Iresponded."Wespentsixyearsontheprevious

study.Itmightbehelpfultobuildonourpreviouswork."

"Iseemtorecallthatyougottheideaforthisstudywhena

partnersaidthatBuilttoLastdidn'tanswerthequestionofhowtochange

agoodcompanyintoagreat

notedPaulWeissman."Whatifthe

answersaredifferent?"

Backandforth,toandfro,thedebatecontinuedforafewweeks.Then

StefanieJuddweighedinwiththeargumentthatswayedme."Ilovethe

ideasinBuilttoLastandthat'swhatworriesme,"shesaid."I'mafraidthat

ifwestartwith

astheframeofreference,we'lljustgoaroundincir-

cles,provingourownbiases."Itbecameclearthattherewouldbesub-

stantiallylessriskinstartingfromscratch,settingouttodiscoverwhatwe

would,whetheritmatchedpreviousworkornot,

Now,fiveyearslater,withthisbookcomplete,wecanstandbackto

lookatthetwoworksinthecontextofeachother.Surveyingacrossthe

twostudies,Iofferthefollowingfourconclusions:

190

Collins

1.WhenIconsidertheenduringgreatcompaniesfromBuilttoLast,

Inowseesubstantialevidencethattheirearlyleadersfollowedthe

good-to-greatframework.Theonlyrealdifferenceisthattheydidsoas

entrepreneursinsmall,early-stageenterprisestryingtoget

offthe

ground,ratherthanas

tryingtotransformestablishedcompanies

fromgoodtogreat.

2.Inanironictwist,InowseeGoodtoGreatnotasasequeltoBuiltto

Last,butasaprequel.Apply

thefindingsinthisbooktocreatesustained

greatresults,asastart-uporanestablishedorganization,andthenapply

thefindingsinBuilttoLasttogofromgreatresultstoanenduringgreat

company.

Established

Goodto

Sustained

Builtto

Enduring

Company

+Great

Great

+Last

Great

orStart-up

Concepts

Results

Concepts

Company

3.Tomaketheshiftfroma

companywithsustainedgreatresultstoan

enduringgreatcompanyoficonicstature,applythecentralconcept

fromBuilttoLast:Discoveryourcorevaluesandpurposebeyondjust

makingmoney(coreideology)andcombinethiswiththedynamicof

preservethe

progress.

4.Atremendousresonanceexistsbetweenthetwostudies;theideasfrom

eachenrichandinformtheideasintheother.Inparticular,Goodto

Greatanswersafundamentalquestionraised,butnot

answered,in

BuilttoLast:Whatisthedifferencebetweena"good"BHAG(Big

HairyAudaciousGoal)anda"bad7'BHAG?

GOODTOGREATINTHEEARLYSTAGES

OFBUILTTOLAST

LookingbackontheBuilttoLaststudy,itappearsthattheenduringgreat

companiesdidinfactgothroughaprocessofbuilduptobreakthrough,

followingthegood-to-greatframeworkduringtheirformativeyears.

Consider,forexample,thebuildup-breakthrough

flywheelpatternin

theevolutionofWal-Mart.MostpeoplethinkthatSamWaltonjust

explodedontothescenewithhisvisionaryideaforruraldiscountretail-

ing,hittingbreakthroughalmostasastart-upcompany.Butnothingcould

befurtherfromthetruth.

GoodtoGreat

SamWaltonbeganin1945

withasingledimestore.Hedidn'topenhis

secondstoreuntilsevenyearslater.Waltonbuiltincrementally,stepby

step,turnbyturnoftheflywheel,untiltheHedgehogConceptoflarge

discountmartspoppedoutasanaturalevolutionarystepinthe

1960s.IttookWaltonaquarterofacenturytogrowfromthatsingledime

storetoachainof38Wal-Marts.Then,from1970to2000,Wal-Marthit

breakthroughmomentumandexplodedtoover3,000storeswithover

$150billion(yes,billion)inrevenues2Justlikethestory

ofthechicken

jumpingoutoftheeggthatwediscussedintheflywheelchapter,

Marthadbeenincubatingfordecadesbeforetheeggcrackedopen.As

SamWaltonhimselfwrote:

Somehowovertheyearspeoplehavegottenthe

impressionthat

Martwas...justthisgreatideathatturnedintoanovernightsuccess.

But...itwasanoutgrowthofeverythingwe'dbeendoingsince

...Andlikemostovernightsuccesses,itwasabouttwentyyears

inthe

IfthereeverwasaclassiccaseofbuildupleadingtoaHedgehogCon-

cept,followedbybreakthroughmomentumintheflywheel,Wal-Martis

it.TheonlydifferenceisthatSamWaltonfollowedthemodelasan

entrepreneurbuildingagreatcompanyfromthegroundup,ratherthan

asaCEOtransforminganestablishedcompanyfromgoodtogreat.But

it'sthesamebasic

Hewlett-Packardprovidesanotherexcellentexampleofthegood-to-

greatideasatworkintheformativestagesofaBuilttoLastcompany.For

instance,BillHewlettandDavidPackard'sentirefoundingconceptfor

HPwasnotwhat,butwho-startingwitheachother.They'dbeenbest

friendsingraduateschoolandsimplywantedtobuilda

greatcompany

togetherthatwouldattractotherpeoplewithsimilarvaluesandstandards.

ThefoundingminutesoftheirfirstmeetingonAugust23,1937,begin

statingthattheywoulddesign,manufacture,andsellproductsintheelec-

tricalengineeringfields,verybroadlydefined.Butthenthosesamefound-

ingminutesgoontosay,"Thequestionofwhattomanufacturewas

postponed...

HewlettandPackardstumbledaroundformonthstryingtocomeup

withsomething,anything,thatwouldgetthecompanyoutofthegarage.

Theyconsideredyachttransmitters,air-conditioningcontroldevices,med-

icaldevices,phonographamplifiers,younameit.Theybuiltelectronic

192

Collins

BUILDUP-BREAKTHROUGHFLYWHEELAT

NumberofStores1945,

1970,1990,2000

3,000

2,000

19451Store

197038Stores

Buildup...

Breakthrough!

bowlingalleysensors,a

clock-driveforatelescope,andanelectronicshock

jigglemachinetohelpoverweightpeopleloseweight.Itdidn'treallymat-

terwhatthecompanymadeintheveryearlydays,aslongasitmadea

technicalcontributionandwouldenableHewlettandPackardtobuilda

companytogetherandwithotherlike-minded

Itwastheultimate

"firstwho...thenwhat"start-up.

Later,asHewlettandPackardscaledup,theystayedtruetotheguiding

principleof"first

AfterWorldWar

evenasrevenuesshrankwith

theendoftheirwartimecontracts,theyhiredawholebatchoffabulous

peoplestreamingoutofgovernmentlabs,withnothingspecificinmindfor

them

do.RecallPackard7sLaw,whichwecitedinchapter3:"Nocom-

panycangrowrevenuesconsistentlyfasterthanitsabilitytogetenoughof

therightpeopletoimplementthatgrowthandstillbecomeagreatcom-

pany."HewlettandPackardlivedandbreathedthis

conceptandobtained

asurplusofgreatpeoplewhenevertheopportunitypresenteditself.

HewlettandPackardwerethemselvesconsummateLevel5leaders,

firstasentrepreneursandlaterascompanybuilders.YearsafterHPhad

establisheditselfasoneofthemostimportanttechnologycompaniesin

theworld,Hewlettmaintainedaremarkablepersonalhumility.In1972,

HPvicepresidentBarneyOliverwroteinarecommendationlettertothe

IEEEAwardsBoardfortheFoundersAward:

GoodtoGreat

Whileoursuccesshasbeengratifying,ithasnotspoiledourfounders.

IOnlyrecently,atanexecutivecouncilmeeting,Hewlettremarked:

"Look,we'vegrownbecausetheindustrygrew.Wewereluckyenough

tobesittingonthenosewhentherockettookoff.Wedon't

deservea

damnbitofcredit."Afteramoment'ssilence,whileeveryonedigested

thishumblingcomment,Packardsaid:"Well,Bill,atleastwedidn't

louseitup

Shortlybeforehisdeath,Ihadtheopportunitytomeet

DavePackard.

DespitebeingoneofSiliconValley'sfirstself-madebillionaires,helived

inthesamesmallhousethatheandhiswifebuiltforthemselvesin1957,

overlookingasimpleorchard.Thetinykitchen,withitsdatedlinoleum,

andthesimplyfurnishedlivingroombespokeamanwhoneededno

materialsymbolstoproclaim"I'mabillionaire.I'mimportant.I'msuc-

cessful.""Hisideaofagoodtime,"saidBillTerry,whoworkedwith

Packardforthirty-sixyears,"wastogetsomeofhis

friendstogetherto

stringsomebarbed

Packardbequeathedhis$5.6billionestatetoa

charitablefoundationand,uponhisdeath,hisfamilycreatedaeulogy

pamphlet,withaphotoofhimsittingonatractorinfarmingclothes.The

captionmadenoreferencetohisstatureasoneofthegreatindustrialists

ofthetwentieth

Itsimplyread:"DavidPackard,1912-1996,

Rancher,etc."Level5,indeed.

COREIDEOLOGY:THEEXTRADIMEN

SIONOF

ENDURINGGREATNESS

DuringourinterviewwithBillHewlett,weaskedhimwhathewasmost

proudofinhislongcareer."AsIlookbackonmy

work,"hesaid,

"I'mprobablymostproudofhavinghelpedcreateacompanythatby

virtueofitsvalues,practices,andsuccesshashadatremendousimpacton

thewaycompaniesaremanagedaroundthe

The"HPWay,"as

itbecameknown,reflecteda

deeplyheldsetofcorevaluesthatdistin-

guishedthecompanymorethananyofitsproducts.Thesevalues

includedtechnicalcontribution,respectfortheindividual,responsibility

tothecommunitiesinwhichthecompanyoperates,andadeeplyheld

beliefthatprofitisnotthefundamentalgoalofacompany.Theseprinci-

ples,whilefairlystandardtoday,wereradicalandprogressiveinthe1950s.

DavidPackardsaidofbusinessmenfromthosedays,"While

were

194

Collins

reasonablypoliteintheirdisagreement,itwasquiteevidentthatthey

firmlybelievedthatIwasnotoneofthem,andobviouslynotqualifiedto

manageanimportant

HewlettandPackardexemplifyakey"extradimension7'thathelped

elevatetheircompanytotheelitestatusofanenduringgreatcompany,a

vitaldimensionformakingthetransitionfromgoodtogreattobuiltto

last.Thatextradimensionisaguidingphilosophyora"coreideology,"

whichconsistsofcorevaluesandacorepurpose(reasonforbeingbeyond

justmakingmoney).TheseresembletheprinciplesintheDeclarationof

Independence("Weholdthesetruthstobeself-

evident7')-neverper-

fectlyfollowed,butalwayspresentasaninspiringstandardandananswer

tothequestionofwhyitisimportantthatweexist.

WewroteinBuilttoLastaboutMerck'sdecisiontodevelopanddistrib-

uteadrugthatcuredriver

blindness.Thispainfuldiseaseafflictedovera

millionpeoplewithparasiticwormsthatswarmthroughtheeyestocause

blindness.Becausethosewhohadthedisease-tribalpeopleinremote

placeslikethe

hadnomoney,Merck

initiatedthecreationofan

independentdistributionsystemtogetthedrugtoremotevillagesandgave

thedrugawayfreetomillionsofpeoplearoundthe

Tobeclear,Merckisnotacharityorganization,nordoesitviewitself

assuch.Indeed,ithas

consistentlyoutperformedthemarketasahighly

profitablecompany,growingtonearly$6billioninprofitsandbeatingthe

marketbyovertentimesfrom1946to2000.Yet,despiteitsremarkable

financialperformance,Merckdoesnotviewitsultimatereasonforbeing

asmakingmoney.In1950,GeorgeMerck

sonofthefounder,setforth

hiscompany'sphilosophy:

Wetrytorememberthatmedicineisforthepatient....Itisnotforthe

profits.Theprofitsfollow,andifwehaverememberedthat,theyhave

neverfailedtoappear.Thebetterwehaverememberedit,thelarger

theyhave

GoodtoGreat

Animportantcaveattotheconceptofcorevaluesisthatthereareno

specific"right7'corevaluesforbecominganenduringgreatcompany.

Nomatterwhatcorevalueyoupropose,wefoundanenduringgreat

companythatdoesnothavethatspecificcorevalue.Acompanyneed

nothavepassionforitscustomers(Sonydidn't),or

respectfortheindi-

vidual(Disneydidn't),orquality(Wal-Mart

orsocialresponsi-

bility(Forddidn't)inordertobecomeenduringandgreat.Thiswas

oneofthemostparadoxicalfindingsfromBuilttoLast-corevaluesare

essentialforenduringgreatness,butitdoesn'tseemtomatterwhatthose

corevaluesare.Thepointisnotwhatcorevaluesyouhave,butthatyou

havecorevaluesatall,thatyouknowwhattheyare,thatyoubuild

themexplicitlyintotheorganization,andthatyou

preservethemover

time.

Thisnotionofpreservingyourcoreideologyisacentralfeatureof

enduringgreatcompanies.Theobviousquestionis,Howdoyoupreserve

thecoreandyetadapttoachangingworld?Theanswer:

Embracethekey

conceptofpreservethe

progress.

The

Disneyexemplifiesthisduality.In1923,anenergetic

movedfromKansasCitytoLosAngelesand

triedtogetajobin

moviebusiness.Nofilmcompanywouldhirehim,

soheusedhismeagersavingstorentacamera,setupastudioinhis

uncle'sgarage,andbeginmakinganimatedcartoons.In1934,Mr.Disney

tooktheboldstep,never

beforetaken,tocreatesuccessfulfull-lengthani-

matedfeaturefilms,includingSnowWhite,Pinocchio,Fantasia,and

Bambi.Inthe

DisneymovedintotelevisionwiththeMickey

MouseClub.Alsointhe

WaltDisneypaidafatefulvisittoanum-

berofamusementparksandcameawaydisgusted,callingthem"dirty,

phonyplaces,runbytough-looking

HedecidedthatDisney

couldbuildsomethingmuchbetter,perhapseventhebest

intheworld,

andthecompanylaunchedawholenewbusinessinthemeparks,first

withDisneylandandlaterwithWaltDisneyWorldandEPCOTCenter.

Collins

CulturalandOperatingPractices

SpecificGoalsandStrategies

Overtime,Disneythemeparkshavebecomea

cornerstoneexperiencefor

manyfamiliesfromallovertheworld.

Throughoutallthesedramaticchanges-fromcartoonstofull-length

featureanimation,fromtheMickeyMouseClubtoDisneyWorld-the

companyheldfirmlytoa

consistentsetofcorevaluesthatincludedpas-

sionatebeliefincreativeimagination,fanaticattentiontodetail,abhor-

renceofcynicism,andpreservationofthe"DisneyMagic."Mr.Disney

alsoinstilledaremarkableconstancyofpurposethatpermeatedeverynew

Disneyventure-namely,tobringhappinesstomillions,especiallychil-

dren.Thispurposecutacrossnationalbordersandhasenduredthrough

time.WhenmywifeandIvisitedIsraelin1995,wemetthemanwho

broughtDisneyproductstotheMiddleEast."Thewhole

idea,"hetoldus

withpride,"istobringasmiletoachild'sface.That'sreallyimportant

here,wheretherearen'tenoughsmilesonthechildren."WaltDisneypro-

videsaclassiccaseofpreservethecoreandstimulateprogress,holdinga

coreideologyfixedwhilechangingstrategiesandpracticesovertime,and

itsadherencetothisprincipleisthefundamentalreasonwhyithas

enduredasagreatcompany.

GoodtoGreat

1920s:Cartoons

1930s:Full-lengthfeatureanimation

1950s:Television,MickeyMouseClub

1960s:Themeparks

1980s:International

the

ProgressatWaltDisney

Company,

GOODBHAGS,BADBHAGS,ANDOTHER

CONCEPTUALLINKS

Inthetableonpage198,I'veoutlinedasketchofconceptuallinks

betweenthetwostudies.Asa

generalpattern,theGood-to-Greatideas

appeartolaythegroundworkfortheultimatesuccessoftheBuilttoLast

ideas.IliketothinkofGoodtoGreatasprovidingthecoreideasforgetting

aflywheelturningfrombuildupthroughbreakthrough,whileBuiltto

Last

outlinesthecoreideasforkeepingaflywheelacceleratinglongintothe

futureandelevatingacompanytoiconicstature.Youwillnoticeinexam-

iningthetablethateachoftheGood-to-Greatfindingsenablesallfourof

thekeyideasfromBuilttoLast.Tobrieflyreview,thosefour

ideasare:

1.ClockBuilding,NotTimeTelling.Buildanorganizationthatcan

endureandadaptthroughmultiplegenerationsofleadersandmultiple

productlifecycles;theexactoppositeofbeingbuiltaroundasingle

greatleaderorasinglegreatidea.

198

Jim

2.Genius

Embracebothextremesona

numberofdimensionsat

thesametime.InsteadofchoosingAORB,figureouthowtohaveA

ANDB-purposeANDprofit,continuityANDchange,freedomAND

responsibility,etc.

3.CoreIdeology.Instillcorevalues(essentialand

enduringtenets)and

corepurpose(fundamentalreasonforbeingbeyondjustmaking

money)asprinciplestoguidedecisionsandinspirepeoplethroughout

theorganizationoveralongperiodoftime.

4.Preservethe

Progress.Preservethecoreideologyasan

anchorpointwhilestimulatingchange,improvement,innovation,and

renewalineverythingelse.Changepracticesandstrategieswhilehold-

ingcorevaluesandpurposefixed.Setandachieve

consistent

withthecoreideology.

FROMGOODTOGREATTO

TOLAST:

Conceptsin

RelationshiptoConceptsin

GoodtoGreat

Builttolast*

Level5Leadership

ClockBuilding,NotTimeTelling:Level5

leadersbuildacompanythatcantickalong

withoutthem,ratherthanfeedingtheir

egosbybecomingindispensable.

GeniusofAND:PersonalhumilityAND

professionalwill.

CoreIdeology:Level5leadersareambi-

tiousforthecompanyandwhatitstands

for;theyhaveasenseofpurposebeyond

theirownsuccess.

Presewethe

Progress:

Level5leadersarerelentlessinstimulating

progresstowardtangibleresultsand

achievement,evenifitmeansfiringtheir

brothers.

GoodtoGreat

Conceptsin

RelationshiptoConceptsin

GoodtoGreat

Builttolast*

I

FirstWho...ThenWhat

ClockBuilding,NotTimeTelling:Prac-

ticing"firstwho"isclockbuilding;practic-

ing"firstwhat"(settingstrategyfirst)istime

telling.

GeniusofAND:Gettherightpeopleon

thebusANDthewrongpeopleoffthebus.

CoreIdeology:Practicing"firstwho"

meansselectingpeoplemoreontheirfit

withthecorevaluesandpurposethanon

theirskillsandknowledge.

Preservethe

Progress:

Practicing"firstwho"meansabiasforpro-

motingfromwithin,whichreinforcesthe

corevalues.

ConfronttheBrutalFacts

ClockBuilding,NotTimeTelling:

Creatingaclimatewherethetruthis

(StockdaleParadox)

heardisclockbuilding,especiallyifyou

createredflagmechanisms.

GeniusofAND:Confrontthebrutalfacts

ofyourcurrentrealityANDretainunwa-

veringfaiththatyouwillprevailinthe

end-theStockdaleParadox.

CoreIdeology:Confrontingthebrutalfacts

clarifiesthevaluesanorganizationtruly

holdsascoreversusthosethatitwouldlike

toholdascore.

Preservethe

Progress:Bru-

talfactsclarifywhatmustbedonetostimu-

lateprogress.

200

Collins

Conceptsin

RelationshiptoConceptsin

GoodtoGreat

Builttolast*

HedgehogConcept

ClockBuilding,NotTimeTelling:

TheCouncilmechanismisconsum-

(TheThreeCircles)

mateclockbuilding.

GeniusofAND:Deepunderstanding

ANDincrediblesimplicity.

CoreIdeology:The"whatyouarepassion-

ateabout"circleoverlapsnicelywithcore

valuesandpurpose.Onlythosevalues

aboutwhichyouaresopassionatethatyou

wouldnever,underanyconditions,give

themupqualifyastrulycore.

Preservethe

Progress:

GoodBHAGsflowfromunderstanding;

badBHAGsflowfrombravado.Great

BHAGssitrightsmackinthemiddleofthe

threecircles.

CultureofDiscipline

ClockBuilding,NotTimeTelling:Oper-

atingthroughsheerforceof

personalityasa

disciplinarianistimetelling;buildingan

enduringcultureofdisciplineisclock

building.

GeniusofAND:FreedomANDresponsi-

bility.

CoreIdeology:Acultureofdiscipline

ejectsthosewhodonotsharethevalues

andstandardsofanorganization.

Preservethe

Progress:

Whenyouhaveacultureof

discipline,you

cangivepeoplemorefreedomtoexperi-

mentandfindtheirownbestpathto

results.

Goodto

Conceptsin

RelationshiptoConceptsin

GoodtoGreat

Builttolast*

Technology

ClockBuilding,NotTimeTelling:

Accelerators

Technologyacceleratorsareakeypartof

theclock.

Genius

Shuntechnologyfads

ANDpioneertheapplicationoftechnology.

CoreIdeology:Inagreatcompany,tech-

nologyissubservienttocorevalues,notthe

otherwayaround

Preservethe

Progress:The

righttechnologiesacceleratemomentum

intheflywheel,towardtheachievementof

Flywheel,Not

ClockBuilding,NotTimeTelling:

DoomLoop

Theflywheeleffectcreatesthe

tainedbuildingofmomentum,anddoesnot

I

dependonthepresenceofacharismatic

visionarytomotivatepeople

GeniusofAND:Evolutionary,incremental

processANDrevolutionary,dramaticresults

CoreIdeology:Thedoomloopmakesit

alinostimpossibletoinstillcorevaluesand

purpose,aspeoplechronicallywonder,

"Whoarewe7Whatdowestandfor?"

Preservethe

Progress:The

smoothconsistencyoftheflywheelandthe

cumulativebuildingofmomentumtoa

pointofbreakthroughcreate

theperfect

conditionsforinstillingcorevalueswhile

stimulatingchangeandprogress

See

toLastSuccessful

of

Collinsand

Porras,

1994

202

Collins

Iamnotgoingtobelaborallthelinksfromtheabovetable,butI

wouldliketohighlightoneparticularlypowerfullink:theconnection

betweenBHAGsandthethreecirclesoftheHedgehogConcept.In

BuilttoLast,weidentifiedBHAGsasakeywayto

stimulateprogress

whilepreservingthecore.ABHAG(pronouncedbee-hag,shortfor"Big

HairyAudaciousGoal")isahugeanddauntinggoal-likeabigmoun-

taintoclimb.Itisclear,compelling,andpeople"getit"rightaway.A

BHAGservesasaunifyingfocalpointofeffort,galvanizingpeopleand

creatingteamspiritaspeoplestrivetowardafinishline.Likethe1960s

NASAmoonmission,aBHAGcapturestheimaginationandgrabspeo-

pleinthegut.

However,asexcitingasBHAGsare,weleftavitalquestionunan-

swered.Whatisthe

betweenabadBHAGandagoodBHAG?

SwimmingfromAustraliatoNew

wouldbeaBHAGforme,but

itwouldalsokillme!Wecannowofferananswertothatquestion,draw-

ingdirectlyfromthestudyofgood-to-greatcompanies.

AsuperbexampleofthiscomesfromBoeinginthe1950s.Untiltheearly

Boeingfocusedonbuildinghugeflyingmachinesforthe

theB-17FlyingFortress,theB-29Superfortress,andtheB-52intercontinen-

taljetbomber

However,Boeinghadvirtuallynopresencein

thecommercialaircraftmarket,andtheairlinesshowednointerestinbuy-

ingaircraftfromBoeing.

("YoumakegreatbombersupthereinSeattle.

don'tyoujuststickwiththat,"theysaidinresponsetoBoeing's

inquiries.)Today,wetakeforgrantedthatmostairtraveltakesplaceon

ingjets,butin1952,almostnooneoutsidethemilitaryflewon

Wisely,throughthe

Boeinghadstayedawayfromthecommer-

cialsphere,anarenainwhichMcDonnellDouglashadvastlysuperior

abilitiesinthesmaller,propeller-drivenplanesthatcomposedthecom-

mercial

Intheearly

however,Boeingsawanopportunityto

leapfrogMcDonnellDouglasbymarryingitsexperiencewithlarge

GoodtoGreat

Whatdrives

Includesyourcorevaluesand

purpose

,

crafttoitsunderstandingofjetengines.LedbyaLevel5leadernamed

BillAllen,Boeingexecutivesdebatedthewisdomofmovingintothe

mercialsphere.Theycametounderstandthat,whereas

Boeingcouldnot

havebeenthebestcommercialplanemakeradecadeearlier,thecumula-

tiveexperienceinjetsandbigplanestheyhadgainedfrommilitarycon-

tractsnowmadesuchadreampossible.Theyalsocametoseethatthe

economicsofcommercialaircraftwouldbevastlysuperiortothemilitary

I

marketand-ofnosmallimportance-theywerejustflat-outturnedon

bythewholeideaofbuildingacommercialjet.

So,in1952,BillAllenand

histeammadethedecisiontospendaquar-

terofthecompany'sentirenetworthtobuildaprototypejetthatcouldbe

usedforcommercial

Theybuiltthe707andlaunchedBoeing

onabidtobecometheleadingcommercialaviation

companyinthe

world.Threedecadeslater,afterproducingfiveofthemostsuccessful

commercialjetsinhistory(the707,727,737,747,and

Boeingstood

astheabsolute,unquestionedgreatestcompanyinthecommercialair-

planeindustry,

Notuntilthelate1990swouldBoeing's

numberonepositionbeseriouslychallenged,anditwouldtakeagovern-

mentconsortiumintheformofAirbustodo

204

Collins

Hereisthekeypoint:

Boeing'sBHAG,whilehugeanddaunting,wasnot

anyrandomgoal.Itwasagoalthatmadesensewithinthecontextofthe

threecircles.Boeing'sexecutivesunderstoodwithcalm,equanimitythat(1)

thecompanycouldbecomethebestintheworldatcommercialjetmanu-

facturingeventhoughithadnopresenceinthemarket,(2)theshiftwould

significantlyimproveBoeing'seconomicsbyincreasingprofitperaircraft

model,and(3)theBoeingpeoplewereverypassionateabouttheidea.Boe-

ingactedwithunderstanding,notbravado,atthispivotal

momentinitshis-

tory,andthatisoneofthekeyreasonswhyitenduredasagreatcompany.

Thethree

frameworkprovidesonepowerfulexampleof

howtheideasfromthetwostudieslinktogether,andI'dliketoofferithere

asapracticaltoolforcreatingthislinkwithinyourownorganization.Yetit

alonewillnotmakeyourcompanygreatandlasting.Tocreateanenduring

greatcompanyrequiresallthekeyconceptsfrombothstudies,tiedtogether

andappliedconsistentlyovertime.Furthermore,ifyou

everstopdoingany

oneofthekeyideas,yourorganizationwillinevitablyslidebackwardtoward

mediocrity.Remember,itismucheasiertobecomegreatthantoremain

great.Ultimately,theconsistentapplicationofbothstudies,onebuilding

upontheother,givesthebestchanceforcreatinggreatnessthatlasts.

WHYGREATNESS?

DuringabreakataseminarthatIgavetoagroupofmyex-studentsfrom

Stanford,onecameuptome,browfurrowed."MaybeI'mjustnotambi-

tiousenough,"hesaid."ButIdon'treallywanttobuildahugecompany.

Istheresomethingwrongwiththat?"

"Notatall,"Ireplied."Greatnessdoesn'tdependonsize."Ithentoldhim

GoodtoGreat

aboutSinaSimantob,whorunsthebuildingwhereIhavemyresearchlab-

oratory.Sinahascreatedatrulygreatinstitution.It'sanold1892

schoolbuildingthathasbeenrenovatedintothemostextraordinaryspace,

decoratedandmaintainedwithtremendousattentiontodetail,bordering

onperfection.Byonedefinitionofresults-attractingthemostinteresting

peopleinBoulder,settingastandardthatotherlocalbuildingsmeasure

themselvesagainst,and

generatingthehighestprofitperfootofspace-his

smallenterpriseistrulyagreatinstitutioninmyhometown.Simantobhas

neverdefinedgreatnessbysize,andthereisnoreasonforhimto.

Thestudentpausedforamoment,thensaid:"Okay,IacceptthatIdon't

needtobuildabigcompanyinordertohaveagreatcompany.Butevenso,

whyshouldItrytobuildagreatcompany?WhatifIjustwanttobesuc-

cessful?"

Thequestionbroughtmeupshort.Thiswasnotalazypersonasking;

he'dstartedhisownbusinessasayoungman,puthimselfthroughlaw

school,andaftergraduateschoolbecameadrivenentrepreneur.Hehas

remarkableenergy,anintenseandinfectiousenthusiasm.Ofallthestu-

dentsI'veknownovertheyears,heisonethatIhave

littledoubtwillbe

enormouslysuccessful.Yethequestionsthewholeideaoftryingtobuild

somethinggreatandlasting.

Icanoffertwoanswers.

First,Ibelievethatitisnohardertobuildsomethinggreatthantobuild

somethinggood.Itmightbestatisticallymoreraretoreachgreatness,but

itdoesnotrequiremoresufferingthanperpetuatingmediocrity.Indeed,if

someofthecomparisoncompaniesinourstudyareanyindication,it

involveslesssuffering,andperhapsevenlesswork.The

beautyandpower

oftheresearchfindingsisthattheycanradicallysimplifyourliveswhile

increasingoureffectiveness.Thereisgreatsolaceinthesimplefactof

clarity-aboutwhatisvital,andwhatisnot.

206

Collins

Letmeillustratethispointwithanonbusinessexample,thelaststoryof

thebook.Thecoachingstaff

ofahighschoolcross-countryrunningteam

recentlygottogetherfordinnerafterwinningitssecondstatechampi-

onshipintwoyears.Theprogramhadbeentransformedintheprevious

fiveyearsfromgood(toptwentyinthestate)togreat(consistentcon-

tendersforthestatechampionship,onboththeboys'andgirls7teams).

"Idon'tgetit,"saidoneofthecoaches."Whyarewesosuccessful?We

don'tworkanyharderthanotherteams.Andwhatwedoisjustsosimple.

Whydoesitwork?"

HewasreferringtotheHedgehogConceptoftheprogram,capturedin

thesimplestatement:Werunbestattheend.Werunbestattheendof

workouts.Werunbestattheendofraces.Andwerunbestattheendof

theseason,whenitcountsthemost.Everythingisgearedto

thissimple

idea,andthecoachingstaffknowshowtocreatethiseffectbetterthanany

otherteaminthestate.Forexample,theyplaceacoachatthe2-mile

mark(ofa3.1-milerace)tocollectdataastherunnersgopast.Butunlike

mostteams,whichcollecttimesplits(minutes-per-milerunningpace),

thisteamcollectsplacesplits(whatplacetherunnersareinastheygoby).

,

Thenthecoachescalculatenothowfasttherunnersgo,buthowmany

competitorstheypassattheendoftherace,frommile2tothefinish.They

thenusethisdatatoaward"headbones"aftereachrace.(Headbonesare

beadsintheshapeofshrunkenskulls,whichthekidsmakeintonecklaces

andbracelets,symbolizingtheirvanquished

competitors.)Thekidslearn

howtopacethemselves,andracewithconfidence:"Werunbestatthe

end,"theythinkattheendofahardrace."So,ifI'mhurtingbad,thenmy

competitorsmusthurtawholelotworse!"

Ofequalimportanceiswhat

theydon'twasteenergyon.Forexample,

whentheheadcoachtookovertheprogram,shefoundherselfburdened

withexpectationstodo"funprograms"and"rah-rahstuff"tomotivatethe

kidsandkeeptheminterested-parties,andspecialtrips,andshopping

adventurestoNikeoutlets,andinspirationalspeeches.Shequicklyputan

endtonearlyallthatdistracting(andtime-consuming)activity."Look,"

shesaid,"thisprogramwillbebuiltontheideathatrunningisfun,racing

isfun,improvingisfun,andwinningisfun.If

notpassionateabout

whatwedohere,thengofindsomethingelsetodo."Theresult:The

numberofkidsintheprogramnearlytripledinfiveyears,fromthirtyto

eighty-two.

Beforetheboys7teamwonthefirst-everstatecross-

countrychampi-

onshipintheschool'shistory,shedidn'texplicitlysetthegoalortryto

GoodtoGreat

"motivate"thekidstowardit.Instead,sheletthekidsgainmomentum,

seeingforthemselves-racebyrace,weekbyweek-thattheycouldbeat

anyoneinthestate.Then,onedayoutonatrainingrun,one

boysaidto

histeammates,"Hey,Ithinkwecouldwinstate.""Yeah,Ithinkso,too,"

saidanother.Everyonekeptrunning,thegoalquietlyunderstood.The

coachingstaffneveroncementionedthestatechampionshipideauntil

thekidssawforthemselvesthattheycoulddoit.

Thiscreatedthestrongestcultureofdisciplinepossible,astheseven

varsityrunnersfeltpersonallyresponsibleforwinningstate-acommit-

mentmadenottothecoaches,buttoeachother.Oneteammembereven

calledallofhisteammatesthenightbeforethestaterace,justtomake

suretheywereallgettingreadyforbedearly.(Noneedforthecoachesto

bedisciplinariansonthisteam.)Hammeringthroughthelastmile,pass-

ingcompetitors("Werunbestattheend!"),eachkid

hurt,butknewit

wouldhurtalotmoreifhehadtolookhisteammatesintheeyesasthe

onewhofailedtocomethrough.Noonefailed,andtheteambeat

everyotherteamatthestatemeetbyalargemargin.

Theheadcoachbegan

rebuildingthewholeprogramaroundtheidea

of"firstwho."Oneoftheassistantcoachesisa300-poundex-shot-putter

(hardlytheimageofaleandistancerunner),butheiswithoutquestion

therightwho:Hesharesthevaluesandhasthetraitsneededtohelpbuild

agreatteam.Astheprogrambuiltmomentum,itattractedmorekidsand

moregreatcoaches.Peoplewanttobepartofthisspinningflywheel;they

wanttobepartofachampionshipteam;theywanttobepartofafirst-class

culture.Whenthecross-

countryteampostsyetanotherchampionship

bannerinthegym,morekidssignup,thegenepooldeepens,theteam

getsfaster,whichproducesmorechampionships,whichattractsmore

kids,whichcreatesevenfasterteams,andsoforthandsoon,intheinfec-

tiousflywheeleffect.

i

Arethesecoachessufferingmorethanotherteamstocreateagreatpro-

gram?Aretheyworkingharder?No!Infact,

theassistantcoacheshave

full-timeprofessionaljobs

outsideofcoaching-engineers,computer

technicians,teachers-andtheyworkforessentiallynopay,carving

cioustimeoutoftheirbusylivestobepartofbuildingagreatprogram.

They'rejustfocusingontherightthings,andnotthewrongthings.

They'redoingvirtuallyeverythingwewriteaboutinthisbook,within

theirspecificsituation,andnotwastingtimeonanythingthatdoesn'tfit.

Simple,clean,straightforward,elegant-andaheckofalotoffun.

Thepointofthisstoryisthattheseideaswork.When

youapplythemin

208

Collins

anysituation,

makeyourlifeandyourexperiencebetter,while

improvingresults.Andalongtheway,youjustmightmakewhatyou're

buildinggreat.So,Iaskagain:Ifit'snoharder(giventheseideas),the

resultsbetter,andtheprocesssomuchmorefun-well,whywouldn'tyou

goforgreatness?

Tobeclear,Iamnotsuggestingthatgoingfromgoodtogreatiseasy,or

thateveryorganizationwillsuccessfullymaketheshift.Bydefinition,itis

notpossibleforeveryonetobeaboveaverage.ButIamassertingthatthose

whostrivetoturngoodintogreatfindtheprocessnomorepainfulor

exhaustingthanthosewhosettleforjustlettingthingswallowalongin

mind-numbingmediocrity.Yes,turninggoodintogreat

takesenergy,but

thebuildingofmomentumaddsmoreenergybackintothepoolthanit

takesout.Conversely,perpetuatingmediocrityisaninherentlydepressing

processanddrainsmuchmoreenergyoutofthepoolthanitputsbackin.

Butthereisasecondanswertothequestionofwhygreatness,onethat

isattheveryheartofwhatmotivatedustoundertakethishugeprojectin

thefirstplace:thesearchformeaning,ormoreprecisely,thesearchfor

meaningfulwork.

Iaskedtheheadcoachofthecross-countryprogramwhyshefeltcom-

pelledtomakeitgreat.Shepausedbeforeanswering."That'sareally

goodquestion."Longpause.

reallyhardtoanswer."Morepause."I

guess...it'sbecauseIreally

careaboutwhatwe'redoing.Ibelievein

runningandtheimpactitcanmakeonthesekids'lives.Iwantthemto

haveagreatexperience,andtohavetheexperienceofbeingpartofsome-

thingabsolutelyfirstclass."

Nowfortheinterestingtwist:

ThecoachhasanMBAfromanelitebusi-

nessschoolandisaPhiBetaKappagraduateineconomics,havingwonthe

prizeforthebestundergraduatehonorsthesisatoneofthemost

universitiesintheworld.Shefound,however,thatmostofwhatherclass-

mateswentontodo-investmentbankingonWallStreet,startingInternet

companies,managementconsulting,workingforIBM,orwhatever-

heldnomeaningforher.Shejustdidn'tcareenoughaboutthoseendeav-

orstowanttomakethemgreat.Forher,thosejobsheld

nomeaningful

purpose.Andsoshemadethedecisiontosearchformeaningfulwork-

workaboutwhichshewouldhavesuchpassionthatthequestion,Whytry

forgreatness?wouldseemalmosttautological.Ifyou'redoingsomething

youcarethatmuchabout,andyoubelieveinitspurposedeeplyenough,

thenitisimpossibletoimaginenottryingtomakeitgreat.It'sjustagiven.

GoodtoGreat

I'vetriedtoimaginetheLevel5leadersofthecompanies

studied

answeringthequestion"Whygreatness?"Ofcourse,mostwouldsay:

"We'renotgreat-wecouldbesomuchbetter."Butpushedtoanswer,

"Whytryforgreatness?"Ibelievetheywouldrespondmuchlikethecross-

countrycoach.They'redoingsomething

reallycareabout,about

whichtheyhavegreatpassion.LikeBillHewlett,theymightcarefirstand

foremostaboutcreatingacompanythatbyvirtueofitsvaluesandsuccess

hasatremendousimpactonthewaycompaniesaremanagedaroundthe

world.OrlikeKenIverson,theymightfeelacrusader'spurposetooblit-

eratetheoppressiveclasshierarchiesthatcausedegradationofbothlabor

andmanagement.OrlikeDarwinSmithatKimberly-Clark,theymight

deriveatremendoussenseofpurposefromtheinnerquest

forexcellence

itself,beingdrivenfromwithintomakeanything

touchthebestit

canbe.OrperhapslikeLyleEveringhamatKrogerorCorkWalgreenat

Walgreens,theymighthavegrownupinthebusinessandjustreallylove

it.Youdon'tneedtohavesomegrandexistentialreasonforwhyyoulove

whatyou'redoingortocaredeeplyaboutyourwork(althoughyou

might).Allthatmattersisthatyoudoloveitandthatyoudocare.

So,thequestionofWhygreatness?isalmosta

nonsensequestion.If

you'reengagedinworkthatyouloveandcareabout,forwhateverreason,

thenthequestionneedsnoanswer.Thequestionisnotwhy,buthow.

Perhapsyourquesttobepartofbuildingsomethinggreatwillnotfallin

yourbusinesslife.Butfinditsomewhere.Ifnotincorporatelife,thenper-

hapsinmakingyourchurchgreat.Ifnotthere,thenperhapsanonprofit,

oracommunityorganization,oraclassyouteach.Getinvolvedinsome-

thingthatyoucaresomuchaboutthatyouwanttomake

itthegreatestit

canpossiblybe,notbecauseofwhatyouwillget,butjustbecauseitcan

bedone.

Whenyoudothis,youwillstarttogrow,inevitably,towardbecominga

Level5leader.Earlyinthebook,wewonderedabout

howtobecome

210

JimCollins

Level5,andwesuggestedthatyoustartbypracticingtherestofthefind-

ings.Butunderwhatconditionswillyouhavethedriveanddisciplineto

fullypracticetheotherfindings?Perhapsitiswhenyoucaredeeply

enoughabouttheworkinwhichyouareengaged,andwhenyourrespon-

sibilitieslineupwithyourownpersonalthreecircles.

Whenallthesepiecescometogether,notonlydoesyour

workmove

towardgreatness,butsodoesyourlife.For,intheend,itisimpossibleto

haveagreatlifeunlessitisameaningfullife.Anditisverydifficultto

haveameaningfullifewithoutmeaningfulwork.Perhaps,then,you

mightgainthatraretranquillitythatcomesfromknowingthat

had

ahandincreatingsomethingofintrinsicexcellencethatmakesacontri-

bution.Indeed,youmightevengainthatdeepestofallsatisfactions:

knowingthatyourshorttimehereonthisearthhasbeenwellspent,and

thatitmattered.

,

FREQUENTLY

QUESTIONS

Q:Didyouoriginallyidentifymorethanelevengood-to-greatpossibilities

and,ifso,whatgood-to-greatexamplesdidnotmakeitintothe

Theelevengood-to-greatcompaniesweretheonlyexamplesfromourinitial

universeofFortune500companiesthatmetallthecriteriaforentranceinto

thestudy;theydonotrepresentasample.(See

Appendixl.Afortheselection

processweused.)Thefactthatwestudiedthetotalsetofcompaniesthatmet

ourcriteriashouldincreaseourconfidenceinthefindings.Wedonotneedto

worrythatasecondsetofcompaniesintheFortune500wentfromgoodto

great-notbyourcriteria,anyway-byothermethods.

Q:Whydidonlyelevencompaniesmakethecut?

Therearethreeprincipalreasons.First,weusedaverytoughstandard(three

timesthemarketoverfifteenyears)asourmetricofgreatresults.Second,the

fifteen-yearsustainabilityrequirementisdifficulttomeet.Manycompanies

showasharpriseforfiveortenyearswithahitproductorcharismaticleader,

butfewcompaniesmanagetoachievefifteenyears.Third,wewerelooking

foraveryspecificpattern:sustainedgreatresults

precededbyasustained

periodofaverageresults(orworse).Greatcompaniesareeasytofind,but

good-to-greatcompaniesaremuchmorerare.Whenyouaddallthesefactors

together,itisnotsurprisingthatweidentifiedonlyelevenexamples.

Iwouldliketostress,however,thatthe"onlyeleven"findingshouldnotbe

discouraging.Wehadtosetacutoffandwechoseaverytoughone.Ifwehad

setaslightlylowerhurdle-say,2.5timesthemarketortenyearsof

ability-thenmanymorecompanieswouldhave

qualified.Aftercompleting

theresearch,Iamconvincedthatmanyorganizationscanmakethejourney

fromgoodtogreatiftheyapplythelessonsinthisbook.Theproblemisnot

thestatisticalodds;theproblemisthatpeoplearesquanderingtheirtimeand

resourcesonthewrongthings.

Q:Whataboutstatisticalsignificance,giventhatonlyelevencompanies

madethefinalcutasgood-to-greatexamplesandthetotal

sizeis

twenty-eightcompanies

(withcomparisons)?

Weengagedtwoleadingprofessorstohelpusresolvethisquestion,onestatis-

ticianandoneappliedmathematician.Thestatistician,JeffreyT.

atthe

212

Collins

UniversityofColorado,lookedatourdilemmaandconcludedthatwedonot

haveastatisticsproblem,pointingoutthattheconceptof"statisticalsignifi-

cance"appliesonlywhensamplingofdataisinvolved."Look,youdidn'tsam-

plecompanies,"hesaid."Youdidaverypurposefulselectionandfoundthe

elevencompaniesfromtheFortune500thatmetyour

criteria.Whenyouput

theseelevenagainsttheseventeencomparisoncompanies,theprobabilities

thattheconceptsinyourframeworkappearbyrandomchanceareessentially

zero."WhenweaskedUniversityofColoradoappliedmathematicsprofessor

WilliamP.Briggstoexamineourresearchmethod,heframedthequestion

thus:Whatistheprobabilityoffindingbychanceagroupofelevencompa-

nies,allofwhosemembersdisplaytheprimarytraitsyoudiscoveredwhilethe

directcomparisonsdonot

possessthosetraits?Heconcludedthattheproba-

bilityislessthan1in17million.Thereisvirtuallynochancethatwesimply

foundelevenrandomeventsthatjusthappenedtoshowthegood-to-greatpat-

ternwewerelookingfor.Wecanconcludewithconfidencethatthetraitswe

foundarestronglyassociatedwithtransformationsfromgoodtogreat.

Q:Whydidyoulimityourresearchtopubliclytradedcorporations?

Publiclytradedcorporationshavetwoadvantagesforresearch:awidely

agreedupondefinitionofresults(sowecanrigorously

selectastudyset)and

aplethoraofeasilyaccessibledata.Privatelyheldcorporationshavelimited

informationavailable,whichwouldbeparticularlyproblematicwithcompar-

isoncompanies.Thebeautyofpubliclytradedcompaniesisthatwedon't

needtheircooperationtoobtaindata.Whethertheylikeitornot,vast

amountsofinformationaboutthemareamatterofpublicrecord.

Q:WhydidyoulimityourresearchtoU.S.corporations?

Weconcludedthatrigorinselectionoutweighedthe

benefitsofaninter-

nationalstudyset.Theabsenceofapples-to-applesstockreturndatafrom

non-U.S.exchangeswouldunderminetheconsistencyofourselection

process.Thecomparativeresearchprocesseliminatescontextual"noise"

(similarcompanies,industries,sizes,ages,andsoforth)andgivesusmuch

greaterconfidenceinthefundamentalnatureofourfindingsthanhavinga

geographicallydiversestudyset.Nonetheless,Isuspectthatourfindingswill

proveusefulacrossgeographies.Anumberofthe

companiesinourstudyare

globalenterprisesandthesameconceptsappliedwherevertheydidbusiness.

Also,Ibelievethatmuchofwhatwefound-Level5leadershipandthefly-

wheel,forinstance-willbehardertoswallowforAmericans

for

fromothercultures.

GoodtoGreat

Q:

don'tanyhigh-technologycompaniesappearinthestudyset?

Mosttechnologycompanieswereeliminatedfromconsiderationbecause

arenotoldenoughtoshowthegood-to-greatpattern.Werequiredat

leastthirtyyearsofhistorytoconsideracompanyforthestudy(fifteenyearsof

goodresultsfollowedbyfifteenyearsofgreatresults).Ofthetechnologycom-

paniesthatdidhavemore

thanthirtyyearsofhistory,noneshowedthespe-

cificgood-to-greatpatternwewerelookingfor.Intel,forexample,neverhada

periodofonlygoodperformance;Intelhas

beengreat.If

thisstudyweretoberepeatedintenortwentyyears,I

wouldfullyexpectthat

high-technologycompanieswouldmakethelist.

Q:HowdoesGoodtoGreatapplytocompaniesthatarealreadygreat?

Isuggestthat

usebothGoodtoGreatandBuilttoLasttohelpthembet-

terunderstandwhytheyaregreat,sothat

cankeepdoingtherightthings.

AsRobertBurgelman,oneofmyfavoriteprofessorsfromStanfordBusiness

School,taughtmeyearsago,"Thesinglebiggestdangerinbusinessandlife,

otherthanoutrightfailure,istobesuccessfulwithoutbeingresolutelyclear

aboutwhyyouaresuccessfulinthefirstplace."

Q:Howdoyouexplainrecentdifficultiesatsomeofthegood-to-great

companies?

Everycompany-nomatter

howgreat-facesdifficulttimes.Thereareno

enduringgreatcompaniesthathaveaperfect,unblemishedrecord.Theyall

haveupsanddowns.Thecriticalfactorisnottheabsenceofdifficultybutthe

ability

bouncebackandemerge

stronger.

Furthermore,ifanycompanyceasestopracticeallofthefindings,itwill

eventuallyslidebackward.Itisnotanyonevariableinisolationthatmakesa

companygreat;itisthecombinationofallofthepiecesworkingtogetherin

anintegratedpackageconsistentlyandovertime.Twocurrentcasesillustrate

thispoint.

OnecurrentcaseforconcernisGillette,whichproducedeighteenyearsof

exceptionalperformance-risingtoover9timesthemarketfrom1980to

1998-butstumbledin1999.Webelievetheprincipalsourceofthisdiffi-

cultyliesinGillette'sneedforgreaterdisciplineinstickingtobusinessesthat

fitsquarelyinsidethethreecirclesofitsHedgehogConcept.Ofevengreater

concernistheclamoringfromindustryanalyststhat

Gilletteneedsacharis-

maticCEOfromoutsidethecompanytocomeinandshakethingsup.If

GillettebringsinaLevel4leader,thentheprobabilitythatGillettewillprove

tobeanenduringgreatcompanywilldiminishconsiderably.

AnothertroublingcaseisNucor,whichhititspeakin1994atfourteen

timesthemarket,thenfelloffconsiderablyasitexperiencedmanagement

.

turmoilinthewakeofKenIverson'sretirement.Iverson'schosensuccessor

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JimCollins

FROMGOODTOGREATTOBUILTTOLAST?

RatioofCumulativeStockReturnstoGeneralMarket,

1927-2000

lastedonlyashorttimeinthejob,beforebeingoustedinanuglyexecutive-

suitebattle.Oneofthearchitectsofthisboardroomcoupindicatedinthe

CharlotteNewsandObserver(June11,1999,page

thatIversonhadfallen

fromLevel5leadershipin

hisoldageandhadbeguntodisplaymoreego-

centricLevel4traits."Inhisheyday,Kenwasagiantofaman,"hesaid,"but

hewantedtotakethiscompanytothegravewithhim."Iversontellsadiffer-

-.

-

entstory,arguingthattherealproblemiscurrentmanagement'sdesireto

diversifyNucorawayfromitsHedgehogConcept."Iversonjustshakeshis

head,"wrotetheNewsandObserver,"sayingitwastogetawayfromdiversifi-

cationthatNucorbecameanarrowlyfocusedsteel

productscompanyinthe

firstplace."Whateverthecase-lossofLevel5leadershiporstrayingfromthe

HedgehogConcept,orboth-thefutureofNucorasagreatcompany

remainsuncertainatthetimeofthiswriting.

Thatbeingsaid,itisworthnotingthatmostofthegood-to-greatcompa-

niesarestillgoingstrongatthetimeofthiswriting.Sevenoftheeleven

companieshavethusfargeneratedovertwentyyearsofextraordinaryperfor-

mancefromtheirtransitiondates,withthemedianofthe

entiregroup

beingtwenty-fouryearsofexceptionalresults-aremarkablerecordbyany

measure.

GoodtoGreat215

Q:HowdoyoureconcilePhilipMorrisasa"great"companywiththefact

thatitsellstobacco?

Perhapsnocompany

anywheregeneratesasmuchantipathyasPhilipMorris.

Evenifatobaccocompanycanbeconsideredtrulygreat(andmanywould

disputethat),thereisdoubtastowhetheranytobaccocompanycanendure,

giventheever-growingthreatoflitigationandsocialsanction.Ironically,

PhilipMorrishasthelongesttrackrecordofexceptionalperformancefrom

thedateofitstransition-thirty-fouryears-andisthe

companythat

madeitintobothstudies(GoodtoGreatandBuilttoLast).Thisperformance

isnotjustafunctionofbeing

inanindustrywithhigh-marginproductssoldto

addictedcustomers.PhilipMorrisblewawayalltheothercigarettecompa-

nies,includingitsdirectcomparison,R.J.Reynolds.ButforPhilipMorristo

haveaviablefuturewillrequireconfrontingsquare-onthebrutalfactsabout

society'srelationshiptotobaccoandthesocialperceptionofthetobacco

industry.Alargepercentageofthepublicbelievesthateverymemberofthe

industryparticipatedequallyinasystematicefforttodeceive.Fairornot,peo-

ple-especiallyintheUnitedStates-canforgivealotof

sins,butwillnever

forgetorforgivefeelingliedto.

Whateverone'spersonalfeelingsaboutthetobaccoindustry(andtherewas

awiderangeoffeelingsontheresearchteamandsomeveryheateddebates),

havingPhilipMorrisinboth

GoodtoGreatandBuilttoLasthasprovedvery

instructive.Ithastaughtmethatitisnotthecontentofacompany'svalues

thatcorrelateswithperformance,butthestrengthofconvictionwithwhichit

holdsthosevalues,whatevertheymightbe.Thisisoneofthosefindingsthat

Ifinddifficulttoswallow,butthatarecompletelysupportedbythedata.(For

furtherdiscussionofthistopic,seechapter3ofBuilttoLast,pages65-71.)

Q:CanacompanyhaveaHedgehogConceptandhaveahighlydiverse

businessportfolio?

Ourstudystronglysuggeststhathighlydiversifiedfirmsandconglomerates

willrarelyproducesustainedgreatresults.Oneobviousexceptiontothisis

GE,butwecanexplainthiscasebysuggestingthatGEhasaveryunusual

andsubtleHedgehogConceptthatunifiesitsagglomeration

ofenterprises.

WhatcanGEdobetterthananycompanyintheworld?Developfirst-rate

generalmanagers.Inourview,thatistheessenceofGE'sHedgehogCon-

cept.AndwhatwouldbeGE'seconomicdenominator?Profitpertop-quartile

managementtalent.Thinkaboutitthisway:Youhavetwobusinessopportu-

nities,boththatmightgenerate

millioninprofits.Butsupposeoneof

thosebusinesseswoulddrainthreetimestheamountoftop-quartilemanage-

menttalenttoachievethoseprofitsastheotherbusiness.Theonethatdrains

lessmanagementtalentwouldfitwiththeHedgehogConceptandtheother

wouldnot.Finally,whatdoesGEprideitselfonmorethananythingelse?

Havingthebestsetofgeneralmanagersintheworld.This

istheirtrue

216

Collins

passion-morethanlightbulbs,jetengines,ortelevisionprogramming.

HedgehogConcept,properlyconceived,enablesthecompanytooperateina

diversesetofbusinessesyetremainsquarelyfocusedontheintersectionofthe

threecircles.

Q:Whatistheroleoftheboardofdirectorsinatransformationfromgood

togreat?

First,boardsplaya

roleinpickingLevel5leaders.Therecentspateof

boardsenamoredwithcharismatic

especially"rockstar"celebrity

types,isoneofthemostdamagingtrendsforthelong-termhealthofcompa-

nies.BoardsshouldfamiliarizethemselveswiththecharacteristicsofLevel5

leadershipandinstallsuchleadersintopositionsofresponsibility.Second,

boardsatcorporationsshoulddistinguishbetweensharevalueandshare

price.Boardshavenoresponsibilitytoalargechunkofthepeoplewhoown

companysharesatanygivenmoment,namelythe

should

refocustheirenergieson

creatinggreatcompaniesthatbuildvalueforthe

shareholders.Managingthestockforanythinglessthana

hori-

zonconfusespriceandvalueandisirresponsibletoshareholders.Fora

superblookattheboard'sroleintakingacompany

fromgoodtogreat,Irec-

ommendthebookResistingHostileTakeoversbyRitaRicardo-Campbell

(PraegerPublishers,1997).Ms.Ricardo-Campbellwasa

board

memberduringtheColmanMocklereraand

adetailedaccountof

howaresponsibleboardwrestledwiththedifficultandcomplexquestionof

priceversusvalue.

Q:Canhotyoungtechnologycompaniesinago-goworldhaveLevel5

leaders?

Myansweristwowords:

Morgridge.Mr.Morgridgewasthetransition

CEOwhoturnedasmall,strugglingcompanyintheBayAreaintooneofthe

greattechnologycompaniesofthelastdecade.Withtheflywheelturning,

thisunassumingand

relativelyunknownmansteppedintothebackground

andturnedthecompanyovertothenextgenerationofleadership.Idoubt

you'veeverheardofJohnMorgridge,butIsuspectyou'veheardofthecom-

pany.ItgoesbythenameCiscoSystems.

Q:Howcanyoupracticethedisciplineof"first

whenthereisashort-

ageofoutstandingpeople?

First,atthetoplevelsofyourorganization,youabsolutelymusthavethedis-

ciplinenottohireuntilyoufindtherightpeople.Thesinglemostharmful

stepyoucantakeinajourneyfromgoodtogreatistoputthewrongpeoplein

keypositions.Second,widenyourdefinitionof"rightpeople"tofocusmore

onthecharacterattributesofthepersonandlessonspecializedknowledge.

Collins

Q:whereandhowshouldIbegin?

First,familiarizeyourselfwithallthefindings.

Remember,nosinglefinding

byitselfmakesagreatorganization;youneedtohavethemallworking

togetherasanintegratedset.Thenworksequentiallythroughtheframework,

startingwith"firstwho"andmovingthroughallthemajorcomponents.

Meanwhile,workcontinuouslyonyourowndevelopmenttowardLevel5

leadership.Ihavelaidoutthisbookinasequenceconsistentwithwhatwe

observedinthecompanies;theverystructureofthebookisaroadmap.I

wishyouthebestofluckonyourjourneyfromgoodto

great.

SELECTIONPROCESSFORGOOD-TO-GREATCOMPANIES

Research-teammemberPeterVan

wasinstrumentalinthecre-

ationoftheselectioncriteriaandinthe"deathmarchoffinancialanalysis"

requiredtousethecriteriatofindthegood-to-greatcompanies.

CriteriaforSelectionasaGood-to-Great

Company

1.Thecompanyshowsapatternof"good"performancepunctuatedbya

transitionpoint,afterwhichitshiftsto"great"performance.Wedefine

"great"performanceasacumulativetotalstockreturnofatleast3times

thegeneralmarketfortheperiodfromthepointof

transitionthroughfif-

teenyears(T+15).Wedefine"good"performanceasacumulativetotal

stockreturnnobetterthan1.25timesthegeneralstockmarketforthefif-

teenyearspriortothepointoftransition.Additionally,theratioofthe

cumulativestockreturnforthefifteenyearsafterthepointoftransition

divided

theratioofthecumulativestockreturnforthefifteenyears

priortothepointoftransitionmustexceed

2.Thegood-to-great

performancepatternmustbeacompanyshift,notan

industryevent.Inotherwords,thecompanymustdemonstratethepattern

notonlyrelativetothemarket,butalsorelativetoitsindustry.

3.Atthetransitionpoint,thecompanymusthavebeenanestablished,ongo-

ingcompany,notastart-up.Thiswasdefinedashavingoperationsforat

leasttwenty-fiveyearspriortothetransitionpoint.Additionally,ithadto

havebeenpubliclytradedwithstockreturndataavailableatleasttenyears

priortothetransitionpoint.

4.Thetransitionpointhadtooccurbefore1985sothatwewouldhave

enoughdatatoassessthesustainabilityofthetransition.Good-to-great

transitionsthatoccurredafter1985mighthavebeengood-to-great

shifts;however,bythetimewecompletedourresearch,

wewouldbe

unabletocalculatetheirfifteen-yearratioofcumulativereturnstothe

generalmarket.

5.Whatevertheyearoftransition,thecompanystillhadtobeasignificant,

ongoing,stand-alonecompanyatthetimeof

selectionintothenextstage

oftheresearchstudy.Tosatisfythiscriterion,thecompanyhadtoappear

.

inthe1995Fortune500rankings,publishedin1996.

220

Appendix

6.Finally,atthetimeofselection,thecompanyshouldstillshowanupward

trend.ForanycompanywhereT+15fallsbefore1996,theslopeofcumu-

lativestockreturnsrelativetothemarketfromtheinitial

pointoftransition

to1996shouldequalorexceedtheslopeof3/15requiredtosatisfycrite-

rion1fortheT+15phase.

Good-to-GreatSelectionProcess

Weusedasiftingprocesswithincreasinglytighterscreenstofindourcompa-

nies.Thesiftingprocesshadfourlayersofanalysis:

ICRSP

ndustrv

Cut1:FromtheUniverseofCompaniesto1,435

Companies

Weelectedtobeginour

searchwithalistofcompaniesthatappearedonthe

Fortune

ofAmerica'slargestpubliccompanies,goingasfarbackas

1965,whenthelistcameintoexistence.Ourinitiallistconsistedofallcom-

paniesthatappearedonthe1965,1975,1985,and1995listings.Therewere

1,435suchcompanies.Mostpeopleknowthese

asthe"Fortune

500,"althoughthetotalnumberofcompanieslistedmaybeasmanyas1,000

Appendix

221

becauseFortuneoccasionallychangesthesizeandformatofitslists.Asabase

settobeginouranalysis,theFortunelargest-companiesrankinghastwokey

advantages.First,itlistsonlycompaniesofsubstantialsize(companiesearn

theirwayontothelistbyannualrevenues).Therefore,nearlyeverycompany

intheFortunerankingmetourcriterionofbeinganestablishedongoing

companyatthetimeoftransition.Second,allcompaniesintheFortunerank-

ing~

arepubliclytraded,whichallowedustousefinancialstockreturndataas

thebasisformorerigorousscreeningandanalysis.Privatelyheldcompanies,

whichdonothavetomeetthesameaccountinganddisclosurestandards,

offernoopportunityforanapples-to-apples,direct

comparisonanalysisof

performance.RestrictingoursettotheFortune

hasoneobviousdis-

Itlimitsour-analysisto

Weconcluded,

however,thatgreaterrigorintheselectionprocess-madepossiblebyusing

onlypubliclytradedU.S.firmsthatholdtoacommonreportingstandard

(apples-to-applesstockreturndata)-outweighedthebenefitsofaninterna-

tionaldataset.

Cut2:From1,435Companiesto126Companies

OurnextstepwastousedatafromtheUniversityofChicagoCenterfor

ResearchinSecurityPrices(CRSP)tomakeourfinalselectionofgood-to-

greatcompanies.Weneeded,however,amethodtoparedownthenumberof

companiestoamanageablesize.Weusedthepublished

Fortunerates-of-

returndatatoreducethecandidatelist.Fortunecalculatestheten-yearreturn

toinvestorsforeachcompanyinthe

backto1965.Usingthisdata,

wereducedthenumberofcompaniesfrom1,435to126.Wescreenedfor

companiesthatshowedsubstantiallyabove-averagereturnsinthetimespans

of1985-1995,1975-1995,and1965-1995.Wealsolookedforcompanies

thatshowedapatternofabove-averagereturnsprecededbyaverageorbelow-

averagereturns.More

specifically,the126companiesselectedpassedanyone

ofthefollowingtests:

Test1:Thecompoundannualtotalreturntoinvestorsovertheperiod

1985-1995exceededthecompoundannualaveragereturntoinvestorsfor

theFortuneIndustrialandServicelistingsoverthesameperiodby30percent

totalreturnsexceededaveragereturns

1.3times),andthecompany

showedevidenceofaverageorbelow-averageperformanceinthepriortwo

decades(1965-1985).

Test2:Thecompoundannualtotalreturntoinvestorsovertheperiod

1975-1995exceededthecompoundannualaveragereturntoinvestorsfor

theFortuneIndustrialandServicelistingsoverthesameperiodby30percent

totalreturnsexceededaveragereturnsby1.3times),

andthecompany

showedevidenceofaverageorbelow-averageperformanceintheprior

decade(1965-1975).

222

Appendix

Test3:Thecompoundannualtotalreturntoinvestorsovertheperiod

1965-1995exceededthecompoundannualaveragereturntoinvestorsfor

theFortuneIndustrialandServicelistingsoverthesameperiodby30percent

totalreturnsexceededaveragereturnsby1.3times).TheFortunelistings

donotcontainten-yearreturnsbefore1965,sowedecidedtoincludealltop

performersoverthethree-decadeperiodintheinitial

set.

Test4:Companiesfoundedafter1970andwhosetotalreturntoinvestorsover

theperiod1985-1995or1975-1995exceededtheaveragereturntoinvestors

fortheFortuneIndustrialandServicelistingsoverthesameperiodby30per-

cent

totalreturnsexceededaveragereturnsby1.3times)butthatdidnot

meettheabovecriteriaduetoalackofdataintheFortunelistinprior

decades.Thisallowedustocloselyconsideranycompaniesthatperformed

wellinlaterdecadesbutdidnotshowupearlierontheFortunelistings.The

1970cutoffalsoallowedustoidentifyandeliminatefromconsiderationany

companieswithhistoriestooshorttobealegitimatetransitioncompany.

Cut3:From126Companiesto19Compan

ies

DrawingupontheresearchdatabaseattheUniversityofChicagoCenterfor

ResearchinSecuritiesPricing(CRSP),weanalyzedthecumulativestock

returnsofeachcandidatecompanyrelativetothegeneralmarket,lookingfor

thegood-to-greatstockreturnpattern.Anycompanythatmetanyoneofthe

Cut3eliminationcriteriawaseliminatedatthisstage.

AnycompanythatmetanyoneofthefollowingeliminationcriteriawasI

eliminatedatthisstage.

TerminologyusedinCut3

eliminationcriteria:

Tyear:Yearweidentifiedasthepointatwhichperformancebeganan

upwardtrend-the"transitionyear,"basedonwhentheactualstock

returnsshowedavisibleupwardshift.

Xperiod:Eraofobservable

"good"performancerelativetothemarket

immediatelypriortotheTyear.

Yperiod:Eraofsubstantiallyabovemarketperformanceimmediately

followingtheTyear.

Cut3EliminationCriterion#1:Thecompanydisplaysa

continual

upwardtrendrelativetothemarketovertheentiretimecoveredby

CRSPdata-thereisnoXperiod.

Cut3EliminationCriterion#2:Thecompanyshowsaflattogradual

riserelativetothemarket.

Thereisnoobviousshifttobreakthroughper-

formance.

Appendixl.A223

Cut3EliminationCriterion

Thecompanydemonstratesatransi-

tion,butanXperiodoflessthantenyears.Inotherwords,the

averageperformancedatawasnotlongenoughtodemonstratea

fundamentaltransition.Insomecases,thecompanylikelyhadmore

yearsofXperiodperformancepriortothetransitionyear,butthestock

becametradedontheNASDAQ,NYSE,or

duringtheXperiod;

therefore,ourdatadidnotgo

backfarenoughto

anXperiod.

Cut3EliminationCriterion#4:Thecompanydemonstratesatransi-

tionfromterribleperformancetoaverageperformancerelativetothe

market.Inotherwords,weeliminatedclassicturnaround

situations

wherethecompanypulledoutofadownwardtrendandintoatrajectory

parallelwiththegeneralmarket.

Cut3EliminationCriterion#5:Thecompanydemonstratesatransi-

tion,butafter1985.Good-to-

greattransitionsthatoccurredafter1985

mightalsohavebeenlegitimategood-to-greatcandidates.Bythetime

wecompletedourresearch,however,wewouldnotbeabletoverifythat

theirfifteen-yearratioofcumulativereturnstothegeneralmarketmet

thethree-to-onecriterion.

Cut3EliminationCriterion#6:Thecompanyshowsatransitionto

increasedperformance,buttheriseinperformanceisnotsustained.

Aftertheinitialrise,itgoesflatordeclinesrelativetothemarketuntil

thetimeofconsiderationforselectionintothestudy.

Cut3EliminationCriterion#7:Thecompanydemonstratesavolatile

patternofreturns-largeupwardanddownwardswings-withnoclear

Xperiod,Yperiod,orTyear.

Cut3EliminationCriterion

AcompletesetofCRSPdataisnot

availablebefore1975,makingitimpossibletoidentifyaverifiableX

periodoftenyears.

Cut3EliminationCriterion#9:Thereisatransitionpattern,butthe

companydemonstrateda

periodofsuchspectacularperformanceprior

totheXperiodthatthereissubstantialevidencethatthecompanyisa

greatcompanythathadfallentemporarilyondifficulttimes,ratherthan

agoodormediocrecompanythatbecamegreat.Theclassicexampleis

WaltDisney.

Cut3EliminationCriterion

Thecompanyisacquired,has

merged,orisotherwiseeliminatedfromconsiderationasastand-alone

companybythetimeofthefinalCut3analysis.

Cut3EliminationCriterion

Thecompanyshowsamildtransition

butfallsshortofthreetimesthemarket.

Appendix

CUT3ANALYSISRESULTS

CompaniesAdmittedinCut2

OutcomeinCut3

1AFLAC,Inc.

Eliminated,criterion3

2AMP,Inc.

Eliminated,criterion6

3AbbottLabs

AcceptedintoCut4analysis

4Albertson's,Inc.

Eliminated,criterion1

5

Standard,Corp.

Eliminated,criterion3

6AlleghenyTeledyne,Inc.

Eliminated,criterion6

7ALLTELCorp.

Eliminated,criterion2

8AmericanExpressCo.

Eliminated,criteria6,7

9AmericanStoresCo.

Eliminated,criterion6

10Anheuser-BuschCompanies,Inc.Eliminated,criterion2

11AppliedMaterials,Inc.

Eliminated,criterion5

12ArcherDanielsMidland

Co.

Eliminated,criterion6

13AutomaticDataProcessing

Eliminated,criterion1

14BANCONECorp.

Eliminated,criterion6

15BankofNewYork,Inc.

Eliminated,criterion2

16

Banks

Eliminated,criteria3,6

17BerkshireHathaway,Inc.

Eliminated,criterion1

18BoeingCo.

Eliminated,criterion1

19Browning-FerrisIndustries

Eliminated,criterion3

20CampbellSoupCo.

Eliminated,criterion2

21CardinalHealth

Eliminated,criterion8

22Chrysler

Eliminated,criterion6

23CircuitCityStores,Inc.

AcceptedintoCut4analysis

24Coca-ColaCo.

AcceptedintoCut4analysis

25Colgate-PalmoliveCo.

Eliminated,criterion11

26Comerica,Inc.

Eliminated,criterion3

27ComputerAssociates

Eliminated,criterion8

28ComputerSciencesCorp.

Eliminated,criteria6,7

29

Inc.

Eliminated,criterion3

30Conseco

Eliminated,criterion8

31CPCInternational

AcceptedintoCut4analysis

(laterBestfoods)

32CSX

Eliminated,criterion8

33DeanFoodsCo.

Eliminated,criterion7

34Dillard's

Eliminated,criterion6

35DoverCorp.

Eliminated,criteria

36

Eliminated,criterion11

37EngelhardCorp.

Eliminated,criterion2

38FMCCorp.

Eliminated,criterion7

39FederalNationalMortgage

AcceptedintoCut4analysis

40FirstInterstateBancorp

Eliminated,criterion2

Appendixl.A

CompaniesAdmittedinCut2

OutcomeinCut3

41FirstUnionCorp.

Eliminated,criteria3,6

42FleetFinancialGroup,Inc.

Eliminated,criterion6

43FleetwoodEnterprises,Inc.

Eliminated,criterion7

44FosterWheelerCorp.

Eliminated,criterion6

45GPU,Inc.

Eliminated,criterion2

46TheGap,Inc.

Eliminated,criterion8

47GEICO

Eliminated,criterion10

48GeneralDynamicsCorp.

Eliminated,criterion7

49GeneralElectricCo.

Eliminated,criteria5,11

50GeneralMills,Inc.

AcceptedintoCut4analysis

51GeneralReCorp.

Eliminated,criterion2

52GiantFoods,Inc.

criterion6

53GilletteCo.

AcceptedintoCut4

analysis

54GoldenWestFinancialCorp.

Eliminated,criterion3

55Hasbro,Inc.

Eliminated,criterion6

56Heinz,H.J.Co.

AcceptedintoCut4

analysis

57

FoodsCorp.

AcceptedintoCut4analysis

58Hewlett-PackardCo.

Eliminated,criterion7

59Humana,Inc.

Eliminated,criteria3,6

60IllinoisToolWorks,Inc.

Eliminated,criterion2

61IntelCorp.

Eliminated,criterion1

62Johnson&Johnson

Eliminated,criteria6,7

63JohnsonControls,Inc.

Eliminated,criterion6

64KelloggCo.

AcceptedintoCut4analysis

65KellyServices,Inc.

Eliminated,criteria

66

Eliminated,criterion3

67Kimberly-ClarkCorp.

AcceptedintoCut4analysis

68KrogerCo.

AcceptedintoCut4analysis

69EliLillyandCo.

Eliminated,criterion2

70LoewsCorp.

Eliminated,criteria

6

71LoralCorp.

Eliminated,criterion7

72

Companies,Inc.

Eliminated,criterion2

73MCICommunications

Corp.

Eliminated,criterion7

74Mapco,Inc.

Eliminated,criteria3,6

75MascoCorp.

Eliminated,criteria3,6

76

Eliminated,criteria3,6

77McDonald'sCorp.

Eliminated,criterion7

78Melville

Eliminated,criterion10

79Merck

Co.,Inc.

Eliminated,criterion1

80MobilCorp.

Eliminated,criterion2

81MonsantoCo.

Eliminated,criteria4,5

82Motorola,Inc.

Eliminated,criterion1

83

Co.

Eliminated,criteria3,6

226

Appendix

CompaniesAdmittedinGut2

OutcomeinCut3

84Nike,Inc.

Eliminated,criteria1,7

85

Corp.

Eliminated,criterion5

86NucorCorp.

AcceptedintoCut4analysis

87OlstenCorp.

Eliminated,criteria1,7

88Owens-Corning

Eliminated,criterion2

89PACCAR,Inc.

Eliminated,criterion2

90

HealthSystems

Eliminated,criterion8

91Pepsico,Inc.

AcceptedintoCut4analysis

92Pfizer,Inc.

Eliminated,criterion1

93PhelpsDodgeCorp.

Eliminated,criterion2

94PhilipMorrisCompanies,Inc.

AcceptedintoCut4analysis

95PitneyBowes,Inc.

AcceptedintoCut4analysis

96Procter

GambleCo.

Eliminated,criteria2,5

97ProgressiveCorp.

Eliminated,criteria1,3

98

Co.

Eliminated,criterion6

99Reebok

Eliminated,criterion8

100RepublicNewYork

Eliminated,criteria3,6

101

InternationalCorp.

Eliminated,criteria

102SCISystems,Inc.

Eliminated,criterion7

103SAFECOCorp.

Eliminated,criterion2

104SaraLeeCorp.

AcceptedintoCut4analysis

105Schering-PloughCorp.

Eliminated,criterion7

106

Co.

Eliminated,criterion7

107ShawIndustries,Inc.

Eliminated,criteria

108SonocoProductsCo.

Eliminated,criteria3,6

109SouthwestAirlinesCo.

Eliminated,criterion1

StateStreetBostonCorp.

Eliminated,criterion3

111

Banks

Eliminated,criterion8

112SYSCOCorp.

Eliminated,criteria3,6

113TandyCorp.

Eliminated,criterion6

114Tele-Communications,Inc.

Eliminated,criteria3,6

115TurnerBroadcasting

Eliminated,criterion8

116TycoInternational,Ltd.

Eliminated,criteria2,6

117TysonFoods,Inc.

Eliminated,criteria1,3

118UnionCarbideCorp.

Eliminated,criterion6

119U.S.Bancorp

Eliminated,criterion2

120VFCorp.

Eliminated,criterion6

121Wal-MartStores,Inc.

Eliminated,criterion1

122WalgreensCo.

AcceptedintoCut4analysis

123WaltDisney

Eliminated,criterion9

124Warner-LambertCo.

Eliminated,criterion6,7

125Wells

Co.

AcceptedintoCut4analysis

126Winn-DixieStores,Inc.

Eliminated,criterion7

Appendix

227

Cut4:FromNineteenCompaniestoEleven

to-GreatCompanies

Wewantedtofindcompaniesthatmadeatransition,notindustriesthatmade

atransition;merelybeingin

therightindustryattherighttimewouldnot

qualifyacompanyforthestudy.Toseparateindustrytransitionsfromcom-

panytransitions,wedecidedtorepeattheCRSPanalysisfortheremaining

nineteencompanies,onlythistimeagainstacompositeindustryindexrather

thanthegeneralstockmarket.Companiesthatshowedatransitionrelativeto

theirindustrywouldbeselectedforthefinalstudyset.

Foreachoftheremainingnineteencompanies,welookedbackintimevia

the

industrycompositesandcreatedanindustrysetofcompaniesatthe

timeoftransition(withinfiveyears).WethenacquiredCRSPstockreturn

dataonallofthecompaniesintheindustrycomposite.Ifthecompanyhad

multipleindustrylinesofbusiness,weusedtwo

separateindustrytests.We

thencreatedanindustrycumulativereturnsindexagainstwhichweplotted

thecumulativereturnsforthetransitioncompany.Thisallowedustoidentify

andeliminatefromthestudyanycompaniesthatdidnotshowthetransition

patternrelativetotheirindustry.

Throughindustryanalysis,weeliminatedeightcompanies.SaraLee,

Heinz,

Kellogg,CPC,andGeneralMillsdemonstratedadramatic

upwardshiftrelativetothe

generalstockmarketinabout1980,butnoneof

thesecompaniesdemonstratedashiftrelativetothefoodindustry.Coca-Cola

andPepsicodemonstratedadramaticupwardshiftrelativetothegeneral

stockmarketinabout1960andagainin1980,butneither

demonstrateda

shiftrelativetothebeverageindustry.Wethereforeendedupwitheleven

companiesthatmadeitthroughCuts1through4andintotheresearchstudy.

(Note:Atthetimeofinitialselectionintothestudy,threeofthecompanies

didnotyethaveafullfifteenyearsofcumulativestockdata-CircuitCity,

FannieMae,andWells

Wecontinuedtomonitorthedatauntilthey

hitT+15years,toensurethattheywouldmeetthe"threetimesthemarket

overfifteenyears"standard

ofperformance.Allthreedid,andremainedin

thestudy.)

DIRECTCOMPARISONSELECTIONS

DirectComparisonSelectionProcess

Thepurposeofthedirect

comparisonanalysisistocreateasclosetoa"his-

toricalcontrolledexperiment"aspossible.Theideaissimple:Byfinding

companiesthatwereapproximatelythesameagesandhadsimilaropportuni-

ties,linesofbusiness,andsuccessprofilesaseachofthegood-to-greatcompa-

niesatthetimeoftransition,wewereabletoconductdirectcomparative

analysisinourresearch,lookingforthedistinguishingvariablesthataccount

forthetransitionfromgoodtogreat.Ourobjectivewastofindcompaniesthat

couldhavedonewhatthegood-to-greatcompaniesdid,

butfailedtodoso,

andthenask:"Whatwasdifferent?"Weperformedasystematicandmethod-

icalcollectionandscoringofallobviouscomparisoncandidatesforeach

good-to-greatcompany,usingthefollowingsixcriteria.

BusinessFit:Atthetimeoftransition,thecomparisoncandidatehadsimilar

productsandservicesasthegood-to-greatcompany.

SizeFit:Atthetimeoftransition,thecomparisoncandidatewasthesame

basicsizeasthegood-to-greatcompany.Weappliedaconsistentscoring

matrixbasedupontheratioofthecomparisoncandidaterevenuesdividedby

thegood-to-greatcompanyrevenuesatthetimeoftransition.

AgeFit:Thecomparisoncandidatewasfoundedinthesameeraasthe

good-to-greatcompany.Weappliedaconsistentscoring

matrixbasedupon

acalculatedageratioofthecomparisoncandidatetothegood-to-great

company.

StockChartFit:Thecumulativestockreturnstomarketchartofthecompar-

isoncandidateroughlytracksthepatternofthegood-to-

greatcompanyuntil

thepointoftransition,atwhichpointthetrajectoriesofthetwocompanies

separate,withthegood-to-greatcompanyoutperformingthecomparisoncan-

didatefromthatpointon.

ConservativeTest:Atthe

timeoftransition,thecomparisoncandidatewas

moresuccessfulthanthegood-to-greatcompany-largerandmoreprofitable,

withastrongermarketpositionandbetterreputation.Thisisacriticaltest,

stackingthedeckagainstourgood-to-greatcompanies.

Appendixl.B229

FaceValidity:Thistakesintoaccounttwofactors:(1)Thecomparisoncandi-

dateisinasimilarlineofbusinessatthetimeofselectionintothestudy,and

(2)thecomparisoncandidateislesssuccessfulthanthegood-to-greatcom-

panyatthetimeof

intothestudy.

Thus,facevalidityandconservativetestworktogether:Conservativetest

ensuresthatthecomparisoncompanywasstrongerthanthegood-to-great

companyattheyearofthegood-to-greatcompany'stransition,andweakerthan

thegood-to-greatcompanyatthetimeofselectionintothestudy.

Wescoredeachcomparisoncandidateoneachoftheabovesixcriteriaon

ascaleof1to4:

4=Thecomparisoncandidatefitsthecriteriaextremelywell-there

arenoissuesorqualifiers.

3=Thecomparisoncandidatefitsthecriteriareasonablywell-there

areminorissuesorqualifiersthatkeepitfromgettinga4.

2=Thecomparisoncandidatefitsthecriteriapoorly-therearemajor

issuesandconcerns.

1=Thecomparisoncandidatefailsthecriteria.

Thefollowingtableshowsthecomparisoncandidatesforeachgood-to-

greatcompanywiththeiraveragescoreacrossthesixcriteria.Thecomparison

candidateselectedasthedirectcomparisonappearsatthetopofeachlist.

Upjohn

Richardson-Merrill

G.D.SearleCo

SterlingDrugs

Schering-Plough

Bristol-Meyers

Norwich

Parke-Davis

Pfizer

Warner-Lambert

230

Appendix

Silo

Tandy

BestBuy

Mae

GreatWesternFinancialCorp.

SallieMae

FreddieMac

H.

Co.

HouseholdInternational

ContinentalBancorp

FirstCharter

Warner-Lambert

Avon

Procter

Gamble

Unilever

InternationalFlavors

Fragrances

Revlon

TheCloroxCompany

Colgate-Palmolive

Cheeseborough-Ponds

Alberto-Culver

AmericanSafetyRazor

PurexCorporation

Appendixl.B

ScottPaperCompany*

TheMeadCorporation

CrownZellerbach

St.RegisPaperCompany

InternationalPaper

UnionCampCorporation

TheWestvacoCorporation

"ScottPaperwasselectedduetobeingamoredirectcompetitorasthetransition

unfolded.

Winn-Dixie

AmericanStores

GiantFoods,Inc.

Jewel

Albertson's

FoodFair

GrandUnion

232

Appendix

BethlehemSteelCorporation

3.00

InlandSteelIndustries,

3.00

USX

2.92

NationalSteelCorporation

2.60

FloridaSteel

2.50

NorthwesternSteelandWireCo.

2.40

TheInterlakeCorporation

2.00

Allegheny

1.83

RepublicSteelCorporation

1.75

LykesCorporation

1.60

Wheeling

1.50

"Inlandscoreshigheronlyinthecategoryofagefit.Bethlehemscoreshigherin

conservativefitandfacevalidity;therefore,weselectedBethleheminthetie-

breaker.

.ReynoldsTobacco

AmericanTobacco

LorillardIndustries

Addressograph-Multigraph

Burroughs(nowUnisys)

NCR

IBM

ControlData

Appendixl.B

Eckerd

RevcoD.S.,Inc.

RiteAidCorporation

Wells

BankofAmerica

FirstChicago

Mellon

ContinentalIllinois

BankofBoston

FirstInterstate

FirstPennsylvania

Interfirst

COMPARISONS

Ratioof

Ratioof

CumulativeStock

CumulativeStock

Numberof

Returnsto

Returnsto

Years

Marketduringthe

Marketduringthe

Comparison

ofRise*

YearsofRise

NextTenYearst

Burroughs

10.08

13.76

0.21

Chrysler

5.67

10.54

0.69

Harris

6.42

6.63

0.16

Hasbro

6.33

35.00

0.63

Rubbermaid

10.83

6.97

Teledyne

9.42

17.95

0.22

Median

7.92

12.15

0.26

Unsustained

8.125

15.14

0.37

Average

Good-to-Great

Averageover

theanalogous

period

*Thisisthenumberofyearsfromthemomentofupwardtransitiontothepeak

oftherise,whentheunsustainedcomparisonbeginstodeclineagainrelativeto

themarket.

tWhenevertheratioofreturnstothemarketislessthan1.0,thisindicatesa

declineinvaluerelativetothemarket.Forexample,iftheratiois0.20,thenfor

everydollaryouinvestinthecompany,youfall80percentbelowwhatyou

wouldhaveearnedhadyouinvestedthatsamedollarinthegeneralmarketover

thesametimeperiod.

ThedataforRubbermaidgoes7.17yearsafterthepeak,atwhichpointthe

companyisacquired.

Calculatedas:Foreachgood-to-greatcompany,calculatetheratioofcumu-

lativereturnstothemarketfromitsmomentofupwardtransitionto8.125

years(8.125istheaveragerisecycleoftheunsustainedcompanies),andthen

calculatetheaverageacrosstheelevengood-to-greatcompaniesatT+8.125.

Appendix

(Place$1inmarketandincompanyontransitiondateandtakeoutonT+8.125.)

Foreachgood-to-greatcompany,calculatetheratioofcumulativereturnsto

themarketfromT+8.125toT+18.125,andaverageacrosstheelevengood-

to-greatcompaniesatT+18.125.(Place$1inmarketandincompanyonT+

18.125.)

18.125,

usethelastavailabledatacellintheaverage.ForWells

weusethelast

cellpriortothe

mergerin1998(10130188).

Thefollowingchartshowsaclassicunsustainedcomparisonpattern:

HARRISCORPORATION,ACLASSIC

COMPARISON

RatioofCumulativeStockReturnstoGeneralMarket,

Good-to-Great

Companies

Harris

OVERVIEWOF

RESEARCHSTEPS

Oncethetwenty-eightcompanieshadbeenselected(elevengood-to-great,

elevendirectcomparison,sixunsustainedcomparison),thefollowingsteps

andanalysesweretakenbytheresearchteam.

COMPANYCODIN

GDOCUMENTS

Foreachcompany,amemberoftheteamwouldidentifyandcollectarticles

andpublishedmaterialsonthecompany,including:

1.Allmajorarticlespublishedonthecompanyoveritsentirehistory,from

suchasForbes,Fortune,

BusinessWeek,theWallStreetfour-

Nation'sBusiness,theNewYorkTimes,U.S.News,theNewRepublic,

HarvardBusinessReview,andtheEconomistandfromselectedarticles

fromindustry-ortopic-specificsources.

2.Materialsobtaineddirectlyfromthecompanies,especiallybooks,articles,

speechesbyexecutives,internallyproducedpublications,annualreports,

andothercompanydocuments.

3.Bookswrittenabouttheindustry,thecompany,

itsleaderspub-

lishedeitherbythecompanyorbyoutsideobservers.

4.Businessschoolcasestudiesandindustryanalyses.

5.Businessandindustryreferencematerials,suchastheBiographicalDictio-

naryofAmericanBusinessLeaders,theInternational

DirectoryofCompany

Histories,Hoover'sHandbookofCompanies,DevelopmentofAmerican

Industries,andsimilarsources.

6.Annualreports,proxystatements,analystreports,andanyothermaterials

availableonthecompany,

especiallyduringthetransitionera.

Thenforeachcompany,theresearcherwould

codeallof

theinformationintoa"codingdocument,"organizedaccordingtothefol-

lowingcategories,

proceedingchronologicallyfromthefoundingofthecom-

panytothepresentday:

Appendixl.D237

CodingCategory-OrganizingArrangements:"Hard"itemssuchasorgani-

zationstructure,policiesand

procedures,systems,rewardsandincentives,

ownershipstructure.

CodingCategory2-SocialFactors:"Soft"itemssuchasthecompany'scul-

turalpractices,peoplepoliciesandpractices,norms,rituals,mythologyand

stories,groupdynamics,

managementstyle,andrelateditems.

CodingCategory3-BusinessStrategy,StrategicProcess:Primaryelementsof

thecompany'sstrategy.Processofsettingstrategy.Includessignificantmerg-

ersandacquisitions.

CodingCategory4-Markets,

Competitors,andEnvironment:Significant

aspectsofthecompany'scompetitiveandexternalenvironment-primary

competitors,significantcompetitoractivities,majormarketshifts,dramatic

nationalorinternationalevents,governmentregulations,industry

structural

issues,dramatictechnologychanges,andrelateditems.Includesdataabout

thecompany'srelationshiptoWallStreet.

CodingCategory5-Leadership:Leadershipofthefirm-keyexecutives,

presidents,boardmembers.

Interestingdataonleadershipsuccession,

leadershipstyle,andsoon.

ICodingCategory6-ProductsandServices:Significantproductsandservices

inthe

CodingCategory

SettingandLocation:Significantaspectsofthe

waythecompanyhandledphysicalspace-plantandofficelayout,newfacil-

ities,etc.Includesanysignificantdecisionsregardingthegeographiclocation

of

partsofthecompany.

CodingCategory8-

UseofTechnology:Howthecompanyusedtechnology:

informationtechnology,state-of-the-artprocessesandequipment,advanced

jobconfigurations,andrelateditems.

CodingCategory9-Vision:CoreValues,Purpose,and

Werethesevari-

ablespresent?Ifyes,howdidtheycomeintobeing?Didtheorganizationhave

thematcertainpointsinitshistoryandnotothers?Whatroledidtheyplay?Ifit

I

I

hadstrongvaluesandpurpose,didtheyremainintactorbecomediluted?

CodingCategory

DirectComparisonsOnly)

ActivitiesduringTransitionEraofCorrespondingGood-to-GreatCompany:

Majorattemptstochangethecompany,tostimulateatransition,duringthe

tenyearspriorandtenyearsafterthetransitiondateinthecorresponding

good-to-greatcompany.

238

Appendix

CodingCategory

(forUnsustainedComparisonsOnly)-AttemptedTran-

sitionEra:Forthetenyearsleadinguptoandthenduringthe"attempted

transitionera,"major

initiativesandsupportingactivities

undertakenbythecompany.

CodingCategory

(forUnsustainedComparisonsOnly)-Posttransition

Decline:Forthetenyears

followingtheattemptedtransitionera,majorfactors

thatseemtohavecontributedtothecompanynotsustainingitstransition.

FINANCIALSPREADSHEETANALYSIS

Weconductedextensivefinancialanalysisforeachcompany,examiningall

financialvariablesfor980combinedyearsofdata(35yearsonaverageper

companyfor28companies).Thiscomprisedgatheringrawincomeandbal-

ancesheetdataandexaminingthefollowingvariablesinboththepre-and

posttransitiondecades:

Totalsalesinnominalandreal(inflation-adjusted)dollars

Salesgrowth

Profitgrowth

Profitmargin

Returnonsales

Salesperemployeeinnominalandrealdollars

Profitper

innominalandrealdollars

(property,plant,andequipment)

Dividendpayoutratio

Selling,general,andadministrativeexpensesasapercentofsales

Researchanddevelopmentas

apercentofsales

Collectionperiodindays

Inventoryturnoverratio

Returnonequity

Ratioofdebttoequity

Ratiooflong-termdebttoequity

Interestexpenseasapercent

ofsales

Highstockpricetoearningspershare

Lowstockpricetoearningspershare

Averagestockpricetoearningspershare

Appendixl.D

EXECUTIVEINTERVIEWS

Weconductedinterviewsofseniormanagementandmembersoftheboard,

focusingonpeoplewhowereinofficeduringthetransitionera.Wetran-

scribedallinterviewsand

synthesizedthedataintocontentanalysisfindings.

COMPANYANDNUMBEROFINTERVIEWSCONDUCTED

Abbott

CircuitCity

FannieMae

Gillette

Kimberly-Clark

Kroger

Nucor

PhilipMorris

PitneyBowes

Walgreens

Wells

Total

2

InterviewQuestions

Couldyoubrieflygiveanoverviewofyourrelationshiptothecompany-years

involvedandprimaryresponsibilitiesheld?

Whatdoyouseeasthetop

fivefactorsthatcontributedtoorcausedtheupward

shiftin

duringtheyears[tenyearsbeforetransition]to[tenyears

aftertransition]?

Nowlet's

toeachofthose

factors,andI'dlikeyoutoallocateatotal

of100pointstothosefactors,accordingtotheiroverallimportancetothetran-

sition(totalacrossallfivefactorsequals100points).

Couldyoupleaseelaborateonthe[toptwoorthree]factors?Canyougiveme

specificexamplesthatillustratethefactor?

Appendixl.D

Didthecompanymakeaconsciousdecisiontoinitiateamajorchangeortran-

sitionduringthistime

[Ifaconsciousdecision:]Tothebestofyourrecollection,whendidthecompany

begintomakethekeydecisionsthatledtothetransition(whatyear,approxi-

mately)?

[Ifaconsciousdecision:]Whatsparkedthedecisiontoundertakeamajortran-

sition?

Whatwastheprocessbywhichthecompanymadekeydecisionsanddeveloped

keystrategiesduringthetransitionera-notwhatdecisionsthecompanymade,

buthowdiditgoaboutmakingthem?

Whatwastherole,ifany,ofoutsideconsultantsandadvisorsinmakingthekey

decisions?

Onascaleof1to10,whatconfidencedidyouhaveinthedecisionsatthetime

theyweremade,beforeyouknewtheiroutcome?(Tenmeansyouhadgreatcon-

fidencethattheywereverygooddecisionswithhighprobabilityofsuccess.One

meansyouhadlittleconfidenceinthedecisions;theyseemedrisky-arollof

thedice.)

[Ifhadconfidenceof6orgreater:]Whatgaveyousuchconfidenceinthedeci-

sions?

Howdidthecompanygetcommitmentandalignment

withitsdecisions?

Canyouciteaspecificexampleofhowthistookplace?

Whatdidyoutryduringthetransitionthatdidn'twork?

Howdidthecompanymanagetheshort-termpressuresofWallStreetwhile

,makinglong-termchangesandinvestmentsforthefuture?

Manycompaniesundertakechangeprogramsandinitiatives,yettheireffortsdo

notproducelastingresults.Oneoftheremarkableaspectsof[good-to-great

company's]transitionisthat

ithasendured-itwasnotjustashort-term

upswing.Wefindthisextraordinary.Whatmakes[good-to-greatcompany]dif-

ferent?Whatweretheprimaryfactorsintheenduranceofthetransitionfar

beyondthefirstfewyears?

Wewillbecomparing[good-to-greatcompany]to[comparisoncompany],which

wasinyourindustryatthetimeofyourtransitionbut-unlike[good-to-great

company]-didnotshowasignificantandlastingshiftin

What

Appendixl.D241

wasdifferentabout[good-to-greatcompany]thatenabledittomakethistransi-

tion?Othercompaniescouldhavedonewhatyoudid,butdidn't;whatdidyou

havethattheydidn't?

Canyouthinkofoneparticularlypowerfulexampleorvignettefromyourexpe-

rienceorobservationthat,toyou,exemplifiestheessenceoftheshift

good

togreatat[good-to-great

company]?

Whoelsewouldyoustronglyrecommendthatweinterview?

Insidemanagementduringandafterthetransition.

Externalboardmembersorotherkeyoutsidepeople.

Arethereanyquestionswedidn'task,butshouldhave?

SPECIALANALYSISUNITS

Weundertookaseriesofspecialanalysisunits.Theseunitsweredesignedto

shedlightonthequestionofgoodtogreatbysystematiccomparisonand

(wherepossible)quantificationof

variablesbetweenthegood-to-great

companiesandthecomparisoncompanies.

AcquisitionsandDivestitures

Thisanalysisunitsoughttounderstandtheroleofacquisitionsanddivest-

mentsinthetransitionfrom

goodtogreat.

1.Whatisthequantitativedifferenceinacquisitionsanddivestments,ifany,

betweenthepretransitionandposttransitionerasforthegood-to-great

companies?

2.Howdothegood-to-greatcompaniesdifferin

acquisitionsanddivestments

fromthe

comparisons?

3.Howdothegood-to-greatcompaniesdifferinacquisitionsanddivestments

fromtheunsustainedcomparisons?

Todothisanalysis,we

createdadatabaseforeachcompany,yearbyyear:

1.Listofacquisitionsmadeduringtheyearandtheirfinancialattributes.

2.Totalnumberofacquisitionsmadeduringtheyear.

Appendix

3.Totalcombinedsizeofall

acquisitionsmadeduringtheyear.

4.Listofdivestmentsmadeduringtheyearandtheirfinancialattributes.

5.Totalnumberofdivestmentsmadeduringtheyear.

6.Totalcombinedsizeofalldivestmentsmadeduringtheyear.

Usingthisdata,wedideightmajoranalyses:

1.Good-to-greatcompanies:pre-andposttransition.

2.Good-to-greatcompaniesversuscomparisoncompanies:pre-and

3.Unsustainedtransitioncompanies:pre-andposttransitiondecades.

4.Summarypre-andpostdecadeanalysis:good-to-greatcompaniesversus

directcomparisonsversusunsustainedcomparisons.

5.Good-to-greatcompanies:transitiondatetopresent.

6.Good-to-greatcompaniesversuscomparisoncompanies:transitiondateto

1998.

7.Unsustainedcomparisons:transitiondateto1998.Dothesameanalysisas

forthegood-to-greatcompaniesfromtransitiondateto1998.

8.Summary,transitiondateto1998:good-to-greatcompaniesversusdirect

comparisonsversusunsustainedcomparisons.

Inaddition,thisanalysislookedatthequalitativeaspectsofacquisitions

anddivestitures,examiningquestionssuchas:

1.Overallstrategyofacquisitions.

2.Overallstrategyof

integratingacquisitions.

3.Theultimatesuccessofeachmajoracquisition.

4.Ultimatesuccessoftheoverallacquisitionstrategy.

IndustryPerformanceAnalysis

Inthisanalysis,welookedattheperformanceofthecompaniesversusthe

performanceoftheindustries.Thepurposeoftheanalysiswastodetermine

whetherthecompanieswerein

attractiveindustriesatthetimeofthe

transition.Wecreatedspreadsheetsthatquantifiedeachindustryversusthe

company,todeterminetherelationshipbetweenthetwo.

Wecomparedeachgood-to-greatcompany'sindustryrelativetoallother

industriesthatappearedintheStandard6Poor'sAnalyst'sHandbookfora

periodfromthetransitionyearto1995.Weusedthefollowingprocedure:

Appendix

243

1.Foreachgood-to-greatcompany,determineallindustriesthatarelistedin

the

Handbookfromtheyearoftransitionto1995.

2.Foreachofthese

industries,usethetotalreturnsfromthetransitionyearof

thecorrespondingcompanyto1995todeterminethepercentagechange

intotalreturnsforaperiodfromthetransitionyearto1995.

3.Ranktheindustriesaccordingtotheirpercentage

returnsoverthis

period.

'ExecutiveChurnAnalysis

Thisanalysisunitlookedattheextenttowhichtheexecutiveteamschanged

inthecompaniesduringcrucialpointsintheirhistory.

UsingMoody'sCompany

Reports,wecalculatedchurninthe

good-to-greatcompaniesversuscomparisoncompanies:

Averagepercentofdeparturesoverpretransitiondecade.

Averagepercentof

departuresoverposttransitiondecade.

Averagepercentofadditionsoverpretransitiondecade.

Averagepercentofadditionsoverposttransitiondecade.

Averagetotalchurnpercentageoverpretransitiondecade.

Averagetotalchurn

percentageoverposttransitiondecade.

Sameanalysesrepeatedoutto1998.

Objectives:

1.Whatisthequantitativedifferenceinexecutivechurn

continuity,if

any,betweenthe

pretransitionandposttransitionerasforthegood-to-great

companies?

2.Howdothegood-to-greatcompaniesdifferinexecutivechurn

con-

tinuityfromthedirectcomparisons?

3.Howdothegood-to-greatcompaniesdifferinexecutivechurn

con-

tinuityfromtheunsustainedcomparisons?

CEOAnalysis:

Weexaminedatotaloffifty-six

ForeachsetofCEOsduringthetran-

sitionerainallthreesetsofcompanies(good-to-great,directcomparison,and

unsustainedcomparison),wedidaqualitativeexaminationof:

Appendix

1.Management

2.Executivepersona.

3.Personallife.

4.What

sawastheirtopfiveprioritiesasCEO.

Also,foreachgood-to-great

company,directcomparison,andunsustained

comparison,weexaminedtheCEObackgroundandtenure.Beginningwith

inplacetenyearspriortothetransitionyearthrough1997,wedeter-

mined:

1.WhethertheCEOwas

broughtinfromtheoutsidedirectlyintotheroleof

CEO

hiredasCEO).

2.Numberofyearsofemploymentwiththecompanypriortobecoming

CEO.

3.Ageatthetimeof

becomingCEO.

4.StartyearandendyearoftenureinCEOrole.

5.NumberofyearsCEOpositionwasheld.

6.ResponsibilityheldimmediatelypriortobecomingCEO.

7.FactorsinselectionofthatpersonasCEO(whypicked

asCEO).

8.Education(especiallystudy

law,business-anddegreesheld).

9.Workexperienceandotherexperiences

military)priortojoiningthe

company.

ExecutiveCompensation

Thisunitexaminedexecutivecompensationacrossthecompaniesinour

study.Forthetwenty-eightcompaniesinthestudy,fromtenyearsbeforethe

transitionpointto1998,wecollecteddataandperformedawidevarietyof

analyses.

1.Totalofallofficers'anddirectors'salary+bonusasapercentofnetworth

attransitionyear.

2.CEO'stotalcashcompensationasapercentofnetworthattransitionyear.

3.CEO'ssalary+bonusasapercentofnetworthat

transitionyear.

4.DifferencebetweenCEO'ssalary+bonusandaverageoftopfourexecu-

tives'salary+bonusasapercentofnetworthattransitionyearandat

transitionyear+10years.

Appendix

245

5.Averageofallofficers'anddirectors'salary+bonusasapercentofnet

worthattransitionyear.

6.Totalofallofficers'anddirectors'salary+bonusattransitionyear.

7.Totalofallofficers'anddirectors'salary+bonusasapercentofsalesat

transitionyear.

8.Totalofallofficers'anddirectors'salary+bonusasapercentofassetsat

transitionyear.

9.Topfourexecutives'totalcashcompensationasa

percentofnetworthat

transitionyear.

10.Topfourexecutives'salary+bonusasapercentofnetworthattransition

year.

11.Averageofallofficers'anddirectors'

+bonusattransitionyear.

12.CEO'ssalary+bonusasapercentofnetincome.

13.DifferencebetweenCEO'sandaverageoftopfourexecutives'salary+

bonus.

14.DifferencebetweenCEO'sandaverageoftopfourexecutives'salary+

bonusasapercentofsales.

15.DifferencebetweenCEO'sandaverageoftopfourexecutives'salary+

bonusasapercentofnetincome.

16.Averageofallofficers'anddirectors'salary+bonusasapercentofsalesat

transitionyear.

17.Averageofallofficers'

anddirectors'salary+bonusasapercentofnet

incomeattransitionyear.

18.Totalofallofficers'anddirectors'salary+bonusasapercentofnet

incomeattransitionyear.

19.CEO'stotalcashcompensationasapercentofnetincomeattransition

year.

20.ValueofstocksgrantedperyeartoCEOasapercentofnetworthattran-

sitionyear.

21.Valueofstocksgrantedperyeartotopfourexecutivesasapercentofsales

attransitionyear.

22.Valueofstocksgrantedperyeartotopfourexecutivesasapercentof

assetsattransitionyear.

23.Valueofstocksgrantedperyeartotopfourexecutivesasapercentofnet

worthattransitionyear.

246

Appendix

24.CEOsalary+bonusasapercentofsalesattransition+10years.

25.Topfourexecutives'salary+bonusasapercentofsalesattransitionyear

+10years.

Objectives:

1.Whatisthequantitativedifferenceinexecutive

compensation,ifany,

betweenthepretransitionandposttransitionerasforthegood-to-great

companies?

2.Howdothegood-to-greatcompaniesdifferinexecutivecompensation

fromthedirectcomparisons?

3.Howdothegood-to-greatcompaniesdifferinexecutivecompensation

fromtheunsustainedcomparisons?

Inthisunit,wesoughttoexaminethegood-to-greatcompanies,thedirect

comparisons,andtheunsustainedcomparisonsforevidenceoflayoffsasasig-

nificantconscioustacticinanattempttoimprovecompanyperformance.We

examined:

1.Totalemploymentheadcountyear

year,fromtenyearspriortotransi-

tionthrough1998.

2.Evidenceoflayoffsasasignificanttacticinanattempttoimprovecom-

panyperformanceduringthetenyearspriorandtenyearsafterthedateof

transition.

3.Iflayoffsdidoccur,thencalculatethenumberofpeoplelaidoff,nomi-

nallyandasapercentofthetotalworkforce.

CorporateOwnershipAnalysis

Thepointofthisanalysiswastodetermineiftherewereanysignificantdiffer-

encesinthecorporateownershipofthegood-to-greatanddirectcomparisons.

Welookedat:

1.Thepresenceoflarge-blockshareholdersandgroups.

2.Theextentofboardownership.

3.Theextentofexecutiveownership.

Appendix

247

MediaHypeAnalysis

Thisunitlookedatthedegreeof"mediahype7'surroundingthegood-to-great

companies,directcomparisons,andunsustainedcomparisons.Fortheperiod

tenyearsbeforetotenyearsafterthetransitiondateforeachofthecompa-

nies,welookedat:

1.Totalnumberofarticlesinthepre-andposttransitiondecadesandforthe

twodecadescombined.

2.Totalnumberof"feature"articlesonthecompanyinthepre-andpost-

transitiondecadesandforthetwodecadescombined.

3.Totalnumberoftheabovearticlesthatexplicitlytalkabouta"transition,"

"rebound,""turnaround,"

"transformation,"underwayatthecompanyin

thepre-andposttransitiondecadesandforthetwodecadescombined.

4.Totalnumberof"highlypositive"articles,totalnumberof"neutral"arti-

cles(fromslightlynegativetoslightlypositive),andtotalnumberof

"highlynegative"articlesinthepre-andposttransitiondecadesandforthe

twodecadescombined.

TechnologyAnalysis

Thisunitexaminedtheroleoftechnology,drawinglargelyuponexecutive

interviewsandwrittensource

materials:

1.Pioneeringapplicationsoftechnology.

2.Timingoftechnology.

3.Criteriaforselectionanduseofspecifictechnologies.

4.Roleoftechnologyindeclineofcomparisoncompanies.

COMPARATIVEANALYSESFRAMEWORKS

Finally,inadditiontotheabove,weperformedanumberofcomparative

analysesframeworksaswemovedthroughtheproject.Thesewereless

detailedanalysesthanthoseabove,althoughtheyalldid

derivedirectlyfrom

theresearchevidence.Theyincluded:

Theuseofboldcorporatemoves

Evolutionaryversusrevolutionarycorporateprocess

Executiveclassversusegalitarianism

Causesofdeclineinonce-greatcomparisoncompanies

Three-circleanalysisandfitwithcorevaluesandpurpose

248

Appendix

Lengthofbuildupperiodbeforebreakthrough

TimingofHedgehogConceptwithbreakthroughdate

CorebusinessversusHedgehogConceptanalysis

Successionanalysisandsuccessratesofsuccessors

Roleofleadershipinthedeclineofonce-greatcomparisoncompanies

4

VERSUSOUTSIDECEOANALYSIS

ThefollowingtablesshowthetotalnumberofinsideversusoutsideCEOs

withineachcompany.Foreachgood-to-greatcompany,weexaminedallthe

CEOsfromtenyearspriorto

thetransitiondateto1998.Forthedirect

comparisoncompany,wedidthesameanalysis,usingthecorresponding

good-to-greatcompany'stransitiondate.Foreachunsustainedcomparison

company,weexaminedtheperiodfromtenyearspriortoitsattemptedtransi-

tiondateto1998.WecountedanyCEOwhohadbeenwiththecompanyfor

oneyearorlessasanoutsider.

Good-to-Great

Numberof

Numberof

Percentof

Companies

CEOs

Outsiders

Outsiders

Abbott

0%

CircuitCity

0%

FannieMae

50%

Gillette

0%

Kimberly-Clark

0%

Kroger

0%

Nucor

0%

PhilipMorris

0%

PitneyBowes

0%

Walgreens

0%

Wells

0%

Total

42

250

Appendix2.A

DirectComparison

Numberof

Numberof

Percentof

Companies

Outsiders

Outsiders

Upjohn

6

2

33%

Silo

6

4

67%

GreatWestern

3

0

0%

Warner-Lambert

5

1

20%

ScottPaper

5

1

20%

7

2

29%

BethlehemSteel

6

0

0%

R.J.Reynolds

9

3

33%

Addressograph

10

7

70%

Eckerd

3

0

0%

BankofAmerica

5

0

0%

Total

65

20

30.77%

Unsustained

Comparison

Numberof

Numberof

Percentof

Companies

CEOs

Outsiders

Outsiders

Burroughs

2

33%

Chrysler

3

75%

Harris

0

0%

Hasbro

0

0%

Rubbermaid

1

25%

Teledyne

0

0%

Total

25

TotalComparisonSet

90

Appendix2.A251

SUMMARYANALYSIS

Ratioof

TotalNumberTotalNumberPercentof

Comparisonto

of

ofOutsiders

Outsiders

Good-to-Great

Good-to-Great

42

2

4.76%

Companies

Direct

65

20

30.77%

6.46

Comparison

Companies

Unsustained

25

6

24.00%

5.04

Comparison

Companies

Total

90

26

28.89%

6.07

Comparison

Set

Numberof

Percentof

Companies

CompaniesRatioof

Numberof

ThatHiredanThatHired

Comparisonto

Companies

OutsideCEO

OutsideCEOGood-to-Great

Good-to-Great

11

1

9.09%

Companies

Direct

11

Comparison

Companies

Unsustained

6

Comparison

Companies

Total

17

Comparison

Set

INDUSTRYANALYSIS

Wecomparedeachgood-to-greatcompany'sindustryrelativetoallother

industriesthatappearedintheStandard6Poor'sAnalyst'sHandbookfora

periodfromthetransitionyearto1995.Weusedthefollowingprocedure:

1.Foreachgood-to-greatcompany,determineallindustriesthatarelistedin

the

Handbookfromtheyearoftransitionto1995.

2.Foreachofthese

industries,usethetotalreturnsfromthetransitionyearof

thecorrespondingcompanyto1995,todeterminethepercentagechange

intotalreturnsforaperiodfromthetransitionyearto1995.

3.Ranktheindustriesaccordingtotheirpercentage

returnsoverthisperiod.

Thefollowingtableshowsthatacompanydoesnotneedtobeina

performingindustrytoproduceatransitiontogreatresults.

INDUSTRYPERFORMANCEFROMTRANSITIONYEARTO1995,

TOEACHCOMPANY-

Numberof

IndustryThat

Rank

Yearsof

Industries

RestReflects

ofThat

Percentile

Company

Calculation

Ranked

Company

Industry

ofIndustry

Abbott

1974-1995

70

Medical

28

40%

products

CircuitCity

1982-1995

80

Retail

17

21%

specialty

FannieMae

1984-1995

90

69

77%

1980-1995

76

Cosmetics

19

25%

Kimberly-Clark

1972-1995

64

Household

18

28%

products

Kroger

1973-1995

66

Retail

12

19%

foodchain

Nucor

1975-1995

71

Steel

70

99%

Appendix5.A

Numberof

IndustryThat

Rank

Yearsof

Industries

BestReflects

ofThat

Percentile

Company

Calculation

Ranked

Company

Industry

ofIndustry

PhilipMorris

1972-1995'

57

Tobacco

2

4%

Bowes

1974-1995

70

Computer

68

97%

systems

Walgreens

1975-1995

71

Retail

13

drugstore

Wells

1983-1995

84

Major

64

76%

regional

banks

savingsandloanindustry

wasdeemedthebestproxyforFannieMae.

Morrisdatesfrom1972because

dataisnotavailablebeforethatdate.

LOOPBEHAVIORINTHECOMPARISONCOMPANIES

DIRECTCOMPARISONS

vacillated,shiftingfromonestrategytoanother,alwayslookingforasin-

glestroketoquicklysolveits

problems.Heldpeprallies,launchedprograms,

grabbedfads,firedCEOs,hiredCEOs,and

themyetagain.Article

headlinesfor

duringtheyearsofdeclineread,"HeraldingtheTrumpet

ofChange,""Awakeningthe

Giant,""Renewing

and"GreatExpecta-

tions."Theexpectationswereneverrealized.'

Addressograph

WentintoaChickenLittle"TheSkyIsFalling"panicaboutthedeclineofits

corebusiness.Trieda

quixotic"totalcorporaterejuvenation,"throwingitself

intotheofficeautomationfieldagainstIBM,Xerox,andKodak.Whenthis

failed,thenextCEOengineereda"strategicflip-flop"awayfromoffice

automation.Then,"likeabrainsurgeonvanishingfromtheoperatingroom

inthemiddleofanoperation,"thatCEOresignedafterlessthanayear.The

nextCEOdoesanother"180-degreeturn"andbuyshiswayintooffsetprint-

ing.Itfails;thecompanytakesawrite-off.FourCEOsinsixyears,leadingup

to1984.Later,notone,but

twobankruptcies2

BankofAmerica

Wentintoareactionaryrevolutionmodeinresponsetoderegulation.Fell

behindin

andtechnology,thenthrewitselfintoanexpensive

wupprogram.Fellbehindin

thenlauncheda

programto

catch-up.Triedto"pulloffitsownversionofMao'sCulturalRevolution"by

hiringcorporatechangeconsultantswholed"corporateencountergroups"

andtriedtoinstitutea"rah-rahapproachto

management."Lurchedafter

CharlesSchwab;cultureclasherupted,andlatersolditback.Lurchedafter

SecurityPacific,tryingtoemulateWells

merger;acquisition

failed,creatingamultibillion-dollarwrite-off.?

Appendix8.A

BethlehemSteel

Vacillatedbackandforth:diversification,thenfocusonsteel,thenbackto

diversification,thenbacktosteel.Fellbehindintechnologyandmoderniza-

tion,thenlaunchedacrashprogramtocatchup.Managementreactedtothe

unions,thenunionsreactedtomanagement,thenmanagementreactedto

unions,thenunionsreactedtomanagement,andsoon.Meanwhile,foreign

competitorsandNucorsnuckinfrombelowtodevour

market

Eckerd

Fellintodoomloopbymakingunrelatedacquisitions,insearchofgrowth,

butwithoutanyguidingHedgehogConcept.Boughtacandycompany,a

chainofdepartmentstores,a

securityservice,andafood-servicesupplier.In

thebiggestdisaster,itboughtAmericanHomeVideo;lost$31million,then

solditofftoTandyat$72millionbelowbookvalue.Eckerdneverfullyrecov-

ered,gotboughtinaleveragedbuyout,andlatersoldouttoJ.C.

GreatWesternFinancial

Inconsistencyofprogram.Wouldzigoneway(tryingtolookmorelikea

bank),thenzaganotherway(tryingtobecomeadiversifiedfirm).Intoinsur-

ance,thenlateroutofinsurance.Intoleasingandmanufacturedhousing,

thenbacktofocusonfinanceandbanking."Don'tworryaboutwhatyoucall

us-abank,anS&LoraZebra."Heldtogetherbythepersonalvisionofthe

CEO,butwhenheretired,GreatWesternstumbledunderitsunwieldy,inco-

herentmodel,fellintoreactionaryrestructuring,and

soldouttoWashington

R.J.Reynolds

AsRJRbegantoslipandfounditselfundersiegefromantitobaccoforces,it

reactedbythrowingitselfintoill-consideredacquisitions,suchasSea-Land.It

bought

pouredover$2billion

tryingtomakeitwork(all

thewhile,itstobaccofactorieswerefallingapartfromunderinvestment),then

solditatalossfiveyearslater.WitheachnewCEO,itgotanewstrategy.

Later,afterlosingitsnumberonespottoPhilipMorris,

RJRthrewitselfintoa

leveragedbuyout,designedprimarilytoenrichmanagementratherthan

buildthe

ScottPaper

Fellintoreactionarydiversificationasitscorebusinesscameunderattack

fromProcter

GambleandKimberly-Clark.WitheachnewCEO,Scottgot

anewroad,anewdirection,anewvision.Withfanfare,Scottundertookrad-

icalchangeeffortsinthelate

butneveransweredthequestion,What

256

Appendix8.A

canwebethebestintheworldat?Fellintorestructuringmode.Hired

knownas

Al,whocut41percentoftheworkforceinone

fellswoopandthensoldthe

Silo

VacuumleftafterdeathofSidneyCooper.Nextgenerationpursuedgrowth

forgrowth'ssake.Whereas

CircuitCitywouldgointoaregion,buildadis-

tributioncenter,andfilleverysurroundingtownwithastore,Siloirra-

tionallyjumpedfromcitytocity,onestorehere,anotherstorethere,creating

atotallyunsystematichodgepodgeagglomerationofstores,withnoregional

economiesofscale.Didnotstickwithaconsistentconceptorlayout.Silo

acquiredbyCyclops,thenCyclopsacquiredbyDixons.Managementfired

bynew

Fellintoapatternofsellingthefuture("Thefutureneverlookedbrighter7')

andhypingthepotentialofnewproducts.Butresultsfailedtomatchthe

hype.

stockbecamevolatileandspeculative-upanddown,upand

downagain-asitsoldthesizzle,butneverdeliveredthesteak.Later,likea

gambleratLasVegas,itthrewitschipson"saviorproducts,"suchasRogaine

baldnesscure.Persistentproductproblems,withHalcionandothers,exacer-

batedtheswings.Eventuallysuccumbedtorestructuringdiseaseandmerged

with

Warner-Lambert

Lurchedbackandforth,fromconsumerproductstopharmaceuticalsand

healthcare,thenbackagain,thenbothatthesametime,thenbacktoone,

thenbacktotheother.EachnewCEOhadanewvision,andnewrestructur-

ing,stoppingthemomentumofhispredecessorandstartingtheflywheel

backinanotherdirection.Triedtoignitebreakthroughwithboldacquisi-

tions,butfailedandtookhundredsofmillionsinwrite-offs.Intheend,after

yearsofinconsistentprograms,itlurchedintothe

armsofPfizer,endingits

turbulentexistenceasanindependent

COMPARISONS

Burroughs

Duringitsrise,Burroughs'CEO,"abrilliantbutabusiveman,"ledasweep-

ingtotalreengineering.Cost

cuttingledtomoraleproblems,whichledtolos-

inggoodpeople.Pickedaweaksuccessor.Hefailedandwasreplacedbya

Appendix8.A

257

"brilliant,brash,overlyaggressive"CEOwhosetanewdirection,blaming

thepriorgeneration.Anothermassivereorganization,400executivesleavein

onepurge.Postersadornedthewalls,toutingnewprograms.Thecompany

restructuredagain.GotyetanotherCEOwhotriedyetanotherrestructuring,

anothernewdirection.Moredecline,andthenanother

Chrysler

Fiveyearsofstellarperformance,thendeclinebackintocrisis."Likesomany

patientswithaheartcondition,we'dsurvivedemergencysurgeryseveralyears

beforeonlytoreverttoouroldunhealthylifestyle,"wroteaninsider.Diverted

attentionintoItaliansportscars,corporatejetbusiness,anddefense.Revived

insecondturnaroundin

buteventuallysoldoutto

Harris

RosewithaCEOwhohadaHedgehogConceptinhishead,andwhopro-

ducedaninitialflywheeleffect.Buthedidnotinstillthisconceptintohis

executiveteam.Later,whenheretired,executivesreplacedtheHedgehog

Conceptwithagrowthmantra.Harrislurchedoffintoofficeautomation,

whichprovedtobeadisaster,andthenintoaseriesof

unrelatedacquisi-

tions.Fellintothe"sellthesizzle,butneverdeliverthe

syndrome.The

flywheelcametoa

Hasbro

Hasbroistheonecomparisoncompanythatnearlygotitallright.Itbuilt

spectacularresultsbyconsistentlypursuingtheHedgehogConceptofrevital-

izingclassictoybrands,likeG.I.Joe.Unfortunately,thearchitectoftheini-

tialtransformationdiedunexpectedlyatayoung

successorappeared

tobemoreaLevel3

(competentmanager)thanaLevel5leader.Thefly-

wheelslowed.TheCEOreactedwithrestructuringandeventuallyhiredan

outsidertorebuild

Rubbermaid

Ifthereeverwasacompanythatskippedthebuildupstage,it'sRubbermaid.

ItstransitionCEOlaunched"acompleterestructuringofthecompany,avery

dramaticandtraumaticundertaking."Growthbecamethemantra,growth

evenattheexpenseoflong-termmomentumintheflywheel.WhentheCEO

retired,itbecameclearthathewastheprimaryforcein

theflywheel,nota

strongteamguidedbyasystematicHedgehogConcept.Theflywheelslowed;

thecompanysuccumbedtorestructuringdiseaseandsellingthefuturewith-

outdeliveringresults.RubbermaidfellfromFortune'snumberonemost

admiredtobeingacquiredby

injustfive

258

Appendix8.A

Teledyne

Teledyneroseandfellwiththegeniusofoneman,HenrySingleton,known

astheSphinx.Thecompany's

HedgehogConceptwas,inessence:Follow

Henry'sbrain.Singletonengineeredoverahundredacquisitions,infields

fromelectronicstoexoticmetals.TheproblemsarosewhenHenryretired

andtookhisbrainwithhim.Teledynefellintoadownwardspiral,eventually

mergingwith

,

SUMMARYOFACQUISITIONANALYSIS

GOOD-TO-GREATCOMPANIESVERSUS

COMPANIES*

Overall

TotalNumber

TotalNumber

Success

ofAcquisitions

of

Rateof

duringEra

duringEra

Acquisitions

Company

Studied

Studied

Strategy

Abbott

21

5

+2

25

7

NA

CircuitCity

1

Silo

4

0

FannieMae

0

0

GreatWestern

21

3

Gillette

39

20

Warner-Lambert

32

14

ScottPaper

18

24

-2

Kroger

11

9

Nucor

2

3

BethlehemSteel

10

23

-3

PhilipMorris

55

19

+1

R.J.Reynolds

36

29

-3

PitneyBowes

17

8

+1

Addressograph

19

9

-

3

Walgreens

11

8

Eckerd

22

9

-1

260

Appendix8.B

Overall

TotalNumber

TotalNumber

Success

ofAcquisitions

ofDivestitures

Rateof

duringEra

duringEra

Acquisitions

Company

Studied

Studied

Strategy

Wells

17

BankofAmerica

22

Burroughs

22

Chrysler

14

Harris

42

Hasbro

14

Rubbermaid

20

Teledyne

85

"Toconstructthistable,we

determinedthetotalnumberofacquisitionsconductedby

eachcompanyfromthepretransitiondecadeto1998.Wethenassessedeachacquisi-

tiononascaleof-3to+3,basingour

onbothfinancialandqualitativeanaly-

sis,andcreatedanaveragescorebasedonthesescores.Inthecaseof

we

couldnotobtainenoughresearchdatatoconductathoroughanalysisandthusdidnot

assignascoretothecompany.

CHAPTER1

1.

WestwiththeNight(SanFrancisco:NorthPointPress,

25.

2.Stockreturncalculationsinthisbookweredeterminedusingdatafrom

theUniversityofChicagoCenterforResearchinSecurityPrices(CRSP).

Keydefinitions:

MonthlyTotalReturn:Thetotalreturntoshareholdersin

agiven

month,includingdividendsreinvested,foranindividualsecurity.

CumulativeStockReturn:Thecompoundedvalueof

investedinan

individualsecuritybetweentimestland

usingtheformula:

(1+

MonthlyTotalReturn

ml)(1+MonthlyTotalReturn

m2)...

(1+MonthlyTotalReturn

whereml=endofthefirst

monthfol-

lowingtl,

=endofthesecondmonthfollowingtl,andsoforth.

GeneralStockMarket(alsocalledtheGeneralMarketorjusttheMar-

ket):

value-weightedreturn,which

consistsof

thecombinedmarketvalueofallcompaniestradedontheseexchanges

(includingdividendsreinvested)weightedbythecapitalizationofthe

companydividedbythecapitalizationofthemarket.

CumulativeReturnRatioto

theMarket:Attheendofanygiventime,

thisratioiscalculatedasthecumulativereturnof

investedinthe

companydividedbythecumulativereturnof

investedinthegeneral

stockmarket,wherethe

isinvestedinboththecompanyandthemar-

ketonthesamedate.

TransitionDate(forgood-to-greatcompanies):Theprecisetransition

dateforagood-to-greatcompanyisthedatewhenthecompany's

mance-intermsof

cumulativestockreturnsrelativetothegeneral

stockmarket-turnsupwardafteraperiodofmarkettobelow-market

performance,andneveragainfallsbelowthispoint.

3.UsingUniversityofChicagoCenterforResearchinSecurityPricesdata,

cumulativereturnswerecalculatedfromDecember31,1984,toDecem-

ber31,1999,forGEandthegeneralmarket,alldividendsreinvested,

adjustedforstocksplits.

4.Thechartonpage2wascreatedusingthefollowingmethodology:

Notes

1.Foreachgood-to-greatcompany,invest$1atthetransitiondateminus

15years.Alsoinvest$1inthegeneralmarket.Calculatethecumulative

stockreturnof$1investedatthetransitiondateminus15

yearsthrough

thetransitiondateplus15yearsforthegood-to-greatcompanyandthe

generalmarket.InthecaseofCRSPdatanotbeingavailable(usually

becausethecompanywasnotyetpubliclytraded,merged,orwas

acquired),usemarketreturnsinlieuofcompanyreturns.

2.Foreachgood-to-greatcompany,calculatetheratioofcumulativestock

returnstothegeneralmarketfromt-15tot+15tocreatea"ratioof

cumulativereturns"curve.

3.Shiftthis"ratioof

cumulativereturnscurve"foreachgood-to-great

companysuchthatatthetransitiondate,theratioofcumulativestock

returnstothemarketequalsprecisely1.Thisshiftsthetransitiondates

forallthegood-to-greatcompaniestoacommonreferencepoint-time

t.Dothisbydividingtheratioofcumulativestockreturnstothemarket

ateachmonth(calculatedinstep2)fromt-15tot+15bytheratioof

thecumulativestockreturnnumbercalculatedatpreciselythetransi-

tiondate.

4.Usetheseshiftedreturnstocalculatetheaverageratioofcumulative

stockreturnstothemarketacrossallelevengood-to-greatcompaniesat

eachmontht-15tot+15.Inotherwords,calculatetheaverageofthe

calculationinstep3att-15acrossallelevencompanies,

thent-15

plus1monthforallelevencompanies,plus2months,andsoforth,for

all360months.Thiscreatesthecombined,cumulativereturnsrelative

tothemarketcurveforthegood-to-greatcompanies.

5.Foreachdirectcomparison

company,repeatsteps1-3above,usingthe

samedatesforthedirectcomparisoncompanyasforitscounterpart

good-to-greatcompany.

6.Forthedirectcomparisoncompaniesasaset,repeatstep4above.

7.Thischartshowsthegood-

to-greatcompaniesversusthedirectcompar-

isoncompanies,cumulativereturnsratiotothemarket,t-15tot+15,

withtasacommonreferencepointwheretheratiotothemarketisset

to1.0.

Thechartonpage4was

createdusingthefollowingmethodology:

1.Foreachgood-to-greatcompany,invest$1onDecember31,1964(the

dateofthefirsttransitioninourstudy).

2.Foreachgood-to-greatcompany,calculatecumulativestockreturnsat

themarketrateofreturnthroughthetransition-datemonth,thenswitch

overtousingreturnsfromthegood-to-greatcompany.Foranymissing

CRSPdata(usuallybecausethecompanywasnotyetpubliclytraded,

merged,orwasacquired),usethemarketrateofreturn

inlieuofcom-

panyreturns.

Notes263

3.ForeachmonthfromDecember31,1964,throughDecember31,1999,

addthecumulativereturnsacrossallelevencompaniesanddivideby11.

Thisgivesthecumulativereturnof$1investedintheentireset.

4.Forthegeneralmarket,invest$1onDecember31,

1964,andcarry

throughDecember31,1999.

5.Foreachdirectcomparisoncompanyrepeatsteps1-3,holdingthe

companyatthemarketrateuntilthedateoftransitionforthecorre-

spondinggood-to-greatcompany.Notes:RJRheldat

marketratefrom

May31,1989,toDecember31,1999,asthecompanyemergedfromits

LBOindifferentpieces(RJRandNabisco).

6.Thischartshowsthemarketversusthecomparisoncompaniesversus

thegood-to-greatcompanies,thevalueof$1investedfromDecember

31,1964,toyear2000.

CHAPTER2

1.David

Truman(NewYork:Simon

Schuster,

564.

2.Robert

basedonresearchandamanuscriptbyWilliamW.

Wicks,SharedValues:AHistoryofKimberly-Clark(Connecticut:Green-

wichPublishingGroup,

101.

3."DarwinSmithMayHaveDoneTooGoodaJob,"BusinessWeek,

August1,1988,57;"RaeTakesOnthePaperIndustry'sToughLone

Wolf,"GlobeandMail,July20,1991;"FormerCEOofK-CDies,"Dal-

lasMorningNews,December27,1995,

4.ResearchInterview#5-E,page26.

5.ResearchInterview#5-E,page26.

6."DarwinSmithMayHaveDoneTooGoodaJob,"BusinessWeek,

August1,1988,57.

7."DarwinSmithMayHaveDoneTooGoodaJob,"

BusinessWeek,

.

August1,1988,57;"Kimberly-ClarkBets,WinsonInnovation,"Wall

Street

November22,1991,A5;"DarwinE.Smith,69,Executive

WhoRemadeaPaperCompany,"NewYorkTimes,December28,1995,

B9;Robert

basedonresearchandamanuscriptbyWilliamW.

Wicks,SharedValues:AHistoryofKimberly-Clark(Connecticut:Green-

wichPublishingGroup,

101.

8.Robert

basedonresearchandamanuscriptbyWilliamW.

Wicks,SharedValues:AHistoryofKimberly-Clark(Connecticut:Green-

wichPublishingGroup,

112.

9.InternationalDirectoryofCompanyHistories,vol.3(Chicago:St.James

Press,

40;"Kimberly-Clark-AimingfortheConsumer,"Finan-

cialWorld,April1,1970,15.

10.Robert

basedonresearchanda

manuscriptbyWilliamW.

Wicks,SharedValues:AHistoryofKimberly-Clark(Connecticut:

Notes

PublishingGroup,

106,112;"DarwinE.Smith,69,Execu-

tiveWhoRemadeaPaperCompany,"NewYorkTimes,December28,

1995,B9;"FormerCEOofK-CDies,"DallasMorningNews,December

27,1995,

ResearchInterview#5-E,page6;"PaperTiger:HowKim-

berly-ClarkWrapsItsBottomLineinDisposableHuggies,"WallStreet

Journal,

23,1987,

"TheBattleoftheBottoms,"Forbes,March24,

12."TheBattleoftheBottoms,"Forbes,March24,

13.Robert

basedonresearchandamanuscriptbyWilliamW.

Wicks,SharedValues:AHistoryofKimberly-Clark(Connecticut:Green-

wichPublishingGroup,

10.

14.ShelbyFoote,TheCivilWar:ANarrative:RedRivertoAppomattox(New

York:RandomHouse,

1040;JamesM.

BattleCryof

Freedom:TheCivilWarEra(NewYork:BallantineBooks,

854.

15.GordonMcKibben,CuttingEdge:Gillette'sJourneytoGlobalLeader-

ship(Boston:HarvardBusinessSchoolPress,

14.

16.Company"Chronology,"Gillettecorporatetypescript,1995;Gordon

McKibben,CuttingEdge:Gillette'sJourneytoGlobalLeadership

(Boston:HarvardBusinessSchoolPress,

198,199;Rita

Campbell,ResistingHostile

Takeovers:TheCaseofGillette(Connecti-

cut:PraegerPublishers,

153.

17.GordonMcKibben,CuttingEdge:Gillette'sJourneytoGlobalLeader-

ship(Boston:HarvardBusinessSchoolPress,

159.

18.RitaRicardo-Campbell,ResistingHostileTakeovers:TheCaseofGillette

(Connecticut:PraegerPublishers,1997).

19.AuthorconversationwithGilletteCEO,summer2000."Weinvested

almost$1.5billioninSensor

and

Webelievedthattheseprojects

wouldhavebeenscrappedhadthetakeoverhappened."

20.GordonMcKibben,CuttingEdge:Gillette's

toGlobalLeader-

ship(Boston:Harvard

BusinessSchoolPress,

158.Calculations

runusingCRSPdata.

2GordonMcKibben,CuttingEdge:Gillette'sJourneytoGlobalLeader-

ship(Boston:HarvardBusinessSchoolPress,

254.

22."MaxwellRelinquishesRightsto$5.5MillionFinalRetirementPay-

ment,"PRNewswire,January21,1992;"$5.5MillionDeclined

Official,"WashingtonPost,January22,1992,

23."Iacocca'sLastStand,"Fortune,April20,1992,63.

24."SincereTyranny,"Forbes,January28,1985,54.

25."Managing:LeadersofCorporateChange,"Fortune,December14,

1992,104.

26."ChairmanQuitsPost,"NewYorkTimes,November17,1992,D5;

"Rubbermaid'sSad

SuccessionTale,"NewYorkTimes,July5,1987,

C1.

27."IsRubbermaidReactingTooLate?"NewYorkTimes,December22,

1996,Al.

Notes265

28.ResearchInterview#7-D,page17.

29.ChrisJonesandDuane

"MediaHypeAnalysis7'(unpublished),

GoodtoGreatresearchproject,summers1998,1999.

30."DidCEO

SaveScottPaper-orJust

PrettyItUp?TheShred-

der,"Business

January

1996.

31."DidCEO

SaveScottPaper-orJustPrettyItUp?TheShred-

der,"Business

January15,1996;"ChainSaw

totheRescue?"

Forbes,August26,1996;"AftertheFall,"AcrosstheBoard,April1996,

28-33;"OnlytheParanoidSurvive,"WorthOnline,October1996;Albert

J.

withBobAndelman,MeanBusiness:HowSaveBadCompa-

niesandMakeGoodCompaniesGreat(NewYork:Fireside,

20.

32.AlbertJ.

withBobAndelman,MeanBusiness:HowISaveBad

CompaniesandMakeGoodCompaniesGreat(NewYork:Fireside,

132.

33.ThecaseswhereacharismaticCEOeventuallybecamealiabilityforthe

companywereGreatWestern,Warner-Lambert,ScottPaper,Bethlehem

Steel,R.J.Reynolds,Addressograph-Multigraph,Eckerd,BankofAmer-

ica,Burroughs,Chrysler,Rubbermaid,andTeledyne.

34."President

WallStreet

July28,1982,1;"Iacocca

HandsOvertheKeysto

Chrysler,"Investor'sBusinessDaily,January4,

35."IacoccaHandsOvertheKeystoChrysler,"Investor'sBusinessDaily,

January4,1993,1.

36."HowChryslerFilledDetroit'sBiggestShoes,"WallStreet

Sep-

tember7,1994,

37."WhyCertainStocks,"WallStreet

April13,1995,Al;

"Chrysler'sNewPlan:SellCars,"Fortune,June26,1995,19.

38."WillSuccessSpoilChrysler?"Fortune,January10,1994;"Companyof

theYear:ChryslerHastheHotCars.MoreImportant,ItHasaSmart,Dis-

ciplinedManagementTeam,"Forbes,January13,

82;

BenzWillAcquireChryslerin$36BillionDealThatWillReshape

Industry,"NewYorkTimes,

May7,1998,A6.

39.ResearchInterview#1-A,page3;ResearchInterview#1-G,page35;"A

Drugmaker'sReturntoHealth,"BusinessWeek,April26,1976,38;Her-

manKogan,TheLongWhiteLine:TheStory

Laboratories(New

York:RandomHouse,

249.

40.The

InternationalDirectoryofCompanyHistories,

707;"TheMedicineMenofKalamazoo,"Fortune,July1959,106.

41.LeighWilbanks,"CEO

AnalysisUnit"(unpublished),GoodtoGreat

research

summer1998.

42.UniversityofChicagoCenterforResearchinSecuritiesPricesdata,all

dividendsreinvestedandadjustedforstocksplits.

43.ResearchInterview

pages9-10.

44.HermanKoganandRickKogan,

totheNation(Deerfield,

WalgreensCompany,

236;ResearchInterview

page3.

266

Notes

45.ResearchInterview#2-G,page10.

46.UniversityofChicagoCenterforResearchinSecuritiesPricesdata,all

dividendsreinvestedandadjustedforstocksplits.

47.ResearchInterview#2-G,page16.

48.ResearchInterview#7-H,

page12.

49.ResearchInterview

pages

10.

50.JosephF.

I'maLuckyGuy(JosephF.

1.

51."SearchingforProfitsat

Bethlehem,"NewYorkTimes,December25,

1983,

52."SteelManKenIverson,"Inc.,April1,

53.JeffreyL.Rodengen,TheLegendoftheNucorCorporation(Fort

derdale,Fla.:WriteStuffEnterprises,

71.

54.JosephF.

I'maLuckyGuy(JosephF.

3d,1998).

55.Gordon

CuttingEdge:Gillette'sJourneytoGlobal

(Boston:HarvardBusiness

SchoolPress,

78-79.

CHAPTER3

1.TomWolfe,TheElectricKool-AidAcidTest(NewYork:Bantam,

83.

2.WarrenBuffett,TheEssaysofWarrenBuffett:

LessonsforCorporateAmer-

ica,selected,arranged,andintroducedbyLawrenceA.Cunningham

(LawrenceA.Cunningham,BenjaminN.CardozoSchoolofLaw,

YeshivaUniversity,

97.

3.ResearchInterview

page5.

4.Duane

"IndustryAnalysisUnit"(unpublished),GoodtoGreat

researchproject,summer1998,CRSPfinancialdataanalysis.

5.ResearchInterview

page5;"ABankerEvenKeynesMightLove,"

Forbes,July2,

6.ResearchInterview

pages1-2,5.

7.ResearchInterview

pages15,20.

8.GaryHector,Breakingthe

Bank:TheDeclineof

(Little,

Brown

Company,

145.

9."BigQuarterlyDeficitStuns

WallStreetJournal,July18,

1985,Al.

10.GaryHector,BreakingtheBank:TheDeclineof

(Little,

Brown

Company,

73,143;"BigQuarterlyDeficitStuns

America,"WallStreetJournal,July18,1985,Al;"AutocratTomClausen,"

WallStreetJournal,October17,1986,1;furtherconfirmedinconversa-

tionbetweenJimCollinsandtwoformerBankofAmericaexecutives,

July-August2000.

11."CombatBanking,"WallStreetJournal,October2,1989,Al.

Notes267

12.ResearchInterview#3-I,page7.

13.ResearchInterview#3-I,pages3-14.

14.ResearchInterview#3-I,page7.

15.ResearchInterview#3-I,pages3,15.

16.ResearchInterview#3-A,page13.

17.ResearchInterview#3-D,page6.

18."EckerdAdMessage:TailoredtoFit,"ChainstoreAgeExecutive,May

1988,242;"Heardonthe

Street,"WallStreetJournal,January21,1964,

B25;"JackEckerdResignsasChiefExecutive,"WallStreetJournal,July

24,1974,17;"J.C.PenneyGetsEckerdShares,"WallStreetJournal,

December18,1996,

"J.C.PenneyHasSeenthe

Future,"

PersonalFinanceMagazine,February1,1997,28.

19.ResearchInterview

page16.

20."TuningIn,"Forbes,April13,1981,96;"VideoFollies,"Forbes,Novem-

ber5,

ResearchInterview

page10.

21.

ForbesFourHundred,"Forbes,October17,1994,200.

22.InternationalDirectory

Histories,vol.10(Chicago:St.James

Press,

520.

23.InternationalDirectoryofCompanyHistories,vol.10(Chicago:St.

JamesPress,1995);"MakingBigWaveswithSmallFish,"BusinessWeek,

December30,1967,36.

24."TheSphinxSpeaks,"Forbes,February20,1978,33.

25."TheSingularHenrySingleton,"Forbes,July9,

26.ScottJones,"ExecutiveCompensationAnalysisUnit"(unpublished),

GoodtoGreatresearchproject,summer1999.

27.JimCollins,"SummaryChangesinCompensationAnalysis,Summary

Notes

(unpublished),GoodtoGreatresearchproject,summer1999.

28."NucorGetsLoan,"WallStreetJournal,March3,1972,11;"Nucor's

Big-BuckIncentives,"BusinessWeek,September21,

29."ANewPhilosophy,"Winston-SalemJournal,March21,1993;"Changing

theRulesoftheGame,"PlanningReview,

30."HowNucorCrawfordsvilleWorks,"IronAgeNewSteel,December

31."ANewPhilosophy,"Winston-SalemJournal,March21,1993.

32."NucorGetsLoan,"WallStreetJournal,March3,1972,Bll.

33.ResearchInterview#9-F,page29.

34.JosephF.

3d,I'maLuckyGuy(Joseph

F.

82.

35."BoldBanker:Wells

TakeoverofCrockerIsYieldingProfitbut

SomePain,"WallStreetJournal,August5,1986,Al.

36."BoldBanker:Wells

TakeoverofCrockerIsYieldingProfitbut

SomePain,"WallStreetJournal,August5,1986,Al.

37.ResearchInterview

page10;ResearchInterview

1-A,page29;

ResearchInterview

page11;"BoldBanker:Wells

Takeover

268

Notes

ofCrockerIsYieldingProfitbutSomePain,"WallStreetJournal,August

5,1986,Al.

38."BootCampforBankers,"Forbes,

23,1990,273.

39.ResearchInterview

pages10-1

40.ChrisJonesandDuaneDuffy,"LayoffsAnalysis"(unpublished),Goodto

Greatresearchproject,summers1998and1999.

41."WellsBuysCrockerinBiggestU.S.BankMerger,"AmericanBanker,

February

"Wells

TakeoverofCrockerIsYieldingProfit

butSomePain,"WallStreet

August5,1986,Al;"ACalifornia

BankThatIsAnythingbutLaidBack,"BusinessWeek,April2,

42.ChrisJonesandDuaneDuffy,"LayoffsAnalysis"(unpublished),Goodto

Greatresearchproject,summers1998and1999.

43.ResearchInterview#2-A,pages1,11.

44."IndustryFragmentationSpellsOpportunityforApplianceRetailer,"

InvestmentDealers'Digest,October12,19723.

45."CircuitCity:PayingCloseAttentiontoItsPeople,"ConsumerElectron-

ics,June1988,36.

46.ResearchInterview#2-D,pages

47."DixonsMakes$384MillionU.S.Bid,"Financial

Times,February18,

1987,

"UKElectronicsChainMapsUSStrategy;DixonsMovingto

AcquireSilo,"HFD-theWeeklyHomeFurnishingNewspaper,March2,

1987;"DixonsTightensGriponSilo,"HFD-theWeekly

HomeFurnish-

ingsNewspaper,February3,

48.Eric

"ExecutiveChurnAnalysis"(unpublished),GoodtoGreat

researchproject,summer1999.

49."Gillette:ThePatientHoningofGillette,"Forbes,

February16,1981,

83-87.

50."WhenMarketingTakesOveratR.J.Reynolds,"BusinessWeek,Novem-

ber13,1978,82;"TarWars,"Forbes,November10,1980,190;Bryan

andJohnHelyar,BarbariansattheGate(NewYork:

Collins,

51.

51.ResearchInterview

page7.

52."TheGeorgeWeissmanRoadShow,"Forbes,November10,1980,179.

53.JosephF.

I'maLuckyGuy(JosephF.

120.

54.ResearchInterview#5-B,page8.

55.ResearchInterview#5-A,page7.

56."HowDoTobaccoExecutivesLivewithThemselves?"NewYorkTimes

Magazine,March20,

57.ResearchInterview

page5.

58.Gordon

CuttingEdge:Gillette'sJourneytoGlobalLeader-

ship(Boston:HarvardBusinessSchoolPress,

256.

59.JosephF.

3d,I'maLuckyGuy(Joseph

149.

60.ResearchInterview#5-A,page10.

Notes269

I

CHAPTER4

1.WinstonS.Churchill,TheHingeofFate(Boston:HoughtonMifflin,

61.

2."HermitKingdom,"WallStreetJournal,December12,1958,Al;

WilliamI.Walsh,TheRiseandDeclineoftheGreatAtlanticandPacific

TeaCompany(NewJersey:LyleStuart,Inc.,

74.Walshstatesthat

hadsalesof$3.2billionin1950andwasthelargestprivatelyowned

companyandthelargest

retailorganizationintheworld.Itssalesvolume

exceededthatofU.S.SteelandStandardOilandwassecondonlyto

GeneralMotorsintotalsalesvolumeforcorporationsofanykind.

3."HermitKingdom,"WallStreetlournal,December12,1958,Al.

4."WeShouldHaveMovedaLot

May

5.WilliamI.Walsh,TheRiseandDeclineoftheGreatAtlanticandPacific

TeaCompany(LyleStuart,Inc.,

78-80;Fortune,March1963,

105.

6."WeShouldHaveMovedaLotSooner,"Forbes,May15,1976,99;

Ploy:CuttingPricestoTurnaProfit,"Business

May20,

March

105.

7."Ailing

WallStreet

April21,

8.WilliamI.Walsh,TheRiseandDeclineoftheGreatAtlanticandPacific

TeaCompany(LyleStuart,Inc.,

9.

Ploy:CuttingPricestoTurnaProfit,"BusinessWeek,May20,

1972,76;

'PriceWar'BitesBroadlyandDeeply,"BusinessWeek,

September30,

56;"BankingAgainst

Time,December11,

1972,108;"How

GotCreamed,"Fortune,January1973,103;

CountstheCostofItsPyrrhicVictory,"Business

April28,1973,

117.

10."StumblingGiant,"WallStreet

January10,1978,

11."ShiftingGears:

Price-CuttingDidn'tCreateKroger'sProblems..

Forbes,November1,1972,29;"SuperstoresMaySuitCustomerstoa

T-shirtoraT-bone,"WallStreet

March13,1973,Al;"Plain

andFancy:SupermarketBoutiquesSpurKroger'sGains,"

May

25,1981,37;"250,000UnpaidConsultants,"Forbes,September14,

147.

12.ResearchInterview#6-C,page6.

13."KrogerandFredMeyerMergetoCreateNo.1U.S.GroceryBiz,"Dis-

countStoreNews,May3,1999,1.

14."TroubleStalkstheAislesat

BusinessWeek,September

23,1991,

60.

15."PitneyBowes'Pep,"FinancialWorld,April11,1962,22;"NoMiddle

Ground,"Forbes,January1,

16.Moody'sIndustrialManual2000.

17."RoyAshIsHavingFun

atAddressogrief-Multigrief,"Fortune,February

27,

"HowRoyAshGotBurned,"

April6,

Notes

18."UpfromtheAshes,"Forbes,April16,1979,104;"AMInternational:

TheCashBindThatThreatensaTurnaround,"BusinessWeek,August

1980,118;"AshForcedoutofTwoAMPosts,"New

YorkTimes,Feb-

ruary24,1981,

19."WhyAshWasOustedatAMInternational,"BusinessWeek,March9,

1981,32;"RoyAshResignsunderFire,"Fortune,March23,1981,16;

"HowRoyAshGotBurned,"Fortune,April6,1981,71;

"Upfromthe

Ashes,"Forbes,April16,1979,104;"AMFilesChapter11,"NewYork

Times,April

1982,

20."WhenTechnologyWasNotEnough,"BusinessWeek,January25,

62;"HowRoyAshGotBurned,"Fortune,April6,1981,71;"AMInter-'

national:TheCashBindThatThreatensaTurnaround,"BusinessWeek,

August18,1980,118.

21."WhenTechnologyWasNotEnough,"Business

January25,1982,

62;

BrightestYearsNowDimMemories,"NewYorkTimes,April

15,1982,

22."HowRoyAshGotBurned,"Fortune,April6,1981,71;"High-Tech-

DreamTurnsintoaNightmare,"FinancialTimes,

March2,

17.

23."AMInternational:TheCashBindThatThreatensaTurnaround,"Busi-

nessWeek,August18,1980,118;"TheUnflappableRoy

Forbes,

December8,

24."AMInternational:TheCashBindThatThreatensaTurnaround,"Busi-

nessWeek,August18,1980,118;"AshForcedOutofTwoAMPosts,"

NewYorkTimes,February24,1981,

"WhenTechnologyWasNot

Enough,"Business

January

25.ResearchInterview

page12.

26.ResearchInterview#9-E,page11.

27.ResearchInterview#9-C,page17.

28.ResearchInterview#9-G,page12.

29.ResearchInterview#9-I,page21.

30.ResearchInterview

page20;#9-I,pages21-22;

page11.

31.WinstonS.Churchill,TheGrandAlliance(Boston:Houghton

371.

32.Churchillcreatedthisspecialunitandputalotofweightonit.According

toMartinGilbert,ChurchillfrequentlyconsultedhisStatisticalOffice,

whichwasheadedbyacivilian,ProfessorLindemenn,beforehemade

criticaldecisions.Hedirectlyandcontinuouslyaskedthem

to"check

facts"onsuchimportanttopicsasmunitionsproduction,importsand

shippinglosses,aircraftlosses,andaircraftproduction.MartinGilbert,

TheChurchillWarPapers,vol.2(NewYork:W.W.Norton,

xvii.

33.WinstonS.Churchill,TheGatheringStorm(Boston:HoughtonMifflin,

667.

34.ResearchInterview,#2-C,page16.

Notes271

35."ManofSteel:CorrentiHopestoTakeNucortoNo.1,"Business

Journal-Charlotte,September19,1994,3.

I

36.Standard

Poor'sIndustrySurvey

Database,Metals:Industrial,Ironand

I

Steel,January18,2001,LeoJ.

metalsanalyst.

37.ResearchInterview#7-C,page13.

38.ResearchInterview#7-E,

page7;JeffreyL.

TheLegendof

Nucor(FortLauderdale,Fla.:Write

45.

39.JeffreyL.Rodengen,The

ofNucor(FortLauderdale,Fla.:Write

Stuff,

39.

40.ResearchInterview#7-A,page3.

41.JosephF.

I'maLuckyGuy(JosephF.

3d,

144;RichardKluger,Ashes

toAshes(NewYork:AlfredA.Knopf.

485;"BeverageManagement:Risky-butStraightUp

Forbes,

April

"CokePeppers7UPandPepsi,"Advertising

Feb-

ruary24,

2,86.

42.JosephF.

3d,I'maLuckyGuy(JosephF.

147.

43.JohnStrohmeyer,CrisisinBethlehem(Pittsburgh:UniversityofPitts-

burghPress,

72-73;"TheLaborsofTrautlein,"Forbes,February

15,

36;"Bethlehem'sThinSlabYawn,"AmericanMetalMarket,

November17,1989,4;"BethlehemMuseum,''NationalPublicRadio

transcript,July5,1998.

44.

Safetyof

OralAntidiabeticDrugDoubtedinStudy;

FirmDisputesFinding,"WallStreetJournal,May21,1970,A6;

ABitterPillfor

Shareholders(DrugCompany

InvolvedinAntibioticControversy),"FinancialWorld,January

1974,

28;

The

Company:PresentationbyR.T.Parfet,

ChairmanoftheBoardandChiefExecutiveOfficer,andL.C.Hoff,

VicePresidentandGeneralManager,PharmaceuticalDivision,tothe

SecurityAnalystsofSanFrancisco,September11,1975,"WallStreet

October

"Upjohn:Hair-RaisingHap-

peningsat

(TestingaCurefor

theCompanySquirms

attheUnwelcome

April6,1981,67-69;

FDASays

ExaggeratedClaimson

Drug'sValueinTreatingBald-

ness,"WallStreetJournal,June

1986,A6;

Riptide:Can

ManageItsWayoutofaProductGap?IfNot,ItCouldBeSwept

intotheIndustryMergerWave,"FinancialWorld,September

1989,

26-28;

TheCorporation:Strategies:WillThisFormulaCure

WhatAils

AstheSharksCircle,It's

SpendingBigon

and

Marketing,"Business

September18,

Technol-

ogyandMedicine:

SleepDrugBeingInvestigatedforSafetyby

FDA,"WallStreetJournal,September20,1984,B4;

Medicine:

HalcionTakesAnotherHit:TaintedData

aKeyRoleinFDA

Approval,"Newsweek,February17,1992,58;

Medicine:

272

Notes

ingtheFireoverHalcion:

OwnStaffHasRaisedSafetyCon-

cerns,"Newsweek,May25,

TopoftheNews:Succes-

sions:At

aGrimChangingoftheGuard:LeySmithInheritsthe

Problem-PlaguedDrugmakerataCriticalJuncture,"BusinessWeek,

May3,1993,36.

45.ResearchInterview

page7.

46."No-Longer-So-GreatScott,"Forbes,August1,1972,25.

47."ScottPaperBackonItsFeet,"Forbes,December15,

48."ScottIsn'tLumberingAnymore,"Fortune,September30,

49."ScottPaper:BackontheAttack,"FinancialWorld,August

"APaperTigerGrowsClaws,"BusinessWeek,August23,1969,100-102;

"Outlookfor1970-Year-EndStatement,"PaperTradeJournal,Decem-

ber22,1969,33;"ProfitsPeakforScottPaper,"FinancialWorld,April22,

1970,13,28;"No-Longer-So-GreatScott,"Forbes,

August1,1972,25.

50.ResearchInterview#5-F,page2.

51.ResearchInterview#5-E,page22.

52.ResearchInterview#6-A,page19.

53.AnnKaiserStearns,ComingBack:RebuildingLivesafterCrisisandLoss

(NewYork:Ballantine,

294.Inherwork,

describesthe

findingsofthesestudies,whichwebelieveprovideascientificbasisfor

understandingtheeffectivenessoftheStockdaleParadox.Wewerealso

influencedbytheworkofMihalyCsikszentmihalyi.Inhiscomprehen-

siveinvestigationintothenatureofhappinessinthebookFlow,Mihaly

Csikszentmihalyidiscussesthetransformationalpotentialofapparent

tragedy,usingasanexamplethestudiesofProfessor

Massiminiof

theUniversityofMilan.Inthesestudies,someparaplegicsandother

severelyhandicappedpeopleassertedthattheirpersonaltragedieshad

actuallyresultedinapositiveexperiencethatledthemtolivefullerlives.

(MihalyCsikszentmihalyi,Flow[NewYork:

192-193.)Foranotherviewpointonthissubject,alsoseetheworkofDr.

Siebert,whowroteTheSurvivorPersonality-HowLife'sBestSurvivors

Thrivein

SituationsandConvert

MisfortuneintoGoodLuck.

54.FannieMaegot9.3percentforitsmortgageportfoliobuthadtopay

14.63percentfortheshort-termdebtitissued."DavidMaxwellTakes

OverTroubledFannieMae,"WashingtonPost,May21,1981;"Fannie

MaeSearchesforHigherGround,"Fortune,

13,1981,110.

55."FannieMaeSearchesforHigherGround,"Fortune,July13,1981,110.

56."FannieMaeSearchesforHigherGround,"Fortune,July13,1981,110.

57.ConversationwithDavid

Maxwell,November14,1997.

58.TimBrooksandEarleMarsh,TheCompleteDirectoryofPrimetimeNet-

worksandCable

Shows(NewYork:Ballantine,

929.

59.JimandSybilStockdale,InLoveandWar(Maryland:NavalInstitute

Press,1990);StockdaleTriumphs,videopresentation-

1994Stanford

AlumniAssociation(Stanford,Calif.).

Notes

CHAPTER5

1.PlatoattributedthispithyquotetotheScribesofDelphiinThe

ras,

TheProtagorasand

TranslatedbyW.K.C.

Guthrie(NewYorkandLondon:PenguinClassics,

77.

2.IsaiahBerlin,TheHedgehogandtheFox(Chicago:ElephantPaperbacks,

1993).

3.ConversationwithMarvinBressler,October2000.

4.ResearchInterview

page3.

5.ResearchInterview

page22.

6."ConveniencewithaDifference,"Forbes,June11,1990.

7.WalgreensAnnualReport1998,16.

8."TurningIn,"Forbes,April

13,

9."TandyAgreestoBuyAssetsofEckerdUnit,"WallStreetJournal,July5,

1985,A4.

10.Moody'sIndustrialSubsidiaryList(MergentFIS,2000).

11.LawrenceA.CunninghamandWarrenE.Buffett,The

EssaysofWarren

Buffett:LessonsforCorporateAmerica(CunninghamGroup,Benjamin

N.CardozoSchoolofLaw,YeshivaUniversity

98.

12."WarrenBuffett'sFavoriteBanker,"Forbes,

October18,

13."Wells

TargetsSouthernCalifornia,"AmericanBanker,July10,

1987,1;"Wells

toCutOverseasActivitiestoBoostItsProfit,"Wall

Street

May3,1985,A32;"Wells

TrimsItsSails,"American

Banker,May3,1985,2;"ABankerEvenKeynesMightLove,"Forbes,

July2,

14.

LaunchesProbe,"WallStreet

January28,1985,

A27;"MoreThanMortgagesAils

Fortune,April1,1985,

50;"BigQuarterlyDeficitStuns

WallStreet

July

18,1985,Al;"SamArmacost'sSeaofTroubles,"Banker,September1,

1985,18.

15.ResearchInterview

pages5,13.

16.ResearchInterview

pages5,

17."BootCampforBankers,"Forbes,July23,1990,273.

18."HospitalSuppliersStrikeBack,"NewYorkTimes,March31,1985,C1;

TheAbbottAlmanac:

YearsofCommitmenttoQualityHealthCare

(Elmsford,N.Y.:Benjamin

Company),1987,170,210;"Abbott:Profiting

fromProductsThatCutCosts,"BusinessWeek,June18,1984,56;"In

MedicalTesting,AbbottIstheNameoftheGame,"BusinessWeek,June

1,

19."Riptide:Can

ManageItsWayoutofaProductGap?"Financial

World,September5,1989,26;

TheCorporation:Strategies:

WillThisFormulaCureWhatAils

AstheSharksCircle,It's

SpendingBigon

andMarketing,"BusinessWeek,September18,

Notes

20."Riptide:Can

ManageItsWayoutofaProductGap?"Financial

World,September5,

21.

Mergers:

FinallyMakesIttotheBig

Leagues:How

CEOZabriskieEngineeredthePharmaciaMerger,"BusinessWeek,Sep-

tember4,1995,35.

22.1960and1961AbbottAnnualReports.

23."HasbroMayAlterBidtoAppeaseTonkaHolders,"LondonFinancial

Times,April16,199

"TonkaSaysYestoHasbro,"LondonFinancial

Times,April19,1991,30.

24."Tobacco:ProfitDespiteAttacks,"NewYorkTimes,January25,1979,

25.JamesC.CollinsandJerryI.Porras,BuilttoLast(NewYork:

Collins,

86.

26.Bryan

andJohnHelyar,BarbariansattheGate(NewYork:

1991).

27.ResearchInterview#5-A,page13.

28."AnIconoclastinaCutthroatWorld,"ChiefExecutive,March1996.

29."GilletteHoldsItsEdgebyEndlesslySearchingforaBetterShave,"Wall

Street

December10,1992,Al.

30.ResearchInterview#3-G,page7.

31.Thecomparison

displayedanobsessionwithgrowthwere

BankofAmerica,Addressograph-Multigraph,Eckerd,GreatWestern

Financial,Silo,

Warner-Lambert,Burroughs,Chrysler,Harris,

Rubbermaid,and

32."TheWallStreetTranscript:CorporateCriticsConfidential:Savingsand

LoanIndustry,"WallStreetJournal,June12,

33."HowPlayingItSafeWorkedforGreatWestern,"BusinessWeek,Sep-

tember7,1987,70.

34."TheWallStreetTranscript:RemarksbyJamesF.Montgomerytothe

BostonSecurityAnalystsSociety,October8,1985,"WallStreetTran-

script,December23,1985,80245.

35.InalettertoCarlSeelig,Einsteinwrote,"Betweentheconceptionofthe

ideaofSpecialRelativityandthecompletionofthecorrespondingpubli-

cation,thereelapsedfiveorsixweeks.Butitwouldbehardlycorrectto

considerthisasabirthday,becauseearliertheargumentsandbuilding

blockswerebeingpreparedoveraperiodofyears...Ina

lettertoR.S.

Shanklandin1952,heestimatedhe"hadworkedfortenyears"onthe

specialtheory.RonaldW.Clark,Einstein:TheLifeandTimes(NewYork

andCleveland:TheWorldPublishingCompany,

74-85,120.

CHAPTER6

1.ViktorE.Frankl,Man'sSearchforMeaning(NewYork:Touchstone

Books,

134.

Notes

2.Hoover'sOnline,www.hoovers.com.

3.ResearchInterview#1-E,page11.

4.BernardH.Semler,Putting

ItAllTogether(autobiography,draftversion,

66.

5.BernardH.Semler,"MeasuringOperatingPerformance,"1.Articlesent

totheresearchteamdirectlyfromMr.Semler.

6.ResearchInterview#1-E,

page3.

7."How'Dr.'LedderCuredAbbottLabs:AbbottLabsWasaSickCom-

pany..

Forbes,August1,

26;"AbbottShapesUp,"Chemical

Week,October20,1976,20;

"AbbottLabs:AddingHospitalSuppliesto

BolsterDrugOperations,"BusinessWeek,July23,1979,177;"Earnings

PerShareforFirstNineMonthsof

Newswire,September17,

1980;"RobertA.SchoellhornReportonCompanyat

AnnualSharehold-

ersMeeting,"BusinessWire,April13,1984;"Abbott:ProfitingfromProd-

uctsThat

Costs,"BusinessWeek,June18,1984,56.

8.ResearchInterview#1-G,page23.

9.ResearchInterview

page1.

10.ResearchInterview#2-F,page3.

11."Managing:CarlE.Reichardt,Chairman,Wells

Co.,"Fortune,

February

12.ResearchInterview

l-H,pages

13."BoldBanker:Wells

TakeoverofCrockerIsYieldingProfitbut

SomePain,"WallStreetJournal,August5,1986,Al.

14.ResearchInterview

l-H,pages

16.

15.ResearchInterview

pages

16.ResearchInterview

l-H,page10.

17."Managing:CarlE.Reichardt,Chairman,Wells

Co.,"Fortune,

February27,

"ABankerEvenKeynesMightLove,"Forbes,July

2,1984,40;"BoldBanker:Wells

TakeoverofCrockerIsYielding

ProfitbutSome

WallStreetJournal,August5,1986,Al.

18.GaryHector,BreakingtheBank:TheDeclineof

(Little,

Brown

Company,

72.

19.Authorexperienceintheearly1980s.

20."AssetorLiability?"

October20,1986,13;

ReportsaSmallProfit,"WallStreetJournal,January22,1988,C4.

21."AnotherBoutofAnxietyoverBankofAmerica,"BusinessWeek,August

19,1985,33.

22."ThingsAreAddingUpAgainatBurroughs,"BusinessWeek,March11,

192;"AnatomyofaTurnaround,"Forbes,November1,1968,25;

"HowRay

GrowthTheoryCreated

ToughestCom-

petitor,"Fortune,January

23."ThingsAreAddingUpAgainatBurroughs,"BusinessWeek,March11,

1967,192;"TheBurroughsSyndrome,"BusinessWeek,November12,

24."TheBurroughsSyndrome,"BusinessWeek,

November12,1979,82.

Notes

25."Rubbermaid:TWSTNamesAwardWinnersHomeProducts:TWST

NamesStanleyC.Gault,ChairmanandCEO,RubbermaidInc.,for

GoldAward,HomeProducts,"WallStreet

Transcript,April18,1988,

89116.

26."Rubbermaid:Features:Marketing:TheBillion-DollarDustpan,"Indus-

tryWeek,August1,

"QualityofProducts,"Fortune,January29,

27."Rubbermaid:

Rubbermaid'sImpact:NewStickItemsPlentifulasVen-

dors'SpruceUp'HouseholdCleaningUtensils,"Housewares,January1,

28."Chrysler'sNextGeneration,"BusinessWeek,December19,1988,52.

29.LeeIacoccawithWilliamNovak,

AnAutobiography(NewYork:

Bantam,

161.

30.LeeIacoccawithWilliamNovak,Iacocca:AnAutobiography(NewYork:

Bantam,

162,163,170,199.

31.LeeIacoccawithWilliamNovak,Iacocca:AnAutobiography(NewYork:

Bantam,

196.

32."IacoccaHandsOvertheKeystoChrysler,"Investor'sBusinessDaily,

1993,1.

33."Mea

WallStreet

September17,1990,Al.

34."ChryslertoBuyAircraftMaker,"WallStreet

June20,1985,A12.

35."HowChrysler's$30,000SportsCarGotSideswiped,"BusinessWeek,

January

36."TheGame'sNotOver,"Forbes,April30,

37."IntoaSkid,"TheEconomist,June16,1990,70;"AftertheDeparture,"

Fortune,July2,1990,55;"CanIacoccaFixChryslerAgain?"Fortune,

April8,1991,50.

38.RobertA.Lutz,Guts:TheSevenLawsofBusinessThatMadeChryslerthe

World'sHottestCarCompany(NewYork:JohnWiley

Sons,Inc.,

27.

39."TheStudiedGambleofPitneyBowes,"Dun's

Review,February1967,30.

40."ToughChoice,"Forbes,May15,1965,18.

41."ToughChoice,"Forbes,May15,1965,18.

42."ToughChoice,"Forbes,May15,1965,18.

43."FancyFootwork:Manager'sHandbook,"SalesandMarketingManage-

ment,July

44."PitneyBowes:JumpingAheadbyGoingHighTech,"Fortune,October

19,1992,113;"ChangesinTaxLawandItsEffectsonLeasingEquip-

ment,"Advantage,July1988,28.

45."Old-LineSellingfor

NewSmokesWinsforReynolds,"BusinessWeek,

February20,1960,74;InternationalDirectoryofCompanyHistories

(Chicago:St.JamesPress,

410.

46."VoyageintotheUnknown,"Forbes,December1,1971,30;Bryan

roughandJohnHelyar,BarbariansattheGate(NewYork:

Collins,

51.

Notes277

47."Voyageintothe

Forbes,December1,1971,30;Bryan

roughandJohnHelyar,BarbariansattheGate(NewYork:

Collins,

51.

48."WhenMarketingTakesOveratR.J.Reynolds,"BusinessWeek,Novem-

ber13,1978,82;"VoyageintotheUnknown,"Forbes,December1,

1971,30.RJRpurchased

Industriesin1969and

less

thanayearlater.Thearticlecitedabove("WhenMarketingTakes...

statesthatin1978RJRcommittedafurther$580millionontopofthe

$1.5billiontheyspentin"earlieryears."Thus,overapproximatelyten

theypouredover$2billionintoSea-Land.Netstockholders'

equityin1978was$2,657,900,090accordingtothe1979Moody's

Report.

49.Bryan

andJohnHelyar,BarbariansattheGate(NewYork:

62;"CigaretteConglomerate,"FinancialWorld,

February5,1969,4;"NewFieldsforReynoldsTobacco,"Financial

World,May6,1970,13;"TheTwo-TierMarketStillLives..Forbes,

March1,1974,25;"R.J.ReynoldsStopsaSlidein

MarketShare,"Busi-

ness

January26,

50."VoyageintotheUnknown,"Forbes,December1,1971,36.

51.Ken

PlainTalk(NewYork:JohnWiley

Sons,

54-59.

52."TheNucorStory,"page5(documentobtainedfromtheNucorCorpo-

ration)-chairmanlvicechairmanlpresident,vice

man-

ager,departmentmanager,

supervisorylprofessional,hourlyemployee.

53.RichardPreston,AmericanSteel(NewYork:Avon,

54.JeffreyL.Rodengen,TheLegendofNucorCorporation(Fort

Fla.:WriteStuff,

73-74;"TheNucorStory"

(NucorWeb

Benefits,August22,1997.

55.ResearchInterview#7-G,page4.

56."MaverickRemakesOld-LineSteel:Nucor'sKenIverson..

Week,January21,

57.KenIverson,PlainTalk

(NewYork:JohnWiley

Sons,

14.

58.RichardPreston,AmericanSteel(NewYork:Avon,

5.

59."HotSteelandGoodCommonSense,"

Management

August

60.JohnStrohmeyer,CrisisinBethlehem(Pittsburgh:UniversityofPitts-

burghPress,

34.

61.JohnStrohmeyer,CrisisinBethlehem(Pittsburgh:

UniversityofPitts-

burghPress,

30-35,86.

62.Hoover'sOnline.

63.Hoover'sOnline.

64.JeffreyL.Rodengen,TheLegendofNucorCorporation(FortLauderdale,

Fla.:WriteStuff,

101.

65."ReportofDarwinE.SmithtotheStockholdersandtheMenand

WomenofKimberly-ClarkCorporation,"February

1972.

66.ResearchInterview#5-E,

page10.

278

Notes

67."RaeTakesOnPaper

Industry'sToughLoneWolf,"GlobeandMail,July

20,1991,

CHAPTER7

1."FirstInauguralAddress,March4,1933,"Gorton

andEugene

Ehrlich,TheHarperBook

Quotations(NewYork:Harper

Row,

230.

2.Drugstore.com

reportfiledFebruary28,2000,page28."We

incurrednetlossesof$123.9millionfromtheperiodfrom

inception

throughJanuary2,2000.Webelievethatwewillcontinuetoincuroper-

atingandnetlossesforatleastthenextfouryears(andpossiblylonger)

andthattherateatwhichwewillincursuchlosseswillincreasesignifi-

cantlyfromcurrentlevels.Weintendtoincreaseouroperatingexpenses

substantiallyaswe:Increaseoursalesandmarketingactivities,particu-

larlyadvertisingefforts...

3."There'sNoBusinessLikeNoBusiness,"IndustryStandard,August7,

4."TheReluctantWebster,"Forbes,October18,

5."TheReluctantWebster,"Forbes,October18,

6."Strugglingdrugstore.comCutsStaff:OnlineRetailerFires60Employ-

ees-PercentofWorkforce,"SeattlePost-Intelligencer,October21,

2000.

7.DrugTopics,February3,1997,90;"Fleet-FootedPharmacy,"Uplink

Magazine,apublicationofHughesCommunications,Fall1996.

8."Walgreen-PharmacyChainoftheYear,1990,"DrugTopics,April23,

1990,12.

9."Walgreen-PharmacyChainoftheYear,1990,"DrugTopics,April23,

1990,12.

10."WalgreensSpecialReport:FirstinPharmacy,"DrugStoreNews,Octo-

ber16,1995,27,30.

11.Datatakendirectlyfromannualreportsand

reports,

12."PlainandFancy:SupermarketBoutiquesSpurKroger'sGains,"

May25,1981,37;"There'saLotofLifeLeftintheKrogerRecap,"

BusinessWeek,December

5,1988,164;"HowBorrowingBoughtKroger

MoreThanTime,"BusinessWeek,February26,1990,71.

13."GilletteKnowsShaving-andHowtoTurnOutHotNewProducts,"

Fortune,October14,1996.

14."Gillette:GilletteSensor:ACaseHistory,"corporate

paper,January17,

"Gillette:Howa$4RazorEndsUpCosting$300Million,"Busi-

nessWeek,January29,

15."Gillette:AtGillette,DisposableIsaDirtyWord,"BusinessWeek,May

29,1989,58.

16.ResearchInterview#3-E,page13.

Notes279

17.ResearchInterview#3-E,page13.

18.ResearchInterview

page5.

19.ResearchInterview#3-E,page13.

20.Prominentphysicistsofthetimehadalreadydevelopedsimilartheories,

bolsteredbyremarkablygoodexperimentalevidence,thatweremathe-

maticallyconsistentandequivalenttoEinstein'sexpositionofrelativity

theory.Alltheylackedwastheclearstatementofafundamentalprinciple

tostartthechainofthinkingthatresultedinaclearpictureofrelativity

theoryanditsconsequences.InUnderstandingRelativity,byStanley

(Boston:Birkhauser,

theauthorpointsout,"Therewas

notcompletesatisfactionwiththetheorythatLorentzand

pro-

ducedin1904,althoughthattheorywasformallyidenticaltothetheory

thatEinsteinintroduceda

yearlater"(page324).(Emphasisadded.)

21."WhoMatteredandWhy,"Time,December31,

22.RichardPreston,AmericanSteel(NewYork:Avon,

75.

23.ResearchInterview#7-E,pages2-3.

24."NucorCorporation:CorporateProfile,"WallStreetCorporateReporter,

9-15,1996,19.

25.ClaytonM.Christensen,TheInnovator'sDilemma(Boston:Harvard

BusinessSchoolPress,

88.

26."Daniel

Bricklin,"CIO,December15,1999,140.

27."AsEasyasLotus1-2-3,"Computerworld,August30,1999,71.

28."EverydayNecessities,theBuildingBlocks,"

October26,

1998,9;"IBMandLotusGetCloser,"

July28,1997,

73-80.

29."BiggerIsn'tBetter:TheEvolutionofPortables,"

October26,

ThomasJ.WatsonJr.andPeter

Father,Son

Co.:(NewYork:Ban-

tam,

229.

31.RobertJ.Serling,LegendandLegacy(NewYork:St.Martin'sPress,

126.

32.CentennialReview,InternalWestinghouseDocument,1986.

33."TheRiseofPersonalDigitalAssistants,"Systems,September1992,

70-72;"UsersMournNewton,"Computerworld,March9,

34.KaraSwisher,

(NewYork:RandomHouse,

64.

35.ResearchInterview#9-D,page11.

36.ResearchInterview#5-E,page5.

CHAPTER8

1.Quotedby

Maazel,musicdirector,NewYorkPhilharmonic,

"MaazelIstoLeadPhilharmonic,"NewYorkTimes,January30,2001,

Al.

2."SomePeopleDon'tLiketoHaggle,"Forbes,August27,

280

Notes

3.CarlM.Brauer,"CircuitCityStores:CustomerSatisfaction,Never

Satisfaction"(draft,April

6-1.

4.Totalnumberofarticlesongood-to-great

pretransition

decade=176,posttransitiondecade=423.Totalnumberoffeaturearti-

clesongood-to-great

pretransitiondecade=21,

decade=67.

5.JeffreyL.

TheLegendofNucor(Fort

Fla.:Write

Stuff,

63,70,82.

6.ResearchInterview#5-B,

page5.

7.ResearchInterview#5-C,page2.

8."TheBattleoftheBottoms,"Forbes,March24,1997,98.

9.ResearchInterview

page7.

10.ResearchInterview

page9.

11.ConversationbetweentheauthorandAlanWurtzel.

12.ResearchInterview#3-B,page13.

13.ResearchInterview#4-D,page3.Theintervieweeinthiscasewas

respondingtothequestion,"Didthecompanymakea

consciousdeci-

siontoinitiateamajorchangeortransitionatsomepointduringthat

timeframe?"

14.ResearchInterview#5-A,page7.

15.ResearchInterview#6-A,page12.

16.ResearchInterview#7-A,page3.

17.ResearchInterview

page6.

18.ResearchInterview#9-F,page25.

19.ResearchInterview

page7.

20.ResearchInterview

page6.

,

21.JohnWoodenandJack

TheyCallMeCoach(Chicago:Contem-

porary,

244.

22.ResearchInterview#3-I,page21.

23.ResearchInterview#1-G,page31;ResearchInterview

page14.

24.

The

Company:RemarksbyC.H.

VicePresi-

dentandTreasurer,andL.C.Hoff,VicePresident,beforetheWashing-

tonSocietyofInvestmentAnalysts,"February20,1974,WallStreet

Transcript,March11,1974,36246-36247.

25.ResearchInterview#6-C,

pages16-17.

26.ResearchInterview#7-F,page11.

27.Fortune1000rankings,fromFortune.comWebsite,February9,2001.

28."TurningW-LintoaMarketing

BusinessWeek,March

5,

60;"Warner-Lambert,"WallStreetTranscript,January7,1980,

56636.

29."ChasingafterMerck,"Forbes,November10,1980,36.

30."Warner-Lambert

WallStreetTranscript,December21,

1981,64122.

31."Warner-Lambert,"FinancialWorld,September5,1989,24.

32."OntheMend,"

January2,1995,19.

Notes

33."W-LtoAcquireIMEDatCostof$465Million,"NewYorkTimes,June

8,1982,D4;"W-LPlantoBuyImedCorp.DrawsCoolReaction

Ana-

lystsDuetoCost,Timing,"

Journal,June14,1982,A41;"W-L

toDumpImed,"

Business

December2,1985,1.

34.TheWarner-LambertWebsitenolongerexistsandyouareautomatically

directedtothePfizersite.

Furthermore,thesiteincludesinformationon

howWarner-LambertstockholderscanexchangetheirsharesforPfizer

stock.

35.Peter

Drucker,ManagingfortheFuture(NewYork:TrumanTalley

160.

36."IntheNews,"Fortune,

3,

37."HarrisIsRaisingItsBetontheOfficeoftheFuture,"BusinessWeek,July

18,1983,134.

38."Harris

BoldStrategy,"Forbes,April25,1983,96;"HarrisIsRais-

ingItsBetontheOfficeoftheFuture,"BusinessWeek,July18,1983,134.

39."MeritsofHarrisTietoLanierDebated,"NewYorkTimes,August11,

1983,D5,plusannualfinancialstatementsdrawnfromMoody'sreports.

40."HarrisHeadsintotheOffice,"Computerworld,October12,1983,29.

CHAPTER9

1.MichaelRayandRochelleMyers,CreativityinBusiness(NewYork:

Doubleday

Company,

113.

2.Hoover'sOnlineandStandard

Poor's

Records,January

2001.

3.SamWaltonwithJohnHuey,SamWalton:MadeinAmerica(NewYork:

Doubleday

Company,

35.

4.Sandra

VanceandRoyV.Scott,Wal-Mart:AHistoryofSamWalton's

RetailPhenomenon(NewYork:Twayne,1994)169-

171;BobOrtega,In

SamWeTrust(NewYork:TimesBooks,1998).

5.ResearchdonefortheBuilttoLaststudy;originalsourcescourtesyof

Hewlett-PackardCompanyArchives.

6.ResearchdonefortheBuilttoLaststudy;original

sourcescourtesyof

Hewlett-PackardCompanyArchives.

7.LetterfromBernardM.OlivertoIEEEAwardsBoard,May23,1972,

courtesyofHewlett-PackardCompanyArchives.

8."Packard

AltoDailyNews,March27,

10.

9.AccordingtoAmyChamberlain,oftheDavidandLucilePackardFoun-

dation,theamountwas$5.62billionasofthedatethefundswere

received.

10.JamesC.Collins

JerryI.Porras,BuilttoLast(NewYork:Harper-

Collins,

1.

11.DavidPackard,CommencementSpeech,ColoradoCollege,June1,

1964,courtesyofHewlett-

PackardCompanyArchives.

282

Notes

12.Merck

Company,ManagementGuide,CorporatePolicyStatement,

February3,1989,courtesyofMerck

Company;GeorgeW.Merck,

"AnEssentialPartnership-theChemicalIndustryandMedicine,"

totheDivisionofMedicinalChemistry,American

ChemicalSociety,April22,1935;1991Merck

CompanyAnnual

Report,insidecover;DavidBollierandKirk

Hansen,Merck

Co.

(A-D),BusinessEnterpriseTrustCase,No.90-013,caseD,3.

13.GeorgeW.Merck,SpeechattheMedicalCollegeofVirginiaatRich-

mond,December1,1950,courtesyofMerck&CompanyArchives.

14.RichardSchickel,TheDisneyVersion(NewYork:Simon

Schuster,

310.

15.HaroldMansfield,Vision:ASagaoftheSky

(NewYork:MadisonPub-

lishingAssociates,

167-201.

16.RobertJ.Serling,LegendandLegacy(NewYork:St.Martin'sPress),79.

17.RobertJ.Serling,LegendandLegacy(NewYork:St.Martin'sPress),

20-22,132.

18.Accordingto"HowBoeingBettheCompanyandWon,"inAudacity,

winter1993,52,andRobertJ.Serling,theprojectwouldcostbetween

$15and$16million.Weverifiedthe$15millionfigurewithBoeing's

incomestatementsandbalancesheetsfortheperiod1947-1951.

19.RobertJ.Serling,LegendandLegacy(NewYork:St.Martin'sPress),159,

323,400-405,409.

20.Standard

Poor'sIndustrySurveys:AerospaceandDefense,

February

15,2001,RobertE.Friedman,CPA,AerospaceandDefenseAnalyst.

Also,in1999,BoeinghadtwicetherevenuesofAirbusinthissegmentof

theindustry($38,409,000,000versus$16,817,000,000)accordingto

Hoover'sOnline.

APPENDIX

1."HermitKingdom,"WallStreet

December12,1958,A6;

"Remodelingthe

BusinessWeek,March23,1963,36;"Ailing

WallStreet

April21,1964,A6;"NewMenfor

Top

BusinessWeek,June20,1964,32;

ReorganizationIs

Announced;MoveTakesEffectFebruary

WallStreet

Janu-

ary15,1969,A4;

theGiant,"FinancialWorld,Feb-

ruary25,1970,5;"GreatExpectations,"

January19,1970,5;

"Renewing

BusinessWeek,February20,

"How

Got

Creamed,"Fortune,January1973,103;

GoesoutsideRanksfor

FirstTime,PicksScottto

AssumeEventualCommand,"WallStreetlour-

nal,December11,1974,A8.

2.

NewCopier,"BusinessWeek,March22,1976,52;"Addresso-

graphGetsAshand$2.7Million,"BusinessWeek,October4,1976,31;

"HowtoNipAwayattheXeroxMarket,"BusinessWeek,November8,

Notes

1976,68;"RoyAsh'sChallenge,"Newsweek,December13,1976,90;

"RoyAshIsHavingFunatAddressogrief-Multigrief,"Fortune,February

27,

"CoupatAM;RoyAshResignsUnderFire,"Time,March

23,198

1;"CuriousTaleofMr.Black,"LondonFinancialTimes,Feb-

ruary27,1982,28;"AMFilesChapter

Petition,"NewYorkTimes,

April15,1982,

3.GaryHector,BreakingtheBank:TheDeclineof

(Little,

Brown

Company,1988);"At

aNewRegimeStrivesto

ReverseDeclines,"WallStreetJournal,May20,1982,Al;"TheCostto

Armacost,"Economist,February16,1985,76;"BankofAmericaRushes

intotheInformationAge,"BusinessWeek,April15,1985,110;"Sam

Armacost'sSeaofTroubles,"Banker,September1,1985,

1;"Schwab

JoinstheRanksofBankofAmericaDropouts,"BusinessWeek,August25,

1986,37;"AddSecurityPacifictoBank

WallStreetJournal,

August13,1991,Al;

FindsItGotaLotofWoe,"

Wall

StreetJournal,July22,1993,Al.

4.JohnStrohmeyer,Crisisin

(Pittsburgh:UniversityofPitts-

burghPress,1994);"BethlehemSteel,"WallStreetJournal,May13,

1977,A4;"BethlehemSetsNewPayReduction,"WallStreet

January21,1983,A5;"BethlehemtoAskProbe,"WallStreet

Jan-

uary24,1984,

"MakingRetireesSharethePain,"BusinessWeek,

April16,1984,50;"BethlehemPlansFurtherCuts,"WallStreetJournal,

January15,1985,A2;"IsBethlehemInvestinginaFutureItDoesn't

Have?"BusinessWeek,July81985,56;"BethlehemExitsFreightCar

Building,"JournalofCommerce,November1,

1991,

"FadedGlory,"

Forbes,March16,

5."TandyAgreestoBuyAssetsofEckerdUnit,"WallStreet

July5,

1985,A4;"DiversificationAppeals,"ChainStoreAge

Executive,August1,

1979,81;"VideoFollies,"Forbes,November5,

"Jack

erdHoldersWillReceiveAllCashina$1.2Billion

WallStreet

Journal,April21,1986,A31;

C.PenneyGetsEckerdShares,"Wall

Street

December18,1996,

6."GreatWestern:GreatWesternFinancialCorporation:Remarksby

JamesF.Montgomery,President,totheSecurityAnalystsofSanFran-

cisco,March8,1977,"WallStreetTranscript,April25,1977,

46873-46874;"GreatWestern:GreatWesternFinancialCorporation:

RemarksbyJamesF.Montgomery,ChairmanandPresident,tothe

SecurityAnalystsofSanFrancisco,November9,

1981,"WallStreetTran-

script,December21,1981,64131-64132;"GreatWestern:GreatWest-

ernFinancialCorporation(GWF):RemarksbyJamesF.Montgomery,

ChairmanandChiefExecutiveOfficer,totheLosAngelesSocietyof

FinancialAnalysts,September11,1984,"WallStreetTranscript,October

22,1984,75659-75660;"GreatWestern:TheCorporation:Strategies:

HowPlayingItSafeWorkedforGreatWestern:ItWaiteduntilRegula-

tionsEasedtoGoonaBuyingSpree,"Business

Week,September7,

284

Notes

1987,70;"GreatWestern:CorporateFocus:GreatWesternFinancial

SeekstoChartaFreshCourse:No.2U.S.ThriftFacesBurdenofSoured

HomeLoans,BloatedOverhead,"WallStreetJournal,May17,1993,B4.

7.Bryan

andJohn

BarbariansattheGate(NewYork:

1991);"CigaretteConglomerate,"FinancialWorld,Feb-

ruary5,

"VoyageintotheUnkown,"Forbes,December1,1971,

30;"WhenMarketingTakesOveratR.J.Reynolds,"BusinessWeek,

November13,

8."APaperTigerGrowsClaws,"BusinessWeek,August23,1969,100-102;

"No-Longer-So-GreatScott,"Forbes,August1,1972,25;"NowanOut-

siderWillRunScottPaper,"BusinessWeek,April23,1979,

"Scott

aPaperTiger,"AdvertisingAge,November3,1980,96;"ScottPaper's

NewChief,"BusinessWeek,November30,1981,62;"ScottIsn'tLum-

beringAnymore,"Fortune,September

"BermudaTrian-

gle,"Forbes,January6,1992,

284;

AnInsider'sView,"

Navigator,December1997;"DidCEO

SaveScottPaper-or

JustPrettyItUp?TheShredder,"BusinessWeek,January15,1996.

9."Silo,DiscountAppliance

Chain,EnjoysPayofffromHardSell,"

ron's,March29,1971,35;"AnApplianceDealerwithRealClout,"Busi-

nessWeek,November6,1971,76;"CyclopsAcquiresSilo,"WallStreet

Journal,October16,1979,A5;"DixonsMakes$384MillionU.S.Bid,"

LondonFinancialTimes,February18,1987,1;"Silo-DixonsPower:How

FarCanItReach?"ConsumerElectronics,November1988,14;"Dixons

StrategicMoveintoLosAngelesArea,"LondonFinancialTimes,Novem-

ber12,1989,10;"Shake-upatSilo,"DiscountStore

News,March4,

1991,1;"DixonsTightensGriponSilo,"HFD-

theWeeklyHomeFur-

nishingsNewspaper,February3,

10.

Two

AntibioticsBarredfromSale;FDA-DrugCom-

panyConfrontationIsSeen,"WallStreetJournal,May15,1969,A38;

TweedleDee:

Can'tEverSeemtoDoQuiteasWell

inEthicalDrugsasTweedle

ItsCorporateLookalike,Eli

WhichIsNoGreatShakesEither,"Forbes,March1,1970,65-66;

Two

DrugsLinkedtoThirty-twoDeathsNeedn'tBe

Banned,FDAAideTestifies,"WallStreetJournal,January30,1975,

A14;

Hair-RaisingHappeningsat

(TestingaCureforBald-

ness,theCompanySquirmsattheUnwelcomeClamor),"Fortune,April

6,1981,67-69;

R&DScoreboard:Drugs,"BusinessWeek,June

22,1987,145;

StockFallsonStudy'sClaimIts

BaldnessDrugHasSideEffects,"WallStreetJournal,February9,1988,

Law:

SettlesLiabilitySuitoverHalcionSleeping

Pill,"WallStreetJournal,August12,1991,

PresidentS.K.HensleyResignstoAcceptPresidencyof

Warner-Lambert,"WallStreetJournal,June21,1967,

"SayLittle,

DoMuch,"Forbes,December1,1974,52;"Afterthe

Diversification

ThatFailed,"BusinessWeek,February28,1977,58;"TurningW-Lintoa

Notes

MarketingConglomerate,"BusinessWeek,March5,1979,60;

OutlinesStrategicPlan,"PRNewswire,October29,1980;"Beatingthe

JapaneseinJapan,"Forbes,April

"W-L:ReversingDirection

toCorrectNeglect,"BusinessWeek,June15,

Outlines

StrategicActions,"PRNewswire,December2,1981;

Announces

IMEDPurchase,"PRNewswire,June7,1982;

DefendsIMED

Purchase,"PRNewswire,July12,1982;"DidW-LMakea$468Million

Mistake?"BusinessWeek,November21,1983,123;"TheSuccessionat

Warner-Lambert,"BusinessWeek,September17,1984,52.

12."ThingsAreAddingUpAgainatBurroughs,"BusinessWeek,March11,

1967,192;"HowRay

GrowthTheoryCreated

ToughestCompetitor,"Fortune,January

"ATough'StreetKid'

StepsinatBurroughs,"

BusinessWeek,October29,1979,50;"Willa

Shake-upReviveBurroughs?"BusinessWeek,May4,1981,53;"Can

roughsCatchUpAgain?"Forbes,March28,

13.RobertA.Lutz,Guts:TheSevenLawsofBusinessThatMadeChryslerthe

World'sHottestCarCompany(NewYork:JohnWiley

Sons,

27;

"PresidentIacocca,"WallStreetJournal,June28,1982,Al;"IsThere

LifeafterIacocca?"Forbes,April8,1985,75;"Lee

Iacocca'sTimeof

Trouble,"Fortune,March14,1988,79;"CanIacoccaFixChrysler

Again?"Fortune,April8,1991,50;"AfterLee,"TheEconomist,March

21,1992,70;"How

FilledDetroit'sBiggestShoes,"WallStreet

Journal,September7,1994,

"Daimler-BenzWillAcquireChryslerin

$36BillionDealThatWillReshapeIndustry,"NewYorkTimes,May7,

1998,A6.

14."Harris-Intertype,RadiationInc.DirectorsApproveMergerPactValued

at$39Million,"WallStreetJournal,April3,1967,30;"CriticalMass?"

Forbes,April15,1976,86;"TechnologyTransfer'sMaster,"Business

Week,October10,1977,120;"Harris

RemarkableMetamorpho-

sis,"Forbes,May26,1980,

45;"Harris

BoldStrategy,"Forbes,

April25,

"HarrisIsRaisingItsBetontheOfficeoftheFuture,"

BusinessWeek,July18,1983,134;"HarrisCorp.Elects

toAdded

PostofChief,"WallStreetJournal,April1,1986,A45;"NewHarrisPres-

identPrefersGrowthtoDownsizing,"UPI,April23,1993.

15."Hasbro:OnaRoll:

HasbroContinuesStringof25%Yearly

Growth,"Barron's,July19,

"Hasbro:HasbroToysFindProfits

inTradition,"WallStreetJournal,December12,1983,A29;"Hasbro:

News:HasbroGetsItsGuns:StephenHassenfeld'sLoadingUpforBat-

tle,"IndustryWeek,April30,1984,17-18;"Hasbro:Silver:A

on

Toys:HasbroBradley'sHassenfeld,"FinancialWorld,April16,1985,29;

"Hasbro:MerryChristmas:ItHasAlreadyComeforHasbro,BiggestU.S.

Toymaker,"

December23,1985,34;"Hasbro:TheCorpora-

tion:Strategies:HowHasbroBecameKingoftheToymakers:With$1.2

BillioninSalesand$99MillioninProfits,ItIsNowNo.1Worldwide,"

BusinessWeek,September22,1986,90-92;"Hasbro:Marketing:Toys:

286

Notes

It'sKidBrother'sTurntoKeepHasbroHot:AlanHassenfeldMustFill

BigShoesattheToymaker,"BusinessWeek,June26,1989,152-153.

16."Rubbermaid:SincereTyranny(WhyHasStanley

SpenttheLast

FourYearsMovingandShakingatRubbermaid?ItWasaCaseofSerious

ProblemsMaskedbyCheery

Numbers),"Forbes,January28,1985,

54-55;"Rubbermaid:RubbermaidEmergesa'Clear'Winner;FoodStor-

ageContainers,"ChainStoreAge-GeneralMerchandiseTrends,Octo-

ber1986,67;"WhytheBounceatRubbermaid?TheCompanySells

HumdrumGoodsinaMatureMarket,andMostofItsCompetitors

UndercutItsPrices.ButItHasDoubledSalesandTripledEarningsin

thePastSixYears,"Fortune,April13,

"Rubbermaid:Amer-

ica'sMostAdmired

Company,"Fortune,Feburary7,1994,50-54;

FromtheMostAdmiredtoJustAcquired:HowRubbermaid

ManagedtoFail,"Fortune,November23,1998,32-33.

17."HenrySingleton'sSingularConglomerate,"Forbes,May1,1976,38;

"Two

TurnTeledyneintoaCashMachine,"BusinessWeek,

November22,1976,133;"TheSphinxSpeaks,"Forbes,February20,

1978,33;"Teledyne'sWinningRoster,"Forbes,August17,1981,35;

"PartingwithHenry

Singleton:

SweetSorrowforTeledyne?"Busi-

nessWeek,April9,

"TeledynetoPay$17.5MilliontoSettleU.S.

CriminalCharges,"WashingtonPost,October6,1992,D6;"Teledyne

StrugglestoRecaptureMagicofYesterday,"WallStreetJournal,Novem-

ber22,1993,B4;"RichardSimmonstoShareSpotlightatAllegheny

dyne,Sees'Good'Fit,"WallStreetJournal,April3,1996,

Pagenumbersinitalicsrefertofiguresandillustrations.

86,141,148,157,250,259

Addressograph,

DoomLoopbehaviorof,254

DoomLoopbehaviorof,254

familydominationof,67-68

PitneyBowesvs.,70-72,71

Forbes'sdescriptionof,67

Aders,Robert,81-82

GoldenKeyexperimentof,68

"AdventureofSilverBlaze,The"

Krogercomparedwith,

141

(Doyle),10

AbbottLaboratories,8,141

Airbus,203

inacquisitionsanalysis,259

Aldinger,Bill,43

"bestintheworld"understandingof,

alignment,11

101

Flywheeland,176,177-78,187

BluePlansof,173

Level5Leadershipand,

Cain'stenureat,30-31

177-78

comparisoncandidatesfor,7-8,229

Allegheny,48,258

cultureofdisciplineat,122-23

Allen,Bill,203

economicdenominatorinsightof,106

Allen,Fred,28,133-34

executiveinterviewsat,239

seealsoPitneyBowes

good-to-greatperformanceof,7

Amazon.com,146,154

industryperformanceand,252

AmericanExpress,188

inside

outsideCEOanalysisof,

AmericanHomeVideoCorporation,

249

94,255

"nomiraclemoment"intransitionat,

Amgen,120,122

170

135

short-termpressuresand,173-74

AND,geniusof,198-200

technologyacceleratorof,150

AOL,158

comparedwith,98-99,

Appert,Dick,

173-74,174

AppleComputer,158

seealsoCain,George

Arbuckle,Ernie,42

acquisitions,11

Armacost,Sam,43

good-to-greatstudyuniton,241-42

Ash,Roy,

misguideduseof,180-81

134

288

lndex

Auchter,Dick,59

brutalfacts,65-89,161

Aycock,David,76

charismaticleadershipand,72-73,89

clockbuildingideaand,199

andconductingautopsieswithout

Bagley,Brian,189

blame,77-78,88

BankersTrust,43

coreideologyideaand,199

bankingindustry,

104,105,

dialogue,debateand,

128

disciplineand,126

Bank

8,72,78,250,

faithand,80-85

260

geniusofANDideaand,199

DoomLoopbehaviorof,97,128-29,

hardinessfactorand,82

254

Kroger'sriseand,65-69,70

layoffsat,53-54

andleadingwithquestions,74-75,

"weakgenerals,stronglieutenants"

88

modelof,43

motivationand,73-74,75,89

Wells

vs.,

53-54,86,

preservethecorelstimulateprogress

128-29

ideaand,199

BarbariansattheGate(Burroughand

redflagmechanismsand,

Helyar),109

shortpaydeviceand,79-80

barcodescanners,148-49

StockdaleParadoxand,

Berlin,Isaiah,90-91

budgeting,140,143

"bestintheworld"question,95,96,

Buffett,Warren,

97-103,118

BuilttoLast(Collinsand

Porras),14,

BethlehemSteel,8,34,78,86,138,139,

188

167,250,259

Built-to-Laststudy:

DoomLoopbehaviorof,255

clockbuildingideain,197

technologyanddemiseof,156-57

coreideologyideain,

Bezos,Jeff,154

geniusofANDideain,198

"biggestdog"syndrome,26

level5leaders'relationshiptoideasof,

BigHairyAudaciousGoals

198

197-204

preservethecorelstimulateprogress

BiographicalDictionary

ideain,198

BusinessLeaders,236

researchmethodsof,188-89

blame,77-78,88

roleof,inGood-to-Greatstudy,

BluePlans,173

189-90

boardofdirectors,216

bureaucracy,disciplineand,

121,142

Boeing,6,109,

Burgelman,Robert,213

Boyd,Joseph,181

Burger,Ralph,67-68

BreakingtheBank(Hector),43,129

Burroughs,8,130,130,

234,250,260

Bressler,Marvin,91

unsustainedperformanceof,256-57

Briggs,WilliamP.,212

BusinessWeek,28,70,130,131,132,

Bruckart,Walter,55

167,178,236

George,

clockbuildingidea,197,198-200

seealsoAbbottLaboratories

Coca-Cola,

107,134,149,

Camel,58

150,166,227

Cederberg,Scott,159

coherence,principleof,182

ColumbiaPictures,189

good-to-greatanalysisof,

compensation:

seealsoexecutives

executive,

change,11

good-to-greatanalysisof,244-46

actingonneedfor,

nonexecutive,50

inducedbytechnology,

155

Nucor'ssystemof,50-51

charactertraits,51-52,64

158

charismaticleadership,

182

CharlesSchwab,254

Congress,U.S.,25

CharlotteNewsandObserver,214

Partners,23

Chirikos,Anthony,30

Cooley,Dick,

171

8,82,153,234,250,260

Cooper,Jenni,94

Iacocca'stenureat,29-30,31,131-33

Cooper,Sidney,55-56,256

unsustainedperformanceof,257

corecompetence,99-100,118-19

Churchill,Winston,

154

coreideology,193-96,196,197,198-200

StatisticalOfficeof,73

ofDisney,195-96

CircuitCity,8,33,57,126,172,227,

ofHewlett-Packard,193-94

256

ofMerck,194

inacquisitionsanalysis,259

Corky's,32

"bestintheworld"understandingof,

CorporateProducts

Committee,116

101

Councilmechanism,114-16,200,217

CEOanalysisof,249

characteristicsof,115-16

comparisoncandidatesfor,230

CPC,227

economicdenominatorquestionand,

CrisisinBethlehem(Strohmeyer),138

106

Bank,52-53,254

executiveinterviewsat,239

JosephF.,

28,37,58,62,

Forbesprofileof,166

77-78

good-to-greatperformanceof,7,74

self-assessmentof,34

industryperformanceand,

252

Weissmandecisionof,58-59

investmentin,167

seealsoPhilipMorris

inmedia,166

cultureofdiscipline,seediscipline

"nomiraclemoment"in

transitionat,

CuttingEdge

37

170

Cyclops,256

Packard'sLawappliedby,55-56

technologyacceleratorof,

150

seealso

Alan

Daimler-Benz,30,257

CiscoSystems,216

Darwin,Charles,91

Citicorp,97,188

DEC,181

290

lndex

DeHavilland,158

drugstore.com,let-47

Dell,158

Duane,86

DevelopmentofAmericanIndustries,2

36

28-29,

31,256

discipline,120-43,

161,

207,

217

cultureof,122-24

andadheringtoHedgehogConcept,

Eckerd,Jack:

133-39,142

Walgreencomparedwith,

budgetingand,140,

143

46-47

bureaucracyand,121,142

EckerdCorporation,

clockbuildingideaand,200

95,250,259

coreideologyideaand,200

DoomLoopbehaviorof,255

freedomandresponsibilitywithin,

economicenginequestion,

123,124-26,142

104-8,118,119

geniusofANDideaand,200

Economist,236

HedgehogConceptand,123-24,126Einstein,Albert,91,

112-14

Level5Leadershipand,130

asTime's"Personofthe20th

matrixof,122

Century,"154

Nucor'scultureof,136-39

ElectricKool-AidAcidTest,The(Wolfe),

PitneyBowes'scultureof,133-34

4

1

preservethe

progress

EliLilly,178

ideaand,200

Ericson,Jim,155

ResponsibilityAccountingand,123

Joanne,116-17

.

yourcottagecheese"factor

Everingham,Lyle,

170,209

and,127-29,142

seealsoKroger

start-upsand,120-2

1

Excel,158

"stopdoing"listand,124,

ExecutiveCouncil,116

143

executiveinterviews,239-41

withinThreeCircles,123-24

executives,41-64

tyrannical,129-33,

142

assignedtobestopportunities,58-60,

Wells

cultureof,128-29

6

3

Dively,George,181-82

charactertraitsaskeytohiringof,

Dixons,256

DoomLoop,14,

178-84

compensationof,

indirectcomparisons,254-56

244-46

atHarris,18

1-82

"firstwho"principleand,42-45,

50,

andleaderswhostoptheflywheel,

181-82

"geniuswithathousandhelpers"

andmisguideduseofacquisitions,

modeland,

180-8

1

layoffsof,53-54

signsofbeingin,183-84

needforchangeof,

atWarner-Lambert,178-80,256

Packard'sLawand,54-5

5

Drucker,Peter,180

personalcostto,60-61

Index291

post-retirementroleof,61-62

buildupandbreakthroughmodelof,

rigorneededindecisionson,44-45,

165-71

clockbuildingideaand,201

turnoverpatternof,

coherenceprincipleand,182

"weakgenerals,stronglieutenants"

core

ideaand,201

modelfor,43

"flywheeleffect"and,174-78

geniusofANDideaand,201

leaderswhostop,181-82

facingreality,seebrutalfacts

perceptionof,165-69,186

faith,80-85

preservethe

progress

FannieMae,

ideaand,201

inacquisitionsanalysis,259

short-termpressuresand,172-74,187

"bestintheworld"understandingof,

signsofbeingon,183-84

101

aswraparoundidea,182

CEOanalysisof,249

Forbes,24,

236

comparisoncandidatesfor,230

asdescribedby,67

economicdenominatorquestionand,

Chrysler'sfailed

venturein,

106

132

executiveinterviewsat,239

CircuitCityprofiledin,166

good-to-greatperformanceof,7

ondotcomphenomenon,145,146

GreatWesterncomparedwith,

onKimberly-Clark'ssuccess,169

,

111-12,113

Mocklerin,24-25

industryperformanceand,252

Singletonin,48

investmentin,172-73

FordMotorCompany,43,

195

Maxwell'stenureat,

82-83

Fortune,

131,167,220-21,222,

motivationat,

236

"nomiraclemoment"in

transitionat,

Fortune500rankings,

136,

170

211,212,219,220

technologyacceleratorof,150,152

Fortune1000list,177

"firstwho"principle,152,207

"4-S"model,101

clockbuildingideaand,199

ViktorE.,86,120

coreideologyideaand,199

freedom,responsibilityand,123,

forexecutives,42-45,

124-26,142

geniusofANDideaand,199

Freud,Sigmund,91

atHewlett-Packard,191-92

preservethe

progress

ideaand,199

Gandhi,MohandasK.,154

andshortageofqualitypeople,

Gates,Richard,131

Stanley,26-27,31,130-31

Flywheel,14,164-78

GeneralElectric,

6,18,

158,

alignmentquestionand,176,177-78,

166,188,215

187

HedgehogConceptof,215-16

292

Index

Mills,227

cut4electioncriteriafor,220,227

GeneralMotors,65

difficulttimesand,213-14

geniusofAND,198-200

directcomparisonselectionprocess

"geniuswithathousandhelpers"model,

in,7-8,228-33

45-48

executivechurnanalysisin,243

G.I.Joe(doll),108,257

executiveinterviewsin,239-41

Gillette,8,

83,141,152,172,178

financialspreadsheetanalysisin,238

inacquisitionsanalysis,259

frequentlyaskedquestionsabout,

attemptedtakeoverof,23-24

211-18

"bestintheworld"understandingof,

industryanalysis

in,252-53

102

industryperformanceanalysisin,

CEOanalysisof,249

242-43

comparisoncandidatesfor,

230

insidevs.outsideCEOanalysisin,

difficulttimesat,213,214

249-51

economicdenominatorquestionand,

lackofhightechnologycompaniesin,

106

213

executiveinterviewsat,239

mediahypeanalysisin,247

good-to-greatperformanceof,7

neweconomyand,14-15

HedgehogConceptand,109-

10

publiclytradedcompaniesin,212

industryperformanceand,252

researchstepsin,236-38

"nomiraclemoment"intransitionat,

researchteamsassembled

for,5-6

170

roleofboardofdirectorsand,2

technologyappliedby,149-50

roleoflayoffsanalysisin,246

seealsoMockler,Colman

specialanalysisunitsin,241-47

GoldenKey,68

statisticalsignificanceof,211-12

Sachs,112

summaryofconceptsof,11-14

"good"performance,defined,

219

technologyanalysisin,247

Good-to-Greatstudy:

unsustainedcompaniesin,234-35

acquisitionsanalysisin,

U.S.corporationsin,212,221

259-60

Graniterock,79-80

blackboxquestionand,9-11

GreatAtlanticandPacificTea

Built-to-Laststudyconceptsand,

Company,see

189-90,197-206

GreatBritain,73

CEOanalysisin,24344,249-51

greatness,questionof,204-10

comparativeanalysesframeworksin,

meaningfulworkand,208

247-48

"great"performance,defined,219

corporateownershipanalysisin,246

GreatWesternFinancial,250,255,259

criteriaforselectionin,219-27

DoomLoopbehaviorof,255

cut1electioncriteriafor,220-29

FannieMaecomparedwith,111-12,

cut2electioncriteriafor,220,221-22

113

cut3electioncriteriafor,

220,

Grundhofer,Jack,43

222-26

Gulfstream,132,153

Index293

Eric,129

technologyand,147-51,153,162

Ward,179

asThreeCircles,seeThreeCircles

Halcion,78,256

understandingvs.bravadoin,110-17,

"Hanoi

83

200,202

"hardiness"researchstudies,82

Heinz,227

HarrisCorporation,8,153,234,235,

Herring,Jim,28,68,176

250,260

seealsoKroger

inDoomLoop,181-82

227

unsustainedperformanceof,257

Hewlett,Bill,191-94,209

Hartford,John,67-68

Hewlett-Packard,6,18,54,

134,166

HarvardBusinessReview,236

coreideologyof,193-94

Harvey,George,134,160

evolutionof,191-93

Hasbro,8,108,234,260

HingeofFate,The

(Churchill),65

unsustainedperformanceof,257

Hitler,Adolf,73,154

Hassenfeld,Stephen,108

Hlavacek,Jim,27

"Hedgehogandthe

HooverInstitution,84

90-91

Hoover'sHandbookofCompanies,236

HedgehogConcept,

Hornung,Lane,80

184,206

HouseholdFinance,43

"bestintheworld"question

and,95,

HowardJohnson,189

"HPWay,"193

clockbuildingideaand,200

20

consistencyin,123-24,126

Hughes,109

corecompetenceand,99-

100,

118-19

coreideologyideaand,200

Iacocca,Lee,

Councilmechanismand,114-16,

Iacocca(Iacocca),29

119

IBM,70,134,158,181,254

disciplineandadherenceto,133-39,

I'maLuckyGuy(Cullman),

142

IndustryStandard,145

diverseportfolioand,215-16

InLoveandWar(Jimand

economicenginequestionand,

Stockdale),84

104-8,118,119

Intel,

166,213

ofGeneralElectric,215-16

Intercomnetworksystem,

geniusofANDideaand,200

InternationalCommitteefortheStudy

growthand,112

ofVictimization,82

asiterativeprocess,114-15,114,

DirectoryofCompany

119

Histories,236

passionin,

108-10,118

InternationalHarvester,18

preservethe

progress

Internet,134,144-46,148,

151,158

ideaand,200

Investor'sBusinessDaily,29

simplicityin,

(triathlon),117,127

294

lndex

Iverson,Ken,34,76,139,167,177,

Smith'stenureat,17-21,19,59,

209

139-40;seealsoSmith,

DarwinE.

onhierarchicalinequality,136

technologyacceleratorof,150

descriptionof,27-28

Kleenex,20,102

onroleoftechnologyinsuccess,

Knight,Linda,110

155-56

Kodak,70,254

successorto,213-14

Kroger,

86,152,172,176,209

seealsoNucor

inacquisitionsanalysis,259

A&Pcomparedwith,

141

"bestintheworld"understandingof,

J.C.Penney,46,255

102

Jensen,PattyGriffin,155

brutalfactsconfrontedby,

Johnson,Jim,25,152

81-82

Johnson

Johnson,6,134,188

CEOanalysisof,249

Jones,Chris,159-60

comparisoncandidatesfor,

231

Jones,Scott,159

economicdenominatorquestionand,

Jorndt,Dan,32,145

107

Joss,Bob,43

executiveinterviewsat,239

Judd,Stefanie,189

good-to-greatperformanceat,7

industryperformanceand,252

"nomiraclemoment"intransitionat,

227

170

Kelvie,Bill,152

riseof,

Kerkorian,Kirk,30

scanningtechnologyusedby,

Kesey,Ken,41

superstoreconceptand,

Kimberly-Clark,28,32,59-60,62,81,

technologyacceleratorof,150

86,147,160,209,255

seealsoEveringham,Lyle;Herring,

inacquisitionsanalysis,259

Jim

"bestintheworld"understandingof,

102

CEOanalysisof,249

LanierBusinessProducts,182

comparisoncandidatesfor,231

KingLive,29

economicdenominatorquestionand,

Larsen,Brian,159

106

layoffs:

executiveinterviewsat,239

ofexecutives,53-54

Forbesonsuccessof,169

ingood-to-greatstudy,246

good-to-greatperformance

of,7

leadership,31,237

industryperformanceand,252

as"answertoeverything,"21-22

"nomiraclemoment"intransitionat,

celebrity,

39-40

170

charismatic,72-73,89,216

inshifttopaper-basedproducts,

inconductingautopsieswithout

blame,77-78,88

Index

dialogue,debateand,75-77,88

Ray,130

informalmeetingsand,75

McDonald's,126

withquestions,74-75,88

Douglas,202

instoppingtheflywheel,181-82

106

seealsoexecutives;Level5

Leadership

Company,1

Level5Leadership,17-40,161,184

Majors,Lee,83

alignmentquestionand,177-78

managers,seeexecutives

ambitionforcompanyand,21,25-27,

Man'sSearchforMeaning(Frankl),

36,

120

andassignmentofcreditandblame,

MarineCorps,51

33-35,39

Beryl,1

boardofdirectorsand,216

Marlboro,59,108

built-to-lastideasand,198

Marriott,189

clockbuildingideaand,198

Marx,Karl,91

coreideologyand,198

Maserati,132,153

cultivationof,35-38

MastersForum,154-55

cultureofdisciplineand,13,130

Maxwell,David,

152,172

asdriven,30,39

Maetenureof,

dualityof,22-23,36,39

82-83

egoand,12-1

36,

MaxwellHouse,108

39

Meehan,Bill,1-3

geniusofANDideaand,198

Merck,George,1

"geniuswithathousandhelpers"

Merck,George,2d,194

comparedwith,47

Merck

Company,6,3

134,

hierarchyof,20

150,178,179

luckand,33-34

philosophyof,194

modestyand,

Miller,108

personalhumilityand,12-13

Miller,

43

preservethe

progress

Millhiser,Ross,108-9

ideaand,198

Mockler,Colman,23,28,30,31,37,38,

prevalenceof,37

49,57,60,216

resolveand,30-33,36

inForbes,24-25

technologyand,13-14

qualityoflifeof,61

attechnologycompanies,216

seealso

fromwithincompany,3

Monopoly,108

Li,Eve,30

MontgomeryWard,74

Lincoln,Abraham,

Moody'sCompany

Reports,

70

57,243

Long-RangeProfitImprovement

Morgridge,John,216

Committee,116

motivation,11,207

Lotus1-2-3,158

brutalfactsand,73-74,75,89

Luftig,JeffreyT.,211-12

MotorolaCompany,6,134

296

Index

NASDAQ,4,173

Oliver,Barney,192

Nassef,Dave,51

Osborne(computer),158

236

neweconomy,14-15

26,131,257

Packard,David,1,54,191-94

Frank,43

Packard'sLaw,54-55,192

New

236

PalmComputing,158

Newsweek,78

Paragonmailprocessor,134

Newton,158

passion,inHedgehogConcept,

NewYorkStockExchange,166

108-10,118

NewYork

236

Pepsico,6,227

Norton

189

Perelman,Ronald,

Nuclear

of

Peterson,R.J.,182

76

Pfizer,31,150,179,256

Nucor,8,27,33-34,78,83,86,104,

Pharmacia,31

167,172,177,254

PhilipMorris,8,

135,255

259

inacquisitionsanalysis,259

"best

theworld"

of,

"bestintheworld"understandingof,

102

102

CEO

of,249

CEOanalysisof,249

classdistinctionsat,138

comparisoncandidatesfor,232

ofdialogueanddebateat,

decision-makingat,60

economicdenominatorquestionand,

for,232

107

systemof,50-51

executiveinterviewsat,239

cultureof

at,136-39

good-to-greatperformanceof,7

denominator

and,

industryperformanceand,253

107

internationalmarketsdecisionof,

at,239

58-60,135

good-to-greatperformanceof,7

"nomiraclemoment"intransitionat,

performanceand,252

171

management

at,213-14

passionforworkat,108-9

media,167

perceptionoftobaccoindustryand,

"nomiraclemoment"in

transitionat,

109,215

171

Seven-Upacquiredby,77,135

technologyacceleratorof,151

technologyacceleratorof,151

technologyusedby,105,155-56,

seealso

JosephF.,

163

Pablo,188

Three

of,137

PitneyBowes,8,

86,104,160,

seealsoIverson,Ken

172

"numberone,numbertwo"concept,

inacquisitionsanalysis,259

69n

Addressographvs.,70-72,71

Index297

"bestintheworld"understandingof,

Ricardo-Campbell,Rita,216

103

rigor,principleof,

.

CEOanalysisof,249

rinsingyourcottagecheese"factor,

comparisoncandidatesfor,232

127-29,142

cultureofdisciplineat,133-34

Rivas,Bill,126

andeconomicdenominatorquestion,

R.J.Reynolds,8,58,59,109,215,250,

107

259

executiveinterviewsat,239

DoomLoopbehaviorof,135,157,

good-to-greatperformanceof,7

255

industryperformanceand,253

Rogaine,173,256

"nomiraclemoment"intransitionat,

Rosenberg,Richard,43

171

Rubbermaid,8,132,153,234,250,260

technologyacceleratorof,151

Gault'stenureat,26-27,130-31

seealsoAllen,Fred

tyrannicaldisciplineat,130-31

PlainTalk(Iverson),136

unsustainedperformanceof,257

"PlasticPeople,"43

Russell,Bertrand,144

Plato,90

Pohlman,Marvin,137,177

Porras,JerryI.,188

Brothers,112

PostalService,U.S.,133

Sanders,Wayne,81,160

preservethe

progress,

SaraLee,227

198-200

ScintillationProbe,76

Procter

Gamble,6,17-18,20,59,80,

Scott,Dave,127-28

86,134,147,169,188,255

ScottPaper,

Prodigy,

DoomLoopbehaviorof,255-56

Fred,72

tenureat,28-29

Procter

Gamble'srivalrywith,

80-8

Radiation,Inc.,181

ScribesofDelphi,90

Rathmann,George,120-23

Sea-Land,135,255

"redflag"mechanisms,78-80,88,199

SecurityPacific,254

Reichardt,Carl,

128,

Semler,BernardH.,123

171

Sensor,23,141,149

seealsoWells

SensorforWomen,23

RemingtonRand,158

Seven-Up,77,135

Resisting

Takeovers

shortpaydevice,79-80

Campbell),216

Siegel,Sam,76,167

responsibility,freedomand,123,

Silo,8,33,106,250,259

124-26,142

DoomLoopbehaviorof,55-56,256

ResponsibilityAccounting,123

205

Revlon,23

Sinclair,Alyson,189

Rexinger,Dan,55

Singleton,Henry,

298

Index

SixMillionDollarMan,The,83

HedgehogConceptand,147-51,153,

Smith,Adam,91

162

Smith,DarwinE.,

30,

Internetand,144-46

31,32,37,

81,

Level5Leadershipand,13-14

168-69

preservethe

progress

"stopdoing"listsusedby,139-40

ideaand,201

seealsoKimberly-Clark

astrap,154-55

178

inVietnamWar,158-59

Sony,158,188,195

Teledyne,8,234,250,260

Stalin,Joseph,154

Singleton'stenureat,

Standard

Poor'sAnalystHandbook,

unsustainedperformanceof,

258

242-43,252

Terry,Bill,193

StanfordUniversity,GraduateSchoolof

ThreeCircles,94-97,96,118,161,

Business,43

184

Starbucks,92

"bestat"questionand,95,97-103

start-upcompanies,120-2

atBoeing,204

Stockdale,

83-87

clockbuildingideaand,200

StockdaleParadox,13,

116,

coreideologyideaand,200

146,184

disciplinewithin,123-24

seealsobrutalfacts

economicenginequestion

and,

stockoptions,49

95-96,104-8

"stopdoing"list,124,139-41,143

failuretostaywithin,134-36,142

StrategicThinkingGroup,116

geniusofANDideaand,200

Stravinsky,Igor,164

ofNucor,137

Strohmeyer,John,138

passionand,

108-10

preservethe

progress

ideaand,200

Tandy,94,255

seealsoHedgehogConcept

technology,11,105,144-63,184,237

3M,

asacceleratorofmomentum,152-53,

Time,154

.

162

titlecreep,"139

changeinducedby,

Toblerone,108

clockbuildingideaand,201

Today,29

coreideologyideaand,201

Truman,HarryS.,17

demiseofBethlehemSteeland,156-57

Richard,181-82

excessiverelianceon,158-59

andfearofbeingleftbehind,159-61,

162

UCLABruins,171-72

geniusofANDideaand,201

UNIVAC,158

good-to-greatanalysisof,247

UniversityofChicagoCenterfor

ingood-to-greatcompanies,155-57,

ResearchinSecurityPrices

162,163

(CRSP),221,222

lndex

100,141,250,259

WallStreetjournal,

110,131-32,

Abbottcomparedwith,98-99,

236

173-74,174

WallStreetTranscript,

1

DoomLoopbehaviorof,98-99,

Wal-Mart,6,147,166,

256

evolutionof,190-91,192

U.S.Bancorp,43

WaltDisneyCompany,6,134,

U.S.News,236

coreideologyof,195-96

U.S.Steel,167

Walton,Sam,190-91

Wang,181

Wards,74

VanGenderen,Peter,219

Warner-Lambert,8,250,259

Velveeta,108

DoomLoopbehaviorof,178-80,256

VietnamWar,83-84

WashingtonMutual,255

relianceontechnologyin,158-59

"weakgenerals,stronglieutenants"

158

model,43

Weissman,George,

Weissman,Paul,189

Walgreen,CharlesR.,

"Cork,"28,

Welch,Jack,33

32-33,209

Wells

8,

78,83,104,

Eckerdcomparedwith,46-47

105,172,227

seealsoWalgreens

inacquisitionsanalysis,260

Walgreens,6,8,

92,141,

BankofAmericavs.,

152,161,209

inacquisitionsanalysis,259

"bestintheworld"understandingof,

"bestintheworld"understandingof,

103

CEOanalysisof,249

CEOanalysisof,249

comparisoncandidatesfor,233

comparisoncandidatesfor,233

Bankacquisitionand,52-54,

economicdenominatorquestionand,

254

107

cultureofdisciplineat,128-29

executiveinterviewsat,239

economicdenominatorquestionand,

good-to-greatperformanceof,7

107

Hedgehogstrategyof,92-94

executivehiringandtransformation

industryperformanceand,253

of,42-44

Intercomsystemof,147-48

executiveinterviewsat,239

Internetthreatto,

good-to-greatperformanceof,7

"nomiraclemoment"intransitionat,

Hedgehogconceptof,97-98

171

industryperformanceand,253

technologyacceleratorof,

"nomiraclemoment"intransitionat,

transformationof,3-5,104-5

seealsoWalgreen,CharlesR.,

technologyacceleratorof,

seealsoReichardt,Carl

300

lndex

Westinghouse,158

onhiringtherightpeople,57

WestpacBanking,43

asleaderwithquestions,

WestwiththeNight(Markham),1

74-75

White,Blair,81

seealsoCircuitCity

Wilbanks,Leigh,94

Williams,Joe,179

Wolfe,Tom,41

Xerox,70,134,254

Wooden,John,171-72

Woolpert,Bruce,79-80

WorldWar

73,154

Young,Amber,159

Wurtzel,Alan,28,33,38,166

Coopercomparedwith,

55-56

Zeien,AlfredM.,109

DocumentOutline

FirstpageContentsAcknowledgementsChapter1:GoodistheenemyofgreatChapter2:Level5LeadershipChapter3:Firstwho...

thenwhatChapter4:ConfrontthebrutalfactsChapter5:ThehedgehogconceptChapter6:AcultureofdisciplineChapter7:TechnologyacceleratorsChapter8:TheflywheelandthedoomloopChapter9:FromgoodtogreattobuilttolastFrequentlyAsked

QuestionsAppendix1.AAppendix1.BAppendix1.CAppendix1.DAppendix2.AAppendix5.AAppendix8.AAppendix8.BNotesIndex