GOOD TO GREATBY JIM COLLINS

CHAPTER 8

TEAM 2CAITLIN CLARK

STEPHEN MASSIMIWILL MAYRATHKATIE TREVINO

MATT VATANKHAH

Picture a huge, heavy flywheel Then, at some point—

breakthrough! There is no single action that

creates the breakthroughIt is an accumulation of events

Buildup and Breakthrough

The flywheel image captures the overall feel of what it was like inside the companies that went from good to great

Example: Circuit City Since it’s a gradual transition, some

people do not realize what is happening until a few years into it

Buildup and Breakthrough, continued

We allow the way transitions look from the outside to drive our perception of what they must feel like to those going through them on the inside

There is no single miracleTo the people on the inside, it was a quiet,

deliberate process of figuring out what needed to be done to create the best future results and then simply take those steps

Buildup and Breakthrough, continued

Example: UCLA Bruins

No matter how short or long it took, every good-to-great company transformation followed the basic steps, accumulating momentum, turn by turn, until breakthrough

Not Just a Luxury of Circumstance After Buildup-Breakthrough Flywheel Model,

it’s not just a luxury of circumstance Good-to-Great companies followed this

model no matter how bad their short-term circumstances wereWells Fargo—deregulationNucor and Circuit City—looming bankruptcyGillette and Kroger—potential takeover threatsFannie Mae—million-dollar-a-day losses

Not Just a Luxury of Circumstance, continued

Companies must also manage the short-term pressures of Wall Street

The Good-to-Great companies were subject to the same short-term pressures from Wall Street as the comparison companiesYet, unlike the comparison companies, Good-to-

Great companies had the patience and discipline to follow the buildup-breakthrough flywheel model despite these pressures

In the end, they attained extraordinary results by Wall Street’s own measure of success

Not Just a Luxury of Circumstance, continued

The key is to harness the flywheel to manage these short-term pressures

Example: Abbott Laboratories—Blue PlansWould tell Wall Street analysts that it expected to grow

earnings of a specified amount which would be lower than their internal goal

Kept rank-ordered list of the proposed entrepreneurial projects that had not yet been funded—the Blue Plans

Abbott would pick a number that exceeded analysts’ expectations but fell short of the actual growth rate○ Would then take the difference between the “make analysts

happy” growth and the actual growth and channel those funds into the Blue Plans

Not Just a Luxury of Circumstance, continued

Example: Abbott Laboratories, continuedBrilliant mechanism for managing short-term

pressuresNo evidence that comparison company, Upjohn,

did anything similar○ Was only investing for the future

Abbott became a consistent performer, breaking through in 1974 with Upjohn falling behind

Good-to-Great companies effectively manage Wall Street during their buildup-breakthrough years○ Practice the time-honored discipline of under-

promising and over-delivering

The “Flywheel Effect” “Tremendous power exists in the fact of

continued improvement and the delivery of results.”Tangible accomplishments can be a very

useful tool to build momentum in the flywheel ○ Even incremental accomplishments at first○ Must show how these accomplishments fit into

the overall concept○ People must see and feel these

accomplishments

The “Flywheel Effect,” continued When accomplishments are pointed to,

people will line up with enthusiasm

The “Flywheel Effect,” continued Good-to-Great companies don’t worry

about consciously creating commitment and alignmentKroger can’t get a company of over 50,000

people to embrace a radical new strategy○ Jim Herring, Kroger’s Level 5 leader, avoided

any attempts at motivation ○ He and his team began turning the flywheel,

creating tangible evidence that their plans made sense

The “Flywheel Effect,” continued Instead of publicly proclaiming huge

goals, Good-to-Great companies began spinning the flywheel, step by step, turn by turnAfter momentum was built, they could look

up and say, “Hey, if we just keep pushing on this thing, there’s no reason we can’t accomplish X.”

The “Flywheel Effect,” continued

Nucor ExampleNucor began turning the flywheel in 1965

○ Trying to avoid bankruptcy (Starting to push) ○ Building first steel mills because of lack of reliable

supplier (Building speed and momentum)○ Realized they could build steel better and cheaper

than anyone else, so built two, then three additional mini-mills (Building even more speed and momentum)

In 1974, it dawned on Nucor that they could become the most profitable steel company in America○ It took 20 years of doing what they were doing,

pushing the flywheel to become number one

The “Flywheel Effect,” continued Overview (page 177)

When you let the flywheel do the talking, you don’t need to fervently communicate your goals

People can just extrapolate from the momentum of the flywheel for themselves:

“Hey, if we just keep doing this, look at where we can go!”

As people decide among themselves to turn the fact of potential into the fact of results, the goal almost sets itself

The “Flywheel Effect,” continued Overview, continued

The right people want to be part of a winning team○ They want to contribute to producing visible,

tangible results ○ They want to feel the excitement of being involved

in something that just flat out works When people can see tangible results, when they

can feel the flywheel beginning to build speed, then the majority of people will line up and help push

The Doom Loop Collins and his team found a very different

pattern in the comparison companiesThey instead frequently launched new programs

aimed at “motivating the troops” only to see the programs fail to produce sustained results

They sought a single defining action, the miracle moment that would allow them to skip right to the breakthrough

After years of lurching the flywheel back and forth, the comparison companies failed to build sustained momentum and fell into what came to be called the doom loop

The Doom Loop, continued

Example: Warner-LambertDirect comparison company to Gillette In 1979, told Business Week it aimed to be a

leading consumer products company In 1980, redirected its aim to health care

companies, such as Merck In 1981, returned to a consumer goods focus In 1987, again aimed toward Merck Finally, in the early 1990s, reversed again to a

consumer goods aim

The Doom Loop, continued

Example: Warner-Lambert, continuedFrom 1979 to 1998, Warner-Lambert

underwent three major restructurings—and changed CEOs for each—in search of breakthrough results ○ Each CEO brought in a new program, halting

the momentum of his predecessor Time and again, the company would attain a

burst of results, then slacken, never attaining the sustained momentum of a buildup-breakthrough flywheel

The Doom Loop, continued

The Doom Loop is shown on page 179 The Warner-Lambert case is extreme, but some

version of the doom loop was found in every comparison companyA full list is given in Appendix 8.A (page 254)

While the specific permutations of the doom loop varied by company, there were some highly prevalent patterns, notably: The misguided use of acquisitions The selection of leaders who undid the work of

previous generations

The Misguided Use of Acquisitions To understand the role of acquisitions in the

process of going from good to great, the team undertook a systematic qualitative and quantitative analysis of all acquisitions and divestitures of the companies in the study

No pattern was noticed in the amount or scale of acquisitions, but there was a significant difference in the success rate of the acquisitions in the good-to-great companies versus the comparisonsFor a full list, see Appendix 8.B (page 259)

The Misguided Use of Acquisitions, continued

So, why did the good-to-great companies have a substantially higher success rate with acquisitions? The key to their success was that their big

acquisitions generally took place after the development of the Hedgehog Concept and after the flywheel had built significant momentum

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

The Misguided Use of Acquisitions, continued

The comparison companies frequently tried to jump right to to breakthrough via an acquisition or mergerIt never worked

They never learned the simple truth that, while you can buy your way to growth, you absolutely cannot buy your way to greatnessTwo big mediocrities joined together never

make one great company

Leaders Who Stop the Flywheel The other frequently observed doom

loop pattern is that of new leaders who stepped in, stopped and already spinning flywheel, and threw it in an entirely new direction

One company that has suffered from this doom loop pattern is Harris Corporation

Leaders Who Stop the Flywheel, continued

Example: Harris Corporation Applied many of the good-to-great concepts

in the early 1960s and began a classic buildup process that led to breakthrough results

George Dively and his successor Richard Tullis identified a hedgehog concept and strove to be the best in the world at applying technology to printing and communications

Reached breakthrough results in 1975

Leaders Who Stop the Flywheel, continued

Example: Harris Corporation, continuedSpinning flywheel began to slow down in 1978

due to newly chief executive Joseph BoydBoyd’s first decision was to move the

headquarters from Cleveland to his hometown in Florida

Flywheel came to a grinding halt in 1983 when Boyd divested the printing business

Boyd decided to throw the company into the office automation business

Leaders Who Stop the Flywheel, continued

Example: Harris Corporation, continuedAttempted to design office automation which

would rival producers such as IBM, DEC, and Wang

Spent 1/3 of its entire corporate net worth to buy Lanier Business Products, a low-end word processing company

Idea was scrapped before introduction into the market

Project was an epic fail

Leaders Who Stop the Flywheel, continued

Example: Harris Corporation, continued From the end of 1973 to the end of 1978,

Harris beat the market by more than five times

From the end of 1978 to the end of 1983, Harris fell 39% behind the market

By 1988, Harris had fallen over 70% behind the market

The Flywheel: A Wraparound Idea

Consistency and coherence

Each piece of the system reinforces the other parts of the system to form an integrated whole that is much more powerful than the sum of the parts

How To Tell If You’re on the FlywheelSigns That You’re on the

Flywheel Signs That You’re in the

Doom Loop

Follow a pattern of buildup leading to breakthrough

Skip buildup and jump right to breakthrough

Reach breakthrough by an accumulation of steps, one after

the other, turn by turn of the flywheel; feels like an organic

evolutionary process

Implement big programs, radical change efforts, dramatic

revolutions; chronic restructuring—always looking for a miracle

moment or a new savior

How To Tell If You’re on the Flywheel, continued

Signs That You’re on the Flywheel

Signs That You’re in the Doom Loop

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

build momentum

Embrace fads and engage in management hoopla, rather than

confront the brutal facts

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

Demonstrate chronic inconsistency—lurching back and forth and

straying far outside the three circles

Follow the pattern of disciplined people, disciplined thought,

disciplined action

Jump right into action, without disciplined thought and without first getting the right people on the bus

How To Tell If You’re on the Flywheel, continued

Signs That You’re on the Flywheel

Signs That You’re in the Doom Loop

Harness appropriate technologies to your Hedgehog Concept to

accelerate momentum

Run about like Chicken Little in reaction to technology change,

fearful of being left behind

Make major acquisitions after breakthrough (if at all) to accelerate

momentum

Make major acquisitions before breakthrough in a doomed attempt

to create momentum

Spend little energy trying to motivate or align people; the momentum of

the flywheel is infectious

Spend a lot of energy trying to align and motivate people, rallying them

around new visions

How To Tell If You’re on the Flywheel, continued

Signs That You’re on the Flywheel

Signs That You’re in the Doom Loop

Let results do most of the talkingSpend a lot of energy trying to align and motivate people, rallying them

around new visions

Maintain consistency over time; each generation builds on the work of

previous generations; the flywheel continues to build momentum

Demonstrate inconsistency over time; each new leader brings a radical new path; the flywheel grinds to a halt, and

the doom loop begins anew

How the Flywheel is Achieved

Starts with Level 5 leaders who are naturally attracted towards a flywheel concept, concentrating on the process of pushing the flywheel and yielding results rather than flashy, misleading programs

Getting the right people on the bus, the wrong people off the bus, and the right people into the right seats

Stockdale Paradox: “We’re not going to hit breakthrough by Christmas, but if we keep pushing in the right direction, we will eventually hit breakthrough.” Confronting the brutal facts helps to see the obvious, yet

difficult, steps that must be taken to turn the wheel

How the Flywheel is Achieved, continued

Continuing to push in a consistent direction on the flywheel and accumulating momentum step by step and turn by turn will eventually cause you to reach breakthrough

“It might not happen today, or tomorrow, or next week. It might not even happen next

year. But it will happen.” –Jim Collins