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Good to Great

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Premise: what makes companies go from mediocre or good performance to sustained great performance?

Methodology

11 companies that went from average or good performance to great performance — 3x or more the growth of the general market (in terms of stock price — public companies only) — over 15 year period. No companies in great industries (to make sure they’re not just riding a good trend). Same number of comparison companies, in same industries, similar size and characteristics at the start, but that haven’t went from good to great. Try to find not just what good-to-great companies have in common, but what they have in common compared to the comparison companies. Additionally, a smaller sample of companies that went from good to great, but haven’t sustained their great performance.

(This isn’t a small sample — those 11 companies are all from Fortune 500 that fit the criteria)

What makes good to great companies great

  1. Disciplined people
  2. Disciplined thought
  3. Disciplined action

Disciplined people

Start from who, not what or how. You need to have the right people on the bus, and the wrong people off the bus. Build an amazing executive team, and let them do the work.

Level 5 executives: People committed not to their own success, but the success of the companies above all. Often mild, self-effacing, gentle managers. It’s not about their strong personality (charisma can be an impediment). It’s about strong leadership. Letting and driving people to do their best work for the company, and not just under pressure to please the boss.

There is no place for nepotism in good to great companies. You need the best people in the world you can find, period.

CEOs from the outside, doing huge sweeping changes, don’t generally succeed at taking a company from good to great.

CEOs with great personality and charisma can, through their own will and leadership and discipline, drive a company from good to great, but the companies rarely sustain greatness when they leave. Build the company to have level 5 leadership, disciplined thought, and disciplined action.

Stare in the mirror or look out the window. The CEOs of good-to-great companies tended to attribute their successes to luck and other people, but would take responsibility of their failures. CEOs of comparison companies tended to blame the external world for failures, but take credit for success.

Disciplined thought

Foxes and hedgehogs. Foxes are cunning and try a thousand ways to get their way. Hedgehogs have just one focus, but that focus is strong and it keeps them safe.

Develop your “hedgehog concept” in the intersection of three criteria:

If you can’t be the best in the world at your core business, this can’t be a basis of your hedgehog concept and you won’t achieve greatness. It’s also not about what you will become or if you actually will be the best in the world at. It’s about a rational, calm understanding of the possibility of being the best in the world at. Deliberately, never with bravado.

You need to have a deep understanding of your economic engine. No one can help you with this. This will take years to figure out. But become the best in the world at understanding what really drives your business (if you can — in one primary denominator like profit per X), and focus on that.

Passion is not sufficient, but it’s necessary. If you don’t care about your business, you won’t go from good to great.

You need a careful balance of optimism — knowing that greatness can be achieved — and constantly confronting brutal reality. You can’t have disciplined action if you ignore reality, but it still takes a bit of faith to push through with your hedgehog concept.

The Council — an organizational idea for a group of disciplined thinkers that argue, debate, revise, and formulate the hedgehog concept. It takes, on average, 4 years for the hedgehog concept to fully develop in good-to-great companies. It takes a lot of iteration, but you need to put thought into it.

Disciplined action

You need a culture of discipline. Not a leader forcing discipline upon their employees. A culture of disciplined people, thought and action.

Rinse your own cottage cheese. When the era of deregulation become new reality, Bank of America clung to the old culture of bankers, the luxury, the money, the private jets. Wells Fargo started from the top, and instituted disciplined spending on the executives first. During recessions, all Nucor employees took a loss on salaries. But it’s executives, not regular workers, that suffered most. There’s no culture of discipline if the top can still enjoy the fat.

Focus on what not to do as much as what you do have to do. Have a stop doing list. (Existential question: should you put a “start a ‘stop doing list’” on your to-do list?)

The best strategy is highly undifferentiated as long as you’re right.

Some companies lose focus, hedge their bets, and spread themselves too thin. Other companies double down on their hedgehog concept, and if they’re right about it, they get the most benefit.

How do you know if you’re right? If you have the right people on the bus engaging in disciplined thought, when ego doesn’t impede the best ideas surfacing, and when you confront brutal facts, maybe it’s not that hard.

Bureaucracy is only needed in response to undisciplined people engaged in undisciplined thought. But if you attack the symptoms with bureaucracy, rather than by fixing the root cause and getting the wrong people off the bus, you’ll only turn away your best people, only making matters worse, necessitating more bureaucracy, and on, and on.

Technology is never the root cause of companies going from good to great, or a demise of a company. Technology is just yet another instance of disciplined action. When a good-to-great company sees a technology relevant to them that can help them at their core business, they will use that technology, and be pioneers of it if necessary. They’ll be motivated by opportunity. Comparison companies are motivated by fear, they will jump at the technology, at any fad, not because of good understanding of the technology’s significance, but because they fear they need it. Or, they will ignore a technology they do have to implement, or fail to implement it. But technology is not in itself special. It’s only an accelerator, of growth or of demise, but it cannot, by itself, without all the core traits of great companies, make a company great.

Flywheel. Success doesn’t happen overnight. What you need is build up momentum, start spinning your flywheel faster and faster until it’s unstoppable and the breakthrough is inevitable. Buildup, then breakthrough.

On the outside, success looks revolutionary. On the inside, it looks organic. A slow, steady process of spinning the flywheel, starting from the first pushes of getting the right people, then the right hedgehog concept, and then pushing and pushing with consistency and discipline.

The doomloop is the opposite of the flywheel. It’s when mediocre companies lurch back and forth, confused, with no consistency, and with no momentum built up in one direction. It’s when new CEOs undermine the work of their predecessors, announce huge changes, try to change everything all at once, create a breakthrough without the buildup.

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