After combing through 40 years of data on over 1400 companies, Jim Collins and his team developed a list of companies that have produced extraordinary and sustained results. Collins published this list in his book Good to Great, along with further in-depth examination of the factors behind these successes. The 11 winning companies were: Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo. A rigorous analysis of these companies produced six Good to Great factors which differentiated them from their competitors and fueled their profits. The factors, as defined by Jim Collins and his team, are: 1) Level 5 Leadership, 2) First Who Then What, 3) Confront the Brutal Facts, 4) The Hedgehog Concept, 5) Culture of Discipline, and 6) Technology Accelerators.
Level 5 Leadership and the Hedgehog Concept intrigued me the most.
Level 5 Leadership
Level 5 Leadership proved to be the most important factor and a prerequisite before the others could take maximum effect. You might expect the leader of a long-successful business to possess an outgoing personality and to take full ownership of his company’s successes; however, Collins discovered these leaders are more likely to be extremely humble, often shy, and to attribute their professional successes to the efforts of those around them. One indicator of Level 5 Leadership is whether the CEO sets the company up for long-term success. Is the company mission greater than the leader’s ego? Does he/she instill a system which breeds success and choose an appropriate successor? A non-Level 5 Leader might view the company’s decline after his/her departure as the ultimate testament to his/her importance.
Steve Jobs immediately came to my mind while reading the Level 5 chapter. I wonder whether Apple will continue to be successful after Jobs ultimately resigns. I ponder the leadership style of Tim Cook, currently in charge of day-to-day operations. How humble is Jobs, and has he set Apple up to be successful with Cook?
The Hedgehog Concept
In addition to displaying Level 5 Leadership, all 11 companies saw through the clutter of everyday business details, recognized simple patterns, and clarified an uncomplicated but powerful truth. This truth, or Hedgehog Concept, guided and informed all their professional decisions. The formation of the Hedgehog Concept, according to Collins, stems from three areas of understanding: 1) what you can be the best in the world at 2) which activities will generate great profits, and 3) what you are passionate about. If your business meets two of these criteria, you may be able to produce good results, but probably not great and sustained results.
Collins describes Walgreens’ Hedgehog Concept as an example. Walgreens strives to operate “the best, most convenient drugstores with high profit per customer visit.” The proliferation of Walgreens on corner lots illustrates this quest for convenience. The company would not hesitate to close a profitable store in order to open another situated half a block down on a corner lot. The new store is easier for customers to access and so aligns with Walgreen’s guiding concept.
Business decisions are easier for Good to Great companies. If a “strategic” move does not fit within its Hedgehog Concept, the company knows to refuse and focus on its simple mission. Without a Hedgehog Concept for reference, a business can make poor, costly decisions. Collins illustrates the ramifications of a missing Hedgehog concept with Walgreen’s competitor, Eckerd. When Eckerd purchased American Home Video Corporation in the early 1980s, the drugstore moved into the home video market. The company hoped the new line of business, still in its infancy, would generate great profits. Eckerd ultimately regretted their decision, however, and sold the company at a 31 million dollar loss. In 2007, Rite Aid acquired Eckerd.
This book has provided me with a new way of looking at companies and evaluating their chances of long-term success. The theories, all of which are worth reading about, can be applied at the small business level and guide one’s own business decisions. Before making a decision, you may ask yourself — is this simply serving my ego, or is it for the betterment of the company? Am I lunging at new ways of generating revenue for revenue’s sake?
If you are a Level 5 Leader with a Hedgehog Concept, you may not need to ask these questions. But it’s a good place to start.