Good is the Enemy of Great
Few people attain great lives, in large part because it is just so easy to settle for a good life. The vast majority of companies never become great, precisely because the vast majority become quite good. There are eleven companies with the ratio of cumulative stock returns relative to the general stock market from before and after years of the transition point. The highest cumulative ratio is 18.50 times for Circuit City and the lowest ratio is 3.42 for Kimberly-Clark. This are companies that grow from good-to-great.
A total study set of twenty-eight companies: eleven good-to-great companies, eleven direct comparisons and six un-sustained comparisons.
- Circuit City
- Fannie Mae
- Philip Morris
- Pitney Bowes
- Wells Fargo
The core of our method was a systematic process of contrasting the good-to-great examples to the comparisons, always asking: “What’s different?”
Larger-than-life, celebrity leaders who ride in from the outside are negatively correlated with taking a company from good to great. Ten of eleven good-to-great CEOs came from inside the company, whereas the comparison companies tried outside CEOs six times more often.
Idea that the structure of executive compensation is a key driver in corporate performance is simply not supported by the data. Strategy per se did not separate the good-to-great companies from the comparison companies. The good-to-great companies did not focus principally on what to do to become great; they focused equally on what not to do and what to stop doing. Technology can accelerate a transformation, but technology cannot cause a transformation. Mergers and acquisitions play virtually no role in igniting a transformation from good to great.
The good-to-great companies paid scant attention to managing change, motivating people, or creating alignment. The good-to-great companies had no name, tag line, launch event, or program to signify their transformations. The good-to-great companies were not, by and large, in great industries and some were in terrible industries.
Think of the transformation as a process of buildup followed by breakthrough, broken into three broad stages: disciplined people, disciplined thought, and disciplined action.
The good-to-great leaders seem to have come from Mars. Self-effacing, quiet, reserved, even shy—these leaders are a paradoxical blend of personal humility and professional will. They first got the right people on the bus, the wrong people off the bus, and the right people in the right seats — and then they figured out where to drive it. People are not your most important asset. The right people are.
Stockdale Paradox: You must maintain unwavering faith that you can and will prevail in the end, regardless of the difficulties and at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be.
When you combine a culture of discipline with an ethic of entrepreneurship, you get the magical alchemy of great performance.
The good-to-great transformations never happened in one fell swoop.
Level 5 Leadership
Man named Darwin E. Smith became chief executive of Kimberly-Clark. Under his stewardship, Kimberly-Clark generated cumulative stock returns 4.1 times the general market. Darwin Smith stands as a classic example of what we came to call a Level 5 leader—an individual who blends extreme personal humility with intense professional will.
The term Level 5 refers to the highest level in a hierarchy of executive capabilities that we identified in our research. Level 5 leaders are a study in duality: modest and willful, humble and fearless.
While it might be a bit of a stretch to compare the good-to-great CEOs to Abraham Lincoln, they did display the same duality. Consider the case of Colman Mockler, CEO of Gillette from 1975 to 1991.
When David Maxwell became CEO of Fannie Mae in 1981, the company was losing $1 million every single business day. Over the next nine years, Maxwell transformed Fannie Mae into a high-performance culture that rivaled the best Wall Street firms, earning $4 million every business day and beating the general stock market 3.8 to 1.
In contrast to the very I-centric style of the comparison leaders, we were struck by how the good-to-great leaders didn’t talk about themselves.
The eleven good-to-great CEOs are some of the most remarkable CEOs of the century, given that only eleven companies from the Fortune 500 met the exacting standards for entry into this study. Yet, despite their remarkable results, almost no one ever remarked about them! George Cain, Alan Wurtzel, David Maxwell, Colman Mockler, Darwin Smith, Jim Herring, Lyle Everingham, Joe Cullman, Fred Allen, Cork Walgreen, Carl Reichardt—how many of these extraordinary executives had you heard of?
When George Cain became CEO of Abbott Laboratories, it sat in the bottom quartile of the pharmaceutical industry. Cain then set out to destroy one of the key causes of Abbott’s mediocrity: nepotism.
Ten out of eleven good-to-great CEOs came from inside the company, three of them by family inheritance.
A superb example of insider-driven change comes from Charles R. “Cork” Walgreen
Alan Wurtzel, a second-generation family member who took over his family’s small company and turned it into Circuit City. If you had to choose between $1 invested in Circuit City or $1 invested in General Electric on the day that the legendary Jack Welch took over GE in 1981 and held to January 1, 2000, you would have been better off with Circuit City—by six times.
Level 5 leaders look out the window to attribute success to factors other than themselves. When things go poorly, however, they look in the mirror and blame themselves, taking full responsibility.
First Who … Then What
The good-to-great leaders understood three simple truths.
- First, if you begin with “who,” rather than “what,” you can more easily adapt to a changing world.
- Second, if you have the right people on the bus, the problem of how to motivate and manage people largely goes away.
- Third, if you have the wrong people, it doesn’t matter whether you discover the right direction; you still won’t have a great company.
Wells Fargo’s approach was simple: You get the best people, you build them into the best managers in the industry, and you accept the fact that some of them will be recruited to become CEOs of other companies. 7 Bank of America took a very different approach. While Dick Cooley systematically recruited the best people he could get his hands on, Bank of America, according to the book Breaking the Bank, followed something called the “weak generals, strong lieutenants” model. If you pick strong generals for key positions, their competitors will leave.
In contrast to the good-to-great companies, which built deep and strong executive teams, many of the comparison companies followed a “genius with a thousand helpers” model. In these cases, the towering genius, the primary driving force in the company’s success, is a great asset—as long as the genius sticks around.
Eckerd Corporation suffered the liability of a leader who had an uncanny genius for figuring out “what” to do but little ability to assemble the right “who” on the executive team.
The contrast between Jack Eckerd and Cork Walgreen is striking. Whereas Jack Eckerd had a genius for picking the right stores to buy, Cork Walgreen had a genius for picking the right people to hire.
We found no systematic pattern linking executive compensation to the process of going from good to great. It’s not how you compensate your executives, it’s which executives you have to compensate in the first place. The right people will do the right things and deliver the best results they’re capable of, regardless of the incentive system.
The good-to-great companies probably sound like tough places to work—and they are. If you don’t have what it takes, you probably won’t last long. But they’re not ruthless cultures, they’re rigorous cultures.
The good-to-great companies rarely used head-count lopping as a tactic and almost never used it as a primary strategy.
Endless restructuring and mindless hacking were never part of the good-to-great model.
One of the immutable laws of management physics is “Packard’s Law.”
If your growth rate in revenues consistently outpaces your growth rate in people, you simply will not—indeed cannot—build a great company.
One of the key contrasts between Alan Wurtzel at Circuit City and Sidney Cooper at Silo is that Wurtzel spent the bulk of his time in the early years focused on getting the right people on the bus, whereas Cooper spent 80 percent of his time focusing on the right stores to buy.
Same strategy, different people, different results.
Letting the wrong people hang around is unfair to all the right people, as they inevitably find themselves compensating for the inadequacies of the wrong people. For every minute you allow a person to continue holding a seat when you know that person will not make it in the end, you’re stealing a portion of his life, time that he could spend finding a better place where he could flourish. Instead of firing honest and able people who are not performing well, it is important to try to move them once or even two or three times to other positions where they might blossom.
The good-to-great companies made a habit of putting their best people on their best opportunities, not their biggest problems.
Indeed, one of the crucial elements in taking a company from good to great is somewhat paradoxical. You need executives, on the one hand, who argue and debate—sometimes violently—in pursuit of the best answers, yet, on the other hand, who unify fully behind a decision, regardless of parochial interests.
The people we interviewed from the good-to-great companies clearly loved what they did, largely because they loved who they did it with.
Confront The Brutal Facts (Yet Never Lose Faith)
There is no worse mistake in public leadership than to hold out false hopes soon to be swept away – WINSTON S. CHURCHILL.
Both Kroger and A&P were old companies (Kroger at 82 years, A&P at 111 years) heading into the 1970s; both companies had nearly all their assets invested in traditional grocery stores; both companies had strongholds outside the major growth areas of the United States; and both companies had knowledge of how the world around them was changing. Yet one of these two companies confronted the brutal facts of reality head-on and completely changed its entire system in response; the other stuck its head in the sand.
In 1958, Forbes magazine described A&P as “the Hermit Kingdom,” run as an absolute monarchy by an aging prince.
In one series of events, the company opened a new store called The Golden Key, a separate brand wherein it could experiment with new methods and models to learn what customers wanted. They didn’t like the answers that it gave, so they closed it.
Kroger decided to eliminate, change or replace every single store and depart every region that did not fit the new realities.
The good-to-great companies did not have a perfect track record. But on the whole, they made many more good decisions than bad ones, and they made many more good decisions than the comparison companies.
The good-to-great companies displayed two distinctive forms of disciplined thought:
- They infused the entire process with the brutal facts of reality.
- They developed a simple, yet deeply insightful, frame of reference for all decisions.
The moment a leader allows himself to become the primary reality people worry about, rather than reality being the primary reality, you have a recipe for mediocrity, or worse. This is one of the key reasons why less charismatic leaders often produce better long-term results than their more charismatic counterparts.
How do you create a climate where the truth is heard?
- Lead with questions, not answers. The good-to-great leaders made particularly good use of informal meetings where they’d meet with groups of managers and employees with no script, agenda, or set of action items to discuss.
- Engage in dialogue and debate, not coercion. In 1965, you could hardly find a company more awful than Nucor. It had only one division that made money. Everything else drained cash. Thirty years later, Nucor stood as the fourth-largest steelmaker in the world 35 and by 1999 made greater annual profits than any other American steel company.
- Conduct autopsies, without blame. When you conduct autopsies without blame, you go a long way toward creating a climate where the truth is heard.
- Build “red flag” mechanisms. In a deregulated world, banking would be a commodity, and the old perks and genteel traditions of banking would be gone forever. Not until it had lost $1.8 billion did Bank of America fully accept this fact. In contrast, Carl Reichardt of Wells Fargo, called the ultimate realist by his predecessor, hit the brutal facts of deregulation head-on.
But every good-to-great company faced significant adversity along the way to greatness, of one sort or another—Gillette and the takeover battles, Nucor and imports, Wells Fargo and deregulation, Pitney Bowes losing its monopoly, Abbott Labs and a huge product recall, Kroger and the need to replace nearly 100 percent of its stores, and so forth. In every case, the management team responded with a powerful psychological duality. On the one hand, they stoically accepted the brutal facts of reality. On the other hand, they maintained an unwavering faith in the endgame, and a commitment to prevail as a great company despite the brutal facts.
We came to call this duality the Stockdale Paradox. The name refers to Admiral Jim Stockdale, prisoner-of-war camp during the height of the Vietnam War. “This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.”
The good-to-great leaders were able to strip away so much noise and clutter and just focus on the few things that would have the greatest impact.
When you start with an honest and diligent effort to determine the truth of your situation, the right decisions often become self-evident.
The Hedgehog Concept – (Simplicity within the Three Circles)
In his famous essay “The Hedgehog and the Fox,” Isaiah Berlin divided the world into hedgehogs and foxes, based upon an ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.”
Berlin extrapolated from this little parable to divide people into two basic groups: foxes and hedgehogs. Foxes pursue many ends at the same time and see the world in all its complexity. It doesn’t matter how complex the world, a hedgehog reduces all challenges and dilemmas to simple—indeed almost simplistic—hedgehog ideas.
Those who built the good-to-great companies were, to one degree or another, hedgehogs. They used their hedgehog nature to drive toward what we came to call a Hedgehog Concept for their companies. Those who led the comparison companies tended to be foxes,
In classic hedgehog style, Walgreens took this simple concept and implemented it with fanatical consistency. It embarked on a systematic program to replace all inconvenient locations with more convenient ones. Walgreens then linked its convenience concept to a simple economic idea, profit per customer visit.
Strategy per se did not distinguish the good-to-great companies from the comparison companies.
A Hedgehog Concept is a simple, crystalline concept that flows from deep understanding about the intersection of the following three circles:
- What you can be the best in the world at?
- What drives your economic engine?
- What you are deeply passionate about?
Every company would like to be the best at something, but few actually understand—with piercing insight and egoless clarity—what they actually have the potential to be the best at and, just as important, what they cannot be the best at.
Abbott team sought to understand what it could be the best at. Around 1967, a key insight emerged: We’ve lost the chance to be the best pharmaceutical company, but we have an opportunity to excel at creating products that contribute to cost-effective health care. Abbott had experimented with hospital nutritional products, designed to help patients quickly regain their strength after surgery and diagnostic devices.
Abbott Laboratories becomes best by offering a low-cost portfolio of health care. Circuit City becomes best at implementing “4-S” model. Fannie Mae becomes best as the player in capital market pertaining to mortgages. Gillette becomes best at offering premier global brands of daily needs. Kimberly-Clark becomes best at providing best paper-based consumer products. Kroger becomes best by building innovative super-combo stores. Nucor becomes best at producing low-cost steel. Philip Morris becomes best at building brand loyalty in cigarettes and other consumables. Pitney Bowes becomes the best at providing sophisticated back office equipment. Walgreens becomes best at the convenient drug store. Wall Fargo becomes best at operating a bank like a business.
The notion of a single “economic denominator”. Think about it in terms of the following question: If you could pick one and only one ratio—profit per x (or in the social sector, cash flow per x) — to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?
Economic denominator grasped by good-to-great companies during the crucial transition years. Abbott shifted its economic denominator from profit per production to profit per employee. Circuit City shifted from profits per single store to profits from region. Fannie Mae shifted from profit per mortgage to profit per mortgage risk level. Gillette shifted from profit per division to profit per customer. Kimberly-Clark shifted from profit per fixed asset to profit per consumer brand. Kroger shifted its economic denominator from profit per store to per local population. Nucor shifted its profit from per division to per ton of finished steel. Philip Morris shifted its profit from per sales region to per global brand category. Pitney Bowes shifted its profit from per postage meters to per customer. Walgreens shifted its profit from per store to per customer. Wall Fargo shifted its profit from per loan to per employee.
The Fannie Mae versus Great Western case highlights an essential point: “Growth” is not a Hedgehog Concept.
Disciplined action—the third big chunk in the framework after disciplined people and disciplined thought—only makes sense in the context of the Hedgehog Concept.
It took about four years on average for the good-to-great companies to clarify their Hedgehog Concepts. Like scientific insight, a Hedgehog Concept simplifies a complex world and makes decisions much easier.
Do we really understand what we can be the best in the world at, as distinct from what we can just be successful at? Do we really understand the drivers in our economic engine, including our economic denominator? Do we really understand what best ignites our passion? One particularly useful mechanism for moving the process along is a device that we came to call the Council. The Council consists of a group of the right people who participate in dialogue and debate guided by the three circles, iteratively and over time, about vital issues and decisions facing the organization.
Good-to-great companies set their goals and strategies based on understanding; comparison companies set their goals and strategies based on bravado.
A Culture of Discipline
Few successful start-ups become great companies, in large part because they respond to growth and success in the wrong way. Entrepreneurial success is fueled by creativity, imagination, bold moves into uncharted waters, and visionary zeal. As a company grows and becomes more complex, it begins to trip over its own success—too many new people, too many new customers, too many new orders, too many new products. What was once great fun becomes an unwieldy ball of disorganized stuff. Lack of planning, lack of accounting, lack of systems, and lack of hiring constraints create friction. Problems surface—with customers, with cash flow, with schedules.
The professional managers finally rein in the mess. They create order out of chaos, but they also kill the entrepreneurial spirit.
When you put these two complementary forces together—a culture of discipline with an ethic of entrepreneurship—you get a magical alchemy of superior performance and sustained results.
Rathmann credits much of his entrepreneurial success to what he learned while working at Abbott Laboratories before founding Amgen. Many of the Abbott disciplines trace back to 1968, when it hired a remarkable financial officer named Bernard H. Semler.
Abbott reduced its administrative costs as a percentage of sales to the lowest in the industry (by a significant margin) and at the same time became a new product innovation machine like 3M, deriving up to 65 percent of revenues from new products introduced in the previous four years.
Build a culture full of people who take disciplined action within the three circles, fanatically consistent with the Hedgehog Concept.
The good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system.
The transition begins not by trying to discipline the wrong people into the right behaviors, but by getting self-disciplined people on the bus in the first place.
A pattern we found in every un-sustained comparison: a spectacular rise under a tyrannical disciplinarian, followed by an equally spectacular decline when the disciplinarian stepped away, leaving behind no enduring culture of discipline, or when the disciplinarian himself became undisciplined and strayed wantonly outside the three circles. Yes, discipline is essential for great results, but disciplined action without disciplined understanding of the three circles cannot produce sustained great results.
The more an organization has the discipline to stay within its three circles, the more it will have attractive opportunities for growth. Indeed, a great company is much more likely to die of indigestion from too much opportunity than starvation from too little. The challenge becomes not opportunity creation, but opportunity selection.
Those who built the good-to-great companies, however, made as much use of “stop doing” lists as “to do” lists. They displayed a remarkable discipline to unplug all sorts of extraneous junk.
If you look back on the good-to-great companies, they displayed remarkable courage to channel their resources into only one or a few arenas. Once they understood their three circles, they rarely hedged their bets.
A culture of discipline is not just about action. It is about getting disciplined people who engage in disciplined thought and who then take disciplined action.
Walgreens didn’t adopt all of this advanced technology just for the sake of advanced technology or in fearful reaction to falling behind. No, it used technology as a tool to accelerate momentum after hitting breakthrough and tied technology directly to its Hedgehog Concept of convenient drugstores increasing profit per customer visit. Walgreens remained resolutely clear: Its Hedgehog Concept would drive its use of technology, not the other way around.
Every good-to-great company became a pioneer in the application of technology, but the technologies themselves varied greatly.
Technology accelerator linked to Hedgehog Concept during the transition period. Abbott pioneered in the application of computer technology. Circuit City pioneered in the application of sophisticated point-of-sale and inventory tracking technologies. Fannie Mae pioneered in sophisticated algorithms and computer analysis. Gillette innovated in sophisticated manufacturing technology for producing billions of low-cost consistent products. Kimberly-Clark pioneered the manufacturing technology in the process of providing a superior product. Kroger pioneered in the application of computer and information technology for modernization of superstores. Nucor pioneered the application of most advanced minimal steel manufacturing technology. Philip Morris pioneered both packaging and manufacturing technology. Pitney Bowes pioneered the advanced mailroom. Walgreens pioneered satellite communication and computer network technology. Wells Forger pioneered the technology to increase economic denominator.
When used right, technology becomes an accelerator of momentum, not a creator of it. Throughout business history, early technology pioneers rarely prevail in the end. The idea that technological change is the principal cause in the decline of once-great companies (or the perpetual mediocrity of others) is not supported by the evidence.
Certainly, a company can’t remain a laggard and hope to be great, but technology by itself is never a primary root cause of either greatness or decline.
The Flywheel and The Doom Loop
No matter how dramatic the end result, the good-to-great transformations never happened in one fell swoop. There was no single defining action, no grand program, no one killer innovation, no solitary lucky break, no wrenching revolution. Good to great comes about by a cumulative process—step by step, action by action, decision by decision, turn by turn of the flywheel—that adds up to sustained and spectacular results.
Our change was a major change, and yet in many respects simply a series of incremental changes—this is what made that change successful. We didn’t really make a big conscious decision or launch a big program to initiate a major change or transition. Individually and collectively, we were coming to conclusions about what we could do to dramatically improve our performance.
Lasting transformations from good to great follow a general pattern of buildup followed by breakthrough. In some cases, the buildup-to-breakthrough stage takes a long time, in other cases, a shorter time. At Circuit City, the buildup stage lasted nine years, at Nucor ten years, whereas at Gillette it took only five years, at Fannie Mae only three years, and at Pitney Bowes about two years.
Clearly, the good-to-great companies did get incredible commitment and alignment—they artfully managed change—but they never really spent much time thinking about it. It was utterly transparent to them. We learned that under the right conditions, the problems of commitment, alignment, motivation, and change just melt away. They largely take care of themselves.
What do the right people want more than almost anything else? They want to be part of a winning team. They want to contribute to producing visible, tangible results.
Peter Drucker once observed that the drive for mergers and acquisitions comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend your day than doing actual work.
Why did the good-to-great companies have a substantially higher success rate with acquisitions, especially major acquisitions? The key to their success was that their big acquisitions generally took place after development of the Hedgehog Concept. They used acquisitions as an accelerator of flywheel momentum, not a creator of it.
In physics, we have been talking about the idea of coherence, the magnifying effect of one factor upon another. In reading about the flywheel, I couldn’t help but think of the principle of 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. It is only through consistency over time, through multiple generations, that you get maximum results.
The comparison companies followed a different pattern, the doom loop. Rather than accumulating momentum—turn by turn of the flywheel—they tried to skip buildup and jump immediately to breakthrough. Then, with disappointing results, they’d lurch back and forth, failing to maintain a consistent direction.
From Good To Great To Built To Last
When I consider the enduring great companies from Built to Last, I now see substantial evidence that their early leaders followed the good-to-great framework. The only real difference is that they did so as entrepreneurs in small, early-stage enterprises trying to get off the ground, rather than as CEOs trying to transform established companies from good to great.
If there ever was a classic case of buildup leading to a Hedgehog Concept, followed by breakthrough momentum in the flywheel, Wal-Mart is it. The only difference is that Sam Walton followed the model as an entrepreneur building a great company from the ground up, rather than as a CEO transforming an established company from good to great. But it’s the same basic idea.
That extra dimension is a guiding philosophy or a “core ideology,” which consists of core values and a core purpose (reason for being beyond just making money). These resemble the principles in the Declaration of Independence (“We hold these truths to be self-evident”)—never perfectly followed, but always present as an inspiring standard and an answer to the question of why it is important that we exist.
Enduring great companies preserve their core values and purpose while their business strategies and operating practices endlessly adapt to a changing world. This is the magical combination of “preserve the core and stimulate progress”.
Each of the Good-to-Great findings enables all four of the key ideas from Built to Last. To briefly review, those four key ideas are:
- Clock Building, Not Time Telling. Build an organization that can endure and adapt through multiple generations of leaders and multiple product life cycles;
- Genius of AND. Embrace both extremes on a number of dimensions at the same time. Figure out how to have A AND B—purpose AND profit, continuity AND change, freedom AND responsibility.
- Core Ideology. Instill core values (essential and enduring tenets) and core purpose (fundamental reason for being beyond just making money).
- Preserve the Core/Stimulate Progress.
A BHAG (pronounced bee-hag, short for “Big Hairy Audacious Goal”) is a huge and daunting goal. Remember, it is much easier to become great than to remain great.
Those who strive to turn good into great find the process no more painful or exhausting than those who settle for just letting things wallow along in mind-numbing mediocrity.
“The single biggest danger in business and life, other than outright failure, is to be successful without being resolutely clear about why you are successful in the first place.”
Having Philip Morris in both Good to Great and Built to Last has proved very instructive. It has taught me that it is not the content of a company’s values that correlates with performance, but the strength of conviction with which it holds those values, whatever they might be.
What can GE do better than any company in the world? Develop first-rate general managers. In our view, that is the essence of GE’s Hedgehog Concept. And what would be GE’s economic denominator? Profit per top-quartile management talent.
Boards should familiarize themselves with the characteristics of Level 5 leadership and install such leaders into positions of responsibility. Second, boards at corporations should distinguish between share value and share price. Boards have no responsibility to a large chunk of the people who own company shares at any given moment, namely the share flippers; they should refocus their energies on creating great companies that build value for the shareholders.