Frequently Asked Questions - Good to Great: Why Some Companies Make the Leap... and Others Don't - Jim Collins

Good to Great: Why Some Companies Make the Leap... and Others Don't, 1st Edition Hardcover - Jim Collins (2001)

Epilogue: Frequently Asked Questions

Q: Did you originally identify more than eleven good-to-great possibilities and, if so, what good-to-great examples did not make it into the study?

The eleven good-to-great companies were the only examples from our initial universe of Fortune 500 companies that met all the criteria for entrance into the study; they do not represent a sample. (See Appendix 1.A for the selection process we used.) The fact that we studied the total set of companies that met our criteria should increase our confidence in the findings. We do not need to worry that a second set of companies in the Fortune 500 went from good to great—not by our criteria, anyway—by other methods.

Q: Why did only eleven companies make the cut?

There are three principal reasons. First, we used a very tough standard (three times the market over fifteen years) as our metric of great results. Second, the fifteen-year sustainability requirement is difficult to meet. Many companies show a sharp rise for five or ten years with a hit product or charismatic leader, but few companies manage to achieve fifteen years. Third, we were looking for a very specific pattern: sustained great results preceded by a sustained period of average results (or worse). Great companies are easy to find, but good-to-great companies are much more rare. When you add all these factors together, it is not surprising that we identified only eleven examples.

I would like to stress, however, that the “only eleven” finding should not be discouraging. We had to set a cutoff and we chose a very tough one. If we had set a slightly lower hurdle—say, 2.5 times the market or ten years of sustain-ability—then many more companies would have qualified. After completing the research, I am convinced that many organizations can make the journey from good to great if they apply the lessons in this book. The problem is not the statistical odds; the problem is that people are squandering their time and resources on the wrong things.

Q: What about statistical significance, given that only eleven companies made the final cut as good-to-great examples and the total study size is twenty-eight companies (with comparisons)?

We engaged two leading professors to help us resolve this question, one statistician and one applied mathematician. The statistician, Jeffrey T. Luftig at the University of Colorado, looked at our dilemma and concluded that we do not have a statistics problem, pointing out that the concept of “statistical significance” applies only when sampling of data is involved. “Look, you didn’t sample companies,” he said. “You did a very purposeful selection and found the eleven companies from the Fortune 500 that met your criteria. When you put these eleven against the seventeen comparison companies, the probabilities that the concepts in your framework appear by random chance are essentially zero.” When we asked University of Colorado applied mathematics professor William P. Briggs to examine our research method, he framed the question thus: What is the probability of finding by chance a group of eleven companies, all of whose members display the primary traits you discovered while the direct comparisons do not possess those traits? He concluded that the probability is less than 1 in 17 million. There is virtually no chance that we simply found eleven random events that just happened to show the good-to-great pattern we were looking for. We can conclude with confidence that the traits we found are strongly associated with transformations from good to great.

Q: Why did you limit your research to publicly traded corporations?

Publicly traded corporations have two advantages for research: a widely agreed upon definition of results (so we can rigorously select a study set) and a plethora of easily accessible data. Privately held corporations have limited information available, which would be particularly problematic with comparison companies. The beauty of publicly traded companies is that we don’t need their cooperation to obtain data. Whether they like it or not, vast amounts of information about them are a matter of public record.

Q: Why did you limit your research to U.S. corporations?

We concluded that rigor in selection outweighed the benefits of an international study set. The absence of apples-to-apples stock return data from non-U.S. exchanges would undermine the consistency of our selection process. The comparative research process eliminates contextual “noise” (similar companies, industries, sizes, ages, and so forth) and gives us much greater confidence in the fundamental nature of our findings than having a geographically diverse study set. Nonetheless, I suspect that our findings will prove useful across geographies. A number of the companies in our study are global enterprises and the same concepts applied wherever they did business. Also, I believe that much of what we found—Level 5 leadership and the fly-wheel, for instance—will be harder to swallow for Americans than for people from other cultures.

Q: Why don’t any high-technology companies appear in the study set?

Most technology companies were eliminated from consideration because they are not old enough to show the good-to-great pattern. We required at least thirty years of history to consider a company for the study (fifteen years of good results followed by fifteen years of great results). Of the technology companies that did have more than thirty years of history, none showed the specific good-to-great pattern we were looking for. Intel, for example, never had a fifteen-year period of only good performance; Intel has always been great. If this study were to be repeated in ten or twenty years, I would fully expect that high-technology companies would make the list.

Q: How does Good to Great apply to companies that are already great?

I suggest that they use both Good to Great and Built to Last to help them better understand why they are great, so that they can keep doing the right things. As Robert Burgelman, one of my favorite professors from Stanford Business School, taught me years ago, “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.”

Q: How do you explain recent difficulties at some of the good-to-great companies?

Every company—no matter how great—faces difficult times. There are no enduring great companies that have a perfect, unblemished record. They all have ups and downs. The critical factor is not the absence of difficulty but the ability to bounce back and emerge stronger.

Furthermore, if any company ceases to practice all of the findings, it will eventually slide backward. It is not any one variable in isolation that makes a company great; it is the combination of all of the pieces working together in an integrated package consistently and over time. Two current cases illustrate this point.

One current case for concern is Gillette, which produced eighteen years of exceptional performance—rising to over 9 times the market from 1980 to 1998—but stumbled in 1999. We believe the principal source of this difficulty lies in Gillette’s need for greater discipline in sticking to businesses that fit squarely inside the three circles of its Hedgehog Concept. Of even greater concern is the clamoring from industry analysts that Gillette needs a charismatic CEO from outside the company to come in and shake things up. If Gillette brings in a Level 4 leader, then the probability that Gillette will prove to be an enduring great company will diminish considerably.

Another troubling case is Nucor, which hit its peak in 1994 at fourteen times the market, then fell off considerably as it experienced management turmoil in the wake of Ken Iverson’s retirement. Iverson’s chosen successor lasted only a short time in the job, before being ousted in an ugly executive-suite battle. One of the architects of this boardroom coup indicated in the Charlotte News and Observer (June 11, 1999, page D1) that Iverson had fallen from Level 5 leadership in his old age and had begun to display more egocentric Level 4 traits. “In his heyday, Ken was a giant of a man,” he said, “but he wanted to take this company to the grave with him.” Iverson tells a different story, arguing that the real problem is current management’s desire to diversify Nucor away from its Hedgehog Concept. “Iverson just shakes his head,” wrote the News and Observer, “saying it was to get away from diversification that Nucor became a narrowly focused steel products company in the first place.” Whatever the case—loss of Level 5 leadership or straying from the Hedgehog Concept, or both—the future of Nucor as a great company remains uncertain at the time of this writing.

image

That being said, it is worth noting that most of the good-to-great companies are still going strong at the time of this writing. Seven of the eleven companies have thus far generated over twenty years of extraordinary performance from their transition dates, with the median of the entire group being twenty-four years of exceptional results—a remarkable record by any measure.

Q: How do you reconcile Philip Morris as a “great” company with the fact that it sells tobacco?

Perhaps no company anywhere generates as much antipathy as Philip Morris. Even if a tobacco company can be considered truly great (and many would dispute that), there is doubt as to whether any tobacco company can endure, given the ever-growing threat of litigation and social sanction. Ironically, Philip Morris has the longest track record of exceptional performance from the date of its transition—thirty-four years—and is the only company that made it into both studies (Good to Great and Built to Last). This performance is not just a function of being in an industry with high-margin products sold to addicted customers. Philip Morris blew away all the other cigarette companies, including its direct comparison, R. J. Reynolds. But for Philip Morris to have a viable future will require confronting square-on the brutal facts about society’s relationship to tobacco and the social perception of the tobacco industry. A large percentage of the public believes that every member of the industry participated equally in a systematic effort to deceive. Fair or not, people—especially in the United States—can forgive a lot of sins, but will never forget or forgive feeling lied to.

Whatever one’s personal feelings about the tobacco industry (and there was a wide range of feelings on the research team and some very heated debates), 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. This is one of those findings that I find difficult to swallow, but that are completely supported by the data. (For further discussion of this topic, see chapter 3 of Built to Last, pages 65-71.)

Q: Can a company have a Hedgehog Concept and have a highly diverse business portfolio?

Our study strongly suggests that highly diversified firms and conglomerates will rarely produce sustained great results. One obvious exception to this is GE, but we can explain this case by suggesting that GE has a very unusual and subtle Hedgehog Concept that unifies its agglomeration of enterprises. 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. Think about it this way: You have two business opportunities, both that might generate $X million in profits. But suppose one of those businesses would drain three times the amount of top-quartile management talent to achieve those profits as the other business. The one that drains less management talent would fit with the Hedgehog Concept and the other would not. Finally, what does GE pride itself on more than anything else? Having the best set of general managers in the world. This is their true passion—more than lightbulbs, jet engines, or television programming. GE’s Hedgehog Concept, properly conceived, enables the company to operate in a diverse set of businesses yet remain squarely focused on the intersection of the three circles.

Q: What is the role of the board of directors in a transformation from good to great?

First, boards play a key role in picking Level 5 leaders. The recent spate of boards enamored with charismatic CEOs, especially “rock star” celebrity types, is one of the most damaging trends for the long-term health of companies. 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 shareflippers; they should refocus their energies on creating great companies that build value for the shareholders. Managing the stock for anything less than a five-to-ten-year horizon confuses price and value and is irresponsible to shareholders. For a superb look at the board’s role in taking a company from good to great, I recommend the book Resisting Hostile Takeovers by Rita Ricardo-Campbell (Praeger Publishers, 1997). Ms. Ricardo-Campbell was a Gillette board member during the Colman Mockler era and provides a detailed account of how a responsible board wrestled with the difficult and complex question of price versus value.

Q: Can hot young technology companies in a go-go world have Level 5 leaders?

My answer is two words: John Morgridge. Mr. Morgridge was the transition CEO who turned a small, struggling company in the Bay Area into one of the great technology companies of the last decade. With the flywheel turning, this unassuming and relatively unknown man stepped into the background and turned the company over to the next generation of leadership. I doubt you’ve ever heard of John Morgridge, but I suspect you’ve heard of the company. It goes by the name Cisco Systems.

Q: How can you practice the discipline of “first who” when there is a shortage of outstanding people?

First, at the top levels of your organization, you absolutely must have the discipline not to hire until you find the right people. The single most harmful step you can take in a journey from good to great is to put the wrong people in key positions. Second, widen your definition of “right people” to focus more on the character attributes of the person and less on specialized knowledge. People can learn skills and acquire knowledge, but they cannot learn the essential character traits that make them right for your organization. Third— and this is key—take advantage of difficult economic times to hire great people, even if you don’t have a specific job in mind. A year before I wrote these words, nearly everyone bemoaned the difficulty of attracting top talent away from hot technology and Internet companies. Now the bubble has burst, and tens of thousands of talented people have been cast into the streets. Level 5 leaders will view this as the single best opportunity to come along in two decades—not a market or technology opportunity, but a people opportunity. They will take advantage of this moment and hire as many of the very best people they can afford and then figure out what they are going to do with them.

Q: How can you practice the discipline of the “right people on the bus and the wrong people off the bus” in situations where it is very hard to get the wrong people off the bus—such as academic institutions and government agencies?

The same basic idea applies, but it takes more time to accomplish. A prominent medical school, for example, went through a transformation from good to great in the 1960s and 1970s. The director of academic medicine changed the entire faculty, but it took him two decades. He could not fire tenured professors, but he could hire the right people for every opening, gradually creating an environment where the wrong people felt increasingly uncomfortable and eventually retired or decided to go elsewhere. Also, you can use the Council mechanism to your advantage. (See chapter 5.) Fill Council seats entirely with the right people, and just ignore the others. Yes, you might still have to carry the wrong people along, but you can essentially restrict them to backseats on the bus by not including them on the Council.

Q: I’m an entrepreneur running a small company, how do these ideas apply to me?

Directly. See chapter 9, where I discuss the application of the good-to-great ideas in the context of small and early-stage companies.

Q: I’m not a CEO. What can I do with these findings?

Plenty. The best answer I can give is to reread the story at the end of chapter 9 about the high school cross-country coach.

Q: Where and how should I begin?

First, familiarize yourself with all the findings. Remember, no single finding by itself makes a great organization; you need to have them all working together as an integrated set. Then work sequentially through the framework, starting with “first who” and moving through all the major components. Meanwhile, work continuously on your own development toward Level 5 leadership. I have laid out this book in a sequence consistent with what we observed in the companies; the very structure of the book is a road map. I wish you the best of luck on your journey from good to great.