Wednesday, September 14, 2011

Good to Great by Jim Collins

GOOD TO GREAT: Why Some Companies Make the Leap and Others Don't, by James C Collins (Jim Collins), 2001, published by Collins (an imprint of HarperCollins Publishers), USA. p 300

Generally as we read about business organizations and their transformations, it becomes obvious to see some of them doing good, some doing better than others and some not reaching to their targeted goals.  There are many factors which play their respective roles to make the organizations as they are and one of the most important factor is the kind of leader it has and the kind of leadership he/she follows in order to direct the efforts of the organization to achieve its established targets and to carry on with the journey of transforming organizations.

Jim Collins, who co-authored (with Jerry Porras) a business classic entitled Build to Last concentrating on organizational transformation, brought out this great book (based on US Corporations) with robust data and methodology to convince the readers of its relevance through defending the cause of great leadership as the most important parameter to transform a good corporation into a great one.  The creativity in putting the arguments and deriving basic principles of modern day leadership is the acumen of Jim who along with his dedicated team of researchers could filter out 11 American companies which were selected into good-to-great set.

The book is divided in 9 chapters, appended with research notes.  In fact around one third part of the book is devoted to the research notes and references which makes the book very rich, authenticated and authoritative.  The first chapter starts with its caption Good is the enemy of great and outlines the motivation of this work and further explains the basis of selection of 11 companies.  The performance of the companies through the stock returns is the primary basis of selection though a precondition that the company must have appeared in Fortune 500 companies of 1995 is followed.  The methodology follows 4 cuts to eliminate the companies at different levels.  At Cut 1 level 1435 companies are selected out of Frotune 500 companies, on the basis of their performance between 1965-1995 (30 years), then at Cut 2 level, out of 1435, 126 companies are filtered on the basis of CRSP (Univeristy of Chicago Centrer for Research on Security Prices) data based on 4 tests and then at Cut 3, 19 companies are selected on the basis of cumulative stock returns of each candidate company as per CRSP data set, and then out of this 11 companies were selected which made a transition.  This is what made them Good-to-Great companies.  The selection process is fully described in the Appendix A.  The 11 companies thus selected are compared with another company (known as director comaparison company).  These companies are : Abbott Vs Upjohn (which was taken over by Pfizer in 2002), Circuit City Vs Silo, Fannie Mae Vs Great Western, Gillette Vs Warner-Lambert, Kimberly-Clark Vs Scott Paper, Kroger Vs A&P, Nucor Vs Bethlehem Steel, Philip Morris Vs RJ Reynolds, Phitney Bowes Vs Addressograph, Walgreens Vs Eckerd, and Wells Fargo Vs Bank of America.  The direct comparison companies are selected on the basis of there operation in the same industry with same opportunities and similar resources at the time of transition.  However there are some companies (Burroughs, Chrysler, Harris, Hasbro, Rubbermaid and Teledyne) which made a short term shift from good to great but failed to maintain the trajectory - to address the question of sustainability.   Thus in total 28 companies are studied to find out the commonalites (and What's Different) which make transform a good company into a great company.

In general, in contrast with the general assumptions they found out interesting facts (dogs that did not bark syndrome) as:
  • Larger-than-life, celebrity leders who ride in from the outside are negativley 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 tims more often.
  • No systematic patter linking specific forms of executive compensation to the process of goin from good to great.
  • Strategy per se did not separate the good to great companies from the comparison companies.
  • Good-to-Great companies did not focus 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 it cannot cause a transformation.
  • No relation and impact of merger/acquisitions.
  • Good-to-Great companies paid scant attention to managing change, motivating people, or creating alignment.  
  • Good-to-Great companies had no name, tag line, launch event, or program to signify their transformations.
  • Good-to-Great companies were not, by and large, in great industries, and some were in terrible industries.  
The book advocates for Level 5 Leadership driven out of the readings, data, narratives and the contributions of great leaders in the good-to-great companies.  The personal characteristics of the leaders, their competence level, commitment to the cause, integrity and honest intentions are some such common features found in the leaders of great organizations.  The transformations of the organizations during the tenure of their visionary leaders is well placed in the book (George Cain at Abott, Alan Wurtzel at Circuit City,  David Maxwell at Fennie Mae, Darwin Smith at Kimberley-Clark, Colman Mockler at Gillette, Jim Herring at Kroger, Lyle Everingham at Nucor, Joe Cullman at Philip Morris, Fred Allen at Pitney Bowes, Charles Walgreen at Walgreen Pharm, and Carl Reichardt at Wells Fargo). The robust database and collections of articles, press reports etc from different journals, magazines etc are the base for the arguments for Good-to-Great organizations.

Professional Will and Personal Humility are portrayed as two sides of Level 5 Leadership which refers to a five level hierarchy of executive capabilities, level 5 leaders are ambitious, to be sure, but ambitious first and foremost for the company, not themselves, they set up their successors for even greater success in the next generation, display a compelling modesty, are self-effacing and understated, are fanatically driven, infected with an incurable need to produce sustained results, display a workmanlike diligence, look out the window to attribute success to factors other than themselves.  Generally we tend to overstate the role of money or compensation with the performance.  Quite the contrary Good-to-great companies do not support such an argument.  This is even otherwise proved in the context of any individual which is popularly known as Easterlin Paradox in happiness literature. Another general perception that 'people are most important asset' is questioned by Collins and he says 'people are not your most important asset. The right people are'.  In fact there have been a concern raised on this issue by the management academicians.  I remember one of the very prominent paper by Peter Drucker where he argues that People (Employees) are not assets, rather they are Liabilities.  Collins view that right people are real asset for organization is well defended in the book.  While making comparisons with the counterpart companies the differences in the practices are explained and the key is found to be the right kind of people at the right place.  Chapter three ends with a very good sentence - The people we interviewed from the good-to-great companies clearly loved what they did, largely because they loved who they did it with.  This sentence says it all.

The companies in order to succeed must confront with the brutal facts of their current reality. And such confrontation must be with all positivity and honest intentions. The truth must be heard and the corporations must develop a culture of this kind through leading with questions and not answers, through employee engagement, through conducting autopsies without blame and through building such mechanisms which does not allow you to ignore crucial information.  The learning of the adversity and successfully managing it is a strong feature of good-to-great companies and such lessons can be learnt from Stockdale Paradox which is based on a simple thinking that - retain absolute faith that you can and will prevail int eh end, regardless of the difficulties.  Unlike general assumption, Jim experiences that in good-to-great companies, charisma can be as much a liability as an asset, as the strength of your leadership personality can deter people from bringing you the brutal facts.

Three intersecting circles (What you are deeply passionate about, what you can be the best in the world at, what drives your economic engine) of Hedgehog concept are really great convincing factors. Jim says that good-to-great companies are the best in the world at circle of the Hedgehog concept and this he explains through the practical example of all the 11 such companies.  The culture of discipline has to be developed to transform an organization into a great organization.  The freedom or autonomy has to be commissioned to the people within a set framework.  The discipline of working within the system and structure and allowing people to use their freedom in decision making within it makes one a great organization.  It is not just the disciplined action which is important, equally important is to get disciplined people who engage in disciplined thought and who then take disciplined action.  The organizations have to get habituated to stay within three circles which shall allow them to explore further opportunities for growth.  The stop doing list has to be prepared cautiously and such activities needs to be ignored for capitalising on potential growth opportunities.

Good-to-Great companies showed consistent use of technology as accelerator of momentum, not a creator of it. The flywheel model (tremendous power exists in the fact of continued improvement and the delivery of results) as suggested by Jim proved that the great organizations followed it in one or the other way as compared to comparison companies which followed the doom loop.  It also included maintaining proper returns through their performance at the Wall Street.

Earlier work of Jim Collins in the shape of Built to Last concentrated on what does it take to start and build an enduring great company from the ground up.  While he took up the project on studying Good-To-Great companies, Built to last was there at the back of the mind of his team.  As mentioned - Looking back on the built to last study, it appears that the enduring great companies did in fact go through a process of buildup to breakthroughs following the good to great framework during their formative years, though the organizations studied were all different, however an overlapping in the approach on looking at them was observed.  Some of the frameworks proposed in this book were seen to have been followed by the organizations which were under study in Built to Last like in the case of role of Sam Walton in the evolution of Walmart, who followed Fly Wheel model.  This chapter 9 (last chapter) of the book compares these two books (Built to last and Good to Great) through suggested models and how they were practiced by them.  As suggested in the Built to Last, preserving core values and purpose is important for enduring corporations and they have to preserve the creative culture of the the organization, however in Good-to-Great, which is primarily focused on developing the base for Level 5 Leadership, the concentration is on the leaders role and his/her sense of personal humility.

As individuals we aspire to be great, we always think (ideally) that we must leave behind such contributions for which we are remembered, this is was drives us to think of something great.  Similarly organizations also need to think of achieving greatness.  And this is where Jim Collins through this work tries to convince the readers of the practices that great business leaders follow to transform their organization into a great organization.  Mind it unquestionably who would not be interested in achieving greatness. Greatness is not a function of circumstance. Greatness, it turns out, is largely a matter of conscious choice.
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