Good to Great by Jim Collins

A summary and review of Jim Collin's book, Good to Great.

This is a work-in-progress.

Truly great companies, for the most part, have always been great. And the vast majority of good companies never become great.

We don't have more great companies precisely because most companies become quite good. Good is the enemy of great.

But the transition from good to great does happen, but how does it happen?

To find out, Jim and his team identified companies that made the leap from good results to great results for at least fifteen years. They compared these companies to a group of comparison companies that failed to make or sustain the leap, then they looked for the distinguishing factors.

The good-to-great companies averaged cumulative stock returns 6.9 times the general stock market in the fifteen years following their transition points. To put that into perspective, every dollar invested into a fund of the good-to-great companies in 1965 that was held until January 1, 2000 would have multiplied 471 times, compared to a 56 fold increase in the market.

These are remarkable numbers, made more remarkable when you consider that many of these companies had been utterly unremarkable before their transition.

The search

Jim and his team looked for companies with fifteen-year cumulative stock returns at or below the general stock market, punctuated by a transition point, then cumulative returns at least three times the market over the next fifteen years.

Fifteen years was long enough to avoid one-hit wonders and lucky breaks, and is longer than the tenure of most chief executive officers. This helps separate great companies from companies that happened to have a single great leader. And three times the market exceeded the performance of most widely recognized great companies between 1985 and 2000, think companies like Coca-Cola, Intel, Wal-Mart, and Disney.

Good-to-great companies also had to demonstrate the good-to-great pattern independent of their industry, if the industry showed the same pattern, they dropped the company.

The final set of companies is as follows:

Compared to what?

Next they contrasted the good-to-great companies with comparison companies to determine what differentiated them.

There were two sets of comparison companies. The first were direct comparisons. Companies in the same industry with the same opportunities and similar resources at the time of transition that showed no change in performance.

The second were unsustained comparisons. Companies that made a short-term shift from good to great but failed to maintain the trajectory.

This produced a list of twenty-eight companies: eleven good-to-great companies, eleven direct comparisons, and six unsustained comparisons.

Inside the black box

Then they collected all articles published on the twenty-eight companies, dating back fifty years or more, coded all the material into categories, interviewed most of the good-to-great executives who held key positions during the transition, and performed a wide range of qualitative and quantitative analysis.

The core of their method was to contrast the good-to-great companies to the comparisons. Think of their research as akin to looking inside a black box, each step shed more light on the good-to-great process.

What they didn't find turned out to be some of the most important findings.

Larger-than life leaders who came from the outside were negatively correlated with taking a company from good to great. Ten of the 11 good-to-great CEOs came from within. Executive compensation didn't matter.

Strategy did not separate the good-to-great companies from the comparisons. Both sets had well-defined strategies.

The good-to-great companies didn't focus on what to do, rather what not to do and what to stop doing. Technology accelerated but did not cause transformations. Mergers and acquisitions played no role in transforming from good-to-great.

Good-to-great companies paid little attention to managing change, motivating people, or creating alignment.

There was no single event that signified the transformation from good-to-great. Some even reported being unaware of the magnitude of the transformation at the time, and many good-to-great companies were not in great industries and some were in terrible industries.

Chaos to concept

Now let's go over the framework of concepts and preview what is to come. Think of the transformation as a process of buildup followed by breakthrough, broken into three stages: disciplined people, disciplined thought, and disciplined action.

Each stage has two key concepts and wrapping the entire framework is the flywheel which captures the entire process of going from good to great. Good-to-great transformations never happened in one fell swoop. Rather it resembles pushing a giant heavy flywheel in one direction, building momentum, until a point of breakthrough.

  • Level 5 Leadership: Good-to-great leaders tend to be self-effacing, quiet, reserved, and even shy. A paradoxical blend of personal humility and professional will.

  • First Who...Then What: Get the right people on the bus, the wrong people off the bus, the right people in the right seats then figure out where to go.

  • Confront the Brutal Facts (Yet Never Lose Faith): Every good-to-great company embraced the Stockdale Paradox. Unwavering faith that you can and will prevail regardless of difficulty while having the disciple to confront reality, whatever it may be.

  • The Hedgehog Concept (Simplicity within the Three Circles): Going from good to great means transcending the curse of competence. If you can't be the best in the world at it, it can't form the basis of a great company.

  • A Culture of Discipline: When you have disciplined people, you don't need hierarchy, bureaucracy, or excessive controls.

  • Technology Accelerators: Technology alone cannot transform a company from good to great, but good-to-great companies were pioneers in the application of carefully selected technologies.

Each of these concepts showed up as a change variable in 100 percent of the good-to-great companies and in less than 30 percent of the comparison companies.

The timeless "physics" of good to great

Good to great isn't about specific companies or timeframes, it's about identifying principles–the enduring physics of great organizations–that remain true and relevant no matter how the world changes around us. Specific applications will change but the principles will endure.

It's about how to take a good organization and turn it into one that procedures sustained great results, using whatever definition of results best applies to your organization.

Good being the enemy of great is not a business problem. It's a human problem. If we can understand what turns good into great, we have something of value for any organization.

Level 5 leadership

Every good-to-great company had a Level 5 leader. Furthermore, the absence of Level 5 leadership was a consistent pattern in the comparison companies.

Level 5 refers to a five-level hierarchy of executive capabilities:

  • Level 1: A highly capable individual who makes productive contributions through talent, knowledge, skills, and good work habits

  • Level 2: A contributing team member who contributes individual capabilities to the achievement of group objectives and works effectively with others in a group setting

  • Level 3: A competent manager who organizes people and resources toward the effective and efficient pursuit of predetermined objectives

  • Level 4: An effective leader catalyzes commitment to and vigorous pursuit of a clear and compelling vision, stimulating higher performance standards

  • Level 5: A level 5 executive builds enduring greatness through a paradoxical blend of personal humility and professional will.

They're incredibly ambitious, but the ambition is first and foremost for the cause, not themselves.

Contrary to conventional wisdom, Level 5 leaders are often self-effacing, quiet, reversed, even shy. More likely to motivate with inspired standards than inspiring personality.

One such leader was Darwin E. Smith who became chief executive of Kimberley-Clark, a paper company whose stock had fallen 36 percent behind the general market over the previous 20 years.

Smith, the company's mild-manner lawyer, wasn't sure the board made the right decision which was reinforced when a director reminded him that he lacked qualifications.

But over the next twenty years, Smith transformed Kimberley-Clark, generating cumulative stock returns 4.1 times the general market.

Yet few people know anything about Darwin Smith, and he probably would have liked that.

In retirement, Smith reflected on his exceptional performance, stating "I never stopped trying to become qualified for the job."

Not what is expected

Jim gave his research teams explicit instructions to downplay the role of leadership to avoid the simplistic "credit or blame the leader" thinking that is prevalent today.

To use analogy, the "Leadership is the answer to everything" perspective is equivalent to "God is the answer to everything" that held back scientific understanding of the physical world. If we attribute everything to "Leadership", we prevent ourselves from gaining a deeper understanding of what makes great companies tick.

The comparison companies also had leaders, so how could leadership be a differentiator?

Because a Level 5 leader was at the helm of every good-to-great company during their transition.

Furthermore, the absence of Level 5 leadership was a consistent pattern in the comparison companies.

Given Level 5 leadership goes against the conventional wisdom of needing larger-than-life leaders to transform companies, it's important to note Level 5 is an empirical, not ideological, finding.

Humility + will = level 5

Level 5 leaders are a study of duality: modest and willful, humble and fearless.

Consider Colman Mockler, CEO of Gillette from 1975 to 1991. During Mockler's tenure, Gillette faced three attacks that threatened to destroy their chance at greatness.

Two attacks came as hostile takeover bids from Revlon, led by Ronald Perelman. The third came from Coniston Partners, who bought 5.9 percent of Gillette stock and initiated a proxy battle to seize control of the company in hopes of selling it to the highest bidder.

Had Mockler accepted Perelman's offer, shareholders would have reaped an instant 44 percent gain on their stock.

Most executives would have cashed in, but Mockler and Gillette's executives instead chose to fight reaching out to thousands of individual investors to win the battle.

Mockler and his team were staking the company's future on huge investments into Sensor and Mach3, had the takeover been successful these projects would have almost certainly been eliminated.

These investments promised significant future profits that weren't reflected in the stock price because of their secrecy.

The board and Mockler believed the future value of the shares far exceeded the current price, even with the price premium offered, and they were right. To sell out would have made short-term investors happy but would have been terrible for long-term shareholders.

If Mockler had accepted the 44 percent price premium offered on October 31, 1986 and then people invested the full amount in the general stock market for ten years to the end of 1996, they would have come out three times worse off than a shareholder who stayed with Mockler and Gillette.

Setting up successors for success

Level 5 leaders want to see the company even more successful in the next generation. They're comfortable with the idea that most people won't even know that the roots of the success trace back to their efforts.

In contrast, the comparison leaders were more concerned with their own reputation. Over three quarters of the comparison company leaders failed to set up their successors for success, chose a weak successor, or both.

While some of the comparisons took their companies from good to great for a brief moment, when they left, the company went from great to irrelevant.

After all, what better testament to your own personal greatness than a place that falls over after you leave?

Compelling modesty

In contrast to the I-centric style of the comparison leaders, good-to-great leaders didn't talk about themselves. They talked about the company and the contributions other executives made, avoiding discussions about their own accomplishments.

It wasn't false modesty. Those who worked or wrote about good-to-great leaders frequently used words like quiet, humble, modest, reserved, shy, gracious, mild-mannered, self-effacing, and understated.

The eleven good-to-great CEOs were some of the most remarkable CEOs of the century yet almost no one ever remarked about them. They never wanted to be larger-than-life heroes. They were ordinary people quietly producing extraordinary results.

In contrast, two thirds of the comparison companies had an egocentric leader that contributed to the demise or continued mediocrity of the company.

This pattern was particularly strong in the unsustained comparisons–cases where the company would show a leap in performance under a talented leader, only to decline in later years.

Unwavering resolve to do what must be done

Level 5 leadership is not just about humility and modesty. It's equally about the resolve to do what needs to be done.

They're fanatically driven to produce results, displaying workman like diligence–more plow horse than show horse.

George Cain, who became CEO of Abbott Laboratories after working there for eighteen years, is one example. He couldn't stand mediocrity and was intolerant of anyone who would accept the idea that good was good enough.

He set out to destroy one of the key causes of Abbott's mediocrity: nepotism. Systematically rebuilding the board and executive team with the best people he could find.

If you didn't have the capability to be the best executive in the industry, you were out.

This is something you'd expect from an outsider brought in to turn the company around, but Cain was an insider. In fact, he was a family member, the son of a previous Abbott president.

Even if they got fired, family members had to be pleased with the performance of their stock. Cain set in motion a profitable growth machine that beat the market by 4.5 times between 1974 and 2000.

This reflects a more systematic finding of Good to Great. Evidence did not support the idea that you need an outside leader to go from good to great. In fact, high profile outsiders were negatively correlated with a sustained transformation.

Ten out of the eleven good-to-great CEOs came from inside the company, three of them by family inheritance. The comparison companies turned to outsiders six times often — yet they failed to produce sustained great results.

The window and the mirror

The good-to-great executives talked a lot about luck. Some even flat-out refused to take credit for their company's success, attributing it to the good fortune of having great colleagues, successors, and predecessors.

At first, Jim and his team were puzzled by this emphasis on luck. They found no evidence that the good-to-great companies were blessed with more good luck than the comparison companies.

Then they noticed a contrasting pattern in the comparison executives. They credited substantial blame to bad luck.

The emphasis on luck turns out to be part of a pattern called the window and the mirror.

Level 5 leaders look out the window and attribute success to factors other than themselves. When things go poorly, they look in the mirror and blame themselves, taking full responsibility.

The comparison CEOs did the opposite, looking in the mirror to take credit and out the window to assign blame.

Cultivating level 5 leadership

Jim's hypothesis is there are two types of people: those who have the seed of Level 5, and those who don't. For those who don't, work will always be about what they get, not what they build.

The great irony is personal ambition often drives people toward positions of power but stands at odds with the humility required for Level 5 leadership.

Most people have the seed of Level 5. The problem is not a dearth of potential Level 5 leaders. Rather it's the fact that people operate under the belief that you need to hire larger-than-life leaders to make an organization great, this is why Level 5 leaders rarely appear as CEOs.

To find Level 5 leaders, look for places where extraordinary results exist but no individual steps forward to claim credit.

For your own development, begin practicing the other good-to-great concepts. This is about what Level 5s are, the remaining concepts cover what they do.