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Good to Great

Why Some Companies Make the Leap


In this issue: and Others Dont
Learn... by Jim Collins
what separates the best
firms from mediocre compa- A summary of the original text.
nies. . . and how you can
ost of today's truly 8. Philip Morris
transform your business
from good to great. M great companies, like
Merck and Coca-Cola, have 9. Pitney Bowes
Profit...
from the seven lessons
always been great. The
derived from 11 companies
vast majority of companies 10. Walgreens
that beat the stock market
remain just that: good, but
by at least 300 percent not great. 11. Wells Fargo.
over 15 years.
But some companies have Next, Collins and his team
Understand... made the transition to compared the good-to-great
why business leaders who greatness. Collins defines a firms to a control group of
put their companies ambi- "great company" as one that companies that failed to
tions ahead of their per- has generated cumulative make the leap.
sonal ambitions outper- stock returns that beat the
form high-profile CEOs. general stock market by at The companies in the
Discover... least 300 percent over 15 control group were:
the importance of putting years. Collins and his
who before what that is, research team studied 11 1. Upjohn
putting the right people in good-to-great firms:
the right jobs before pursu- 2. Silo
ing a new vision or strategy. 1. Abbott Laboratories
Escape... 3. Great Western
the doom loop of chasing 2. Circuit City Stores
after a single big program, 4. Warner-Lambert
and instead make spectac- 3. Federal Home Loan
ular progress through a Mortgage 5. Scott Paper
slow, steady buildup of
momentum. 4. Gillette 6. A&P

5. Kimberly-Clark 7. Bethlehem Steel


Volume 10, No. 12 (2 sections). Section 1, December 2001
2002 Audio-Tech Business Book Summaries 12-23. 6. Kroger 8. R.J. Reynolds
No part of this publication may be used or reproduced
in any manner whatsoever without written permission.

To order additional copies of this summary, reference


7. Nucor 9. Addressograph
Catalog #12011
10. Eckerd Doom Loop. Momentum market by nearly four
for greatness is built times; Circuit City trounced
11. Bank of America. slowly, rather than in a it by 18.5 times. Gillette
single moment. outperformed it by more
Finally, the team analyzed than seven times. The com-
both sets of companies in What is most surprising is plete results can be found in
order to discover the seven what the team did not find. a table on page 3.
essential factors that sepa- None of the companies has a
rate the good-to-great firms flashy or colorful CEO. The most remarkable aspect
from the merely good ones. None of the companies used of the transformation of
These seven factors are: technology to begin the the other good-to-great com-
process of becoming great, panies was that the pundits
1. "Level 5" Leaders. and none used acquisitions didn't even notice. Those
These CEOs put their or mergers, either. were not companies you
companies ahead of Corporate strategy had little heard talked about on
their own egos. to do with greatness, and CNBC, nor did you see
executive compensation had splashy profiles of their
2. A Focus on Who Before nothing to do with it at all. CEOs on the front page of
What. Leaders concen- Scant attention was paid in the Wall Street Journal.
trated on getting the those great companies to
right people in place managing change; in fact, Instead, those unremark-
before they pursued a most companies were able companies in some
new vision or strategy. unaware of their crucial rather backward industries,
transition to greatness. The led by quiet, self-effacing
3. A Willingness to good-to-great companies leaders, simply plugged
Confront the Brutal were not in great industries. along with dogged determi-
Truth. Every good-to- nation, pursuing a simple
great company admitted Many of the companies concept in a culture of
its difficulties, yet Collins studied were down- discipline, until they had
believed it would win in right boring. Walgreens created an unstoppable
the end. had bumped along as an momentum that carried
average company, more or them into astounding
4. The Hedgehog Concept. less tracking the general earnings figures year after
If you cannot be the market, for more than 40 year.
best in the world at years. Then in 1975, it
your core competence, it began its climb to great- Let's take a look at some of
cannot form the basis of ness. Between 1975 and those Level 5 leaders and
a great company. 2000, it beat technology the qualities they share.
superstar Intel as an invest-
5. A Culture of Discipline. ment by a factor of two. It
When you have disci- beat GE by five times and
plined people, you don't Coca-Cola by eight. It beat L EVEL 5 LEADERSHIP
need a hierarchy, a the general market, includ-
bureaucracy, or excessive ing the NASDAQ run-up at Kimberly-Clark is about as
controls. the end of 1999, by more boring a business as you
than seven times. could find. The paper com-
6. Technology Accelerators. pany's stock had dropped 36
Good-to-great companies Note that Collins refers to percent behind the general
don't use technology to "the general market" as the market during the 1960s
ignite a transformation, totality of all stocks traded and 1970s. It looked as
but they find new uses on the New York Stock if the company was on a
for widely-available Exchange, American Stock long, slow decline toward
technology. Exchange, and NASDAQ. extinction or acquisition.

7. The Flywheel and the Abbott beat the general Then in 1971, Darwin E.
2 AUDIO-TECH
Smith, a mild-mannered in- Good-to-Great Cases
house lawyer, was appointed
CEO by the board of direc-
tors. Shortly after he took
the reins, Smith made the
most dramatic decision in
the company's history: He
sold its paper mills, which
represented Kimberly-
Clark's core business of
coated paper.

Smith concluded that the


economics of selling coated
paper were poor, and that
the competition was weak.
The company would contin-
ue to be mediocre if it
remained in that business.
He reasoned that if
Kimberly-Clark entered the
consumer paper-products
industry, top competitors
like Procter & Gamble and
Scott Paper would force his
company to either achieve
greatness or perish.

Wall Street downgraded the


stock and analysts jeered,
but Smith never wavered.
Twenty-five years later,
Kimberly-Clark owned Scott Good-to-Great Cases
Paper and it beat Procter &
Gamble in six out of eight
product categories. Under
Smith's leadership,
Kimberly-Clark generated
cumulative stock returns
four times those of the
general market, easily sur-
passing such venerable
companies as GE, 3M, and
Hewlett-Packard.

In all 11 of the good-to-great


companies Collins studied,
there was the same sort of
leader at the top: a self-
effacing individual with a
fierce resolve and a para-
doxical blend of personal
humility and professional
will. In the comparison
companies, by contrast, he
BUSINESS BOOK SUMMARIES 3
found flamboyant, charis- Every one of the companies the highest caliber.
matic, self-promoters more chosen by Collins had the
intent on building their own same type of leadership, Selecting the right people is
image than their companies while not one of the compar- crucial, because it almost
people like Chrysler's ison companies did. Level 5 instantly solves a host of
Lee Iacocca, Stanley Gault leaders displayed modesty, problems, such as change,
at Rubbermaid, and Al even shyness, coupled with a motivation, alignment, and
"Chainsaw" Dunlap at Scott fierce drive and an incur- even strategy. Conversely, if
Paper. able, almost obsessive, need you have the wrong people,
to obtain results. Their it hardly matters how bril-
In some cases, companies efforts were all directed liant your strategy is: They
with charismatic leaders toward the success of the won't be able to execute it.
make an initial leap in per- company, not themselves,
formance, but it is never and they took blame but At Wells Fargo, for exam-
sustained. Lee Iacocca's not credit, accepting respon- ple, CEO Dick Cooley
Chrysler rose to 2.9 times sibility while giving the decided to build one of the
the market in the first half accolades to others on their most talented management
of his tenure, but dropped 31 team. teams in the banking indus-
percent behind the market try. According to investor
in the second half. Iacocca, Warren Buffett, they
meanwhile, made himself a assembled the best team.
name and a bundle of cash. F IRST WHO, THEN WHAT
Beginning in the 1970s,
The CEOs of the winning Just as the quality of the Cooley and chairman Ernie
companies, on the other leadership of the company Arbuckle hired the best peo-
hand, showed no interest in seems to make all the dif- ple they could find from
self-promotion. Indeed, ference in the world, so do everywhere in the world,
none of them were willing to all the other players. and often they didn't even
take credit for the success of have jobs for them before-
their companies. George When Collins began his hand. Cooley admitted at
Cain took over Abbott Labs research project, he expect- the time that they knew
at a time when the company ed to find that the first step change was coming, but did
was just drifting along, sell- in taking a company from not know what kind of
ing erythromycin. He good to great would be to change or what their
looked around and saw two set a new direction, a new response ought to be. He
obstacles to greatness: vision and strategy for the said, "If I'm not smart
nepotism and laziness. company. Only then, he enough to see the changes
assumed, would the leader that are coming, they will.
Cain was not only an 18- get people committed and And they'll be flexible
year veteran of the company, aligned behind that new enough to deal with them."
he was the son of a previous direction.
Abbott president, but he The main change that was
took no prisoners when he The research revealed that coming was deregulation,
started replacing executives good-to-great companies and few of the players in
at every level, building his took the opposite approach. the banking industry were
new team from the ground The great executives prepared. Yet, Wells Fargo
up. weren't at all worried about handled the new challenges
what direction to take the more deftly than its com-
Starting in 1974, Cain beat company. They concerned petitors. It actually beat
the market by four and a themselves with getting the the market by three times
half times during the period best people in the world while the industry, as a
ending in the year 2000, into the right spots in the whole, fell 59 percent
putting rivals such as company and, equally behind the general market.
Merck and Pfizer to shame. important, getting rid of Nearly every member of the
any people who weren't of Wells Fargo executive team
4 AUDIO-TECH
went on to become CEO of good example. Jack Eckerd including stock options,
another company. was a master of acquisi- cash, short-term incentives,
tions. That was his big and so on. Time and again
By contrast, comparison strategy. Starting from two the results proved that it's
companies that failed at little stores in Delaware, he not how much you pay, it's
greatness paid scant atten- spread to 1,000 units all whom you pay.
tion to team building. For over the Southeast. By the Compensation does not
example, Bank of America late '70s, his company's rev- motivate people to succeed.
used a technique called enues matched those of It is only a way of keeping
the "weak generals, strong Walgreens, and it looked as successful people inside the
lieutenants" model. The if it might become the great company.
theory is that the strong company in its industry.
lieutenants will stick Then Eckerd left to run for At Nucor Steel, an execu-
around if the general is political office. Without tive describes its winning
weak, presumably so that his guiding genius, his com- formula for compensation as
they can move up. pany began a long decline follows: "We hire five, work
and was eventually them like ten, and pay
The weakness extended to acquired by J.C. Penny. them like eight." Nucor
Bank of America's stock rejects the old adage that
market performance, which Eckerd's fall traces a typical people are your most
lagged behind the general pattern that can be seen in important asset. In a good-
market, while Wells Fargo the comparison companies: to-great transformation, the
was achieving greatness. Charismatic leaders fail to right people are your most
After losing more than $1 pick a successor who can important asset.
billion in the mid-1980s, sustain their momentum. In
Bank of America recruited a Nucor locates its plants in
fact, they often set their suc-
team of strong generals to cessor up for failure becausesmall rural communities
turn the bank around. And they want to be able to say because of its core belief
where did it find those that no one could match that you can teach farmers
strong generals? Right their own performance. to make steel, but you can't
across the street at Wells teach a farmer's work ethic
Fargo. The company, in short, is to people who don't have it
simply operating in the in the first place. Nucor
The idea of getting good service of their ego. In the team members often arrive
people may seem self evi- great companies, the ego 30 minutes before their
dent, but that's not the is operating in the service shifts to arrange their tools
point: The point is that the of the company. The great so they will be ready the
great companies got the CEOs have high ambitions, moment their workday
best people first, before too, but they are not person- starts. Nucor ejects people
even planning what to do al ambitions; they are who do not share this work
with them. Then the great ambitions for the company. ethic, generating high
companies let those great turnover in the first year of
people set the direction. While they have high ambi- a plant, followed by the low-
tions, they do not aspire to est turnover in the industry
By contrast, the comparison high salaries. Collins found once the right people are on
companies often would have no connection between com- board.
a single genius CEO with a pensation and greatness.
great vision, who would hire In fact, the executives of The take-away lessons from
thousands to execute his great companies tended to this part of Collins' research
vision. The problem with earn less on the whole than can be boiled down to three
that technique is that when those at the comparison practical disciplines:
the genius leaves, the companies.
helpers are helpless. 1. When in doubt, don't
Collins analyzed proxy state- hire keep looking.
Eckerd Drugs provides a ments using 112 variations, Sometimes it's very
BUSINESS BOOK SUMMARIES 5
hard not to hire some- decades later, Forbes returns that were 10 times
one when you can't find called the move a stroke the market, and 80 times
exactly the right person, of genius. Weissman better than A&P. What
but that's the discipline: had made Marlboro the happened was that America
Don't compromise. If best-selling cigarette in changed and A&P did not.
you force growth with- the world. Of course, it
out the right people in wasn't difficult to pre- A&P had built a perfect
place, the company may dict that a man like model for the first half of
show profits for a while, Weissman would put all the 20th century, when two
but it will eventually his energy into making world wars and a depres-
collapse. his division the best. sion imposed frugality upon
He was a man incapable Americans: The company
2. When you know you need of doing anything less. offered cheap, plentiful
to make a change in per- groceries in bland stores.
sonnel, act right away. That's why choosing the
This applies most impor- right people is essential to But in the affluent second
tantly to letting the going beyond good perfor- half of the century,
wrong people go. It's not mance: because they are Americans wanted cleaner
fair to the person or the incapable of anything less stores, more parking
company to keep them than greatness. spaces, and more choices of
hanging around, hoping products. They also wanted
for a change. However, health foods, medicines,
don't overlook the possi- and a banking center. In
bility that the right per- C ONFRONT THE BRUTAL short, consumers no longer
son may be in the wrong FACTS wanted to shop in grocery
slot. When Colman stores; they wanted to stroll
Mockler became CEO of When a company has Level through superstores that
Gillette, he spent two 5 leadership and the right offered everything under
years moving managers employees in place, every- one roof.
around and ended up one puts the company's per-
changing the jobs of 38 formance above his or her While A&P stuck with its
out of his top 50 people. own ego. This capability tried-and-true business
enables the people in a model, living by the slogan,
3. Put your best people on good-to-great firm to con- "You can't argue with 100
your biggest opportuni- front brutal facts, yet never years of success," its perfor-
ties, not on your biggest lose faith. mance slid. Meanwhile,
problems. At Philip Kroger confronted the brutal
Morris, Joe Cullman Consider the case of Kroger. reality that the old grocery-
had identified the In the 1950s, Kroger and store concept was extinct. It
international market, A&P faced off in a David eliminated, changed, or
which the company had and Goliath battle that still replaced every store and
largely ignored, as the makes people's heads spin. exited every region in which
biggest new opportunity. But the difference in their it could not be first or
He took his top execu- performance can be second in the market. By
tive, George Weissman, summed up in the simplest 1999, Kroger was the No. 1
away from the domestic of terms: A&P ignored the grocery chain in America.
business and gave him truth, while Kroger
the international mar- embraced it. In each comparison between
ket. At first, it looked the good-to-great firms and
like a demotion. A&P was second only to the control companies, the
Weissman had run 99 General Motors in earnings conclusion is obvious:
percent of the business, in the early 1950s. Kroger Greatness results from a
and suddenly he found was less than half that series of good decisions,
himself running only size. Yet over the next half- diligently executed and
one percent. But two century, Kroger generated accumulated one after the
6 AUDIO-TECH
other. To do that, the great was true at many other But simply facing facts is
executives first infused comparison companies, not enough. The idea is to
everything they did with where people were afraid to see the brutal reality as a
the facts of the situation. speak their minds for fear great opportunity for
They didn't hide their heads of being shot down by a change. Collins calls it a
in the sand. They did not strong-willed leader. sense of exhilaration that
engage in denial. No mat- comes from facing the facts
ter how bleak it looked, A key to being a leader of a and saying, "We will never
they faced reality. great company is to create a give up."
culture where people can be
Pitney Bowes had to face heard. Collins suggests For example, David
the fact that all its postage three simple steps to accom- Maxwell was CEO of
metering machines were plish that goal: Fannie Mae when it was
about to become obsolete losing $1 million every sin-
and its core business would 1. Lead with questions, not gle business day and had
disappear. Yet, the execu- answers. Admit that $56 million in loans under
tives did face this fact and you don't know the water. He saw that the
did reinvent the business. answers, and the great business had gone so bad
Its competitor, people you've hired will that his only chance to save
Addressograph, buried its bring them to you. it would be to make it the
head in a series of acquisi- leader in its industry. He
tions and quick fixes under 2. Engage in dialogue and rebuilt the business around
a charismatic CEO, Roy debate, not coercion. risk management, invented
Ash, in the early 1970s. Collins suggests being a sophisticated new mortgage
Socratic moderator, like finance instruments, and
Until 1973, the two compa- Ken Iverson of Nucor. wound up returning almost
nies were roughly equal in In his meetings, people eight times the general
revenues, profits, number of were not afraid. They'd market over 15 years.
employees, and stock charts. yell and scream and
By 2000, Pitney Bowes had almost come to blows.
30,000 employees and rev- But they'd emerge with
enues over $4 billion, com- a decision. Such dia- T HE HEDGEHOG CONCEPT
pared to Addressograph's logues are always based
670 employees and $100 in fact and mounted in One of the traits that
million in revenues. Pitney search of the best distinguishes the leaders of
Bowes outperformed its answers; they are not good-to-great firms is the
competitor by 3,581 to one. turf wars. simplicity of their concepts.
Ash was ultimately removed Put another way, they are
from office and his company 3. Conduct autopsies with- focused on a single, almost
filed for bankruptcy. out blame. When Philip obsessive, goal. This is
Morris bought, and then what Collins calls "the
This example proves once sold, the 7-Up Company Hedgehog Concept."
again that a charismatic at a huge loss, it could Hedgehogs always focus on
leader is often a liability. have been the opportuni- a single idea: If attacked,
At Pitney Bowes, it was ty for heads to roll, but they will roll up into a ball
acceptable for people to it was viewed instead as with their spikes protecting
speak up and be the bearer a very prestigious and them. Because they have
of bad news. They could expensive school for only one strategy, they are
tell senior executives where learning lessons in busi- free to perfect it.
they were going wrong. At ness. Executives still
Addressograph, Ash simply talk about it, but no one Similarly, the people who
instilled fear in his man- is blamed; everyone is make the biggest impact
agers, so no one was willing learning from it to this focus on a single big idea:
to confront the truth unless day. Charles Darwin and his
it was favorable. The same theory of natural selection,
BUSINESS BOOK SUMMARIES 7
Sigmund Freud and his questions before going It sounds like a simple mat-
theory of the unconscious, ahead. Anything that did ter to find out what makes
Albert Einstein and his not stand up to that test your company money, but
theory of relativity. was abandoned, and all it's a subtle and elusive
resources were poured thing to measure correctly.
In business as well, the leap into the answers in which For example, Walgreens
from good to great depends those three concepts found wanted to increase its profit
on taking a hedgehog common ground. per customer visit. The
approach. For example, normal measure in that
Cork Walgreen decided that Knowing what you can and business is profit per store,
his mission was to create the cannot be best at is the root but that would have run up
best, most convenient drug- of all business strategy. For against the core concept
stores in the world with high example, Abbott Labs and that Walgreens had devel-
profit per customer. He Upjohn were almost identi- oped of convenience,
didn't have to invent the cal companies in 1964 in because it would have
computer chip, as Intel did. terms of product, profit, and dictated decreasing, not
But he beat Intel on returns. revenues. But then Abbott increasing, the number of
He didn't have a secret soft developed a simple core stores.
drink formula, as Coca-Cola concept, and Upjohn did not.
did. But he beat Coke, too. Wells Fargo, as well, had to
Abbott began by confronting be creative about how it
Walgreens invented the the sad reality that it had defined success to keep it in
drive-through pharmacy, put already lost the game of line with its core concept.
in one-hour photo process- being the best pharmaceuti- Standard banking metrics,
ing, and replaced any stores cal company in the world. such as profit per loan,
that didn't meet its rigorous By 1964, it could never catch wouldn't work. They decid-
specifications. In a relent- up with Merck's huge ed to measure profit per
less quest for convenience, it research lead. Abbott CEO employee instead and used
clustered nine stores within George Cain, therefore, stripped-down branches and
a square mile in San asked the logical question: ATMs to push that objective.
Francisco. What can we be best at? By
1967, an answer had begun The effort you will put into
In contrast, the main com- to emerge. Abbott could answering the question of
petition, Eckerd, went after create products that provid- what denominator is best
growth for the sake of ed cost-effective health care. for your company will force
growth. Walgreens grew to For example, good diagnos- a much deeper understand-
twice Eckerd's size with net tics can reduce costs dramat- ing of what you do than
profits $1 billion greater. ically, and proper nutrition almost any other exercise.
can reduce recovery time. It will stimulate intense
The simplicity of Walgreens' dialogue and debate. And
strategy comes down to As the company began slow- what you measure is what
answering three questions: ly but surely moving toward drives your work at every
being No. 1 in that area, level.
1. What can you be the Upjohn was unrealistically
best in the world at? trying to beat Merck. The
company had a hard lesson A CULTURE OF DISCIPLINE
2. What drives your to learn: Just because some-
economic engine? thing is your core business Most executives mistake
doesn't mean you can be the control for discipline. They
3. What are you passionate best at it. After fighting a believe at some level that
about? losing R&D battle with the discipline they seek to
Merck, Upjohn saw its prof- instill can be achieved by
In the case of each of the its dwindle to half those of controlling what other peo-
11 great companies, execu- Abbott, and was acquired in ple do. But that reasoning
tives answered those 1995. is backwards. In fact, what
8 AUDIO-TECH
people do comes from inside Consider Carl Reichardt at Stanley Gault at
them, no matter what the Wells Fargo when it went Rubbermaid is a perfect
outside stimuli. head to head with Bank of example of trying to impose
America during the period discipline on his employees.
Most companies build of deregulation. He saw He worked 80-hour weeks
bureaucracies to manage that the key to winning was and made sure his man-
the wrong people they have, not with some great, new agers did, too. The company
not to assist the right peo- strategy but with sheer rose dramatically under
ple in getting work done. determination and the will- that leadership. But like all
Getting the right people, ingness to tear apart the tyrannical bureaucracies,
and getting rid of the wrong traditional banking system, when he left, the company
people, solves almost all the which rested on perks and a lost 59 percent of its value
problems a company has. lavish life style. relative to the market.
Creating a culture of disci- Chrysler under Lee Iacocca
pline is based on the right Reichardt set the tone from showed the same pattern.
people, and that starts at the start. He froze execu-
the top. tive salaries for two years, The scheme that reaps the
shut the executive dining most rewards is the simplest
At Amgen, George room, closed the executive one. But it takes a bal-
Rathmann recruited entre- elevator, sold the corporate anced, selfless person at the
preneurial leaders and gave jets, and even banned green top, which is rare. At Nucor,
them creative and bureau- plants from the executive Ken Iverson's cheap, rented
cratic freedom. He trusted suites because they were offices were staffed by fewer
them to achieve their goals, expensive to maintain. He than 25 people and had only
because the right people are removed the free coffee from four layers of management,
already motivated to be the the executive suite, elimi- yet grew into a $3.5 billion
best. nated Christmas trees for Fortune 500 company.
management, and rejected There was no corporate din-
The company became so reports that were submitted ing room; visiting moguls
consistently profitable that in expensive binders. were taken to lunch at Phil's
an investor who bought as Diner across the street. In
little as $7,000 of Amgen During meetings with his the 1982 recession, when
stock at its IPO in 1983 executives, Reichardt sat in workers' pay was cut 25
would have realized a capi- a beat-up old chair in which percent, executive salaries
tal gain of more than $1 the stuffing was hanging were slashed by 60 percent,
million. This return is 13 out; as he sat in the chair and the CEO himself took a
times greater than the picking at the stuffing, 75 percent pay cut.
return from the same his executives' must-do pro-
investment in the general posals to spend money just The idea behind a culture
market. melted away. of discipline is so simple
that it's a wonder it can
But freedom is not chaos. The comparison companies elude so many smart execu-
Amgen's people had to work attempted to impose disci- tives: If you want a great
within a system. In other pline from above, without company, you must be great
words, being free does not living it themselves. The yourself. Bethlehem Steel,
mean being out of control. executives at Bank of ensconced in its 21-story
It means being accountable. America, for example, were vanity address, was the
living in an ivory tower exact opposite. It spent
A culture of discipline also adorned with Oriental rugs, millions to design the build-
involves knowing when to executive elevators, and a ing in the shape of a cross
put profits ahead of perks. panoramic view of San so that all executives could
The Level 5 leaders that Francisco. Amid all of this have a corner office.
we've discussed have shown opulence, Bank of America
the way for others who are lost $1.8 billion in three Bethlehem's fleet of corpo-
willing to learn. years. rate jets even ferried the
BUSINESS BOOK SUMMARIES 9
officers' children to their accelerate their momentum. When Walgreens launched
prep schools and colleges. its complete Web site in
The executive country club Walgreens, for example, October, 2000, its stock
had a world-class 18-hole didn't react at all while the price nearly doubled, while
golf course. The purpose of Internet race was on. Drugstore.Com was
the company was to support While other companies were announcing layoffs and
an elite class in high style. falling all over themselves accumulating mammoth
to get onto the Web and losses. Drugstore.com had
By the end of the century, stake out territory, lost nearly all of its $3.5
Nucor, which had been Walgreens took time to billion market cap and had
less than a third the size think about it. gone from run to walk to
of Bethlehem in 1990, sur- crawl.
passed Bethlehem's While Drugstore.com was
revenues. Even more trading at 398 times So how do good-to-great
astounding, Nucor's average revenue, Walgreens was companies think about tech-
five-year profit per employ- trading at 1.4 times rev- nology? The point is, they
ee exceeded Bethlehem's by enue. Analysts downgraded do think, they don't react
nearly 10 times. Walgreens stock, erasing impulsively. They adapt
$15 billion in market value. carefully. They spark inter-
An investor who bought Walgreens didn't panic. nal debate. They take small
Nucor stock in 1966 would "We're a crawl, walk, run steps. They understand
have earned a return 200 company," Dan Jorndt told that first-mover advantage
times greater than the Forbes magazine. is a myth. They understand
return from an investment that there are no magic bul-
in Bethlehem's stock. In Walgreens moved slowly by lets. They understand that
short, Bethlehem's culture of experimenting with a Web technology is a tool like any
privilege lost money, while site. At the same time, the other tool, and it can be
Nucor's culture of discipline company engaged in intense used in the service of their
made money. internal debate about how core concept nothing
the Internet would impact more, and nothing less.
its Hedgehog Concept of con-
venience. Executives asked, What Collins found in his
T ECHNOLOGY ACCELERATORS "How can we use the Web to five years of research was
enhance what we do better that technology, per se, had
Just as the good-to-great than any other company in nothing to do with great-
companies have learned to the world?" ness. But all the great
succeed without extrava- companies had pioneered
gant offices, they have While everyone was saying carefully selected applica-
proven that a business does Walgreens was too old and tions of technology. Here are
not need the latest, hottest stodgy to get on the Web, four examples:
technology to win. the company was gradually
tying the Internet to its 1. Kroger pioneered
Technology never made a sophisticated inventory and the bar code to link
company great. In fact, all distribution model. The front-line purchases to
11 companies examined by company figured out a way backroom inventory.
Collins paid little attention to enable customers to go
to technology in the initial on-line, place an order, and 2. Fannie Mae pioneered
stages of building toward either pick it up at the the application of sophis-
greatness. What they did drive-through window or ticated algorithms and
do was to marshal their have it delivered. To computer analysis to
technological resources in Walgreens, the Internet was assess mortgage risks.
the service of greatness simply another channel for
when the appropriate time providing its customers 3. Nucor pioneered the
came. In other words, with convenience. application of mini-mill
they used technology to steel production.
10 AUDIO-TECH
TECHNOLOGY ACCELERATORS IN THE GOOD-TO GREAT COMPANIES

Company Technology Accelerators Linked to Company Technology Accelerators Linked to


Hedgehog Concept during Transition Era Hedgehog Concept during Transition Era
Abbott Pioneered application of computer tech- to make huge bets (up to 50 percent of
nology to increase economic denomina- corporate net worth) on new technolo-
tor of profit per employee. Not a leader gies that others viewed as risky, such
in pharmaceutical R&D leaving that as continuous thin slab casting.
to Merck, Pfizer, and others that had a
different Hedgehog Concept. Phillip Morris
Pioneered application of both packag-
Circuit City Pioneered application of sophisticated ing and manufacturing technology. Bet
point-of-sale and inventory-tracking on technology to make flip-top boxes-
technologies-linked to the concept the first packaging innovation in twenty
of being the "McDonald's" of big-ticket years in the industry. First to use com-
retailing, able to operate a geographi- puter-based manufacturing. Huge
cally dispersed system with great investment in manufacturing center to
consistency. experiment with, test, and refine
advanced manufacturing and quality
Fannie Mae Pioneered application of sophisticated techniques.
algorithms and computer analysis to
more accurately assess mortgage risk, Pitney Bowes
thereby increasing economic denomi- Pioneered application of advanced
nator of profit per risk level. "Smarter" technology to the mailroom. At first, it
system of risk analysis increases took the form of mechanical postage
access to home mortgages for lower- meters. Later, Pitney invested heavily
income groups, linking to passion for in electrical, software, communications,
democratizing home ownership. and Internet engineering for the most
sophisticated back-office machines.
Gillette Pioneered application of sophisticated Made huge R&D investment to reinvent
manufacturing technology for making basic postage meter technology in the
billions of high-tolerance products at I980s.
low cost with fantastic consistency.
Protects manufacturing technology Walgreens Pioneered application of satellite com-
secrets with the same fanaticism that munications and computer network
Coca-Cola protects its formula. technology, linked to its concept of con-
venient corner drugstores, tailored to
Kimberly-Clark the unique needs of specific demo-
Pioneered application of manufacturing- graphics and locations. A "swallow
process technology, especially in non- your tonsils" big investment on a satel-
woven materials, to support their pas- lite system that links all stores together,
sionate pursuit of product superiority. like one giant web of a single corner
Sophisticated R&D labs; "babies crawl pharmacy. "Like a trip through NASA
about with temperature and humidity space center." Led the rest of the
sensors trailing from their tails..." industry by at least a decade.

Kroger Pioneered application of computer and Wells Fargo Pioneered application of technologies
information technology to the continu- that would increase economic denomi-
ous modernization of super- stores. nator of profit per employee. Early
First to seriously experiment with scan- leader in twenty-four-hour banking by
ners, which it linked to the entire cash- phone, early adopter of ATMs, first to
flow cycle, thereby providing funds for allow people to buy and sell mutual
the massive store-revamping process. funds at an ATM, pioneer in Internet and
electronic banking. Pioneered sophisti-
Nucor Pioneered application of the most cated mathematics to conduct better
advanced mini-mill steel manufacturing risk assessment in lending.
technology. "Shop the world over" for
the most advanced technology. Willing

4. Gillette pioneered the to the production of nor did it allow the technol-
application of laser razors on a mass scale. ogy to drive the company.
welding, normally used But it showed great
on expensive products In each case, the company creativity in the use of
like heart pacemakers, didn't invent the technology, the technology, and then
BUSINESS BOOK SUMMARIES 11
brilliantly applied it in the never satisfied. And that quiet, deliberate process of
service of its own vision. applies to technological figuring out whats needed
applications as much as to be done and then taking
Fannie Mae called this "the anything. those steps, one after the
second wind," the accelera- other.
tion of momentum after
the transformation from a Significantly, the great com-
good company to a great panies had no name for
company. But in all cases, their transitions from good
the technology came after T HE FLYWHEEL AND THE to great. They just plugged
the company had put the D OOM LO O P along, doggedly pursuing
right people in place and their passion, their core
formulated its core concept, The final theme that all of concept.
its passion. It came late in the good-to-great companies
the transition, only when share is a slow, steady But the interesting thing is
the company could fully buildup of momentum. this: It takes nerves of steel
understand the role the to pull that off. None of the
technology would play. For a useful analogy, companies involved had the
imagine trying to turn a luxury of circumstance to
Wherever a new technology 5,000-pound flywheel. grant them the time and
didn't fit, the good-to-great Pushing with great effort, comfort to sit back and take
firms simply ignored it and you might move the fly- those small steps. They
went about their business. wheel an inch at first. After were under fire from all
But that attitude changed two or three more hours of sides. There was looming
as soon as they discovered persistent effort, you get the bankruptcy, impending
how a technology could fit flywheel to complete one take-overs, million-dollar-a-
the core concept, as entire turn. day losses, and Wall Street
Walgreens did in using its breathing down their necks.
Web site to give customers As you keep pushing, the And yet they had the forti-
even more convenience. In flywheel begins to move tude to remain calm enough
those cases, the companies faster and faster. Then at to take those simple, small
became fanatical in the some point, you make a steps instead of trying one
pursuit of excellence breakthrough: the momen- big push to greatness, one
where that technology was tum kicks in in your favor big change.
concerned. until its own weight is work-
ing for you. You no longer By contrast, the companies
Collins' research led him need to push harder, but the in the control group were
to the conclusion that flywheel goes faster and marked by a different pat-
technology can not only faster, with each turn build- tern that Collins calls the
accelerate greatness. ing on all of the previous "Doom Loop." They con-
Misused, it can accelerate momentum. stantly sought the grand
the demise of a company as program or killer innova-
well. Technology pioneers In the good-to-great tion that would allow them
rarely prevail. And technol- companies, the transforma- to skip the difficult buildup
ogy by itself is frequently tion never happened as stage and skip right to the
more a hindrance than a the result of a single big breakthrough.
help. effort. There was no grand
program, no killer To return to the flywheel
Once again, it comes back innovation, and no radical analogy, they would push
to the same theme: Those revolution. Good to great it in one direction, then
who turn good companies comes about by a cumula- stop, change course, and
into great ones are motivat- tive process, in which each throw it in a new direction.
ed by a deep drive to step, action, and decision Then they would stop,
greatness. Driven by will adds up to sustained and change course, and push the
and discipline, they are spectacular results. It is a flywheel in yet another
12 AUDIO-TECH
direction. After years of The Flywheel Effect
lurching back and forth,
these companies failed to
build sustained momentum.

For example, Warner-


Lambert announced in
1979 that it would be a
leading consumer products
company. In 1980, it did a
180-degree turn to health
care products. In 1981, it
reversed course again to
consumer goods. In 1987, it
again abandoned consumer
goods and went back to
health care products. In
the 1990s, it spun around
again, embracing diversifi-
cation and consumer
brands.

Meanwhile, it was hemor-


rhaging cash and failing to The Doom Loop
build momentum. From
1979 through 1998 Warner-
Lambert went through three
major restructurings, one
per CEO, firing 20,000
people in the process. Stock
returns flattened relative to
the general market, and
Warner-Lambert vanished
as an independent company,
swallowed up by Pfizer.

It is impossible for a compa-


ny to build up a head of
steam with all those abrupt
changes in direction. And
lost on those leaders is the
truth that it doesn't really
matter what business you're
in. Remember that all 11
good-to-great companies in
the study were in rather
unpleasant industries to The same two patterns already-moving concept, to
begin with, such as banking the Flywheel Effect and create more momentum.
and steel. Your company the Doom Loop can be The mediocre firms grasped
can be great in any busi- seen in companies' different at them in a desperate effort
ness, as long as you can be approaches to mergers and to jump-start their efforts,
the best at it, as long as it acquisitions. The great and it never worked.
drives your bottom line, and companies used them the
as long as you're passionate same way they used tech-
about it. nology: to accelerate an
BUSINESS BOOK SUMMARIES 13
o escape the Doom Loop steady progress toward sen-
T and make the leap to
greatness, you must
sational results. Along the
way, you will need to spend
embrace each of the seven very little energy to moti-
themes that Collins found in vate or align people to the
the companies he studied. new vision. The momentum
on the flywheel builds on
1. Practice Level 5 leader- itself, constantly propelling
ship by putting your the entire company beyond
company's ambitions good performance to great
ahead of your career performance.
aspirations.

2. Focus on who before


what by putting the
right people into the
right jobs, instead of
jumping right into
action.

3. Confront the brutal facts N OTES


to see clearly what steps
must be taken to build
momentum, rather than
embracing fads.

4. Attain consistency with


a clear Hedgehog
Concept, rather than
lurching back and forth
from one strategy to
another.

5. Establish of culture of
discipline in which
everyone is accountable.

6. Harness the right tech-


nologies to accelerate
momentum, instead of
trying to keep up with
each technology change
out of a fear of being
left behind.

7. Make slow, measured


progress on the flywheel,
rather than pushing
in different directions
and hoping for a big
breakthrough.

Once you apply these con-


cepts to your own business,
you can start making slow,
14
ABOUT THE AUTHORS

Jim Collins is coauthor of Built to Last, a national bestseller for over


five years with a million copies in print. A student of enduring great
companies, he serrves as a teacher to leaders throughout the corporate
and social sectors. Formerly a faculty member at the Stanford
University Graduate School of Business, where he received the
Distringuished Teaching Award, Jim now works from his management
research laboratory Boulder, Colorado.

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Good to Great summarized by arrangement with Harper Business, an Imprint of HarperCollins Publishers,
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Copyright 2001 by Jim Collins.

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