Good to Great: Why Some Companies Make the Leap...And Others Don't

by Jim Collins

To get insight into the drivers of your economic engine, search for the one denominator (profit per x or, in the social sector, cash flow per x) that has the single greatest impact.

Strategy per se did not separate the good-to-great companies from the comparison companies. Both sets had strategies, and there is no evidence that the good-to-great companies spent more time on strategic planning than the comparison companies.

The professional managers finally rein in the mess. They create order out of chaos, but they also kill the entrepreneurial spirit.

The creative magic begins to wane as some of the most innovative people leave, disgusted by the burgeoning bureaucracy and hierarchy. The exciting start-up transforms into just another company, with nothing special to recommend it. The cancer of mediocrity begins to grow in earnest.

Rathmann also understood an alternative exists: Avoid bureaucracy and hierarchy and instead create a culture of discipline.

You never just focus on what you’ve accomplished for the year; you focus on what you’ve accomplished relative to exactly what you said you were going to accomplish—no matter how tough the measure. That was a discipline learned at Abbott, and that we carried into Amgen.3

They had freedom, but freedom within a framework. Abbott instilled the entrepreneur’s zeal for opportunistic flexibility.

We recognized that planning is priceless, but plans are useless,” said one Abbott executive.)

Build a culture around the idea of freedom and responsibility, within a framework.

Fill that culture with self-disciplined people who are willing to go to extreme lengths to fulfill their responsibilities. They will “rinse their cottage cheese.”

Don’t confuse a culture of discipline with a tyrannic...

Adhere with great consistency to the Hedgehog Concept, exercising an almost religious focus on the intersection of the three circles. Equally important, create a “stop doing lis...

Customer service at the airlines might be terrible, but you are almost certain to get where you are going in one piece.

The good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-disciplined people who didn’t need to be managed, and then managed the system, not the people.

In a sense, much of this book is about creating a culture of discipline. It all starts with disciplined people. The transition begins not by trying to discipline the wrong people into the right behaviors, but by getting self-disciplined people on the bus in the first place. Next we have disciplined thought. You need the discipline to confront the brutal facts of reality, while retaining resolute faith that you can and will create a path to greatness. Most importantly, you need the discipline to persist in the search for understanding until you get your Hedgehog Concept.

Finally, we have disciplined action, the primary subject of this chapter. This order is important. The comparison companies often tried to jump right to disciplined action. But disciplined action without self-disciplined people is impossible to sustain, and disciplined action without disciplined thought is a recipe for disaster.

Everyone would like to be the best, but most organizations lack the discipline to figure out with egoless clarity what they can be the best at and the will to do whatever it takes to turn that potential into reality.

Whereas the good-to-great companies had Level 5 leaders who built an enduring culture of discipline, the unsustained comparisons had Level 4 leaders who personally disciplined the organization through sheer force.

The above cases illustrate a pattern we found in every unsustained comparison: a spectacular rise under a tyrannical disciplinarian, followed by an equally spectacular decline when the disciplinarian stepped away, leaving behind no enduring culture of discipline, or when the disciplinarian himself became undisciplined and strayed wantonly outside the three circles.

Fortunately, a Level 5 leader named Fred Allen stepped in and asked hard questions that led to deeper understanding of Pitney’s role in the world. Instead of viewing itself as a “postage meter” company, Pitney came to see that it could be the best in the world at servicing the back rooms of businesses within the broader concept of “messaging.” It also came to see that sophisticated back-office products, like high-end faxes and specialized copiers, played right into its economic engine of profit per customer, building off its extensive sales and service network.

The key point is that every step of diversification and innovation stayed within the three circles.

The good-to-great companies at their best followed a simple mantra: “Anything that does not fit with our Hedgehog Concept, we will not do. We will not launch unrelated businesses. We will not make unrelated acquisitions. We will not do unrelated joint ventures. If it doesn’t fit, we don’t do it. Period.”

In contrast, we found a lack of discipline to stay within the three circles as a key factor in the demise of nearly all the comparison companies. Every comparison either (1) lacked the discipline to understand its three circles or (2) lacked the discipline to stay within the three circles.

“Look, these guys are the world’s best at making and selling tobacco products, but what do they know about ships or oil? I’m not worried about them going broke, but they look like country boys with too much cash in their pockets.”

The more an organization has the discipline to stay within its three circles, the more it will have attractive opportunities for growth. Indeed, a great company is much more likely to die of indigestion from too much opportunity than starvation from too little. The challenge becomes not opportunity creation, but opportunity selection.

It takes discipline to say “No, thank you” to big opportunities. The fact that something is a “once-in-a-lifetime opportunity” is irrelevant if it doesn’t fit within the three circles.

This notion of fanatical consistency relative to the Hedgehog Concept doesn’t just concern the portfolio of strategic activities. It can relate to the entire way you manage and build an organization.

When we interviewed Ken Iverson, he told us that nearly 100 percent of the success of Nucor was due to its ability to translate its simple concept into disciplined action consistent with that concept. It grew into a $3.5 billion Fortune 500 company with only four layers of management and a corporate headquarters staff of fewer than twenty-five people—executive, financial, secretarial, the whole shebang—crammed into a rented office the size of a small dental practice.

Executives did not receive better benefits than frontline workers. In fact, executives had fewer perks.

When Nucor had a highly profitable year, everyone in the company would have a very profitable year. Nucor workers became so well paid that one woman told her husband, “If you get fired from Nucor, I’ll divorce you.”56 But when Nucor faced difficult times, everyone from top to bottom suffered. But people at the top suffered more. In the 1982 recession, for example, worker pay went down 25 percent, officer pay went down 60 percent, and the CEO’s pay went down 75 percent.

In contrast to Nucor’s dental suite–sized headquarters, Bethlehem Steel built a twenty-one-story office complex to house its executive staff. At extra expense, it designed the building more like a cross than a rectangle—a design that accommodated the large number of vice presidents who needed corner offices.

We came to the conclusion that Bethlehem executives saw the very purpose of their activities as the perpetuation of a class system that elevated them to elite status. Bethlehem did not decline in the 1970s and 1980s primarily because of imports or technology—Bethlehem declined first and foremost because it was a culture wherein people focused their efforts on negotiating the nuances of an intricate social hierarchy, not on customers, competitors, or changes in the external world.

By the 1990s, Nucor’s profitability beat Bethlehem’s every single year, and at the end of the century, Nucor—which had been less than a third the size of Bethlehem only a decade earlier— finally surpassed Bethlehem in total revenues.62 Even more astounding, Nucor’s average five-year profit per employee exceeded Bethlehem by almost ten times.63 And for the investor, $1 invested in Nucor beat $1 invested in Bethlehem Steel by over 200 times.

Nucor had no union and enjoyed remarkably good relations with its workers.

the union argument begs a crucial question: Why did Nucor have such a better relationship with its workers in the first place? Because Ken Iverson and his team had a simple, crystalline Hedgehog Concept about aligning worker interests with management interests and—most importantly—because they were willing to go to almost extreme lengths to build the entire enterprise consistent with that concept.

Do you have a “to do” list? Do you also have a “stop doing” list?

Most of us lead busy but undisciplined lives. We have ever-expanding “to do” lists, trying to build momentum by doing, doing, doing—and doing more. And it rarely works.

He saw increasing layers as the natural result of empire building. So he simply unplugged a huge stack of layers with a simple elegant mechanism: If you couldn’t justify to your peers the need for at least fifteen people reporting to you to fulfill your responsibilities, then you would have zero people reporting to you.

The good-to-great companies institutionalized the discipline of “stop doing” through the use of a unique budget mechanism. Stop and think for a moment: What is the purpose of budgeting? Most answer that budgeting exists to decide how much to apportion to each activity, or to manage costs, or both. From a good-to-great perspective, both of these answers are wrong.

In a good-to-great transformation, budgeting is a discipline to decide which arenas should be fully funded and which should not be funded at all.

Once they understood their three circles, they rarely hedged their bets.

They all had the guts to make huge investments, once they understood their Hedgehog Concept.

The real question is, once you know the right thing, do you have the discipline to do the right thing and, equally important, to stop doing the wrong things?

A culture of discipline is not just about action. It is about getting disciplined people who engage in disciplined thought and who then take disciplined action.

The fact that something is a “once-in-a-lifetime opportunity” is irrelevant, unless it fits within the three circles. A great company will have many once-in-a-lifetime opportunities.

“Stop doing” lists are more important than “to do” lists.

Most men would rather die, than think. Many do.

We entered a remarkable moment in history when the whole idea of trying to build a great company seemed quaint and outdated. “Built to Flip” became the mantra of the day. Just tell people you were doing something, anything, connected to the Internet, and—presto!—you became rich by flipping shares to the public, even if you had no profits (or even a real company).

“Investors seem to think that the Web race will be won by competitors who hit the ground running—companies like drugstore.com, which trades at 398 times revenue, rather than Walgreen, trading at 1.4 times revenue.”

“We’re a crawl, walk, run company,” Dan Jorndt told Forbes in describing his deliberate, methodical approach to the Internet. Instead of reacting like Chicken Little, Walgreens executives did something quite unusual for the times. They decided to pause and reflect.