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

by Jim Collins

The good-to-great companies were subject to the same short-term pressures from Wall Street as the comparison companies. Yet, unlike the comparison companies, they had the patience and discipline to follow the buildup-breakthrough flywheel model despite these pressures. And in the end, they attained extraordinary results by Wall Street’s own measure of success.

One particularly elegant method for doing so came from Abbott Laboratories, using a mechanism it called the Blue Plans. Each year, Abbott would tell Wall Street analysts that it expected to grow earnings a specified amount—say, 15 percent. At the same time, it would set an internal goal of a much higher growth rate—say, 25 percent, or even 30 percent. Meanwhile, it kept a rank-ordered list of proposed entrepreneurial projects that had not yet been funded—the Blue Plans. Toward the end of the year, Abbott would pick a number that exceeded analyst expectations but that fell short of its actual growth. It would then take the difference between the “make the analysts happy” growth and the actual growth and channel those funds into the Blue Plans. It was a brilliant mechanism for managing short-term pressures while systematically investing in the future.23

The good-to-great companies understood a simple truth: Tremendous power exists in the fact of continued improvement and the delivery of results.

Clearly, the good-to-great companies did get incredible commitment and alignment—they artfully managed change—but they never really spent much time thinking about it. It was utterly transparent to them. We learned that under the right conditions, the problems of commitment, alignment, motivation, and change just melt away. They largely take care of themselves.

Stop and think about it for a minute. What do the right people want more than almost anything else? They want to be part of a winning team.

We found a very different pattern at the comparison companies. Instead of a quiet, deliberate process of figuring out what needed to be done and then simply doing it, the comparison companies frequently launched new programs—often with great fanfare and hoopla aimed at “motivating the troops”—only to see the programs fail to produce sustained results.

They sought the single defining action, the grand program, the one killer innovation, the miracle moment that would allow them to skip the arduous buildup stage and jump right to breakthrough.

To understand the role of acquisitions in the process of going from good to great, we undertook a systematic qualitative and quantitative analysis of all acquisitions and divestitures in all the companies in our study, from ten years before the transition date through 1998. While we noticed no particular pattern in the amount or scale of acquisitions, we did note a significant difference in the success rate of the acquisitions in the good-to-great companies versus the comparisons. (See Appendix 8.B.)

Why did the good-to-great companies have a substantially higher success rate with acquisitions, especially major acquisitions? The key to their success was that their big acquisitions generally took place after development of the Hedgehog Concept and after the flywheel had built significant momentum. They used acquisitions as an accelerator of flywheel momentum, not a creator of it.

In contrast, the comparison companies frequently tried to jump right to breakthrough via an acquisition or merger. It never worked.

they never addressed the fundamental question: “What can we do better than any other company in the world, that fits our economic denominator and that we have passion for?” They never learned the simple truth that, while you can buy your way to growth, you absolutely cannot buy your way to greatness.

Two big mediocrities joined together never make one great company.

When I look over the good-to-great transformations, the one word that keeps coming to mind is consistency.

Getting the right people on the bus, the wrong people off the bus, and the right people in the right seats—these are all crucial steps in the early stages of buildup, very important pushes on the flywheel.

Equally important is to remember the Stockdale Paradox: “We’re not going to hit breakthrough by Christmas, but if we keep pushing in the right direction, we will eventually hit breakthrough.”

Next, when you attain deep understanding about the three circles of your Hedgehog Concept and begin to push in a direction consistent with that understanding, you hit breakthrough momentum and accelerate with key accelerators, chief among them pioneering the application of technology tied directly back to your three circles. Ultimately, to reach breakthrough means having the discipline to make a series of good decisions consistent with your Hedgehog Concept—disciplined action, following from disciplined people who exercise disciplined thought. That’s it. That’s the essence of the breakthrough process.

In short, if you diligently and successfully apply each concept in the framework, and you continue to push in a consistent direction on the flywheel, accumulating momentum step by step and turn by turn, you will eventually reach breakthrough. It might not happen today, or tomorrow, or next week. It might not even happen next year. But it will happen.

Early in the research, then, we made a very important decision. We decided to conduct the research for Good to Great as if Built to Last didn’t exist. This was the only way to clearly see the key factors in transforming a good company into a great one with minimal bias from previous work. Then we could return to ask, “How, if at all, do the two studies relate?”

When I consider the enduring great companies from Built to Last, I now see substantial evidence that their early leaders followed the good-to-great framework. The only real difference is that they did so as entrepreneurs in small, early-stage enterprises trying to get off the ground, rather than as CEOs trying to transform established companies from good to great. In an ironic twist, I now see Good to Great not as a sequel to Built to Last, but as a prequel. Apply the findings in this book to create sustained great results, as a start-up or an established organization, and then apply the findings in Built to Last to go from great results to an enduring great company.

To make the shift from a company with sustained great results to an enduring great company of iconic stature, apply the central concept from Built to Last: Discover your core values and purpose beyond just making money (core ideology) and combine this with the dynamic of preserve the core/stimulate progress. A tremendous resonance exists between the two studies; the ideas from each enrich and inform the ideas in the other. In particular, Good to Great answers a fundamental question raised, but not answered, in Built to Last: What is the difference between a “good” BHAG (Big Hairy Audacious Goal) and a “bad” BHAG?

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 breakthrough, following the good-to-great framework during their formative years.

Sam Walton began in 1945 with a single dime store. He didn’t open his second store until seven years later. Walton built incrementally, step by step, turn by turn of the flywheel, until the Hedgehog Concept of large discount marts popped out as a natural evolutionary step in the mid-1960s. It took Walton a quarter of a century to grow from that single dime store to a chain of 38 Wal-Marts.

Somehow over the years people have gotten the impression that Wal-Mart was… just this great idea that turned into an overnight success. But…it was an outgrowth of everything we’d been doing since [1945].… And like most overnight successes, it was about twenty years in the making.3

The founding minutes of their first meeting on August 23, 1937, begin by stating that they would design, manufacture, and sell products in the electrical engineering fields, very broadly defined. But then those same founding minutes go on to say, “The question of what to manufacture was postponed.…”5

Later, as Hewlett and Packard scaled up, they stayed true to the guiding principle of “first who.”

“No company can grow revenues consistently faster than its ability to get enough of the right people to implement that growth and still become a great company.”

Hewlett and Packard lived and breathed this concept and obtained a surplus of great people whenever the opportunity presented itself.

The caption made no reference to his stature as one of the great industrialists of the twentieth century.9 It simply read: “David Packard, 1912–1996, Rancher, etc.” Level 5, indeed.

The “HP Way,” as it became known, reflected a deeply held set of core values that distinguished the company more than any of its products. These values included technical contribution, respect for the individual, responsibility to the communities in which the company operates, and a deeply held belief that profit is not the fundamental goal of a company.

That extra dimension is a guiding philosophy or a “core ideology,” which consists of core values and a core purpose

Enduring great companies don’t exist merely to deliver returns to shareholders. Indeed, in a truly great company, profits and cash flow become like blood and water to a healthy body: They are absolutely essential for life, but they are not the very point of life.

core values are essential for enduring greatness, but it doesn’t seem to matter what those core values are. The point is not what core values you have, but that you have core values at all, that you know what they are, that you build them explicitly into the organization, and that you preserve them over time.

Enduring great companies preserve their core values and purpose while their business strategies and operating practices endlessly adapt to a changing world. This is the magical combination of “preserve the core and stimulate progress.”

Clock Building, Not Time Telling. Build an organization that can endure and adapt through multiple generations of leaders and multiple product life cycles; the exact opposite of being built around a single great leader or a single great idea. Genius of AND. Embrace both extremes on a number of dimensions at the same time. Instead of choosing A OR B, figure out how to have A AND B—purpose AND profit, continuity AND change, freedom AND responsibility, etc. Core Ideology. Instill core values (essential and enduring tenets) and core purpose (fundamental reason for being beyond just making money) as principles to guide decisions and inspire people throughout the organization over a long period of time. Preserve the Core/Stimulate Progress. Preserve the core ideology as an anchor point while stimulating change, improvement, innovation, and renewal in everything else. Change practices and strategies while holding core values and purpose fixed. Set and achieve BHAGs consistent with the core ideology.

A BHAG (pronounced bee-hag, short for “Big Hairy Audacious Goal”) is a huge and daunting goal—like a big mountain to climb. It is clear, compelling, and people “get it” right away. A BHAG serves as a unifying focal point of effort, galvanizing people and creating team spirit as people strive toward a finish line. Like the 1960s NASA moon mission, a BHAG captures the imagination and grabs people in the gut.

What is the difference between a bad BHAG and a good BHAG?

Bad BHAGs, it turns out, are set with bravado; good BHAGs are set with understanding. Indeed, when you combine quiet understanding of the three circles with the audacity of a BHAG, you get a powerful, almost magical mix.

In the early 1950s, however, Boeing saw an opportunity to leapfrog McDonnell Douglas by marrying its experience with large aircraft to its understanding of jet engines. Led by a Level 5 leader named Bill Allen, Boeing executives debated the wisdom of moving into the commercial sphere. They came to understand that, whereas Boeing could not have been the best commercial plane maker a decade earlier, the cumulative experience in jets and big planes they had gained from military contracts now made such a dream possible. They also came to see that the economics of commercial aircraft would be vastly superior to the military market and—of no small importance—they were just flat-out turned on by the whole idea of building a commercial jet. * Includes your core values and purpose So, in 1952, Bill Allen and his team made the decision to spend a quarter of the company’s entire net worth to build a prototype jet that could be used for commercial aviation.18 They built the 707 and launched Boeing on a bid to become the leading commercial aviation company in the world. Three decades later, after producing five of the most successful commercial jets in history (the 707, 727, 737, 747, and 757), Boeing stood as the absolute, unquestioned greatest company in the commercial airplane industry, worldwide.19 Not until the late 1990s would Boeing’s number one position be seriously challenged, and it would take a government consortium in the form of Airbus to do it.20

Here is the key point: Boeing’s BHAG, while huge and daunting, was not any random goal. It was a goal that made sense within the context of the three circles. Boeing’s executives understood with calm, equanimity that (1) the company could become the best in the world at commercial jet manufacturing even though it had no presence in the market, (2) the shift would significantly improve Boeing’s economics by increasing profit per aircraft model, and (3) the Boeing people were very passionate about the idea. Boeing acted with understanding, not bravado, at this pivotal moment in its history, and that is one of the key reasons why it endured as a great company.

“Greatness doesn’t depend on size.”

“Okay, I accept that I don’t need to build a big company in order to have a great company. But even so, why should I try to build a great company? What if I just want to be successful?”

First, I believe that it is no harder to build something great than to build something good.

“Look,” she said, “this program will be built on the idea that running is fun, racing is fun, improving is fun, and winning is fun. If you’re not passionate about what we do here, then go find something else to do.” The result: The number of kids in the program nearly tripled in five years, from thirty to eighty-two.

The point of this story is that these ideas work. When you apply them in any situation, they make your life and your experience better, while improving results.

To be clear, I am not suggesting that going from good to great is easy, or that every organization will successfully make the shift. By definition, it is not possible for everyone to be above average.

Why try for greatness? would seem almost tautological. If you’re doing something you care that much about, and you believe in its purpose deeply enough, then it is impossible to imagine not trying to make it great. It’s just a given.

So, the question of Why greatness? is almost a nonsense question. If you’re engaged in work that you love and care about, for whatever reason, then the question needs no answer. The question is not why, but how.

Indeed, the real question is not, “Why greatness?” but “What work makes you feel compelled to try to create greatness?” If you have to ask the question, “Why should we try to make it great? Isn’t success enough?” then you’re probably engaged in the wrong line of work.

The single most harmful step you can take in a journey from good to great is to put the wrong people in key positions.