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

by Jim Collins

the good-to-great companies founded their strategies on deep understanding along three key dimensions—what we came to call the three circles. Second, the good-to-great companies translated that understanding into a simple, crystalline concept that guided all their efforts—hence the term Hedgehog Concept.

a simple, crystalline concept that flows from deep understanding about the intersection of the following three circles:

What you can be the best in the world at (and, equally important, what you cannot be the best in the world at).

What drives your economic engine.

attained piercing insight into

how to most effectively generate sustained and robust cash flo...

they discovered the single denominator—profit per x—that had the greatest imp...

What you are deeply passionate about.

The idea here is not to stimulate passion but to discover what makes you passionate.

THREE CIRCLES OF THE HEDGEHOG CONCEPT

Ikigai

To have a fully developed Hedgehog Concept, you need all three circles. If you make a lot of money doing things at which you could never be the best, you’ll only build a successful company, not a great one. If you become the best at something, you’ll never remain on top if you don’t have intrinsic passion for what you are doing. Finally, you can be passionate all you want, but if you can’t be the best at it or it doesn’t make economic sense, then you might have a lot of fun, but you won’t produce great results.

“They stick with what they understand and let their abilities, not their egos, determine what they attempt.”

What can we potentially do better than any other company, and, equally important, what can we not do better than any other company? And if we can’t be the best at it, then why are we doing it at all?

We just took a hard-nosed look at what we were doing and decided to focus entirely on those few things we knew we could do better than anyone else, not getting distracted into arenas that would feed our egos and at which we could not be the best.”

A Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at.

Every company would like to be the best at something, but few actually understand—with piercing insight and egoless clarity—what they actually have the potential to be the best at and, just as important, what they cannot be the best at.

The Hedgehog Concept requires a severe standard of excellence. It’s not just about building on strength and competence, but about understanding what your organization truly has the potential to be the very best at and sticking to it.

To go from good to great requires transcending the curse of competence. It requires the discipline to say, “Just because we are good at it—just because we’re making money and generating growth—doesn’t necessarily mean we can become the best at it.” The good-to-great companies understood that doing what you are good at will only make you good; focusing solely on what you can potentially do better than any other organization is the only path to greatness.

each good-to-great company attained a deep understanding of the key drivers in its economic engine and built its system in accordance with this understanding.

If you could pick one and only one ratio—profit per x (or, in the social sector, cash flow per x)—to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?

The denominator can be quite subtle, sometimes even unobvious. The key is to use the question of the denominator to gain understanding and insight into your economic model.

Nucor, for example, made its mark in the ferociously price competitive steel industry with the denominator profit per ton of finished steel. At first glance, you might think that per employee or per fixed cost might

be the proper denominator. But the Nucor people understood that the driving force in its economic engine was a combination of a strong-work-ethic culture and the application of advanced manufacturing technology. Profit per employee or per fixed cost would not capture this duality as well as profit per ton of finished steel.

Do you need to have a single denominator? No, but pushing for a single denominator tends to produce better insight than letting yourself off the hook with three or four denominators. The denominator question serves as a mechanism to force ...

Furthermore, even in cases where the team failed (or refused) to identify a single denominator, the challenge of the question drove them to deeper insight. And that is, after all, the point—to have a denominator not for the sake of having a denominator, but for the sake of gaining insight

that ultimately leads to more robust and sustainable economics.

Shift from profit per single store to profit per region reflected local economies of scale.

Shift from profit per mortgage to profit per mortgage risk level reflected the fundamental insight that managing interest risk reduces dependence on the direction of interest rates.

Shift from profit per division to profit per customer reflected the economic power of repeatable purchases (e.g., razor cartridges) times high profit per purchase

Shift from profit per store to profit per local population reflected the insight that local market share drove grocery economics. If you can’t attain number one or number two in local share, you should not play.

Shift from profit per division to profit per ton of finished steel reflected Nucor’s unique blend of high-productivity culture mixed with mini-mill technology, rather than just focusing on volume.

Shift from profit per sales region to profit per global brand category reflected the understanding that the real key to greatness lay in brands that could have global power, like Coke.

All the good-to-great companies discovered a key economic denominator (see the table on page 106), while the comparison companies usually did not.

If you successfully apply these ideas, but then stop doing them, you will slide backward, from great to good, or worse. The only way to remain great is to keep applying the fundamental principles that made you great.

When interviewing the Philip Morris executives, we encountered an intensity and passion that surprised us. Recall from chapter 3 how George Weissman described working at the company as the great love affair of his life, second only to his marriage.

Most of the top executives at Philip Morris were passionate consumers of their own products.

You can’t manufacture passion or “motivate” people to feel passionate. You can only discover what ignites your passion and the passions of those around you.

We should only do those things that we can get passionate about.

This doesn’t mean, however, that you have to be passionate about the mechanics of the business per se (although you might be). The passion circle can be focused equally on what the company stands for.

In the prehedgehog state, it’s like groping through the fog. You’re making progress on a long march, but you can’t see all that well. At each juncture in the trail, you can only see a little bit ahead and must move at a deliberate, slow crawl.

Then, with the Hedgehog Concept, you break into a clearing, the fog lifts, and you can see for miles. From then on, each juncture requires less deliberation, and you can shift from crawl to walk, and from walk to run. In the posthedgehog state, miles of trail move swiftly beneath your feet, forks in the road fly past as you quickly make decisions that you could not have seen so clearly in the fog.

For the comparison companies, the exact same world that had become so simple and clear to the good-to-great companies remained complex and shrouded in mist. Why? For two reasons. First, the comparison companies never asked the right questions, the questions prompted by the three circles. Second, they set their goals and strategies more from bravado than from understanding.

The Fannie Mae versus Great Western case highlights an essential point: “Growth!” is not a Hedgehog Concept. Rather, if you have the right Hedgehog Concept and make decisions relentlessly consistent with it, you will create such momentum that your main problem will not be how to grow, but how not to grow too fast.

It took about four years on average for the good-to-great companies to clarify their Hedgehog Concepts. Like scientific insight, a Hedgehog Concept simplifies a complex world and makes decisions much easier.

But while it has crystalline clarity and elegant simplicity once you have it, getting the concept can be devilishly difficult and takes time. Recognize that getting a Hedgehog Concept is an inherently iterative process, not an event.

The essence of the process is to get the right people engaged in vigorous dialogue and debate, infused with the brutal facts and guided by questions formed by the three circles. Do we really understand what we can be the best in the world at, as distinct from what we can just be successful at? Do we really understand the drivers in our economic engine...

One particularly useful mechanism for moving the process along is a device that we came to call the Council. The Council consists of a group of the right people who participate in dialogue and debate guided by the three circles, iteratively and over time, about vital issues and decisi...

GETTING THE HEDGEHOG CONCEPT AN ITERATIVE PROCESS

“Build the Council, and use that as a model. Ask the right questions, engage in vigorous debate, make decisions, autopsy the results, and learn—all guided within the context of the three circles. Just keep going through that cycle of understanding.”

The council exists as a device to gain understanding about important issues facing the organization. The Council is assembled and used by the leading executive and usually consists of five to twelve people. Each Council member has the ability to argue and debate in search of understanding, not from the egoistic need to win a point or protect a parochial interest. Each Council member retains the respect of every other Council member, without exception. Council members come from a range of perspectives, but each member has deep knowledge about some aspect of the organization and/or the environment in which it operates. The Council includes key members of the management team but is not limited to members of the management team, nor is every executive automatically a member. The Council is a standing body, not an ad hoc committee assembled for a specific project. The Council meets periodically, as much as once a week or as infrequently as once per quarter. The Council does not seek consensus, recognizing that consensus decisions are often at odds with intelligent decisions. The responsibility for the final decision remains with the leading executive. The Council is an informal body, not listed on any formal organization chart or in any formal documents.