Thursday, April 12, 2007

Reading :: Good to Great

Good to Great
by Jim Collins

Jim Collins' Good to Great, which follows on the heels of his bestselling Built to Last, has become a bestseller in its own right. Collins, who left his faculty position at Stanford's Graduate School of Business to found a management research lab in Boulder, attempts to define what distinguishes "good" companies from "great" companies. How do companies make this transition, and what are their characteristics?

To be specific, his team studied
companies that showed the following basic pattern: 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. (pp.5-6).
Eleven companies on the Fortune 500 fit these characteristics. His team compared each company directly with a competitor in the same industry. They also examined six "unsustained" comparisons, companies that made a short-term shift but did not sustain that trajectory. That made a total of 28 companies (pp.7-8).

The comparisons were not just financial. Collins' team also examined "articles, analyses, interviews, and the research coding" (p.9), systematically comparing the "good-to-great" examples to their comparisons. Based on this work, they drew several conclusions that cut across the grain of management wisdom:
  • "Celebrity" leaders who were brought in to run companies were negatively correlated with success. The good-to-great companies were characteristically run by people who came from within the company and who were both modest and determined.
  • No forms of executive compensation appeared to have any effect.
  • Long-range strategic planning did not appear to have any effect.
  • Good-to-great companies were as likely to focus on what not to do as they were on what to do.
  • Technology did not precipitate good-to-great transitions, although it could accelerate transitions that were already in progress.
  • Mergers and acquisitions played no role.
  • Good-to-great companies spent little time on motivating people.
  • Good-to-great companies did not launch efforts with events or programs; they often were not aware of the magnitude of changes at the time.
  • Good-to-great companies were not generally in great industries; they performed despite their industries. (pp.10-11)
In many ways, then, this book is the analogue to The Millionaire Next Door, the famous study that revealed how many millionaires live in middle-class neighborhoods and drive used cars.

Collins found that great leaders, so-called "Level 5" leaders, were "self-effacing, quiet, reserved, even shy" (p.12), a sharp contrast to the brash type-A personalities that we often think of as leaders. These leaders, Collins says, tended to focus on getting the right people first, before setting vision or strategy (p.13). The best companies, like prisoners of war, confronted the brutal facts about their situations even as they maintained faith that they would prevail (p.13).

Good-to-great companies also employed what Collins calls the "hedgehog concept": staying within the intersection of (a) what the company can be best in the world at; (b) what drives the company's economic engine; (c) what the company and its people are deeply passionate about (pp.95-96). They did not stray out of that intersection, while comparison companies tended to diversify too much or hang onto a legacy area for too long.

The good-to-great companies had a "culture of discipline": "When you have disciplined people, you don't need hierarchy," Collins states (p.13). They also used carefully selected technologies to accelerate their momentum, without relying on that technology for the initial spark (pp.13-14).

Finally, these transitions relied on steady momentum rather than great leaps, a concept that Collins calls the "flywheel" (p.14).

Okay, let's get critical. I really like the narrative of this book, which follows the plot of Aesop's fable about the ant and the grasshopper or the tortoise and the hare -- and I always root for the ant and the tortoise in those stories. On the other hand, those stories are a bit simplistic. And even though I believe Collins when he says these stories emerged from the data, I see places in which they also tend to be a bit simplistic.

For instance, at least in the telling, the study seems to rely heavily on the recollections of the good-to-great companies' CEOs and executives, and retrospective interviews are notoriously unreliable. Some of the interview questions also relied on simplistic categories: CEOs, for instance, were asked to name their "top five factors in the shift from good to great" (p.155), as if abstract and overbroad categories such as "technology" and "consistency" were discrete and readily evaluated. Similarly, Collins tends to overemphasize the individuals' roles in the transitions, not only focusing on the executives but also asserting that they key to success is hiring "the right people" (p.192) -- while underdefining what constitutes "right." When Collins talks about how workers collaborate, which is not often, he characterizes successful collaboration as a natural result of hiring people who are passionate and motivated. That is, the system is simply an effect of having the right individuals.

Even though I'm skeptical of some aspects of the study, though, the book is quite valuable for thinking through what it takes to build sustainable positive change within an organization. The precepts generally make intuitive sense, particularly the notion of working steadily in one direction (like the turtle, I suppose, rather than the hare), and Collins' clear writing style makes the pages turn quickly. I'll be using this book as a reference as I continue to work within my own organizations.

No comments: