Good to Great by Jim Collins Chapter 8

1. Team 2 Caitlin Clark Stephen Massimi Will Mayrath Katie Trevino Matt Vatankhah Good to Greatby Jim CollinsChapter 8

2. Picture a huge, heavy flywheel • Then, at some point—breakthrough! • There is no single action that creates the breakthrough • It is an accumulation of events

3. Buildup and Breakthrough • The flywheel image captures the overall feel of what it was like inside the companies that went from good to great • Example: Circuit City • Since it’s a gradual transition, some people do not realize what is happening until a few years into it

4. Buildup and Breakthrough, continued • We allow the way transitions look from the outside to drive our perception of what they must feel like to those going through them on the inside • There is no single miracle • To the people on the inside, it was a quiet, deliberate process of figuring out what needed to be done to create the best future results and then simply take those steps

5. Buildup and Breakthrough, continued • Example: UCLA Bruins • No matter how short or long it took, every good-to-great company transformation followed the basic steps, accumulating momentum, turn by turn, until breakthrough

6. Not Just a Luxury of Circumstance • After Buildup-Breakthrough Flywheel Model, it’s not just a luxury of circumstance • Good-to-Great companies followed this model no matter how bad their short-term circumstances were • Wells Fargo—deregulation • Nucor and Circuit City—looming bankruptcy • Gillette and Kroger—potential takeover threats • Fannie Mae—million-dollar-a-day losses

7. Not Just a Luxury of Circumstance, continued • Companies must also manage the short-term pressures of Wall Street • 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, Good-to-Great companies had the patience and discipline to follow the buildup-breakthrough flywheel model despite these pressures • In the end, they attained extraordinary results by Wall Street’s own measure of success

8. Not Just a Luxury of Circumstance, continued • The key is to harness the flywheel to manage these short-term pressures • Example: Abbott Laboratories—Blue Plans • Would tell Wall Street analysts that it expected to grow earnings of a specified amount which would be lower than their internal goal • Kept rank-ordered list of the proposed entrepreneurial projects that had not yet been funded—the Blue Plans • Abbott would pick a number that exceeded analysts’ expectations but fell short of the actual growth rate • Would then take the difference between the “make analysts happy” growth and the actual growth and channel those funds into the Blue Plans

9. Not Just a Luxury of Circumstance, continued • Example: Abbott Laboratories, continued • Brilliant mechanism for managing short-term pressures • No evidence that comparison company, Upjohn, did anything similar • Was only investing for the future • Abbott became a consistent performer, breaking through in 1974 with Upjohn falling behind • Good-to-Great companies effectively manage Wall Street during their buildup-breakthrough years • Practice the time-honored discipline of under-promising and over-delivering

10. The “Flywheel Effect” • “Tremendous power exists in the fact of continued improvement and the delivery of results.” • Tangible accomplishments can be a very useful tool to build momentum in the flywheel • Even incremental accomplishments at first • Must show how these accomplishments fit into the overall concept • People must see and feel these accomplishments

11. The “Flywheel Effect,” continued • When accomplishments are pointed to, people will line up with enthusiasm

12. The “Flywheel Effect,” continued • Good-to-Great companies don’t worry about consciously creating commitment and alignment • Kroger can’t get a company of over 50,000 people to embrace a radical new strategy • Jim Herring, Kroger’s Level 5 leader, avoided any attempts at motivation • He and his team began turning the flywheel, creating tangible evidence that their plans made sense

13. The “Flywheel Effect,” continued • Instead of publicly proclaiming huge goals, Good-to-Great companies began spinning the flywheel, step by step, turn by turn • After momentum was built, they could look up and say, “Hey, if we just keep pushing on this thing, there’s no reason we can’t accomplish X.”

14. The “Flywheel Effect,” continued • Nucor Example • Nucor began turning the flywheel in 1965 • Trying to avoid bankruptcy (Starting to push) • Building first steel mills because of lack of reliable supplier (Building speed and momentum) • Realized they could build steel better and cheaper than anyone else, so built two, then three additional mini-mills (Building even more speed and momentum) • In 1974, it dawned on Nucor that they could become the most profitable steel company in America • It took 20 years of doing what they were doing, pushing the flywheel to become number one

15. The “Flywheel Effect,” continued • Overview (page 177) • When you let the flywheel do the talking, you don’t need to fervently communicate your goals • People can just extrapolate from the momentum of the flywheel for themselves: “Hey, if we just keep doing this, look at where we can go!” • As people decide among themselves to turn the fact of potential into the fact of results, the goal almost sets itself

16. The “Flywheel Effect,” continued • Overview, continued • The right people want to be part of a winning team • They want to contribute to producing visible, tangible results • They want to feel the excitement of being involved in something that just flat out works • When people can see tangible results, when they can feel the flywheel beginning to build speed, then the majority of people will line up and help push

17. The Doom Loop • Collins and his team found a very different pattern in the comparison companies • They instead frequently launched new programs aimed at “motivating the troops” only to see the programs fail to produce sustained results • They sought a single defining action, the miracle moment that would allow them to skip right to the breakthrough • After years of lurching the flywheel back and forth, the comparison companies failed to build sustained momentum and fell into what came to be called the doom loop

18. The Doom Loop, continued • Example: Warner-Lambert • Direct comparison company to Gillette • In 1979, told Business Week it aimed to be a leading consumer products company • In 1980, redirected its aim to health care companies, such as Merck • In 1981, returned to a consumer goods focus • In 1987, again aimed toward Merck • Finally, in the early 1990s, reversed again to a consumer goods aim

19. The Doom Loop, continued • Example: Warner-Lambert, continued • From 1979 to 1998, Warner-Lambert underwent three major restructurings—and changed CEOs for each—in search of breakthrough results • Each CEO brought in a new program, halting the momentum of his predecessor • Time and again, the company would attain a burst of results, then slacken, never attaining the sustained momentum of a buildup-breakthrough flywheel

20. The Doom Loop, continued • The Doom Loop is shown on page 179 • The Warner-Lambert case is extreme, but some version of the doom loop was found in every comparison company • A full list is given in Appendix 8.A (page 254) • While the specific permutations of the doom loop varied by company, there were some highly prevalent patterns, notably: • The misguided use of acquisitions • The selection of leaders who undid the work of previous generations

21. The Misguided Use of Acquisitions • To understand the role of acquisitions in the process of going from good to great, the team undertook a systematic qualitative and quantitative analysis of all acquisitions and divestitures of the companies in the study • No pattern was noticed in the amount or scale of acquisitions, but there was a significant difference in the success rate of the acquisitions in the good-to-great companies versus the comparisons • For a full list, see Appendix 8.B (page 259)

22. The Misguided Use of Acquisitions, continued • So, why did the good-to-great companies have a substantially higher success rate with acquisitions? • The key to their success was that their big acquisitions generally took place after the 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

23. The Misguided Use of Acquisitions, continued • The comparison companies frequently tried to jump right to to breakthrough via an acquisition or merger • It never worked • 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

24. Leaders Who Stop the Flywheel • The other frequently observed doom loop pattern is that of new leaders who stepped in, stopped and already spinning flywheel, and threw it in an entirely new direction • One company that has suffered from this doom loop pattern is Harris Corporation

25. Leaders Who Stop the Flywheel, continued • Example: Harris Corporation • Applied many of the good-to-great concepts in the early 1960s and began a classic buildup process that led to breakthrough results • George Dively and his successor Richard Tullis identified a hedgehog concept and strove to be the best in the world at applying technology to printing and communications • Reached breakthrough results in 1975

26. Leaders Who Stop the Flywheel, continued • Example: Harris Corporation, continued • Spinning flywheel began to slow down in 1978 due to newly chief executive Joseph Boyd • Boyd’s first decision was to move the headquarters from Cleveland to his hometown in Florida • Flywheel came to a grinding halt in 1983 when Boyd divested the printing business • Boyd decided to throw the company into the office automation business

27. Leaders Who Stop the Flywheel, continued • Example: Harris Corporation, continued • Attempted to design office automation which would rival producers such as IBM, DEC, and Wang • Spent 1/3 of its entire corporate net worth to buy Lanier Business Products, a low-end word processing company • Idea was scrapped before introduction into the market • Project was an epic fail

28. Leaders Who Stop the Flywheel, continued • Example: Harris Corporation, continued • From the end of 1973 to the end of 1978, Harris beat the market by more than five times • From the end of 1978 to the end of 1983, Harris fell 39% behind the market • By 1988, Harris had fallen over 70% behind the market

29. The Flywheel: A Wraparound Idea • Consistency and coherence • Each piece of the system reinforces the other parts of the system to form an integrated whole that is much more powerful than the sum of the parts

30. How To Tell If You’re on the Flywheel

31. How To Tell If You’re on the Flywheel, continued

32. How To Tell If You’re on the Flywheel, continued

33. How To Tell If You’re on the Flywheel, continued

34. How the Flywheel is Achieved • Starts with Level 5 leaders who are naturally attracted towards a flywheel concept, concentrating on the process of pushing the flywheel and yielding results rather than flashy, misleading programs • Getting the right people on the bus, the wrong people off the bus, and the right people into the right seats • 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.” • Confronting the brutal facts helps to see the obvious, yet difficult, steps that must be taken to turn the wheel

35. How the Flywheel is Achieved, continued • Continuing to push in a consistent direction on the flywheel and accumulating momentum step by step and turn by turn will eventually cause you to reach breakthrough “It might not happen today, or tomorrow, or next week. It might not even happen next year. But it will happen.” –Jim Collins