Chapter 6 A Culture of Discipline

Chapter 6A Culture of Discipline Jessica Drummond, Adrienne Collins, Mark Beal, Spencer Thomas, Michael Sanchez, Chad Hensley, Mario Santos, Alec Wegmann

Few successful Start-Ups become Great Companies • This is because of how they respond to growth • ACCT 2301 Professor Steve Buchheit, spoke of his father’s appliance business loosing shipments of refrigerators

Companies trip over their own success • Too many NEW PEOPLE • Too many NEW CUSTOMERS • Too many NEW ORDERS • Too many NEW PRODUCTS

This leads to disorganization • Lack of PLANNING • Lack of ACCOUNTING • Lack of SYSTEMS • Lack of HIRING

In response to these problems • Management is often replaced - This changes corporate culture - Increase in procedures, processes, etc. • Reporting Relationships and Hierarchy are established. - “We” and “They” segmentation appears

This can create the wrong Culture of Discipline • A company’s Culture of Discipline must complement their Ethic of Entrepreneurship

The Good-to-Great Matrix of Creative Discipline High Culture of Discipline Low Low Ethic of Entrepreneurship High

Airline Pilot Model and the Framework • Guiding framework required • In the end, the operator makes the decision. • Must Have Discipline • BLAW 3391(Reed)

Airline Pilot Example • Stormy conditions • Option to land • Option to not land • These options ultimately rest in the hands of the pilot; however, the pilot will base his decision on regulations (such as air traffic control and the FAA)

Hedgehog and Discipline • Find your Hedgehog Concept • Stick to it • The Culture of Discipline has 3 Parts

The Three Parts of Discipline • 1. Get self-disciplined people on the bus • Don’t discipline wrong people into right actions. • 2. Disciplined thought • Confront the brutal facts of reality • Keep the faith • 3. Disciplined action • This is the last part, some people jump straight to it and this is incorrect. Must have the prior two parts before action is taken!

Rinsing Your Cottage Cheese • Analogy used by Collins to explain how “good to great” companies have the discipline to do whatever it takes to become the best, and then seek continual improvement from there • Everyone would like to be the best, but most organizations lack the discipline to do whatever it takes to turn that potential into reality. • These companies lack the discipline to “rinse their cottage cheese”

Wells Fargo vs. Bank of America • President of Wells Fargo, Carl Reichardt, believed his bank could emerge from bank deregulation in the 1970s as a stronger company • Key to becoming a great company was not with brilliant new strategies but to eliminate a hundred years of banker mentality • “There’s to much waste in banking, getting rid of it takes tenacity, not brilliance.”

Wells Fargo vs. Bank of America • Reichardt set a clear tone: We’re not going to ask everyone to else to suffer while we sit high • Started by “rinsing their own cottage cheese”, right off with the executives • Froze executive salaries for two years • Replaced executive dining room with college dorm food catering • Sold corporate jets • Removed free coffee from executive suite

Wells Fargo vs. Bank of America • On the other hand, B of A executives didn’t have the discipline to “rinse their own cottage cheese” • They kept all their perks believing: why “rinse our cottage cheese “ when life is so good? • After losing $1.8 billion across three years in the mid-1980s, B of A eventually made the necessary changes in response to deregulation (largely by hiring ex- Wells Fargo executives)

A Culture, Not A Tyrant • A company’s approach to discipline affects the company’s performance in the long-run. • 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.

Ray MacDonald • President of Burroughs in 1964. • He got things done through sheer force of personality, using a form of pressure that came to be known as “The MacDonald Vise.” • After he retired, his helper minions were frozen by indecision, leaving the company unable to get anything done.

Stanley Gault • Gault, convinced that the lip of the dustpan was too thick, issued a dictate to his engineers to redesign the product. • When called a tyrant he responded with, “Yes, but I’m a sincere tyrant.” • Rubbermaid rose dramatically under the tyranny of this singularly disciplined leader but then just as dramatically declined when he departed.

Lee Iacocca • Iacocca became president of Chrysler in 1979 and imposed his towering personality to discipline the organization into shape. • Iacocca produced spectacular results and Chrysler became one of the most celebrated turnarounds in industrial history… • Until he got caught up in his own hobbies.

Fanatical Adherence to The Hedgehog Concept “anything that does not fit with our Hedgehog Concept, we will not do. We will not launch unrelated businesses, make unrelated acquisitions, or launch unrelated joint ventures. If it doesn’t fit we won’t do it”

Sticking to your Hedgehog Concept: Disciplined Diversification • Pitney Bowes • Had a monopoly on the sale of postage meter machines • when they lost their monopoly the company started to rapidly decline • Company was saved by shifting to a broader focuse • went from a “postage meter company” to a broader focus on “messaging” • high end fax machines, specialized copiers, other various high tech office machines • later on became a pioneer at linking backroom machines to the internet

Lack of Discipline leads to straying from your Hedgehog Concept which leads to failure • 1960s: RJ Reynolds was a tobacco company • Started to diversify outside its 3 circles of defined logic • bought a shipping container company • ultimately failed

Nucor Steel • Built success around the Hedgehog Concept • Fanatical consistency • Harnessed culture & technology • 34 straight years of profitability (1966-1999) • Main concept: Idea to align workers interests with management & shareholders interest • Goal was to avoid any hierarchical inequalities • Avoided class distinctions • Executives received less perks • Compensated all workers for profitable years • Small sized headquarters

Nucor’s Three Circles Passion For eliminating class distinctions and creating an egalitarian meritocracy that aligns management, labor, and financial interest Could become the best in the worldat harnessing culture and technology to produce low-cost steel Economic Denominator of profit per ton of finished steel • Nucor had a better relationship with its workers because they went to extreme lengths to build their enterprise with a simple, transparent concept.

The “Stop Doing List” • Instead of just a “To Do List” try implementing a “Stop Doing List” • This will help eliminate dead weight • Kimberly-Clark CEO, Darwin Smith • Future Earnings • Official Titles • Layering in the Office

It Takes Courage • If you focus on becoming a Hedgehog, you will have to give up a lot • Kimberly-Clark left the paper business completely • Became a consumer company which led to them becoming “great”

What is Budgeting? • How much each activity gets? • Which activity best supports the Hedgehog Concept • Allocate resources appropriately

Effective Undiversified Portfolio • Being undiversified is the most effective way to invest…only when you’re right • When are you right? • Level 5 Leaders • Create a climate where truth is heard • Decisions based on the Hedgehog Concept

Summary • Avoid bureaucracy and hierarchy and instead create a culture of discipline. • Stick to freedom and responsibility within the framework of a highly developed system. • “Good to Great” companies have the discipline to do whatever it takes to be the best.

Summary • A culture of discipline is not a tyrant who disciplines • Diversification and innovation within the three circles will lead to success • Staying within the three circles creates more opportunities for growth • Utilize a “Stop Doing List”

Chapter 6 A Culture of Discipline