The Hedgehog Concept (Simplicity Within the Three Circles) Chapter 5 GTG

1. The Hedgehog Concept(Simplicity Within the Three Circles) Chapter 5 GTG Kelly Bredensteiner Christine Cox Cailtin Greenwood Michele Haynes

2. Hedgehog or Fox • Fox • Knows many things • See the world in all its complexity and pursue many things at one time • Moving on many levels and are then scattered and are not unified on one concept • Hedgehog • Knows one big thing • Simplify a complex into a single organized idea • Reduces all challenges and dilemmas

3. Walgreens • Took a simple concept and implemented with fanatical consistency …“The best, most convenient drugstores, with high profit per customer visit.” • Replace all inconvenient locations with convenient ones • Pioneered drive-through pharmacies • Idea of profit per customer visit • Tight clustering of stores - local economies of scale • High-margin services - Increase profit per customer visit • More convenience – more visits more profit per visit

4. The Three Circles • “A hedgehog Concept is a simple, crystalline concept that flows form deep understanding about the intersection of the following three circles:” • What you can be the best in the world at? • What drives your economic engine? • What are you deeply passionate about?

5. Three Circles Concept

6. Understanding what you can and cannot be the best at • Put away the ego and understand: • What are you best at? • What are you not best at? • What do you need to change or dump? (outsource?)

7. Plans vs. Ability • Hedgehog Concept is NOT • what you plan or intend to be the best at • It IS • What you CAN be best at.

8. Wells Fargo- Keeping it Simple • What it didn’t do well: • International operations • What it did well: • Running a bank like a business esp. in the western US • How it kept it simple: • Dropped most of its IOs • Conclusion: • When deregulation occurred, Wells Fargo was king

9. Core vs. Ability • Just because its your core. • Just because it’s what you have been doing for years. • Does NOT mean its what you’re best at.

10. Abbott vs. Upjohn: Changing Cores • Both similar companies in 1964 • Why did Abbott change so dramatically? • How it employed the Hedgehog Concept: • Lost chance to be best in pharmaceuticals to Merck • Still chance to provide cost effective health care with • Nutritional and diagnostic services

11. Money and Growth vs. Greatness • Just because you’re growing and making money, • Does NOT mean you are the best in the world. • “Doing only what you are good at will only make you good.” (pg 101) Greatness focuses on your best attributes • Ex: SAT’s and the exceptional math student vs. the average student

12. Companies Employing the Hedgehog Concept • Gillette • Kimberly-Clark • Kroger • Nucor • Philip Morris • Pitney Bowes • Walgreens • Wells Fargo

13. Insight Into Your Economic Engine- What is Your Denominator? • A company does not need to be in a great industry to become a great company • Each good-to-great company built an excellent economic engine • They attained profound insights in their economies • Attained a deep understanding of the key drivers in its economic engine and built its system in accordance with this understanding

14. Economic Denominator • All good-to-great companies have an economic denominator • Asking one question can lead to profound insight into the inner workings of an organization’s economics • This question is “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?

15. Economic Denominator Example • 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 • You can have more than one economic denominator, but it is better for the company to strive for only one.

16. Examples of Economic Denominators • Abbott: per employee • Circuit City: per geographical region • Fannie Mae: per mortgage risk level • Gillette: per customer • Kimberly-Clark: per consumer brand • Kroger: per local population • Nucor: per ton of finished steel • Philip Morris: per global brand category • Pitney Bowes: per customer • Walgreens: per customer visit • Wells Fargo: per employee

17. Successful Companies Without Economic Denominators • Hasbro • More sustainable cash flow than big one time hits • Understood all three circles of the Hedgehog Concept • Reintroduced classic brands at the right time • Employees had a passion for the business • Didn’t stay within the three circles after the CEO Stephen Hassenfeld Died • 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.

18. Understanding Your Passion • Many CEOs of companies are passionate consumers of their products • In 1979, Ross Millhiser, then vice chairman of Philip Morris and a dedicated smoker, said, “I love cigarettes. It’s one of the things that makes life worth living.” • Passion became a big part of the Hedgehog Concept in good-to-great companies • You cant manufacture passion or “motivate” people to feel passionate. You can only discover what ignites your passion and the passion of those around you.

19. Understanding Your Passion Cont. • You don’t necessarily have to be passionate about the product but more on what the company stands for. • For example, employees of Fannie Mae were not passionate about the mechanical process of packaging mortgages into market securities. But they were motivated by the whole idea of helping people of all classes. Backgrounds, and races realize the American dream of owning their own home.

20. The Triumph of Understanding Over Bravado • Pre-hedgehog • State of fog creating a slow progression on a long march • Hedgehog • Fog lifts and less deliberation is required at each juncture • Post-hedgehog • Quickly make decisions

21. Great Western vs. Fannie Mae • Great Western • Focused on growing in every way possible • Found itself in finance, leasing, insurance, and manufactured houses on an expansion binge • Fannie Mae • Focused on being the best capital markets player in anything related to mortgages • Inspired workers by its vital role in democratizing home ownership • After 1984 when Fannie Mae clarified its Hedgehog Concept, the company’s stock charts exploded upward while Great Western lagged around until its acquisition in 1997

22. Acquiring a Hedgehog Concept • It took about 4 years for the good-to-great companies to clarify their hedgehog concepts • It is an inherently iterative process, not an event • Essence of the process is to get the right people engaged in dialogue and debate, infused with the brutal facts and guided by the questions formed by the 3 circles • The Council can be a useful device for stimulating the process of acquiring a hedgehog concept

23. The Council • Consists of a group of the right people who participate in dialogue and debate guided by the three circles • Ask the right questions • Engage in dialogue and debate • Make decisions • Autopsy the results • Learn

24. Hedgehog Concept • Does every organization have a Hedgehog Concept to discover? • Most good to great companies were not the best in the world at anything • Infused with the Stockdale Paradox, every company prevailed in its search • When you get the concept right, it has the quite ping of truth