● They set up successors for success. Many leadersfail to set their companies up for success when theydepart, or pick a weak leader to replace them at the helm— after all, what better testament to your own personalgreatness than that the place falls apart after you leave?Level 5 leaders like Fannie Mae’s former CEO, DavidMaxwell, make sure those who follow them are poisedto continue a successful path, or to exceed the expecta-tions that arise as a result of that success. Maxwell cameunder fire from Congress for the perceived excessivenessof his $20 million retirement package (Fannie Mae oper-ates under a government charter). Instead of serving hisown self-interest and taking the money, he instructed hissuccessor to withhold the remaining balance of $5.5 mil-lion, saving the company from a potentially bad (not tomention threatening) relationship with Washington.● They are compellingly modest. In contrast to thevery I-centric style of some other leaders, Level 5 leadersdo not typically talk about themselves, preferring to directattention to other individuals, or to the results of the com-pany as a whole. They don’t aspire to be larger-than-lifeheroes, or to be placed on a pedestal. They are seeminglyordinary people quietly producing extraordinary results.● They have unwavering resolve. Level 5 leaders donot simply exude modesty or humility; they also have aferocious resolve, an almost stoic determination to dowhatever needs to be done to make the company great.When George Cain became CEO of AbbottLaboratories, the company occupied a lowly space inthe pharmaceutical industry. Cain didn’t have an inspir-ing personality to galvanize the company, but he didhave a steadfast intolerance for mediocrity; good wassimply not good enough. He destroyed the company’smost glaring causes of its mediocrity — nepotism — byrebuilding the board and executive teams with the bestpeople available, not just those who had family connec-tions or had been with the company longest.Want to find out if one of your managers has the poten-tial for Level 5 leadership? Look for situations whereextraordinary results exist, but where no individual stepsforth to claim excess credit. Want to be a Level 5 leader?Read on; now that you know what a Level 5 leader is,you are ready to discover what a Level 5 leader does. ■First Who … Then WhatOne of the things most people assume they will findwhen studying good-to-great companies is a com-pelling, new vision, strategy, or direction, around whichmanagement will gain people’s commitment.The truth is quite the opposite. Executives who ignit-ed transformations from good to great did not first fig-ure out where to drive the bus, then get the people totake it there. Instead, they first got the right people onthe bus (and the wrong people off) and then figured outwhere to drive it. “Who” questions must come before3Good To Great — SUMMARYLevel 5 Leadership(continued from page 2)(continued on page 4)Soundview Executive Book Summaries®Wells Fargo’sRigorous People DecisionWells Fargo began its fifteen-year stint of spectacu-lar performance in 1983, but the foundation of theshift began in the early 1970s, when then-CEO DickCooley first foresaw that the banking industry wouldeventually undergo wrenching change. Because hecould not envision the breadth or form of thatchange, he focused on “injecting an endless streamof talent” into the veins of the company, building atalent-stocked team that could handle any exigency.Under Cooley’s direction, Wells Fargo hired out-standing people whenever and wherever they couldfind them, often without a specific job in mind. Someof these people would go on to become executives; allof them were responsible for the company’s high per-formance, even in the face of extreme industry change.At a time when its sector of the banking industry fell59 percent behind the general stock market, WellsFargo outperformed the market by a 3-to-1 margin.Level 5 HierarchyLevel 5 ExecutiveBuilds enduring greatness through a paradoxicalblend of personal humilty and professional will.Effective LeaderCatalyzes commitment to and vigorous pursuit of a clear andcompelling vision, stimulating higher performance standards.Competent ManagerOrganizes people and resources toward the effectiveand efficient pursuit of predetermined objectives.Contributing Team MemberContributes individual capabilities to the achievement of groupobjectives and works effectively with others in a group setting.Highly Capable IndividualMakes productive contributions through talent, knowledge,skills and good work habits.Level 5Level 4Level 3Level 2Level 1
Confront the Brutal FactsAll good-to-great companies began the process offinding a path to greatness by confronting the brutalfacts of their current reality. When a company startswith an honest and diligent effort to determine the truthof its situation, the right decisions often become self-evident. Good decisions are impossible without an hon-est confrontation of the brutal facts.Why Kroger Beat A&PThe Great Atlantic and Pacific Tea Company (alsoknown as A&P) had the perfect business model for thefirst half of the twentieth century, when two world warsand an economic depression imposed frugality uponAmericans: cheap, plentiful groceries sold in utilitarianstores. However, in the more affluent second half of thecentury, Americans began demanding bigger stores,more choices, fresh baked goods, fresh flowers, bankingservices and so forth. They wanted superstores thatoffered almost everything under one roof.To face the brutal facts about the mismatch between itspast model and the changing world, A&P opened a newstore called Golden Key, where it could experiment withnew methods and models and learn what customerswanted. It sold no A&P-branded products, experimentedwith new departments, and began to evolve toward the“what” decisions — before vision, before strategy,before organization structure, before tactics.Simple TruthsGood-to-great leaders understand three simple truths:● If you begin with the “who,” rather than the“what,” you can more easily adapt to a changing world.● If you have the right people on the bus, the prob-lem of how to motivate and manage people largelygoes away.● If you have the wrong people, it doesn’t matterwhether you discover the right direction—you stillwon’t have a great company. Great vision withoutgreat people is irrelevant.Good-to-great companies tend to have rigorous cul-tures — cultures in which leadership consistentlyapplies exacting standards at all times and at all levels,especially upper management. To be rigorous meansthat the best people need not worry about their posi-tions, leaving them to concentrate fully on doing theirbest work. It can also mean being up front about theneed to let people go, if that is warranted.To be rigorous in people decisions means first becom-ing rigorous about top management people decisions,and to following three practical disciplines:● When in doubt, don’t hire — keep looking. Nocompany can grow revenues consistently faster than itsability to get enough of the right people to implementthat growth and still become a great company. If yourgrowth rate in revenues consistently outpaces yourgrowth rate in people, you cannot build a great company.● When you know you need to make a peoplechange, act. The moment you feel the need to tightlymanage someone, you’ve made a hiring mistake. Thebest people don’t need to be managed — guided, taught,led, yes, but not tightly managed. Don’t delay, try differ-ent alternatives, give third or fourth chances, or build sys-tems to compensate for shortcomings. Letting the wrongpeople hang around is unfair to all the right people, whooften find themselves compensating for the wrong peo-ple’s inadequacies. Get the wrong people off the bus.● Put your best people on your biggest opportuni-ties, not your biggest problems. Many companiesthink that putting their best people in bad situations willhelp turn the bad situation around. While this some-times works to everyone’s advantage, managers who doso fail to grasp the fact that managing your problemscan only make you good. Building opportunities is theonly way to become great. ■Good To Great — SUMMARYFirst Who … Then What(continued from page 3)(continued on page 5)When “I Don’t Know”Is the Right AnswerWhen Alan Wurtzel assumed the CEO post ofWards (the hi-fi and appliance seller that would oneday become Circuit City), the company stood at thebrink of bankruptcy, its stores a hodgepodge ofloosely connected units with no unifying concept.When asked where he was going to take the compa-ny, Wurtzel answered honestly: “I don’t know.”Rather than claiming he had the right answers,Wurtzel got the right people on the bus and beganasking questions, sparking debates in the companyboardroom and on the executive team. At each stepalong the way on the company’s turnaround path,Wurtzel would keep asking questions until he had aclear picture of reality and its implications.By asking questions, leaders at good-to-great com-panies create a forum where current realities bubbleto the surface and can be addressed honestly.4DISCIPLINED THOUGHTSSoundview Executive Book Summaries®
more modern superstore. A&P began to discover theanswer to the questions of why it was losing marketshare and what it could do about it. But A&P executivesdidn’t like the answers they got, so they closed the store,rather than diverge from their ages-old business ideas.Meanwhile, the Kroger grocery chain also conductedexperiments and, by 1970, discovered the inescapabletruth that the old-model grocery store was going tobecome extinct. Rather than ignore the brutal truth, asA&P did, the company acted on it, eliminating, chang-ing, or replacing every single store that did not fit thenew realities. It went block-by-block, city-by-city, state-by-state, until it had rebuilt its entire system. By 1999,it was the number one grocery chain in America.Let the Truth Be HeardOne of the primary tasks in taking a company fromgood to great is to create a culture wherein people havea tremendous opportunity to be heard and, ultimately,for the truth to be likewise heard.To accomplish this, you must engage in four basicpractices:● Lead with questions, not answers. Leading fromgood to great does not mean coming up with theanswers and motivating everyone to follow your mes-sianic vision. It means having the humility to grasp thefact that you do not yet understand enough to have theanswers, and then to ask questions that will lead to thebest possible insights.● Engage in dialogue and debate, not coercion. Allgood-to-great companies have a penchant for intensedebates, discussions and healthy conflict. Dialogue is notused as a sham process to let people “have their say” sothey can buy into a predetermined decision; rather, it isused to engage people in the search for the best answers.● Conduct autopsies, without blame. Good-to-greatleaders must take an honest look at decisions his or hercompany makes, rather than simply assigning blame forthe outcomes of those decisions. These “autopsies” go along way toward establishing understanding and learn-ing, creating a climate where the truth is heard.● Build red flag mechanisms that turn informationinto information that cannot be ignored. Good-to-great companies have no better access to informationthan any other company; they simply give their peopleand customers ample opportunities to provide unfilteredinformation and insight that can act as an early warningfor potentially deeper problems. ■The Hedgehog ConceptIn his famous essay “The Hedgehog and the Fox,”Isaiah Berlin divided the world into two groups, basedon an ancient Greek proverb, which pitted the two natu-ral enemies against each other. Foxes pursue many endsat the same time and see the world in all its complexity;they are scattered or diffused, moving on many levels,never integrating their thinking into one overall conceptor unifying vision. Hedgehogs, on the other hand, sim-plify a complex world into a single idea or principlethat unifies and guides everything. Regardless of theworld’s complexity, the hedgehog reduces all challengesand dilemmas to simple ideas — anything that does notsomehow relate to the hedgehog idea holds no rele-vance. When foxes and hedgehogs are pitted against oneanother, the hedgehog always wins.Three Key DimensionsThose who built the good-to-great companies were, toone degree or another, hedgehogs. They used their hedge-hog nature to drive toward a Hedgehog Concept, a sim-ple, crystalline concept that flows from deep understand-Good To Great — SUMMARYConfront the Brutal Facts(continued from page 4)(continued on page 6)The “Best in the World”UnderstandingThe following are among the good-to-great compa-nies that attained an understanding of what theycould be best in the world at, and what they did withthat understanding:✓ Abbott Laboratories understood it could becomethe best at creating a product portfolio that wouldlower the cost of health care. The company confront-ed the reality that it could not become the best phar-maceutical company in the world, despite the fact that99 percent of its revenue at one time came frompharmaceuticals. It shifted its focus to creating thatlower-cost product portfolio, principally hospitalnutritionals, diagnostics and hospital supplies.✓ Nucor understood it could become the best atharnessing culture and technology to produce low-coststeel. The company came to see that it had tremen-dous skill in two activities—creating a performanceculture and making farsighted bets on new technolo-gies. By combining these two, it was able to becomethe lowest-cost steel producer in the United States.✓ Kimberly-Clark understood it could become thebest in the world at paper-based consumer products.The company realized it had a latent skill at creating“category-killer” brands (brands that were synony-mous with their products, like Kleenex) in paper-based products.Soundview Executive Book Summaries®For more information on the root causes of A&P’s troubles, go to:http://my.summary.com5
A Culture of DisciplineSustained great results depend upon building a culturefull of self-disciplined people who take disciplinedaction fanatically consistent with the three circles of theHedgehog Concept.This is in contrast to the typical ways in which manycompanies (particularly start-ups) conduct themselveswhen responding to growth and success. As these com-panies grow, they tend to sacrifice the creativity, ener-gy and vision that made them successful in favor ofhierarchical, bureaucratic structures and strictures —thus killing the entrepreneurial spirit as they createorder. Exciting companies thus transform themselvesinto ordinary companies, and mediocrity begins togrow in earnest.Indeed, bureaucratic cultures arise to compensate forincompetence and lack of discipline, which arise fromhaving the wrong people on the bus in the first place.Most companies build their bureaucratic rules to man-age a small percentage of the wrong people, which inturn drives away the right people.This self-perpetuating problem can be avoided by cre-ating a culture of discipline.Action StepsTo create a culture of discipline, you must:● Build a culture around the idea of freedom andresponsibility, within a framework. Good-to-greatcompanies built a consistent system with clear con-straints, but they also gave people freedom and respon-sibility within the framework of that system. They hiredself-disciplined people who didn’t need to be managed,and then managed the system, not the people. They alsohad the discipline of thought, to confront the brutal factsof reality and still maintain faith that they were on thetrack to greatness. Finally, they took disciplined actionsthat kept them on that track.● Fill your culture with self-disciplined people whoare willing to go to extreme lengths to fulfill theirresponsibilities. People in good-to-great companiestend to be almost fanatical in the pursuit of greatness;they possess the discipline to do whatever it takes tobecome the best within carefully selected arenas, andthen seek continual improvement from there. Whileeveryone would like to be the best, most organizationslack the discipline to figure out with egoless claritywhat they can be the best at, and the will to do whatevering about the intersection of the three key dimensions:● At what you can be best in the world. This stan-dard goes far beyond core competence — just becauseyou possess a core competence doesn’t necessarilymean you are the best in the world at that competence.Conversely, what you can be best in the world at mightnot even be something in which you are currentlyengaged. The Hedgehog Concept is not a goal or strate-gy to be the best at something; it is an understanding ofwhat you can be the best at and, almost equally impor-tant, what you cannot be the best at.● What drives your economic engine. To get insightinto the drivers of your economic engine, search for theone denominator (profit per x, for example, or cash flowper x) that has the single greatest impact. If you couldpick one and only one ratio to systematically increaseover time to make a greater impact, what would that ratiobe? This denominator can be subtle, sometimes evenunobvious. The key is to use the denominator to gainunderstanding and insight into your economic model.● What you are deeply passionate about. Good-to-great companies did not pick a course of action, thenencourage their people to become passionate about theirdirection. Rather, those companies decided to do onlythose things that they could get passionate about. Theyrecognized that passion cannot be manufactured, norcan it be the end result of a motivation effort. You canonly discover what ignites your passion and the pas-sions of those around you. ■6Good To Great — SUMMARYSoundview Executive Book Summaries®(continued on page 7)The Hedgehog Concept(continued from page 5)DISCIPLINED ACTIONFor the complete parable of “The Hedgehog and the Fox,” go to:http://my.summary.comThree Circles of the Hedgehog ConceptWhat You CanBe The Best InThe World AtWhat DrivesYourEconomicEngineWhat You Are DeeplyPassionate About
it takes to turn that potential into reality.● Don’t confuse a culture of discipline with atyrannical disciplinarian. Many companies that couldnot sustain their success had leaders who personally dis-ciplined the organization through sheer force. Good-to-great companies had Level 5 leaders who built anenduring culture of discipline, powered by self-disci-plined people who acted in the company’s best interestswithout strict dictums from leadership.These disciplined companies could and did thriveeven after their leaders had departed the organization;those companies that practiced discipline only by tyran-nical rule could not sustain themselves once their lead-ers departed.● Adhere with great consistency to the HedgehogConcept, exercising an almost religious focus on theintersection of the three circles. The good-to-greatcompanies at their best followed a simple mantra —“Anything that does not fit with our Hedgehog Concept,we will not do.” They did not launch unrelated business-es or joint ventures in an effort to diversify. They didnot panic if the competitive landscape shifted. If acourse of action did not fit into their disciplinedapproach, they did not perform that action. It takes dis-cipline to say “No” to such opportunities. ■Technology AccelerationGood-to-great organizations think differently thanmediocre organizations about technology and technolog-ical change. They avoid the fads and bandwagons thattypically arise from new technology, instead becomingpioneers in the application of carefully selected tech-nologies. When used correctly, technology becomes anaccelerator of momentum, not a creator of it.Find the Right TechnologiesGood-to-great companies never began their transitionswith pioneering technology, for the simple reason thatyou cannot make good use of technology until youknow which technologies are relevant — the ones thatlink directly to the three intersecting circles of theHedgehog Concept. Examples of this approach aboundin the list of good-to-great companies:● Circuit City pioneered the application of sophisti-cated point-of-sale and inventory-tracking technologies,both of which were linked to the concept of being the“McDonald’s” of big-ticket retailing, able to operate ageographically dispersed system with great consistency.● Gillette pioneered the application of sophisticatedmanufacturing technology for making billions of high-tolerance products at low cost with fantastic consisten-cy. The company protects its manufacturing technologysecrets with the same fanaticism that Coca-Cola pro-tects its cola formula.● Philip Morris pioneered the application of bothpackaging and manufacturing technology, including thetechnology to make flip-top boxes — the first tobaccoindustry packaging innovation in twenty years. Thecompany also was the first to use computer-based man-ufacturing, making an enormous investment in a manu-facturing center to experiment with, test and refineadvanced manufacturing and quality techniques.Don’t Overreact to New TechnologyHow a company reacts to technological change is agood indicator of its inner drive for greatness versusmediocrity. Leaders of good-to-great companies respondwith thoughtfulness and creativity, driven by a compul-sion to turn unrealized potential into results. They do nottake reactionary measures, defining strategy in responseto what others are doing. They act in terms of what theywant to create, and how to improve their companies, rela-tive to an absolute standard of excellence.Mediocre companies, on the other hand, react andlurch about, motivated chiefly by the fear of what theydon’t understand — a fear of watching others hit it bigwhile they’re left behind. Never was there a betterexample of this difference than during the technologybubble of the late 1990s, when mediocre companiesmoved from one technological scheme to the next,always reacting, never pioneering. The great companiesacted with calm equanimity, taking quiet, deliberatesteps forward, with great discipline.Those organizations that stay true to their fundamen-tals and maintain their balance will accumulate themomentum required to break through; those that do notwill spiral downward or remain mediocre. ■Good To Great — SUMMARYA Culture of Discipline(continued from page 6)7Soundview Executive Book Summaries®For more information on one athlete’s fanatical discipline, go to:http://my.summary.comFor more information on Walgreens Internet battles, go to:http://my.summary.comWalgreens and TechnologyWalgreens pioneered the use of satellite communi-cations and computer network technology, linked toits concept of convenient corner drugstores, tailoredto the unique needs of specific demographics andlocations. Walgreens also approached the Internetwith great care, even in the face of new, technology-driven competition.
The Flywheel andThe Doom LoopGood-to-great transformations often look like dramat-ic, revolutionary events to those observing from the out-side, but they feel like organic, cumulative processes topeople on the inside. The confusion of end outcomes(dramatic results) with process (organic and cumulative)skews our perception of what really works over the longhaul. Those companies had no name for their transfor-mations; there was no launch event, no tag line, no pro-grammatic feel whatsoever.There was, in other words, no miracle moment in thetransformation of each company from good to great.Each went through a quiet, deliberate process of figur-ing out what needed to be done to create the best futureresults, then they simply took those steps, one by oneover time, until they hit their breakthrough moments.The Flywheel EffectTheir successes can be seen in the following illustra-tion: Imagine an enormous, heavy flywheel — a mas-sive disc mounted horizontally on an axle, measuring 30feet in diameter, two feet in thickness and 5,000 poundsin weight. In order to get the flywheel moving, youmust push it. Its progress is slow; your consistent effortsmay only move it a few inches at first. Over time, how-ever, it becomes easier to move the flywheel, and itrotates with increasing ease, carried along by itsmomentum. The breakthrough comes when the wheel’sown heavy weight does the bulk of the work for you,with an almost unstoppable force.Each of the good-to-great companies experienced theflywheel effect in their transformations. The first effortsin each transformation were almost imperceptible. Yet,over time, with consistent, disciplined actions pro-pelling it forward, each company was able to build onits momentum and make the transformation — a build-up that led to a breakthrough. The momentum they builtwas then able to sustain their success over time.These companies understood a simple truth: Tremendouspower exists in the fact of continued improvement and thedelivery of results. Point to tangible accomplishments —however incremental at first — and show how those stepsfit into the context of an overall concept that will work.When this is done in such a way that people see and feelthe buildup of momentum, they will line up with enthusi-asm. This is the real flywheel effect.When a leader lets the flywheel do the talking, he orshe does not need to fervently communicate the organi-zation’s goals — people can just extrapolate from themomentum of the flywheel for themselves. As peopledecide among themselves to turn the fact of potentialinto the fact of results, the goal almost sets itself.People want to be part of a winning team, producingvisible, tangible results.The Doom LoopOther companies exhibited very different patterns.Instead of a quiet, deliberate process of figuring outwhat needed to be done, then doing it, these companiesfrequently launched new programs — often loudly, withthe aim of “motivating the troops” — only to see thoseprograms fail to produce sustained results. They pushedthe flywheel in one direction, stopped, changed courseand pushed it in a new direction, a process they repeat-ed continually. After years of lurching back and forth,these companies failed to build sustained momentumand fell into what could be termed the doom loop.Are You on the Flywheel or in the Doom Loop?How can you tell if your organization is on the fly-wheel, or in the doom loop? Consider the following:You’re on the flywheel if you—● Follow a pattern of buildup, leading to break-through.● Confront the brutal facts to see what steps must betaken to build momentum.● Attain consistency with a clear Hedgehog Concept,staying within the three circles.● Follow the pattern of disciplined people, thoughtand action.● Harness appropriate technologies to your HedgehogConcept, to accelerate momentum.● Spend little energy trying to motivate or align peo-ple; the momentum of the flywheel is infectious.● Maintain consistency over time.You’re in the doom loop if you—● Skip buildup and jump right into breakthrough.● Implement big programs, radical change efforts,dramatic revolutions and chronic restructuring.● Embrace fads and engage in management hoopla,rather than confront the brutal facts.● Demonstrate chronic inconsistency, lurching backand forth and straying outside the three circles.● Jump right into action, without disciplined thought,or first getting the right people on the bus.● Spend a lot of energy trying to align and motivatepeople, rallying them around new visions.● Sell the future to compensate for lack of results inthe present. ■8Good To Great — SUMMARYSoundview Executive Book Summaries®BUILDUP AND BREAKTHROUGHFor more information on one company’s flywheel discovery, go to:http://my.summary.com