Good To Great

1. Good to Great A leader, a hedgehog and a flywheel Book Review MAKE IT HAPPEN BAKER Ann Arbor, MI STRATEGY GROUP February 20, 2003

2. Good to Great Book Summary A leader, a hedgehog and a flywheel Our Discussion Today Introduction – a summary of the book and the process of analysis 1 2 Key Ideas – a look at three ideas we find intriguing BAKER STRATEGY GROUP Page 1 February 20, 2003

3. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Main Premise The main premise of Good to Great is that any company can become a “great” company by systematically implementing key principles outlined in the book “Our five-year quest yielded many insights, a number of them surprising and quite contrary to conventional wisdom, but one giant conclusion stands above the others: We believe that almost any organization can substantially improve its stature and performance, perhaps even become great, if it conscientiously applies the framework of ideas we’ve uncovered.” - Jim Collins, Good to Great BAKER STRATEGY GROUP Page 2 February 20, 2003

4. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Framework Collins’ “framework of ideas” for steering a company from good to great involves six key learnings wrapped in a continual process he calls the “flywheel” We will focus on three: - Level 5 Leadership - Hedgehog Concept - Flywheel BAKER STRATEGY GROUP Page 3 February 20, 2003

5. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Why Care Being familiar with the basic concepts at best allows you to incorporate concepts into program discussions and at worst make you more informed about a popular book Could be a good discussion point with a client Reference to the book may be made in a meeting Why should I care? It’s fun to see what business books out there are popular The concepts may have implications for your strategy BAKER STRATEGY GROUP Page 4 February 20, 2003

6. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel How Good-to-Great Companies were Selected The good-to-great companies were selected through a careful evaluation process that began with 1,435 companies taken from Fortune 500 lists since it began in 1965 Screening Process for Selecting Good-to-Great Companies Cut1 1,435 companies Selected from the Fortune 500, 1965 - 1995 Main Test Cut 2 126 companies Selected into full CRSP data pattern analysis 11 Elimination Criteria Cut 3 19 companies Selected into industry analysis Industry Comparisons Cut 4 11 companies Selected into good-to-great set BAKER STRATEGY GROUP Page 5 February 20, 2003

7. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Cut Criteria The good-to-great companies were selected through a careful evaluation process that began with 1,435 companies taken from Fortune 500 lists since it began in 1965 Main Test 11 Elimination Criteria Cut 2 Cut 3 Compound annual return 1.Continual upward trend is 1.3 times that of Fortune 2.Flat gradual rise Industrial and Service listings 3.Insufficient “good” period 4.Transition was from “terrible” 5.Transition was after 1985 6.Unsustained transition 7.Volatile returns patterns 8.Incomplete research data 9.Evidence of already being great 10.Acquired or merged 11.Short of 3 times the market BAKER STRATEGY GROUP Page 6 February 20, 2003

8. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Good-to-Great Companies The 11 good-to-great companies had to have 15 years of “good” results, followed by 15 years of “great” results, which translates into a return at lease 3 times the market Good to Great Cases NYSE Results from Transition point to 15 T Year to Company Ticker Years beyond Transition Point T year + 15 Abbott 3.98 times the market 1974 -1989 ABT Circuit City 18.50 times the market 1982 -1997 CC Fannie Mae 7.56 times the market 1984 -1999 FNM Gillette 7.39 times the market 1980 -1995 G Kimberly-Clark 3.42 times the market 1972 -1987 KMB Kroger 4.17 times the market 1973 -1988 KR Nucor 5.16 times the market 1975 -1990 NUE Philip Morris 7.06 times the market 1964 -1979 Pitney Bowes 7.16 times the market 1973 -1988 PBI Walgreens 7.34 times the market 1975 -1990 WAG Wells Fargo 3.99 times the market 1983 -1998 WAG BAKER STRATEGY GROUP Page 7 February 20, 2003

9. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Great Companies vs. Good Companies Each of the good-to-great companies showed a clear transition point, after which they showed steady growth that outpaced the market and their industry BAKER STRATEGY GROUP Page 8 February 20, 2003

10. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Gillette Example Gillette, for example, had at least 15 years before 1980 of “good” performance, with “great” performance in the 80’s and early 90’s after the Transition Point in 1980 BAKER STRATEGY GROUP Page 9 February 20, 2003

11. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Gillette Example Looking at Gillette since 1995, however, it is not easy to conclude that they are a “great” company today, since they have underperformed the market these past 7 years BAKER STRATEGY GROUP Page 10 February 20, 2003

12. Good to Great Book Summary 1] Introduction A leader, a hedgehog and a flywheel Dogs that Didn’t Bite There were a number of things that Collins and his team expected to find, but it turned out that the data proved their instincts wrong • Larger-than-life, celebrity leaders who ride in from the outside are negatively correlated with taking a company from good to great. • The structure of executive compensation is not a key driver in corporate performance • Strategy per se did not separate the good-to-great companies from the comparison companies. • Good-to-great companies paid attention to what not to do and what to stop doing • Technology can accelerate a transformation, but it cannot cause a transformation • M&A plays virtually no role in igniting a transformation from good to great • Good-to-great companies paid scant attend to managing change, motivating people, or creating alignment. • Good-to-great companies had no name, tag line, launch event, or program to signify their transformations. • Good-to-great companies were not, by and large, in great industries, and some were in terrible industries. BAKER STRATEGY GROUP Page 11 February 20, 2003

13. Good to Great Book Summary 12] Key Ideas A leader, a hedgehog and a flywheel Level 5 Leadership Everything start with a qualified, Level 5 leader; one who’s ambition is first and foremost for the institution, not himself or herself Leader The Leader The Hedgehog The Flywheel BAKER STRATEGY GROUP Page 12 February 20, 2003

14. Good to Great Book Summary 12] Key Ideas A leader, a hedgehog and a flywheel Yin and Yang Level 5 leaders demonstrate two remarkable qualities: a humble and generally selfless manner, and a steely resolute fixation on quality results. Leader The Leader The Hedgehog The Flywheel BAKER STRATEGY GROUP Page 13 February 20, 2003

15. Good to Great Book Summary 12] Key Ideas A leader, a hedgehog and a flywheel Fox vs. Hedgehog The Hedgehog Concept, drawn from the Isaiah Berlin essay, is that great companies tend to think of their strategy and corporate vision in clear and simple terms Fox Foxes pursue many ends at the same time and see all the world in its complexity Hedgehog The • Scattered Leader • Diffused • Moving on many levels The • Never integrating their thinking into an Hedgehog overall concept or unifying vision The Flywheel Hedgehog Hedgehogs simply a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything • Simplifies a concept • Reduces all challenges to simple ideas BAKER STRATEGY GROUP Page 14 February 20, 2003

16. Good to Great Book Summary 12] Key Ideas A leader, a hedgehog and a flywheel Hedgehog Concept Level 5 leaders used the Hedgehog Concept to create an organization that is clear in its purpose and focused on delivering results Hedgehog “Those who built the good-to-great companies were, to one degree or another, The hedgehogs. They used their hedgehog nature to drive toward what we came to Leader call a Hedgehog Concept for their companies. Those who led the comparison The Hedgehog companies tended to be foxes, never gaining the clarifying advantage of a The Hedgehog Concept, being instead scattered, diffused, and inconsistent. Flywheel - Jim Collins, Good to Great BAKER STRATEGY GROUP Page 15 February 20, 2003

17. Good to Great Book Summary 12] Key Ideas A leader, a hedgehog and a flywheel Three Elements of the Hedgehog Concept The three main questions in the Hedgehog Concept involve tapping your passion, determining if you can be the best, and understanding your economic engine. Notes The Hedgehog Concept Good-to-great 1 companies focused on Hedgehog 1 those activities that The What are You Deeply ignited their passion. Leader Passionate About 2 The This is beyond core Hedgehog competence. Just because you have a The competence does not Flywheel mean that you can be the best 3 2 3 All good-to-great What Drives Your companies have piercing What You can Be Economic Engine insight into the single the Best in the denominator – profit per World At x – that had the greatest impact on their economies. BAKER STRATEGY GROUP Page 16 February 20, 2003

18. Good to Great Book Summary 12] Key Ideas A leader, a hedgehog and a flywheel Flywheel The Flywheel concept emphasizes the fact hate the transformation of good-to-great companies was not a sudden event, but rather a steady, ongoing process Flywheel “No matter how dramatic the end result, the good-to-great transformations never The happened in one fell swoop. The was no single defining action, no grand Leader program, no one killer innovation, no solitary lucky break, no wrenching The revolution. Good to great comes about by a cumulative process – step by step, Hedgehog action by action, decision by decision, turn by turn of the flywheel – that adds up The Flywheel to sustained and spectacular results.” - Jim Collins, Good to Great BAKER STRATEGY GROUP Page 17 February 20, 2003

19. Good to Great Book Summary A leader, a hedgehog and a flywheel Takeaways The Flywheel concept emphasizes the process, but, as we know, companies still need to know the “what” in order to effectively direct the companies resources Implications for Implications for Your Company Your Clients • Encourage Level 5 • Could combine Level 5 leadership in clients on The leadership learnings projects, especially as it Leader with internal staff pertains to focusing on feedback how to improve, rather than who to blame • Could apply something • Be clear about the similar to the Hedgehog economic engine when The Concept of simplicity determining Customer Hedgehog when thinking of how to Behaviors in the model compete in the • Measure aspects of what marketplace they could be best at • Continued efforts to • Encourage year-to-year, build the your business ongoing dedication to The step-by-step high-Impact areas to see Flywheel “breakthrough” results over time BAKER STRATEGY GROUP Page 18 February 20, 2003

20. Good to Great Book Summary A leader, a hedgehog and a flywheel Final Thought The Flywheel concept emphasizes the process, but, as we know, companies still need to know the “what” in order to effectively direct the companies resources “After completing the research, I am convinced that many organizations can make the journey from good to great if they apply the lessons in this book. The problem is not the statistical odds; the problem is that people are squandering their time and resources on the wrong things.” - Jim Collins, Good to Great BAKER STRATEGY GROUP Page 19 February 20, 2003

Good To Great

Baker Strategy Group

Good To Great