book review about how not so good companies made extraordinary changes led by people within their organizations that were otherwise keeping a low profile and created a significant impact on

1. Good to Great Companies
Picking Great Companies to Build the
Greatest Portfolio and Using Such
Techniques to Make You a Great
Executive
Eric Borzino, 4/11/2005

2. Today’s Objectives
 Show how an avg person can use non-financial
techniques to pick great long-term holds
 Prove that “change” that leads to sustained
stock gains cannot be pinpointed in a “great”
company
 Are you investing in hedgehogs or foxes?
 Will YOU be a hedgehog or fox?
 These tips to identify companies are also
applicable to YOUR future management careers

3. Jim Collins
 Not as much of an idol as
Peter Lynch
 Author of fine and popular
books as Built to Last and
Good to Great
 Taught at Stanford’s
Graduate School of
Business
 Founded his management
research laboratory back
home in Boulder

4. Collins’ Laboratory Results
 Started with 1,435 good companies
 Found the companies that became great based
on certain criteria over 40 year performance
 Company had to show good stock performance,
capped with a transition point
 After transition, company had to generate stock
returns that exceeded general market at least 3
times over 15 years independent of industry

5. Being Good, Ain’t Good
Enough
 Vast majority of good companies remain just that –
good, not great
 11 “great” companies were identified
 $1 invested in the general market since 1970 would
yield $56 by year 2000
 $1 invested evenly upon the 11 great companies would
have yielded $471 by year 2000
 All 11 companies had decent performance, until a
transition occurred

6. 11 “Great” Companies
 A few of the companies over the past 15 years
that have been identified as great:
 Abbot
 Circuit City
 Fannie Mae
 Gillette
 Kimberly-Clark
 Wells Fargo
 Walgreens
 Philip Morris
 Kroger
 Nucor
 Pitney Bowes

7. What factors do not lead to
greatness?
 Larger-than-life celebrity leaders
 Negative correlation
 10 of the 11 good to great CEOs came from the firm
 Good to great companies did not principally
focus on what to do to become great
 Equally focused on what NOT to do
 And also what to STOP doing – diworsification
 Technology can accelerate a transformation,
but cannot cause a transformation

8. What factors do not lead to
greatness – Part Duex?
 M&A played no role in igniting a transformation
from good to great
 Two big ok companies joined together NEVER make
one great company
 Sorry Sat for bursting the bubble
 Good to great companies had no specific action
or program to signify their transformations
 Only in retrospect did the magnitude appear
 No outlandish, over published event or change
 Good to great companies were not in great
industries, some were in terrible industries

9. The Flywheel Cycle to Greatness
 Level 5 leadership
 First who…then what
 Confront the brutal facts
 Hedgehog concept
 Culture of discipline
 Technology accelerators
Buildup
Break-
Through
People
Thought
Action

10. Be Humble Yet Cool
 There are five levels of leaders
 Level 5 leaders, had one distinguishing
characteristic: humility
 Level 5 leaders channel their ego needs away
from themselves
 Larger goal is building a great company
 Ambition is first and foremost for the institution, not
themselves
 Extreme blends of humility and intense will

11. Egos Can Kill
 Absence of Level 5 leaders was the consistent
factor that hindered greatness
 Level 5 leaders set up successors for success
 Other level leaders set up their successors for failure
 Or chose weak successors
 Good to great leaders never wanted to be larger-
than life
 Ordinary people producing extraordinary results due to
unwavering resolve to produce sustained results
 Large personal egos contributed to the demise or
continued mediocrity of 2/3rd of comps

12. Are You Level 5 Worthy?
 Abraham Lincoln
 Personal modest and shy nature
 Weren’t signs of weakness
 Darwin Smith – CEO of Kimberly Clark 1971
 Generated stock returns 4.1 times the market
 Demolished rivals Scott Paper and P&G
 Resolve to do what’s best for company: sold the
paper mills to concentrate on consumer products
 Wall Street called the move stupid – downgraded
 “I never stopped trying to become qualified for the
job”

13. Great, How Do You Find
5spot?
 If you listen to a CEO and he boosts of how his
new ideas/programs will enhance returns
 Or how his strategies have already enhanced returns
 AVOID – got an ego and wants credit
 Level 5 leaders look outside the window to
accredit
 Thanked others and luck
 Also never blamed bad luck when things when
poorly, took credit for mistakes (unlike other leaders)

14. The Flywheel Cycle to Greatness
 Level 5 leadership
 First who…then what
 Confront the brutal facts
 Hedgehog concept
 Culture of discipline
 Technology accelerators
Buildup
Break-
Through
People
Thought
Action

15. First Who NOT What
 Began achieving sustained success by first
getting the right people on the bus
 Get the wrong people off the bus
 Then, figured out where to drive it

16. Isn’t Strategy and Product Mas
Importante?
 Why do it this way?
 Begin with “who” instead of “what, can more easily
adapt to a changing world
 If you have the right people on the bus, problem of
motivation and people managing are diminished
 If you have the wrong people, doesn’t matter
whether you have the right direction b/c company will
still not be great

17. Teamwork Baby
 Good to great companies build deep and strong
executive teams
 Decent companies followed a “genius” with a
“thousand helpers”
 What happens if genius is wrong or leaves? Idiots…
 People are NOT your most important asset. The
RIGHT people are.
 Look for companies with distinguished
managers who have been in the company and
work together over time

18. Wells Fargo’s Success
 Early 1970s, then CEO Dick Cooley foresaw
changes in the banking world, but did not know
what or how
 Assembled an endless stream of talent – best
team according to Warren Buffet
 Hired outstanding people whenever and
wherever without a specific job in mind

19. The Flywheel Cycle to Greatness
 Level 5 leadership
 First who…then what
 Confront the brutal facts
 Hedgehog concept
 Culture of discipline
 Technology accelerators
Buildup
Break-
Through
People
Thought
Action

20. Who Says Honor Doesn’t
Matter
 All good to great managers first confronted the
brutal facts of their current reality
 Impossible to make good decisions without being
honest in the process
 Look for executives who admit to the reality of their
industry – company to invest in
 Comparison companies were afraid to confront
adversity, not the good to great companies

21. Got to Stay Stiff and Hard
 Stockdale Paradox:
 Absolute faith that you can and will prevail in the end
 Same time, confront the most brutal facts of your
current reality
 Leadership does not begin just with vision,
begins with the right people confronting reality
and sticking to a rigorous yet flexible plan

22. The Flywheel Cycle to Greatness
 Level 5 leadership
 First who…then what
 Confront the brutal facts
 Hedgehog concept
 Culture of discipline
 Technology accelerators
Buildup
Break-
Through
People
Thought
Action

23. The Hedgehog and the Fox
 Ancient Greek parable:
 The fox knows many things
 The hedgehog knows one big thing
 Foxes pursue many ends and see the world in
all of its complexity
 Hedgehogs simplify the world into a basic
principle, see what’s essential, and ignore the
rest

24. The Big Three
 All good to great companies adhered to the
Hedgehog Concept (three questions)
 What you can be the best in the world at
 What drives your economic engine
 What are you deeply passionate about
 Not the goal to be the best, but understanding
of what you can be the best at

25. Sometimes Need to Rethink
 If you cannot be the best in the world at your
core business, then your core business cannot
form the basis of your Hedgehog concept
 Best to look for companies that keep it simple
 Exotic companies in many different industries are like
the fox and stretch themselves too thin
 As a manager, want to focus solely on your core and
how to make it the best in the world

26. What the Hell You Saying?
 Takeaways for investing:
 Look for companies with humble, yet passionate
leaders
 Research the background of management to
determine if the team was assembled with a “who”
instead of “what” mentality
 Find out the culture of the firm, whether it is
bureaucratic, dominated by a few executives, or
open and willing to confront the brutal facts
 Keep an eye out for simple companies, with great
people, hard-working culture, and not constantly
featured in CNBC or Wall Street Journal

27. Hedgehog Concept Most
Important
 To remain great over time requires to strictly
adhere to the Hedgehog Concept
 If the firm slides outside its hole, it will slide
back down to mediocrity
 Good to great transformations never happen at
once, unlike the WSJ likes to make it appear
 Happens slowly over time
 And can easily be tracked by looking at qualitative
clues outside of ratios and DCFs