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IInn tthhiiss iissssuuee::

■ Learn...what separates the bestfirms from mediocre compa-nies. . . and how you cantransform your businessfrom good to great.

■ Profit...from the seven lessonsderived from 11 companiesthat beat the stock marketby at least 300 percentover 15 years.

■ Understand...why business leaders whoput their companies’ ambi-tions ahead of their per-sonal ambitions outper-form high-profile CEOs.

■ Discover...the importance of puttingwho before what — that is,putting the right people inthe right jobs before pursu-ing a new vision or strategy.

■ Escape...the “doom loop” of chasingafter a single big program,and instead make spectac-ular progress through aslow, steady buildup ofmomentum.

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Good to GreatWhy Some Companies Make the Leap

and Others Don’tby Jim Collins

A summary of the original text.

Most of today's trulygreat companies, like

Merck and Coca-Cola, havealways been great. Thevast majority of companiesremain just that: good, butnot great.

But some companies havemade the transition togreatness. Collins defines a"great company" as one thathas generated cumulativestock returns that beat thegeneral stock market by atleast 300 percent over 15years. Collins and hisresearch team studied 11good-to-great firms:

1. Abbott Laboratories

2. Circuit City Stores

3. Federal Home LoanMortgage

4. Gillette

5. Kimberly-Clark

6. Kroger

7. Nucor

8. Philip Morris

9. Pitney Bowes

10. Walgreens

11. Wells Fargo.

Next, Collins and his teamcompared the good-to-greatfirms to a control group ofcompanies that failed tomake the leap.

The companies in the control group were:

1. Upjohn

2. Silo

3. Great Western

4. Warner-Lambert

5. Scott Paper

6. A&P

7. Bethlehem Steel

8. R.J. Reynolds

9. Addressograph

Volume 10, No. 12 (2 sections). Section 1, December 2001© 2002 Audio-Tech Business Book Summaries 12-23.No part of this publication may be used or reproducedin any manner whatsoever without written permission.

To order additional copies of this summary, referenceCatalog #12011

10. Eckerd

11. Bank of America.

Finally, the team analyzedboth sets of companies inorder to discover the sevenessential factors that sepa-rate the good-to-great firmsfrom the merely good ones.These seven factors are:

1. "Level 5" Leaders.These CEOs put theircompanies ahead oftheir own egos.

2. A Focus on Who BeforeWhat. Leaders concen-trated on getting theright people in placebefore they pursued anew vision or strategy.

3. A Willingness toConfront the BrutalTruth. Every good-to-great company admittedits difficulties, yetbelieved it would win inthe end.

4. The Hedgehog Concept.If you cannot be thebest in the world atyour core competence, itcannot form the basis ofa great company.

5. A Culture of Discipline.When you have disci-plined people, you don'tneed a hierarchy, abureaucracy, or excessivecontrols.

6. Technology Accelerators.Good-to-great companiesdon't use technology toignite a transformation,but they find new usesfor widely-availabletechnology.

7. The Flywheel and the

Doom Loop. Momentumfor greatness is builtslowly, rather than in asingle moment.

What is most surprising iswhat the team did not find.None of the companies has aflashy or colorful CEO.None of the companies usedtechnology to begin theprocess of becoming great,and none used acquisitionsor mergers, either.Corporate strategy had littleto do with greatness, andexecutive compensation hadnothing to do with it at all.Scant attention was paid inthose great companies tomanaging change; in fact,most companies wereunaware of their crucialtransition to greatness. Thegood-to-great companieswere not in great industries.

Many of the companiesCollins studied were down-right boring. Walgreenshad bumped along as anaverage company, more orless tracking the generalmarket, for more than 40years. Then in 1975, itbegan its climb to great-ness. Between 1975 and2000, it beat technologysuperstar Intel as an invest-ment by a factor of two. Itbeat GE by five times andCoca-Cola by eight. It beatthe general market, includ-ing the NASDAQ run-up atthe end of 1999, by morethan seven times.

Note that Collins refers to"the general market" as thetotality of all stocks tradedon the New York StockExchange, American StockExchange, and NASDAQ.

Abbott beat the general

market by nearly fourtimes; Circuit City trouncedit by 18.5 times. Gilletteoutperformed it by morethan seven times. The com-plete results can be found ina table on page 3.

The most remarkable aspectof the transformation of the other good-to-great com-panies was that the punditsdidn't even notice. Thosewere not companies youheard talked about onCNBC, nor did you seesplashy profiles of theirCEOs on the front page ofthe Wall Street Journal.

Instead, those unremark-able companies in somerather backward industries,led by quiet, self-effacingleaders, simply pluggedalong with dogged determi-nation, pursuing a simpleconcept in a culture of discipline, until they hadcreated an unstoppablemomentum that carriedthem into astounding earnings figures year afteryear.

Let's take a look at some ofthose Level 5 leaders andthe qualities they share.

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LEVEL 5 LEADERSHIP

Kimberly-Clark is about asboring a business as youcould find. The paper com-pany's stock had dropped 36percent behind the generalmarket during the 1960sand 1970s. It looked as if the company was on along, slow decline towardextinction or acquisition.

Then in 1971, Darwin E.2 A U D I O - T E C H

Smith, a mild-mannered in-house lawyer, was appointedCEO by the board of direc-tors. Shortly after he tookthe reins, Smith made themost dramatic decision inthe company's history: Hesold its paper mills, whichrepresented Kimberly-Clark's core business ofcoated paper.

Smith concluded that theeconomics of selling coatedpaper were poor, and thatthe competition was weak.The company would contin-ue to be mediocre if itremained in that business.He reasoned that ifKimberly-Clark entered theconsumer paper-productsindustry, top competitorslike Procter & Gamble andScott Paper would force hiscompany to either achievegreatness or perish.

Wall Street downgraded thestock and analysts jeered,but Smith never wavered.Twenty-five years later,Kimberly-Clark owned ScottPaper and it beat Procter &Gamble in six out of eightproduct categories. UnderSmith's leadership,Kimberly-Clark generatedcumulative stock returnsfour times those of the general market, easily sur-passing such venerablecompanies as GE, 3M, andHewlett-Packard.

In all 11 of the good-to-greatcompanies Collins studied,there was the same sort ofleader at the top: a self-effacing individual with afierce resolve and a para-doxical blend of personalhumility and professionalwill. In the comparisoncompanies, by contrast, heB U S I N E S S B O O K S U M M A R I E S 3

Good-to-Great Cases

Good-to-Great Cases

found flamboyant, charis-matic, self-promoters moreintent on building their ownimage than their companies— people like Chrysler'sLee Iacocca, Stanley Gaultat Rubbermaid, and Al"Chainsaw" Dunlap at ScottPaper.

In some cases, companieswith charismatic leadersmake an initial leap in per-formance, but it is neversustained. Lee Iacocca'sChrysler rose to 2.9 timesthe market in the first halfof his tenure, but dropped 31percent behind the marketin the second half. Iacocca,meanwhile, made himself aname and a bundle of cash.

The CEOs of the winningcompanies, on the otherhand, showed no interest inself-promotion. Indeed,none of them were willing totake credit for the success oftheir companies. GeorgeCain took over Abbott Labsat a time when the companywas just drifting along, sell-ing erythromycin. Helooked around and saw twoobstacles to greatness:nepotism and laziness.

Cain was not only an 18-year veteran of the company,he was the son of a previousAbbott president, but hetook no prisoners when hestarted replacing executivesat every level, building hisnew team from the groundup.

Starting in 1974, Cain beatthe market by four and ahalf times during the periodending in the year 2000,putting rivals such asMerck and Pfizer to shame.

Every one of the companieschosen by Collins had thesame type of leadership,while not one of the compar-ison companies did. Level 5leaders displayed modesty,even shyness, coupled with afierce drive and an incur-able, almost obsessive, needto obtain results. Theirefforts were all directedtoward the success of thecompany, not themselves,and they took blame but not credit, accepting respon-sibility while giving theaccolades to others on theirteam.

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FIRST WHO, THEN WHAT

Just as the quality of theleadership of the companyseems to make all the dif-ference in the world, so doall the other players.

When Collins began hisresearch project, he expect-ed to find that the first stepin taking a company fromgood to great would be toset a new direction, a newvision and strategy for thecompany. Only then, heassumed, would the leaderget people committed andaligned behind that newdirection.

The research revealed thatgood-to-great companiestook the opposite approach.The great executivesweren't at all worried aboutwhat direction to take thecompany. They concernedthemselves with getting thebest people in the worldinto the right spots in thecompany and, equallyimportant, getting rid ofany people who weren't of

the highest caliber.

Selecting the right people iscrucial, because it almostinstantly solves a host ofproblems, such as change,motivation, alignment, andeven strategy. Conversely, ifyou have the wrong people,it hardly matters how bril-liant your strategy is: Theywon't be able to execute it.

At Wells Fargo, for exam-ple, CEO Dick Cooley decided to build one of themost talented managementteams in the banking indus-try. According to investorWarren Buffett, they assembled the best team.

Beginning in the 1970s,Cooley and chairman ErnieArbuckle hired the best peo-ple they could find fromeverywhere in the world,and often they didn't evenhave jobs for them before-hand. Cooley admitted atthe time that they knewchange was coming, but didnot know what kind ofchange or what theirresponse ought to be. Hesaid, "If I'm not smartenough to see the changesthat are coming, they will.And they'll be flexibleenough to deal with them."

The main change that wascoming was deregulation,and few of the players inthe banking industry wereprepared. Yet, Wells Fargohandled the new challengesmore deftly than its com-petitors. It actually beatthe market by three timeswhile the industry, as awhole, fell 59 percentbehind the general market.Nearly every member of theWells Fargo executive team

A U D I O - T E C H4

went on to become CEO ofanother company.

By contrast, comparisoncompanies that failed atgreatness paid scant atten-tion to team building. Forexample, Bank of Americaused a technique called the "weak generals, stronglieutenants" model. The theory is that the stronglieutenants will stickaround if the general isweak, presumably so thatthey can move up.

The weakness extended toBank of America's stockmarket performance, whichlagged behind the generalmarket, while Wells Fargowas achieving greatness.After losing more than $1billion in the mid-1980s,Bank of America recruited ateam of strong generals toturn the bank around. Andwhere did it find thosestrong generals? Rightacross the street at WellsFargo.

The idea of getting goodpeople may seem self evi-dent, but that's not thepoint: The point is that thegreat companies got thebest people first, beforeeven planning what to dowith them. Then the greatcompanies let those greatpeople set the direction.

By contrast, the comparisoncompanies often would havea single genius CEO with agreat vision, who would hirethousands to execute hisvision. The problem withthat technique is that whenthe genius leaves, thehelpers are helpless.

Eckerd Drugs provides a

good example. Jack Eckerdwas a master of acquisi-tions. That was his bigstrategy. Starting from twolittle stores in Delaware, hespread to 1,000 units allover the Southeast. By thelate '70s, his company's rev-enues matched those ofWalgreens, and it looked asif it might become the greatcompany in its industry.Then Eckerd left to run forpolitical office. Without his guiding genius, his com-pany began a long declineand was eventuallyacquired by J.C. Penny.

Eckerd's fall traces a typicalpattern that can be seen inthe comparison companies:Charismatic leaders fail topick a successor who cansustain their momentum. Infact, they often set their suc-cessor up for failure becausethey want to be able to saythat no one could matchtheir own performance.

The company, in short, issimply operating in the service of their ego. In thegreat companies, the ego is operating in the service of the company. The greatCEOs have high ambitions,too, but they are not person-al ambitions; they are ambitions for the company.

While they have high ambi-tions, they do not aspire tohigh salaries. Collins foundno connection between com-pensation and greatness.In fact, the executives ofgreat companies tended toearn less on the whole thanthose at the comparisoncompanies.

Collins analyzed proxy state-ments using 112 variations,

including stock options,cash, short-term incentives,and so on. Time and againthe results proved that it'snot how much you pay, it'swhom you pay.Compensation does not motivate people to succeed.It is only a way of keepingsuccessful people inside thecompany.

At Nucor Steel, an execu-tive describes its winningformula for compensation asfollows: "We hire five, workthem like ten, and pay them like eight." Nucorrejects the old adage thatpeople are your most important asset. In a good-to-great transformation, theright people are your mostimportant asset.

Nucor locates its plants insmall rural communitiesbecause of its core beliefthat you can teach farmersto make steel, but you can'tteach a farmer's work ethicto people who don't have itin the first place. Nucorteam members often arrive30 minutes before theirshifts to arrange their toolsso they will be ready themoment their workdaystarts. Nucor ejects peoplewho do not share this workethic, generating highturnover in the first year ofa plant, followed by the low-est turnover in the industryonce the right people are onboard.

The take-away lessons fromthis part of Collins' researchcan be boiled down to threepractical disciplines:

1. When in doubt, don'thire — keep looking.Sometimes it's very

B U S I N E S S B O O K S U M M A R I E S 5

hard not to hire some-one when you can't findexactly the right person,but that's the discipline:Don't compromise. Ifyou force growth with-out the right people inplace, the company mayshow profits for a while,but it will eventuallycollapse.

2. When you know you needto make a change in per-sonnel, act right away.This applies most impor-tantly to letting thewrong people go. It's notfair to the person or thecompany to keep themhanging around, hopingfor a change. However,don't overlook the possi-bility that the right per-son may be in the wrongslot. When ColmanMockler became CEO ofGillette, he spent twoyears moving managersaround and ended upchanging the jobs of 38out of his top 50 people.

3. Put your best people onyour biggest opportuni-ties, not on your biggestproblems. At PhilipMorris, Joe Cullmanhad identified the international market,which the company hadlargely ignored, as thebiggest new opportunity.He took his top execu-tive, George Weissman,away from the domesticbusiness and gave himthe international mar-ket. At first, it lookedlike a demotion.Weissman had run 99percent of the business,and suddenly he foundhimself running onlyone percent. But two

decades later, Forbescalled the move a strokeof genius. Weissmanhad made Marlboro thebest-selling cigarette inthe world. Of course, itwasn't difficult to pre-dict that a man likeWeissman would put allhis energy into makinghis division the best.He was a man incapableof doing anything less.

That's why choosing theright people is essential togoing beyond good perfor-mance: because they areincapable of anything lessthan greatness.

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CONFRONT THE BRUTALFACTS

When a company has Level5 leadership and the rightemployees in place, every-one puts the company's per-formance above his or herown ego. This capabilityenables the people in agood-to-great firm to con-front brutal facts, yet neverlose faith.

Consider the case of Kroger.In the 1950s, Kroger andA&P faced off in a Davidand Goliath battle that stillmakes people's heads spin.But the difference in theirperformance can besummed up in the simplestof terms: A&P ignored thetruth, while Krogerembraced it.

A&P was second only toGeneral Motors in earningsin the early 1950s. Krogerwas less than half that size. Yet over the next half-century, Kroger generated

returns that were 10 timesthe market, and 80 timesbetter than A&P. Whathappened was that Americachanged and A&P did not.

A&P had built a perfectmodel for the first half ofthe 20th century, when twoworld wars and a depres-sion imposed frugality uponAmericans: The companyoffered cheap, plentiful groceries in bland stores.

But in the affluent secondhalf of the century,Americans wanted cleanerstores, more parking spaces, and more choices ofproducts. They also wantedhealth foods, medicines, and a banking center. Inshort, consumers no longerwanted to shop in grocerystores; they wanted to strollthrough superstores thatoffered everything underone roof.

While A&P stuck with itstried-and-true businessmodel, living by the slogan,"You can't argue with 100years of success," its perfor-mance slid. Meanwhile,Kroger confronted the brutalreality that the old grocery-store concept was extinct. Iteliminated, changed, orreplaced every store andexited every region in whichit could not be first or second in the market. By1999, Kroger was the No. 1grocery chain in America.

In each comparison betweenthe good-to-great firms andthe control companies, theconclusion is obvious:Greatness results from aseries of good decisions, diligently executed andaccumulated one after the

6 A U D I O - T E C H

other. To do that, the greatexecutives first infusedeverything they did withthe facts of the situation.They didn't hide their headsin the sand. They did notengage in denial. No mat-ter how bleak it looked,they faced reality.

Pitney Bowes had to facethe fact that all its postagemetering machines wereabout to become obsoleteand its core business woulddisappear. Yet, the execu-tives did face this fact anddid reinvent the business.Its competitor,Addressograph, buried itshead in a series of acquisi-tions and quick fixes undera charismatic CEO, RoyAsh, in the early 1970s.

Until 1973, the two compa-nies were roughly equal inrevenues, profits, number ofemployees, and stock charts.By 2000, Pitney Bowes had30,000 employees and rev-enues over $4 billion, com-pared to Addressograph's670 employees and $100million in revenues. PitneyBowes outperformed itscompetitor by 3,581 to one.Ash was ultimately removedfrom office and his companyfiled for bankruptcy.

This example proves onceagain that a charismaticleader is often a liability. At Pitney Bowes, it wasacceptable for people tospeak up and be the bearerof bad news. They couldtell senior executives wherethey were going wrong. AtAddressograph, Ash simplyinstilled fear in his man-agers, so no one was willingto confront the truth unlessit was favorable. The same

was true at many othercomparison companies,where people were afraid tospeak their minds for fearof being shot down by astrong-willed leader.

A key to being a leader of agreat company is to create aculture where people can beheard. Collins suggeststhree simple steps to accom-plish that goal:

1. Lead with questions, notanswers. Admit thatyou don't know theanswers, and the greatpeople you've hired willbring them to you.

2. Engage in dialogue anddebate, not coercion.Collins suggests being aSocratic moderator, likeKen Iverson of Nucor.In his meetings, peoplewere not afraid. They'dyell and scream andalmost come to blows.But they'd emerge witha decision. Such dia-logues are always basedin fact and mounted insearch of the bestanswers; they are notturf wars.

3. Conduct autopsies with-out blame. When PhilipMorris bought, and thensold, the 7-Up Companyat a huge loss, it couldhave been the opportuni-ty for heads to roll, butit was viewed instead asa very prestigious andexpensive school forlearning lessons in busi-ness. Executives stilltalk about it, but no oneis blamed; everyone islearning from it to thisday.

But simply facing facts isnot enough. The idea is tosee the brutal reality as agreat opportunity forchange. Collins calls it asense of exhilaration thatcomes from facing the factsand saying, "We will nevergive up."

For example, DavidMaxwell was CEO ofFannie Mae when it waslosing $1 million every sin-gle business day and had$56 million in loans underwater. He saw that thebusiness had gone so badthat his only chance to saveit would be to make it theleader in its industry. Herebuilt the business aroundrisk management, inventedsophisticated new mortgagefinance instruments, andwound up returning almosteight times the generalmarket over 15 years.

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THE HEDGEHOG CONCEPT

One of the traits that distinguishes the leaders ofgood-to-great firms is thesimplicity of their concepts.Put another way, they arefocused on a single, almostobsessive, goal. This iswhat Collins calls "theHedgehog Concept."Hedgehogs always focus ona single idea: If attacked,they will roll up into a ballwith their spikes protectingthem. Because they haveonly one strategy, they arefree to perfect it.

Similarly, the people whomake the biggest impactfocus on a single big idea:Charles Darwin and his theory of natural selection,

B U S I N E S S B O O K S U M M A R I E S 7

Sigmund Freud and his theory of the unconscious,Albert Einstein and his theory of relativity.

In business as well, the leapfrom good to great dependson taking a hedgehogapproach. For example,Cork Walgreen decided thathis mission was to create thebest, most convenient drug-stores in the world with highprofit per customer. He didn't have to invent thecomputer chip, as Intel did.But he beat Intel on returns.He didn't have a secret softdrink formula, as Coca-Coladid. But he beat Coke, too.

Walgreens invented thedrive-through pharmacy, putin one-hour photo process-ing, and replaced any storesthat didn't meet its rigorousspecifications. In a relent-less quest for convenience, itclustered nine stores withina square mile in SanFrancisco.

In contrast, the main com-petition, Eckerd, went aftergrowth for the sake ofgrowth. Walgreens grew totwice Eckerd's size with netprofits $1 billion greater.

The simplicity of Walgreens'strategy comes down toanswering three questions:

1. What can you be thebest in the world at?

2. What drives your economic engine?

3. What are you passionateabout?

In the case of each of the 11 great companies, execu-tives answered those

questions before goingahead. Anything that didnot stand up to that testwas abandoned, and allresources were poured into the answers in whichthose three concepts foundcommon ground.

Knowing what you can andcannot be best at is the rootof all business strategy. Forexample, Abbott Labs andUpjohn were almost identi-cal companies in 1964 interms of product, profit, andrevenues. But then Abbottdeveloped a simple core concept, and Upjohn did not.

Abbott began by confrontingthe sad reality that it hadalready lost the game ofbeing the best pharmaceuti-cal company in the world.By 1964, it could never catchup with Merck's hugeresearch lead. Abbott CEOGeorge Cain, therefore,asked the logical question:What can we be best at? By1967, an answer had begunto emerge. Abbott could create products that provid-ed cost-effective health care.For example, good diagnos-tics can reduce costs dramat-ically, and proper nutritioncan reduce recovery time.

As the company began slow-ly but surely moving towardbeing No. 1 in that area,Upjohn was unrealisticallytrying to beat Merck. Thecompany had a hard lessonto learn: Just because some-thing is your core businessdoesn't mean you can be thebest at it. After fighting alosing R&D battle withMerck, Upjohn saw its prof-its dwindle to half those ofAbbott, and was acquired in1995.

It sounds like a simple mat-ter to find out what makesyour company money, butit's a subtle and elusivething to measure correctly.For example, Walgreenswanted to increase its profitper customer visit. Thenormal measure in thatbusiness is profit per store,but that would have run upagainst the core conceptthat Walgreens had devel-oped of convenience,because it would have dictated decreasing, notincreasing, the number ofstores.

Wells Fargo, as well, had tobe creative about how itdefined success to keep it inline with its core concept.Standard banking metrics,such as profit per loan,wouldn't work. They decid-ed to measure profit peremployee instead and usedstripped-down branches andATMs to push that objective.

The effort you will put intoanswering the question ofwhat denominator is bestfor your company will forcea much deeper understand-ing of what you do thanalmost any other exercise.It will stimulate intensedialogue and debate. Andwhat you measure is whatdrives your work at everylevel.

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A CULTURE OF DISCIPLINE

Most executives mistakecontrol for discipline. Theybelieve at some level thatthe discipline they seek toinstill can be achieved bycontrolling what other peo-ple do. But that reasoningis backwards. In fact, what

8 A U D I O - T E C H

people do comes from insidethem, no matter what theoutside stimuli.

Most companies buildbureaucracies to managethe wrong people they have,not to assist the right peo-ple in getting work done.Getting the right people,and getting rid of the wrongpeople, solves almost all theproblems a company has.Creating a culture of disci-pline is based on the rightpeople, and that starts atthe top.

At Amgen, GeorgeRathmann recruited entre-preneurial leaders and gavethem creative and bureau-cratic freedom. He trustedthem to achieve their goals,because the right people arealready motivated to be thebest.

The company became soconsistently profitable thatan investor who bought aslittle as $7,000 of Amgenstock at its IPO in 1983would have realized a capi-tal gain of more than $1million. This return is 13times greater than thereturn from the sameinvestment in the generalmarket.

But freedom is not chaos.Amgen's people had to workwithin a system. In otherwords, being free does notmean being out of control.It means being accountable.

A culture of discipline alsoinvolves knowing when toput profits ahead of perks.The Level 5 leaders thatwe've discussed have shownthe way for others who arewilling to learn.

Consider Carl Reichardt atWells Fargo when it wenthead to head with Bank ofAmerica during the periodof deregulation. He sawthat the key to winning wasnot with some great, newstrategy but with sheerdetermination and the will-ingness to tear apart thetraditional banking system,which rested on perks and alavish life style.

Reichardt set the tone fromthe start. He froze execu-tive salaries for two years,shut the executive diningroom, closed the executiveelevator, sold the corporatejets, and even banned greenplants from the executivesuites because they wereexpensive to maintain. Heremoved the free coffee fromthe executive suite, elimi-nated Christmas trees formanagement, and rejectedreports that were submittedin expensive binders.

During meetings with hisexecutives, Reichardt sat ina beat-up old chair in whichthe stuffing was hangingout; as he sat in the chairpicking at the stuffing, his executives' must-do pro-posals to spend money justmelted away.

The comparison companiesattempted to impose disci-pline from above, withoutliving it themselves. Theexecutives at Bank ofAmerica, for example, wereliving in an ivory toweradorned with Oriental rugs,executive elevators, and apanoramic view of SanFrancisco. Amid all of thisopulence, Bank of Americalost $1.8 billion in threeyears.

Stanley Gault atRubbermaid is a perfectexample of trying to imposediscipline on his employees.He worked 80-hour weeksand made sure his man-agers did, too. The companyrose dramatically underthat leadership. But like alltyrannical bureaucracies,when he left, the companylost 59 percent of its valuerelative to the market.Chrysler under Lee Iacoccashowed the same pattern.

The scheme that reaps themost rewards is the simplestone. But it takes a bal-anced, selfless person at thetop, which is rare. At Nucor,Ken Iverson's cheap, rentedoffices were staffed by fewerthan 25 people and had onlyfour layers of management,yet grew into a $3.5 billionFortune 500 company.There was no corporate din-ing room; visiting mogulswere taken to lunch at Phil'sDiner across the street. Inthe 1982 recession, whenworkers' pay was cut 25 percent, executive salarieswere slashed by 60 percent,and the CEO himself took a75 percent pay cut.

The idea behind a cultureof discipline is so simplethat it's a wonder it canelude so many smart execu-tives: If you want a greatcompany, you must be greatyourself. Bethlehem Steel,ensconced in its 21-storyvanity address, was theexact opposite. It spentmillions to design the build-ing in the shape of a crossso that all executives couldhave a corner office.

Bethlehem's fleet of corpo-rate jets even ferried the

B U S I N E S S B O O K S U M M A R I E S 9

officers' children to theirprep schools and colleges.The executive country clubhad a world-class 18-holegolf course. The purpose ofthe company was to supportan elite class in high style.

By the end of the century,Nucor, which had been less than a third the size of Bethlehem in 1990, sur-passed Bethlehem's revenues. Even moreastounding, Nucor's averagefive-year profit per employ-ee exceeded Bethlehem's bynearly 10 times.

An investor who boughtNucor stock in 1966 wouldhave earned a return 200times greater than thereturn from an investmentin Bethlehem's stock. Inshort, Bethlehem's culture ofprivilege lost money, whileNucor's culture of disciplinemade money.

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TECHNOLOGY ACCELERATORS

Just as the good-to-greatcompanies have learned tosucceed without extrava-gant offices, they haveproven that a business doesnot need the latest, hottesttechnology to win.

Technology never made acompany great. In fact, all11 companies examined byCollins paid little attentionto technology in the initialstages of building towardgreatness. What they diddo was to marshal theirtechnological resources inthe service of greatnesswhen the appropriate timecame. In other words, they used technology to

accelerate their momentum.

Walgreens, for example,didn't react at all while theInternet race was on.While other companies werefalling all over themselvesto get onto the Web andstake out territory,Walgreens took time tothink about it.

While Drugstore.com wastrading at 398 times revenue, Walgreens wastrading at 1.4 times rev-enue. Analysts downgradedWalgreens stock, erasing$15 billion in market value.Walgreens didn't panic."We're a crawl, walk, runcompany," Dan Jorndt toldForbes magazine.

Walgreens moved slowly byexperimenting with a Website. At the same time, thecompany engaged in intenseinternal debate about howthe Internet would impactits Hedgehog Concept of con-venience. Executives asked,"How can we use the Web toenhance what we do betterthan any other company inthe world?"

While everyone was sayingWalgreens was too old andstodgy to get on the Web,the company was graduallytying the Internet to itssophisticated inventory anddistribution model. Thecompany figured out a wayto enable customers to goon-line, place an order, andeither pick it up at thedrive-through window orhave it delivered. ToWalgreens, the Internet wassimply another channel forproviding its customerswith convenience.

When Walgreens launchedits complete Web site inOctober, 2000, its stockprice nearly doubled, whileDrugstore.Com wasannouncing layoffs andaccumulating mammothlosses. Drugstore.com hadlost nearly all of its $3.5 billion market cap and hadgone from run to walk tocrawl.

So how do good-to-greatcompanies think about tech-nology? The point is, theydo think, they don't reactimpulsively. They adaptcarefully. They spark inter-nal debate. They take smallsteps. They understandthat first-mover advantageis a myth. They understandthat there are no magic bul-lets. They understand thattechnology is a tool like anyother tool, and it can beused in the service of theircore concept — nothingmore, and nothing less.

What Collins found in hisfive years of research wasthat technology, per se, hadnothing to do with great-ness. But all the great companies had pioneeredcarefully selected applica-tions of technology. Here arefour examples:

1. Kroger pioneered the bar code to linkfront-line purchases tobackroom inventory.

2. Fannie Mae pioneeredthe application of sophis-ticated algorithms andcomputer analysis toassess mortgage risks.

3. Nucor pioneered theapplication of mini-mill steel production.

10 A U D I O - T E C H

4. Gillette pioneered theapplication of laserwelding, normally usedon expensive productslike heart pacemakers,

to the production ofrazors on a mass scale.

In each case, the companydidn't invent the technology,

nor did it allow the technol-ogy to drive the company.But it showed great creativity in the use of the technology, and then

B U S I N E S S B O O K S U M M A R I E S 11

Company Technology Accelerators Linked toHedgehog Concept during T ransition Era

Abbott Pioneered application of computer tech-nology to increase economic denomina-tor of profit per employee. Not a leaderin pharmaceutical R&D — leaving thatto Merck, Pfizer, and others that had adifferent Hedgehog Concept.

Circuit City Pioneered application of sophisticatedpoint-of-sale and inventory-trackingtechnologies-linked to the concept of being the "McDonald's" of big-ticketretailing, able to operate a geographi-cally dispersed system with great consistency.

Fannie Mae Pioneered application of sophisticatedalgorithms and computer analysis tomore accurately assess mortgage risk,thereby increasing economic denomi-nator of profit per risk level. "Smarter"system of risk analysis increasesaccess to home mortgages for lower-income groups, linking to passion fordemocratizing home ownership.

Gillette Pioneered application of sophisticatedmanufacturing technology for makingbillions of high-tolerance products atlow cost with fantastic consistency.Protects manufacturing technologysecrets with the same fanaticism thatCoca-Cola protects its formula.

Kimberly-ClarkPioneered application of manufacturing-process technology, especially in non-woven materials, to support their pas-sionate pursuit of product superiority.Sophisticated R&D labs; "babies crawlabout with temperature and humiditysensors trailing from their tails..."

Kroger Pioneered application of computer andinformation technology to the continu-ous modernization of super- stores.First to seriously experiment with scan-ners, which it linked to the entire cash-flow cycle, thereby providing funds forthe massive store-revamping process.

Nucor Pioneered application of the mostadvanced mini-mill steel manufacturingtechnology. "Shop the world over" forthe most advanced technology. Willing

Company Technology Accelerators Linked toHedgehog Concept during T ransition Era

to make huge bets (up to 50 percent ofcorporate net worth) on new technolo-gies that others viewed as risky, suchas continuous thin slab casting.

Phillip MorrisPioneered application of both packag-ing and manufacturing technology. Beton technology to make flip-top boxes-the first packaging innovation in twentyyears in the industry. First to use com-puter-based manufacturing. Hugeinvestment in manufacturing center toexperiment with, test, and refineadvanced manufacturing and qualitytechniques.

Pitney BowesPioneered application of advancedtechnology to the mailroom. At first, ittook the form of mechanical postagemeters. Later, Pitney invested heavilyin electrical, software, communications,and Internet engineering for the mostsophisticated back-office machines.Made huge R&D investment to reinventbasic postage meter technology in theI980s.

Walgreens Pioneered application of satellite com-munications and computer networktechnology, linked to its concept of con-venient corner drugstores, tailored tothe unique needs of specific demo-graphics and locations. A "swallowyour tonsils" big investment on a satel-lite system that links all stores together,like one giant web of a single cornerpharmacy. "Like a trip through NASAspace center." Led the rest of theindustry by at least a decade.

Wells Fargo Pioneered application of technologiesthat would increase economic denomi-nator of profit per employee. Earlyleader in twenty-four-hour banking byphone, early adopter of ATMs, first toallow people to buy and sell mutualfunds at an ATM, pioneer in Internet andelectronic banking. Pioneered sophisti-cated mathematics to conduct betterrisk assessment in lending.

TECHNOLOGY ACCELERATORS IN THE GOOD-TO GREAT COMPANIES

brilliantly applied it in theservice of its own vision.

Fannie Mae called this "thesecond wind," the accelera-tion of momentum after the transformation from agood company to a greatcompany. But in all cases,the technology came afterthe company had put theright people in place andformulated its core concept,its passion. It came late inthe transition, only whenthe company could fullyunderstand the role thetechnology would play.

Wherever a new technologydidn't fit, the good-to-greatfirms simply ignored it andwent about their business.But that attitude changedas soon as they discoveredhow a technology could fitthe core concept, asWalgreens did in using itsWeb site to give customerseven more convenience. Inthose cases, the companiesbecame fanatical in the pursuit of excellence where that technology wasconcerned.

Collins' research led him to the conclusion that technology can not onlyaccelerate greatness.Misused, it can acceleratethe demise of a company aswell. Technology pioneersrarely prevail. And technol-ogy by itself is frequentlymore a hindrance than ahelp.

Once again, it comes backto the same theme: Thosewho turn good companiesinto great ones are motivat-ed by a deep drive to greatness. Driven by willand discipline, they are

never satisfied. And thatapplies to technologicalapplications as much asanything.

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THE FLYWHEEL AND THEDOOM LOOP

The final theme that all ofthe good-to-great companiesshare is a slow, steadybuildup of momentum.

For a useful analogy, imagine trying to turn a5,000-pound flywheel.Pushing with great effort,you might move the fly-wheel an inch at first. Aftertwo or three more hours ofpersistent effort, you get theflywheel to complete oneentire turn.

As you keep pushing, theflywheel begins to movefaster and faster. Then atsome point, you make abreakthrough: the momen-tum kicks in in your favoruntil its own weight is work-ing for you. You no longerneed to push harder, but theflywheel goes faster andfaster, with each turn build-ing on all of the previousmomentum.

In the good-to-great companies, the transforma-tion never happened as the result of a single bigeffort. There was no grandprogram, no killer innovation, and no radicalrevolution. Good to greatcomes about by a cumula-tive process, in which eachstep, action, and decisionadds up to sustained andspectacular results. It is a

quiet, deliberate process offiguring out what’s neededto be done and then takingthose steps, one after theother.

Significantly, the great com-panies had no name fortheir transitions from goodto great. They just pluggedalong, doggedly pursuingtheir passion, their coreconcept.

But the interesting thing isthis: It takes nerves of steelto pull that off. None of thecompanies involved had theluxury of circumstance togrant them the time andcomfort to sit back and takethose small steps. Theywere under fire from allsides. There was loomingbankruptcy, impendingtake-overs, million-dollar-a-day losses, and Wall Streetbreathing down their necks.And yet they had the forti-tude to remain calm enoughto take those simple, smallsteps instead of trying onebig push to greatness, onebig change.

By contrast, the companiesin the control group weremarked by a different pat-tern that Collins calls the"Doom Loop." They con-stantly sought the grandprogram or killer innova-tion that would allow themto skip the difficult buildupstage and skip right to thebreakthrough.

To return to the flywheelanalogy, they would push it in one direction, thenstop, change course, andthrow it in a new direction.Then they would stop,change course, and push theflywheel in yet another

12 A U D I O - T E C H

direction. After years oflurching back and forth,these companies failed tobuild sustained momentum.

For example, Warner-Lambert announced in 1979 that it would be aleading consumer productscompany. In 1980, it did a180-degree turn to healthcare products. In 1981, itreversed course again toconsumer goods. In 1987, itagain abandoned consumergoods and went back tohealth care products. Inthe 1990s, it spun aroundagain, embracing diversifi-cation and consumerbrands.

Meanwhile, it was hemor-rhaging cash and failing tobuild momentum. From1979 through 1998 Warner-Lambert went through threemajor restructurings, oneper CEO, firing 20,000 people in the process. Stockreturns flattened relative tothe general market, andWarner-Lambert vanishedas an independent company,swallowed up by Pfizer.

It is impossible for a compa-ny to build up a head ofsteam with all those abruptchanges in direction. Andlost on those leaders is thetruth that it doesn't reallymatter what business you'rein. Remember that all 11good-to-great companies inthe study were in ratherunpleasant industries tobegin with, such as bankingand steel. Your companycan be great in any busi-ness, as long as you can bethe best at it, as long as itdrives your bottom line, andas long as you're passionateabout it.

The same two patterns —the Flywheel Effect and the Doom Loop — can beseen in companies' differentapproaches to mergers andacquisitions. The greatcompanies used them thesame way they used tech-nology: to accelerate an

already-moving concept, tocreate more momentum.The mediocre firms graspedat them in a desperate effortto jump-start their efforts,and it never worked.

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B U S I N E S S B O O K S U M M A R I E S

The Flywheel Effect

The Doom Loop

13

To escape the Doom Loopand make the leap to

greatness, you mustembrace each of the seventhemes that Collins found inthe companies he studied.

1. Practice Level 5 leader-ship by putting yourcompany's ambitionsahead of your careeraspirations.

2. Focus on who beforewhat by putting theright people into theright jobs, instead ofjumping right intoaction.

3. Confront the brutal factsto see clearly what stepsmust be taken to buildmomentum, rather thanembracing fads.

4. Attain consistency witha clear HedgehogConcept, rather thanlurching back and forthfrom one strategy toanother.

5. Establish of culture ofdiscipline in whicheveryone is accountable.

6. Harness the right tech-nologies to acceleratemomentum, instead oftrying to keep up witheach technology changeout of a fear of beingleft behind.

7. Make slow, measuredprogress on the flywheel,rather than pushing in different directionsand hoping for a bigbreakthrough.

Once you apply these con-cepts to your own business,you can start making slow,

steady progress toward sen-sational results. Along theway, you will need to spendvery little energy to moti-vate or align people to thenew vision. The momentumon the flywheel builds onitself, constantly propellingthe entire company beyondgood performance to greatperformance.

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NOTES

14

ABOUT THE AUTHORS

Jim Collins is coauthor of Built to Last,a national bestseller for overfive years with a million copies in print. A student of enduring greatcompanies, he serrves as a teacher to leaders throughout the corporateand social sectors. Formerly a faculty member at the StanfordUniversity Graduate School of Business, where he received theDistringuished Teaching Award, Jim now works from his managementresearch laboratory Boulder, Colorado.

Good to Great summarized by arrangement with Harper Business, an Imprint of HarperCollins Publishers,Inc., from Good to Great: Why Some Companies Make the Leap and Others Don’t by Jim Collins.Copyright © 2001 by Jim Collins.

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