I finished this book during the week. It is about how good companies became great ones. They set some tough requirements as 15y performing below market and then after a transition point, 15y performing three times above market. The book was completed by 2000 so just in the middle of the .com bubble so I would be curious what the result would be now (and after the subprime crisis in 2008). And all of them are companies trading in USA and public markets. As well, for each candidate there is a counterpart to demonstrate how two companies in similar circumstances, became one great and the other not.
To be honest, from the eleven companies passing the exam, I knew five: Gillete (shaving stuff), Kimberly-Clark (paper based things), Phillip Morries (tobacco), Fannie Mae (mortgages, that collapsed in 2008 crisis..), Wells-Fargo (bank). And I was surprised for the lack of other big names.
It is interesting the history of each company and most of them related to very different sectors. So there is no really lucky strike as the study covers nearly 30y history of a company.
So the goal is to identify the traits that all these great companies had to made that transition.
The book treat the following points in each chapter:
- Level 5 leadership: Leaders no super-stars. They are ambitious about their company and not just during their tenure. I like the example of those CEOs, people who didnt have big head and just looked through the window to explain their success. So it is that mix of humility and will that “create” them.
- First Who, then What: Your biggest asset is the good people, no just people. So having the best ingredients and knowing how to use them, you will get a great meal. As well, you need to get rid of the no good people. This is something the level5 leader has to accomplish. So hiring is a critical part (or have the process to form these people) and dont hire until you have your candidate. And looks like money wasnt the main thing to get or maintain the good people in your bus, comparing with the counterpart companies.
- Stockdale Paradox – Confront the brutal facts, yet never lose faith. This is based on the experience of a Vietnam war prisoner. “The optimistics” were the ones who didnt make it out. All these companies faced a challenge that after passing it, became great. They didnt ignore the reality but believed they could go through.
- Hedgehog Concept: This is the concept I struggled more to understand. This is based in the hedgehog and fox paradox. In summary, the fox tries many different things to hunt the hedgehog, but the hedgehog always sticks with the same plan (become a spiky ball) to defeat it. So this is based on Keep It Simple Stupid (KISS) from my point of view. So see the complex world and simplified it, you focus in the essential and ignore the rest. From the business perspective this translate into the three circles:
- What you can be the best in the world at (and what you can’t be the best too)
- What drives your economic engine:
- What you are deeply passionate about: This is not just get passionate about something, you need to have it before. Wrong example.
- Culture of Discipline: If you have that, you dont need hierarchy and motivation. This is based on disciplined people, disciplined thought and disciplined action. Two interesting points in this chapter are
- Budgeting: Based on the hedgehog concept, it is just decide what areas to be fully funded and what not at all.
- “Stop doing” list: Again, this is another point in just focus in the important thing.
- Technology Accelerators: You would think that technology made some companies great. But the summary here is, technology was just a tool. You buy the technology or develop it to stick with your hedgehog concept.
- The Flywheel: “Revolution means turning the wheel”. So you need to push the flywheel. At the beginning is hard, but with time, once it gets momentum, get easier. So this is based on a compound investment of effort, and there is no miracle involved. And the results will speak by themselves. This contrary to the doom loop where you avoid the buildup, just implement big/radical programs, without thinking.
And what after being great? It is to last as great. This is another book from the author that was written before this one about this concept.
So, based in the book, all these concepts make a great company, but it is not the recipe to last forever.
Gillete was merged by P&G in 2005. Fannine Mae didnt do very well during the mortage crisis in 2007/8. Tobacco is not healthy business, etc.
In summary, interesting book, as I used to think only the “big” corporations, famous CEOs were great companies (at revenue level) and here you can find more successful companies (at revenue level) with much less glitter around beating them very badly those for long runs.