As entrepreneurs, we’re always looking to make our companies better. When we look at companies like Apple or Tesla, we assume it takes a charismatic and visionary leader to be great. After all, the leader sets the culture and pace for growth. However, it takes more than a leader to make a company last (and sometimes, we need to think of leadership with a lowercase “l”).
Recently, I picked up the book Good to Great by Jim Collins. Good to Great has been cited by the Wall Street Journal’s CEO as the best management book. In it, Collins presents research on twenty-eight great companies to show trends of great companies as compared to their direct competition. His list includes companies like Walgreens, Circuit City, and Gillette. While these companies are not as strong today, each of them significantly outperformed their competitors from 1975-2000.
There’s a lot in the book worth noting, but two particular concepts stood out:
1) Are you a Hedgehog or a Fox?
2) Humility + Will = Level 5
Are you a Hedgehog or a Fox?
“The fox knows many things but the hedgehog knows one big thing.”
Is your company good at one big thing or many, smaller things? In this parable by Isaiah Berlin, Berlin divides the world into two categories: hedgehogs and foxes. Companies that are foxes are often scattered, diffused, and inconsistent. Hedgehog companies have focus and strive for simplicity.
Collins argues that all great companies are hedgehog companies. To prove his point, he describes Walgreens versus Eckerd. Walgreens simply sought to be the best and most convenient drugstore. That’s it. Walgreens is a hedgehog. The company strove only to fulfill that vision, and this straightforward approach resulted in tremendous success. (From the end of 1975 to 2000, Walgreens’ cumulative stock returns exceeded the market by over fifteen times beating companies such as GE and Coca-Cola).
Eckerd on the other hand was a fox. It leapt at opportunities to acquire clumps of stores just because it wanted growth for growth’s sake. In addition to being in the convenience store business, Eckerd jumped into other markets simply because they were emerging. For instance, Eckard acquired American Home Video Corporation because it felt the industry was ramping up; however, the acquisition resulted in $31 million dollars in losses before an ultimate resale to Tandy.
As you continue to build your business, ask yourself these three questions:
- What can you be best at in the world (and equally important, what can you not be the best at?)
- What drives your resource engine?
- What are you deeply passionate about?
The intersection of these three questions will help convert your company to a hedgehog.
Humility + Will = Level 5
“You can accomplish anything in life provided that you do not mind who gets the credit.”
–Harry S. Truman
Darwin Smith, Coleman Mockler, or David Maxwell. How many of these CEOs have you heard of? Smith, the CEO of Kimberly-Clark, Mockler, CEO of Gillette, and Maxwell, CEO of Fannie Mae, are all what Collins classifies as Level 5 leaders. They were all highly ambitious, not for themselves, but for their companies.
Level 5 leaders embody a paradoxical mix of personal humility and professional will. A Founders ego can often times drive the company instead of their company’s vision. However, Level 5 leaders are the latter. Level 5 leaders channel their ego needs away from themselves and into the larger goal of building a great company. It doesn’t mean that Level 5 Leaders aren’t ambitious; they’re ambitious first and foremost for the company, not themselves.
One example of a Level 5 leader is Coleman Mockler. As CEO of Gillette, he fought off two hostile takeover bids from Revlon and one from an investment group. Mockler could have financially benefited from each of those outcomes (he could have pocketed $2.3 billion dollars in short-term profit from a Revlon buyout). However, because he was ambitious for Gillette, he fought off each bid to watch his company grow and create the Sensor and Mach3. These innovations led his stock to rise to $95.68 as compared to the General Market at $14.92 in 1996.
To help you become a Level 5 leader, take a look at this Level 5 Hierarchy (and think about which applies to you):
There are several other points that Collins includes as characteristics of great companies (but not limited to):
- First Who, Then What: Get the right people in the right seats, then figure out where to go.
- “You must retain faith that you will prevail in the end, regardless of the difficulties. And at the same time, you must confront the brutal facts of your current reality, whatever they might be.” –Stockdale Paradox
- It took four years on average for the good-to-great companies to get a Hedgehog Concept.
- You absolutely do not need to be in a great industry to produce sustained great results. No matter how “bad” the industry, every good-to-great company figured out how to produce truly superior economic returns.
As we return to the examples of Apple and Tesla, would they have met Jim Collins’ list of great companies? From the dipping stocks of Apple (which fell 5% after their announcement of the new iPhones), probably not. For Tesla, the verdict is still too early.
Collins shows that great companies are built from a combination of focus and simplicity. As a leader or colleague of a great company, you must not be ambitious for yourself, but for your company.
Thanks for sharing simple but great insights