Books

Book Summary: Good to Great by Jim Collins

Item: Good to Great by Jim Collins
Rating: 5

Varun Sundar

Posted on December 5, 2020

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One Sentence Summary: Good to Great highlights the factors that enable a company to outperform the average and achieve greatness instead of settling for being good.

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Jim Collins condenses research on 11 good-to-great companies that outperformed their competitors and the general market over a long period. The companies in the book are old but the principles are still relevant and applicable. Jim Collins looks at what makes the companies great: leadership, employees, culture, the role of technology, etc. A must-read for anyone who is looking to start a business, optimize your current business or be a better executive

Good to Great Summary: Quick Look

Who is this Book for?

For a book that clearly required a lot of research by many people, Good to Great is really well condensed. The basic principles laid out in the book are easy to follow. With clear explanations and examples, backed by solid research, the content of the book never tends to feel dry.

The main goal of this book is to enumerate what can make a company great and outperform other competitors. If you are someone who is looking to start your own business or optimize a business you already have, this book can help you define a general direction for the company. It can also help you define a path for yourself as an executive of the company.

If you don’t intend to start your own business but climb up the corporate ladder, the book can help you gain an insight into how to be an effective leader who helps a company thrive.

Let’s look at a summary of all the ideas in Good to Great.

Good is the Enemy of Great

Being great often seems elusive because it is easier to settle and be just good. Jim Collins sets forth his reasoning for believing “Good is the Enemy of Great”:

“We don’t have great schools, principally because we have good schools. We don’t have great government, principally because we have good government. Few people attain great lives, in large part because it is just so easy to settle for a good life.”

Among the companies studied in the book, the ones that managed to become great had some qualities that made it stand out. These companies far outperformed the general stock market and their competitors.

Even though the book was first published in 2001, the specific companies examined are not as important as the principles driving the results in the case of good to great companies. The principles are timeless even though you might not recognize some companies mentioned in the book.

Level 5 Leadership

To become a great company, you need solid leadership for effective decision making. The book defines 5 different types of leaders characterized by what level they are at.

What defines a Level 5 Leader?

Level 5 leaders put the interests of the organization before themselves. They are incredibly ambitious people who are working towards the goal of building a truly great company. This confers with Peter Drucker’s idea of an Effective Executive who “Think and Say ‘We'” instead of “I”.

A Level 5 Leader puts the company first instead of seeking validation from outside. This is in tandem with Warren Buffett’s idea of having an inner scorecard instead of seeking validation from the outside.

Maintaining Level 5 Leadership and Greatness

It is not uncommon that a really effective leader becomes the CEO of a company and completely transforms the company to stand out thus carving his niche in the history of the company. However, as soon as the star CEO leaves the company, things go back to how they were before and the company loses its competitive edge.

A true Level 5 Leader is far from self-pompous inflation of their achievements in the news and to pump up their ego. They think about the company even in terms of its future without the current leadership in place. Because of their inherent humility, a Level 5 Leader is comfortable with and desires the next generation to perform even better than the current one. They maintain an inner scorecard to stay on track and seek to set the company up for success even after they leave.

First Who…Then What

Instead of defining a new vision and strategy to motivate employees, the Good to Great companies focused on getting the right employees on board and then on the goals.

“The good-to-great leaders understood three simple truths. First, if you begin with ‘who’, rather than ‘what’, you can more easily adapt to a changing world…The right people don’t need to be tightly managed or fired up; they will be self-motivated by the inner drive to produce the best results and to be part of creating something great…Great vision without great people is irrelevant.”

Having the right people in the company before defining a vision and strategy is much more efficient. In their research, they also noticed that the executives from the Good to Great companies were not motivated by their salaries alone. They are perfectionists, driven to build a great company.

Confront the Brutal Facts

Richard Feynman once said:

“The first principle is that you must not fool yourself and you are the easiest person to fool.”

We find it tough to accept the truth sometimes because it is painful. However, in the course of running a company or even a division within it, you would have to face truths that challenge everything you have worked towards. The “brutal facts” can range from your company losing its competitive edge, outdated principles, change in consumer behavior, or any combination of headwinds.

The Good to Great companies exhibited an ability to confront facts without any of their biases influencing them. Knowing what exactly is wrong is the first step towards fixing it.

Refine Yourself by Facing Brutal Facts

Confronting the brutal facts combined with curiosity can help you identify the root cause of the problem and devise creative solutions. Being open to face the facts can help you continuously refine yourself which eventually would lead to greatness.

“What separates people is not the presence or absence of difficulty, but how they deal with the inevitable difficulties of life”

Level 5 Leader and Emerging Stronger

It is also important to note that confronting brutal facts is tougher when you have an ego. This is why a Level 5 Leader is much more open to implementing the appropriate solutions to solve a problem when faced with painful truths. The Good to Great companies ensured that the company emerged stronger and more resilient than before from facing the facts. They maintained an unwavering faith that they will be successful even under harsh conditions.

The Hedgehog Concept

The Hedgehog Concept is one of the most fascinating ideas in the book. The book distinguishes between a hedgehog and a fox as follows:

A fox pursues solutions that are more scattered and varied. They do not stick to a single approach or solution but keep shifting their focus. On the other hand, a hedgehog manages to condense complex information into a basic principle with a focused approach.

Just like the hedgehog, the Good to Great companies were able to condense down their business to see what truly matters. Having a clear idea of what matters, they implemented ideas to pursue what matters.

This could be one simple idea, as in the case of Walgreens, “the best, most convenient drugstores, with high profit per customer visit”. In order to achieve greatness, Walgreens worked towards staying true to that description and maximizing profit per customer. The other comparison companies were haphazard in their approach without a clear concept that would facilitate growth.

The Three Circles

The Good to Great companies condensed down their Hedgehog Concept by using the model of the Three Circles.

What you can be the best in the world at: You can be good/competent at many things but there are few things you can be the best at. The Good to Great companies recognized what they would be the best at. Additionally, they also used inversion to recognize what they cannot be the best at. This gave the companies an idea of what can make them great.
What drives your economic engine: The Good to Great companies recognized how they can generate sustained and robust cash flow and profitability most effectively.
What you are deeply passionate about: The Good to Great companies did not cling on to something just because they have been doing it for a long time. They recognized what activity truly ignited their passion and pursued that route. The companies did not try to ask other executives to get passionate about something but sought activities that made them passionate.

A Culture of Discipline

In order to keep the people in the company motivated and not have bureaucracy erode passions, the Good to Great companies used the following Matrix of Creative Discipline. Unwanted bureaucracy and rules would only drive the right people away.

Instead of hammering in the “culture” of the company, the Good to Great companies worked to build a culture full of people who are consistent with the circles in the Hedgehog Concept and take appropriate action.

The companies created systems with constraints but gave the executives the freedom to work within the framework of the system. Because the executives were self-disciplined and working as per the Hedgehog Concept, they were motivated to become great.

Technology Accelerators

New technology dominates headlines and creates an almost fanatical adherence in the public. The great companies did not blindly jump on the bandwagon when they saw other competitors using new technology. Neither did their transition from becoming good to great start with a piece of technology.

Even in the midst of seeing other companies and competitors using new technology, the great companies reviewed the new technology with their Hedgehog Concept in mind. If the new technology was relevant to and consistent with their Hedgehog concept, the company started employing the new technology.

“When used right, technology becomes an accelerator of momentum, not a creator of it. The good-to-great companies never began their transitions with pioneering technology, for the simple reason that you cannot make good use of technology until you know which technologies are relevant.”

The Flywheel and The Doom Loop

It is not uncommon to see a company being glorified in the news. Sometimes we fail to realize that the company’s executives have been working hard for decades until we read something about them in a news article.

Going from good to great is a long term process. The work needed to transition from good to great is slow in the beginning. Eventually, good decisions, adherence to the hedgehog concept leads to a great company. Becoming a great company is not tied to a single event. In the book, the comparison companies faced similar pressures and constraints. However, the great companies had the patience and discipline to follow through to go from good to great.

The Flywheel Effect

“The good-to-great companies understood a simple truth: Tremendous power exists in the fact of continued improvement and the delivery of results.”

The Good to Great companies realized the power of harnessing accumulated momentum. Each component of the flywheel shown above fueled the next component. Due to consistent efforts, the flywheel kept building momentum which helped the companies achieve greatness.

The Doom Loop

The comparison companies lacked a clear sense of direction. Without a clear focus, it became impossible to build momentum which disappointed other components of the wheel. In this case, the components did not fuel each other. Rather each component caused a decline in results which only pushed the company away from achieving greatness.

Final Thoughts

The principles from Good to Great can help you define a direction for yourself and your company. The timeless principles along with the examples in the book can provide a great insight into how to think about building a company.