Good to Great book Review Good to Great Why Some Companies Make the Leap and Others Dont

Good to Great Why Some Companies Make the Leap and Others Dont

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 2/3
rd
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