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March 01, 2004 at 02:00 AM
Jim Collins has great ideas about how you build a great business. Collins is not interested in telling you how to build a good company. In the very first line of his book, Good To Great (HarperCollins, 2001) he says, “Good is the enemy of great,” adding, “And that is one of the key reasons we have so little that becomes great.”
Collins’s book, which has sold more than one million copies in hardcover, examines how 10 big publicly-held companies made the transition from good to great. Collins explains this by comparing the paths of these 10 great companies to their competitors–companies that he calls their “genetic twins.” He examines why $1 invested in Wells Fargo, for instance, in January 1973 grew to be worth $74.47 on January 1, 1998, while $1 invested in Bank of America over the same period grew to only $15.60.
A former professor at Stanford University’s Graduate School of Business, Collins and his team of grad-student researchers studied Abbot versus Upjohn, Circuit City versus Silo, Fannie Mae versus Great Western, Kimberly-Clark versus Scott Paper, Kroger versus A&P, Nucor versus Bethlehem Steel, Philip Morris versus R.J. Reynolds, Pitney Bowes versus Addressograph, Walgreens versus Eckerd, as well as Wells Fargo versus Bank of America. He traces the stories of these matched pairs and examines the common factors that differentiated the 10 great companies from their peers that did not achieve greatness. Collins now runs his own Boulder, Colorado consulting firm.
What are the differences between good and great companies? We’ve done 15 years of research on that question. You need four things to qualify as a great company. Number one, you have to have great performance relative to other investments. An investment in a great company must have outperformed the general market by at least 300% over 15 years. Number two, you must have made a unique, indelible imprint on the world you touch–an impact no one else could make as well or as distinctively. Number three, in the world that you touch, you must be regarded for your creative contribution or the way you carried yourself. And, finally, Number four, you must have longevity. You have to have done all of the above for at least 15 years. So the outputs of a great company are performance, impact, reputation, and longevity. But all this is not what it takes to become great. It’s just the definition of great.
Your research focuses on what makes a big company great. Do your ideas work for the small businesses our readers work in? The definition of a great company or a great organization applies to any size and any type. There is a building in my town of Boulder, Colorado, that achieves all of the outputs of a great company. It has spectacular performance, an impact unlike any other building in town, a reputation as the nicest space in which to do creative work, and it is 100 years old. A single operator owns this one building, but he’s got a great business.
The criteria can apply to big, small, or massive companies. In fact, I think it is easier to be great when you are small. Go back to the definition of great, which is great performance, a unique impact on the world that you touch, an excellent reputation, and longevity. When you are smaller, you are able to focus on those things. You don’t dilute them. You can have high performance as a small organization because you don’t have as much junk that you carry by being big. Your impact can be totally unique.
Moreover, it is easier to maintain your reputation in the world that you touch because you have fewer people. By having fewer people, you run fewer risks of those people diluting your reputation. Finally, with regard to longevity, as a company becomes big, it becomes harder to hang on to these variables. As a small company, you can really hone them with a lot of attention. In my own business, I deliberately am small. We will not grow beyond a certain size because I think that becoming larger would get in the way of doing great work.
One of the big ideas I took from your research about great companies is how important people are. Can you cover this? What being great is about is that however many seats you have on your bus, every single seat has to be filled with somebody that you have 100% confidence in, confidence that they are the right person to be on your bus. You must be sure that you can totally trust each person on your bus, and that they are driven to always do the best work that they can. You must know that each of them will take on extra responsibility because that is the kind of people they are. They understand that they don’t have a job. They have big responsibilities rather than a job. And every seat–I don’t care whether it is an assistant or a partner or whether it is a technical person, if you are a small bus–must be filled with somebody you consider to be an outstanding person who you feel incredibly lucky to have. If you feel blessed by each person you have on the bus, then you are doing well.
Let’s get into your research. We examine companies that have proven themselves to be great. We vigorously compare them to companies that during the same period could have become great but did not. We systematically ask what was different. That’s the key to our work, the matched pair method.
That method is a common-sense approach but it’s a different way of looking at a business. Explain it. It’s like a genetic twin study. We take two operations that had virtually the same size, opportunities, resources, and so forth, and we systematically contrast them. We derive from that the differences that explain why some companies make that leap to a higher level versus those that do not. In fact, the single most important contribution from our work is not our findings, it’s our research method. It can be used in any systematic analysis for determining what makes a company, person, or product great versus one that is not.
Say you wanted to study Microsoft, for example. You would go back to the 1984-1985 time frame and find another company that also had a personal computer operating system that was a viable potential standard, and that could have become Microsoft but did not. So you’d find its genetic twin–a company with the same technology and opportunities. You then have two companies coming from the same point in history, that were the same size, and that had the same resources. Yet only one became Microsoft. The question, given that they were twins and ended up very differently, is what was the difference?
What are the common traits of the great companies? What’s critical is not what they shared in common, but what they shared in common that was different from the comparison companies. If you studied great companies, you will find that they all had buildings, but that is not very relevant because the comparison companies all had buildings, too. So we were not looking for commonalities alone. We were looking for systematic differences. In terms of the systematic differences and distinct commonalities, there are ten fundamental principles that separate great from good.
At the risk of sounding like David Letterman, please list the top 10 reasons a company becomes great. Number one, those who build greatness build it in a cumulative fashion. It’s like turning a heavy fly wheel, or like compounding interest. You don’t do it in one step. It’s a cumulative effect of one turn after another, building momentum. That creates greatness over time. Number two, the very first thing you do in building a great company is that you do not think about where to drive your ‘bus.’ You don’t focus on your direction or your strategy. The first thing to focus on is who should be on the bus, who should be off, and who should be in which seat. Then, you figure out where to drive. I call this principle, “First, who; then, what.” You first think about who should be on the bus, then you think about where to drive.
Now that is counterintuitive. Initially, it does seem to cut across the grain. Most people would say you must first figure out where to drive your bus and then figure out how to get people there. But we found that that is what the average companies do.
So the first thing that great companies do is find great people. Get the right people on the right bus and the right people in the right seat. Then, you start worrying about where to drive it.
Okay, please go on with Number three. Principle three is that leadership is really not a variable. What matters is what we call Level 5 leadership, rather than Level 4 leadership. Level 5 leaders are humbler than Level 4 leaders, but combine that humility with a ferocious will to do whatever it takes to make the company great. They will fire their brother or mother if they have to–if that is what’s best for the company.
But they also are humble. The company is not about them, and they don’t talk a lot of their accomplishments. They are not people who are really trying to prove to you that they are a great person. They are just trying to build a great company.
Give me an example. Two stand out. One is Darwin Smith of Kimberly-Clark, who is clearly one of the top 10 CEOs of all time. Almost nobody has heard of Darwin Smith, but he turned Kimberly-Clark from a mediocre paper-products company into a truly great corporation in consumer goods, and he did it without ever drawing attention to himself. It was never about him; it was really about the company. He had the ferocious will to sell all the paper mills, and throw all of the company’s resources into the consumer business, which was a very gutsy move that most CEOs lack the courage to do. At the end of his career, he said he was just trying to become qualified for the job and that is how he summed up his tenure. Not only did he qualify, he ended up as one of the great CEOs of all times.
Who was the other one? Katherine Graham of the Washington Post Company. She took The Washington Post from an average regional paper to a great world newspaper. Yet she never really took much credit for it herself, even though she was the real leader. Without her, Woodward and Bernstein probably could not have done the Watergate story. The paper probably would have not published the Pentagon Papers. She was a woman made of absolute iron and ferocious will and she willed the Post into a really great journalistic enterprise. But she did it in a way that never drew attention to herself. It was really always about the journalistic enterprise and the great reporters.
