Book Review: Good to Great by Jim Collins
‘Good to Great’ is the a book written by a business professor from Stanford named, Jim Collins. It is a book I have heard a lot about and one that has been on my reading list for a long time.
The book asks why is it that some companies achieve greatness, while others never go beyond good? Do those who achieve greatness follow certain tactics, or is it merely a matter of luck?
Success comes easy when your expanded industry is flourishing. In a market carrying upward trajectory, it becomes easy for an investor to earn money.
By putting companies under similar circumstances, Collins makes an effort to remove industries from the equation. These circumstances include similar industry, profit, area and products. Despite this, one company touches the peaks of success, while the other falls.
In his book, Jim Collins says, ‘consider the difference between two pharmaceuticals: Abbott and Upjohn. He goes on to say, ‘in 1964, both companies had a similar line of products and gained the same profit. Both Abbott and Upjohn played a major part in the pharmaceutical business, focused mainly on antibiotics. They were also family managed. But most importantly, both companies got lost among all the other companies in the industry.
However, a few years later in 1974 was when Abbott had a life-changing moment in terms of their performance. It produced a total market return of four times, than the amount Upjohn could generate for the next fifteen years. This raises the question, what triggered this sudden inequality between the two companies?
Before getting to the answer, the book provides another example.
‘Walgreens’ and ‘Eckerd’ are two drugstores with a strange story. “Forty years was the time for how long Walgreens trudged and survived as an average company in the market. Until in 1975, when, almost with a big bang; Walgreens started climbing up the ladder of success.”
This led to the unprecedented success of Walgreens between the years 1976-2000. It beats the stock market successfully over fifteen times. On the other hand, the other drugstore, Eckerd, which had been on the same level as Walgreens continued to falter and eventually disappeared.
Why did this situation take place?
In the book, Collins has identified eight traits that are common to all ‘good to great’ companies. Among the traits, the primary trait is the embracement of the Stockdale Paradox by leaders.
During the Vietnam War, a high-ranking officer, by the name of ‘Admiral Jim Stockdale’ was imprisoned. He faced an imprisonment that lasted eight years and became the subject of torture more than twenty times. During this entire period, he possessed no hope of seeing his family ever again.
Despite the torture, Admiral Stockdale continued to lead other prisoners of war in a resistance against those who had captured them and made attempts to damage their high spirits. Admiral Stockdale’s attitude led to the formation of what we call today, the ‘Stockdale-Paradox’. This paradox follows the school of thought that one must always face the ugly truth of his or her situation while also having a firm belief in coming out strong when everything is over.
Those companies that followed the Stockdale Paradox are the ones who journeyed from being good to great.
In the example of Abbott and Merck, Abbott hung about its rewards and honors from the 1940’s to the 1950’s. Merck, on the other hand went on to build a laboratory for research purposes, which had the strength to compete with Harvard.
When 1964 came along, Abbott felt the need to ‘come face-to-face with the ugly truth.’ This truth was simple; Abbott had lost a once-in-a-lifetime chance to become a renowned pharmaceutical. Merck had gone up so far that trying to build competition with it would be impossible.
Despite this unfavorable situation, Abbott’s leadership had faith. It followed the Stockdale Paradox and firmly believed that failure would not be the result of what they were about to pursue.
Abbott then took a risky step. They quit the pharmaceuticals, which constituted a large part of what their business was about. Instead, Abbott focused on a new niche and aimed to dominate the healthcare market. Abbott’s focus shifted to the manufacture products such as devices and nutritional products, which would lower the cost of health care.
“While Abbott used the Stockdale Paradox and succeeded, Upjohn never bothered to face the reality. It held false-faith that it had the capability to compete with Merck,” Collins mentions in the book. To sum it up; Upjohn believed that it would exist without confronting the ugly truth. While Abbott followed the Stockdale Paradox and achieved greatness. As a result, Upjohn faltered and fell.
The Hedgehog Concept
One of the simplest animals is a Hedgehog. Known to trudge along and live a dull life.
In contrast, a Fox is a clever animal. It is cunning and often pokes its nose where it does not belong.
Collins writes in his book that all great companies behave as hedgehogs do. They identify what they do best. They make sure to never stray from it.
For a leadership to activate their ‘inner-hedgehog’, they must ask themselves three crucial questions:
1. What is it that I am best at?
2. What generates revenue?
3. What lights up my passion?
Asking these questions brings the leadership to a common ground that they stick to forever. This strategy is simple yet effective. In fact, its level of simplicity seems almost amusing.
Yet, treating this strategy as overly simplified is not what brings companies to grasp greatness. Companies become great because they successfully identify what they are best at and then they use this information for a clean execution.
Taking Walgreens as an example, we can see how it achieved greatness. It trudged along and barely survived as an ordinary business. That was before the management decided otherwise. Walgreens would not be a low-cost drug store. However, it would be a convenient one.
To bring this decision to life, the management evaluated Walgreens success by a simple metric system: the amount of ‘profit’ gained per customer visit.
A number of retail businesses use the ‘profit-per-store’ metric. If Walgreens used a similar approach, it would have to set up stores in locations that were cheaper. An easy way to boost this system of metric is to lower the store renting or purchasing cost.
However, for Walgreens to become a convenient drugstore, they would need to choose locations carefully. Locations such as busy intersections and city centers would be good locations to set up stores in. This would bring an increase in the per store cost, which would ultimately lower ‘profit per store’. However, ‘profit-per-customer’ would increase. Notice the difference between the metrics?
In simple words, by asking three simple questions Walgreens was able to achieve greatness. It figured out the niche they could rule which would ultimately bring money and a niche that ignited the fire of passion in their team. After this realization, Walgreens discarded other metrics and directed their attention towards one thing. This ultimately helped them reach the hedgehog approach.
The Bottom Line
It is clear to see from this detailed synopsis that this book, in my opinion is a fantastic read. Jim Collins provides not only good research, but also has the capability to keep readers engaged. But more importantly, he has perfectly explained lessons of greatness through interesting and captivating case studies.
If you are someone who wishes to learn about the ways through which companies achieve success, then this is the book for you.