Monday Review: Great by Choice 7

This is the final post reading through Jim Collins and Morten Hansen's book, Great by Choice.

1. The final chapter has to do with luck. Did the 10X companies have better luck than the comparisons, or did the comparisons have worse luck? Did the 10X companies have good luck earlier than the comparisons? Or was there a single, giant piece of good luck that made the difference?

Collins and Hansen say no. They say the difference is what 10X companies did during their luck that made the difference. By Collins' analysis, all the companies had pretty much the same overall amount of bad and good luck. They defined good luck as involving 1) some significant event independent of the people involved, 2) an event with potentially significant good or bad consequence, and 3) an event with some unpredictability to it.

2. There were a couple interesting examples of taking advantage of good luck, and of not taking advantage. AMD had some really good luck when Intel was vulnerable, but it wasn't able to deliver. Meanwhile, Intel's "fanatic discipline" saw them through that crisis. AMD failed.

Collins seemed reluctantly to acknowledge that it often comes down to people. If Amgen had not happened to snag Fu-Kuen Lin (who just happened to catch an ad in the paper), it probably wouldn't have developed the drug that made it boom. Without Bill Gates, Microsoft wouldn't have happened. Amid all the luck, good and bad, they finally seem to admit something I don't think they wanted to--the brilliance of specific people has often been the ultimate key.

Yes, yes, they were people with fanatical discipline. Yes, they were people who were empirically creative. Yes, they had productive paranoia. That's what Collins and Hansen have fronted in this book. But all those important elements still wouldn't have made a difference without some very key extraordinary people.

3. Bad luck, even really bad luck wasn't the end of many of these extraordinary characters. In fact, really bad luck sometimes was the driver that propelled them forward.

Here endeth the book review.

Monday Review: Great by Choice 6

This is the sixth post reading through Jim Collins and Morten Hansen's book, Great by Choice.

1. This chapter is called "SMaC," which stands for "Specific, Methodical, and Consistent." The authors are suggesting that companies that performed extraordinarily well over the long haul despite crises that tanked other companies had smac recipies from which they deviated little over the course of thirty years.

Throughout the chapter, specific examples are given. Southwest almost entirely stuck to its formula of only 737s, stick to less than two hour flights, stay out of food services, etc over the long haul of some thirty years. Progressive stuck to high risk drivers, pricing for individual customers, keeping experiments to less than 5% of total revenues. Intel stuck to doubling the capacity of its integrated circuits every two years, being unbendingly reliable in delivery, avoiding markets with entrenched competitors, not skimping on R & D. Even David Breashear, Mt. Everest photographer, had a formula to which he fanatically stuck.

The point I think is that there was less overall change from the core winning formula among 10X companies than there was among parallel companies that could have succeeded similarly but failed instead. Over thirty years, the 10X companies only had 10-20% change of their basic formula. The competing companies varied from 55-70%.

"The signature of mediocrity is not an unwillingness to change; the signature of mediocrity is chronic inconsistency"  (138).

2. That is not to say that they did not change. Indeed, several of them changed in key ways and would have failed if they had not. One wonders if this chapter could have also been written from that perspective. Microsoft "zoomed out and back in" and realized that it needed to get on the internet train in the mid-90s. Intel realized that its core business in memory was going nowhere and changed fairly significantly to microprocessors, which had only been a minor element in their portfolio up to that time.

So how does a lasting company make the changes that are needed? Here's where the previous chapters come into play. They have productive paranoia that smells a looming crisis and zooms out and then back in to refocus. They have empirical creativity that makes changes on the basis of empirical evidence.

The chapter ends by using the US Constitution as a good example of a company that has gone the distance. It set up a good core formula, but made room for amendments. But the process of making amendments is arduous and, aside from the original ten in the Bill of Rights, we have only made 17 changes in 225 years.

Monday Review: Great by Choice 5

This is the fifth post reading through Jim Collins and Morten Hansen's book, Great by Choice.

1. This chapter is called "Leading Above the Death Line." It deals with the third of Collins' three distinctives of companies that weather difficult times. The first two were 1) fanatical discipline and 2) empirical creativity. The third characteristic is "productive paranoia."

2. He starts with the story of David Breashears climbing Mt. Everest in 1996 trying to shoot a panoramic view from the top for an IMAX movie in the works. Coming up behind him were two experienced guides, Rob Hall and Scott Fischer. Given the circumstances, Breashears decided to go back down, let the groups coming up pass and any erratic weather, and then try again. He had brought enough extra oxygen to wait a little.

A day later, Hall and Fischer and their groups were dead, and Breashears had enough extra oxygen both to find them and still go to the top himself.

3. Collins breaks down productive paranoia into three aspects: 1) having reserves for a crisis, 2) carefully managing 3 different kinds of risk, and 3) being able to zoom out and then zoom back in when a crisis seems looming.

So 10X companies carried 3 to 10 times the ratio of cash to assets. Intel, for example, had a free cash flow that was 40 percent of its monthly revenue as opposed to the more average 25% of AMD). "It's what they do before the storm comes that matters most" (105). Southwest had a billion dollars in cash on hand when 9-11 hit. They were the only airline that posted a profit not only in 2012, but in the last quarter of 2011.

Breashears had the extra oxygen canisters to postpone his push to the top of Mt. Everest.

4. There are a number of types of risk that productively paranoid companies watch. The first is the Death Line Risk. These are the type of events that could kill or severely damage an enterprise.

A second kind of risk is an asymmetric risk, one where to fail would produce a much greater negative than the positive of success (think Pascal's Wager). Finally, uncontrollable risks are ones that a company would have little ability to manage or control.

10X companies made far fewer decisions in these risky areas than the comparison companies (22% as opposed to 43%).

They added another kind of risk near the end of their study--time-based risks, risks relating to the speed of decision and action. The study found that recognizing a threat early and then taking the time to make a rigorous and deliberate decision yielded better outcomes than quick decisions.

(Their example, though, involved a decision in a couple weeks, so we're not really talking about a whole lot of time. Basically, they didn't just make a decision the day they recognized the looming crisis.)

5. Being able to zoom out and then zoom back in relates to stopping to brainstorm when leadership gets paranoid about a crisis that could happen. So the threat of Motorola led Intel to spend a week zooming out to formulate a strategy before then zooming back in to go full tilt.

Let me say again, they are not counseling inaction. Dare I say that in my circles (education), there's not a lot of leaping at all. The advice to slow down is not what is needed in this case. It is to get paranoid.

Monday Review: Great by Choice 4

This is the fourth post reading through Jim Collins and Morten Hansen's book, Great by Choice.

1. So the previous chapter presented Collins and Hansen's conclusion that companies that thrived in difficult times had "fanatic discipline." Mostly what they mean is that these 10X companies set difficult but attainable goals that they stuck to in good times and bad.

This fourth chapter is called, "Fire Bullets, Then Cannonballs." The idea is that the most successful companies did low-cost, low-risk innovations first and only then fired "calibrated cannonballs" in the directions of what worked.

2. So the first section points out that it was not the most innovative companies that had the phenomenal growth. Usually it was a company that came just a little behind the initial innovators. They were innovative, to be sure. Unless they met some minimum innovation threshhold for their market, they didn't go anywhere. But beyond that threshhold, being more innovative didn't make much of a difference.

3. The next section gives examples of the bullets then cannonballs idea. Amgen tried its recombinant DNA innovation on about a dozen possible uses (bullets) before it shot a cannonball at an applicant relating to anemia. A bullet is a) low cost, b) low risk, and c) low distraction.

Then they give examples of groups that shot cannonballs first, risky cannonballs that ended up sinking the companies. PSA was the model for Southwest, but it shot risky cannonball after cannonball and ended up sinking.

4. So even the 10Xers didn't get it all right all the time. Progressive made a rather big gamble, a uncalibrated cannonball that failed. So from then on they shot bullets first. From then on they used "empirical validation," test bullets, before firing any more cannonballs. From now on they were calibrated cannonballs.

Bill Gates was not able to predict whether IBMs new OS/2 would take over the market. At Microsoft, he kept some of his people still working on Windows. Surprisingly, Windows won out. If Bill Gates didn't succeed by predictive genius, then what hope do the rest of us have.

The chapter ends with Steve Jobs coming back to Apple. He has the idea of setting up local stores. But they don't make a huge investment. They make some bullet trials. They recalibrate. They fire again. He goes back to the old MacIntosh and improves it. The iPod starts as a branch of their computer business. It expands inch by inch.

Thus, "empirical creativity" is Collins second key, after fanatic discipline. It is innovation implemented in dialog with evidence gathered.

Monday Review: Great by Choice 3

This is now my third post reading through Jim Collins and Morten Hansen's book, Great by Choice.

1. This chapter expands on the first of three characteristics that Collins and Hansen think typify the kind of organization that makes striking long term gains despite an often chaotic environment. They titled this characteristic, "fanatic discipline."

They titled this chapter, "20 Mile March," and they did so before they realized that Admunsen, their south pole hero, had a goal of 15-20 miles a day, no matter what the weather or circumstances. Was it a horrible day? He strove to go at least 15 miles. Was it a wonderful day? He didn't try to do more. Rather, his plan was steady progress every day as a discipline.

2. They identified seven characteristics of these "20 Mile March" companies:

• Clear performance goals
• Self-imposed limits
• Limits appropriate to their market
• Within the company's power to acheive
• Just the right time frame to achieve
• Contraints not copied from somewhere else
• Achieved with high consistency

There main examples were Stryker, Southwest, Progressive, and Intel. Stryker's performance goal was 20% net profit increase a year. What was more striking about Southwest was its refusal to expand too quickly, even when airports were clamoring for them to expand. Progressive aimed to stay in a 4% profit over payout sweet spot. Intel wanted to double the capacity of its integrated circuits every two years.

The bottom line is that these companies set a yearly goal that was stretching, but attainable. They forced themselves to do it in hard times but they did not go for the gold in the good times. This last part is probably what stands out the most from the chapter. Many of these companies could have expanded more quickly in certain years but they stuck to the plan, just as Admunsen did for the south pole. Then when hard times hit, they did not find themselves overextended.

3. Collins and Hansen suggested three reasons why the "20 miles a day in good times and bad" works:

• It builds confidence and a "can do" attitude. You've done it every year. You can do it again.
• It reduces the likelihood of catastrophe if there is a sudden up-turn.
• It allows you to be in control of the future when everything around you is out of control.

4. This section worries me a little. My take-away is that an organization needs to be careful about becoming overextended or about losing focus on what its core business is. The question needs to be asked, "What would we do if something catastrophic happened in our environment?"

Monday Review: Great by Choice 2

Last week I started reviewing Jim Collins and Morten Hansen's new book, Great by Choice. Today is chapter 2: "10Xers."

1. The title of the chapter has to do with the companies that form the focus of this book's study, namely, companies that performed at least 10 times better than its industry index over the period from 1972-2002.

The study concluded that there were three key characteristics of the leadership of the companies in this category: 1) fanatic discipline, 2) empirical creativity, and 3) productive paranoia. I like the last two titles, not as happy with the first.

2. So they begin by contrasting Roald Amundsen and Robert Falcon Scott, who in 1911 raced to be the first to get to the south pole. Amundsen made it there and back in good time. Scott got bogged down and ended up freezing to death.

Collins and Hansen use Amundsen as an example of the kind of leader who is more likely to lead an organization through chaotic times. Amundsen prepared fanatically for the trip to the south pole. He experimented with various options to find the ones that seemed most likely to work. He expected everything to go wrong and had multiple failsafes. They basically summarize his philosophy as, "Don't wait until you're in a crisis to prepare for it."

By contrast, Scott had done little experimentation in preparation. He chose the wrong animals and the wrong equipment. He had barely enough provisions to make it if everything went right. He depended on being able to hit his return path without error. He made it to the pole, but died before he made it back to his starting camp.

3. So the first characteristic they identified of the companies that super-produced in tough times is "fanatic discipline." Frankly, I'm not sure that they found the right term because they seem to ball up several things in this category. For example, they include "consistency of action" here--clearsightedness in terms of goals. But surely the leaders of the other companies were tenacious in some way too.

I liked this line: These leaders were "utterly relentless, monomaniacal even, unbending in their focus on their quests. They don't overreact to events, succumb to the herd, or leap for alluring--but irrelevant--opportunities" (21). They were "non-conformists in the best sense" (23). They were "fanatics" (22).

It sounds like this category should have been titled, "disciplined fanatics" rather than "fanatical discipline." But I've detected in Collins a tendency to push against charisma. He's a data guy by personality, which suggests there could be some bias against the charismatic in his books.

So let's go ahead and put a hypothesis out there, namely, that what he is talking about here is an intense, focused, and idiosyncratic passion that often bordered on the weird. These guys didn't give a rip what other people thought about them.

4. The second characteristic of the leaders of these companies was a certain "empirical creativity." What they mean here is that these leaders were creative, but based on data. "At times of uncertainty, most people look to other people... They look primarily for empirical evidence" (28).

A key point Collins and Hansen make here is that they didn't "favor analysis over action." There is a certain kind of data person that just likes endlessly collecting data and never acts. That's not what they're saying here. These companies sometimes took big risks, but they were risks based on evidence.

5. Finally, these leaders had something called "productive paranoia." They were always expecting the bottom to fall out. Bill Gates was "Doctor Doom" at Microsoft, once prompting an 11% drop because of a memo he sent worried that the sky was going to fall at any minute. One of the company presidents had a portrait of General Custer on his wall. The leader of Southwest predicted 11 of the last 3 recessions. :-)

"By embracing the myriad of possible dangers, they put themselves in a superior position to overcome danger" (28). I particularly identified with this one. It's part of why I was willing to step back into a leadership role at IWU this year. I see the educational sky cracking all around us, and I fear my part of the university is doing squat.

6. Collins then connects these specific characteristics with what he called "Level 5 Ambition" from his Good to Great book. In that book, Level 5 Ambition was a combination of humility and professional will. Since many of the leaders of this book were flamboyant (seeming to contradict their earlier findings--again, one suspects there is some bias against charisma lurking here), they describe humility as a tendency to work for the greater good.

Now maybe that's what they should have said in Good to Great! These leaders weren't out for themselves but for the greater good of the company. Now that will preach. These "paranoid, neurotic freaks" (PNFs) were "passionately driven for a cause beyond themselves" (33).

The next few chapters begin to play out these concepts in greater detail.

Monday Review: Great by Choice

For the next few Mondays, I'm going to do reviews of Jim Collins and Morten Hansen's book, Great by Choice. Now that I'm done with my theology Sunday series, I'm moving my schedule around a little. Normally, I would do the electronics series on Mondays, but I'm moving that to Saturdays.

Collins is of course known for a series of books on successful businesses: Built to Last, Good to Great, and How the Mighty Fall. This latest asks why some companies do better than others in chaotic times. The first chapter is titled, "Thriving in Uncertainty."

So why did Southwest thrive under the same circumstances in which Pacific Southwest Airlines failed with "a similar business model in the same industry with the same opportunity" (3)? Southwest gave the greatest 30 year investment on stock from 1972-2002. It was 63 times better than the stock market in general.

In this book, Collins and Hansen are going to look at ten companies in this book that fit the following criteria: 1) truly spectacular results for 15+ years in comparison to the stock market in general, 2) it happened in a turbulent, uncontrollable, fast-moving, uncertain, and potential harmful environment, and 3) the starting point was vulnerable.

The ten he picked were Amgen, Biomet, Intel, Microsoft, Progressive, Southwest, and Stryker. He's contrasting these with comparable companies that had similar circumstances but quite different results: Genentech, Kirschner, AMD, Apple (which floundered during this period), Safeco, Pacific Southwest Airlines, and the US Surgical Corporation.

Here is a small taste of what they found:

• Successful leaders in a turbulent world are not necessarily risk-taking visionaries. "They observed what worked, figured out why it worked, and built upon proven foundations" (9). They were "more disciplined, more empirical, and more paranoid." 
• Successful companies were not necessarily more innovative than those that were unsuccessful. They were able to scale innovation.
• Speed did not necessarily mean success. These companies knew when to move fast and when not to.
• They did not simply change just because the broader context was changing.
• They did not necessarily have more good luck.

He ends chapter one with a Peter Drucker quote: "The best--perhaps even the only--way to predict the future is to create it" (12).