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November 15, 2011

News & Opinion: Great By Choice

By: 800-CEO-READ @ 3:00 PM – Filed under: Management & Workplace Culture

Chaos and uncertainty are all around us. The economy is struggling, some have been out of work for years, and entrepreneurs are having a more and more difficult time creating success. Yet despite those things, there are organizations that are extremely successful. Looking at them on the surface, surmising their marketing techniques, management practice, and general strategy does not reveal enough to truly understand the 'hows' and 'whys' of their success.

Fortunately, Jim Collins and Morten Hansen have spent close to a decade digging deep into what makes these companies tick, and how other managers and leaders can apply those truths to their own organizations. Their research is revealed in their new book, Great By Choice: Uncertainty, Chaos, and Luck - Why Some Thrive Despite Them All.

The principles, insights and lessons are presented through a variety of captivating case studies and comparison stories, from deadly vs. successful mountain climbing expeditions to post-9/11 Southwest Airlines. Throughout the writing, numbers, charts, and other data offer clear evidence and support for their interpretations and ideas. Survival is a strong theme throughout the book, and some of the details about the practices of the survivors, or the 20 mile marchers, will surprise you.

Where will your company be in 5 years? 10 years? Will it 'be' at all? These might be hard questions to ask, but can be more easily answered by understanding the principles in this book. Before reading the book myself, I had many thoughts about chance and luck, being prepared, longevity, and how to create or maintain any kind of strategy when planning seems to be less and less possible. After reading the book, these ideas came into clearer focus, and I had the opportunity to pursue some of them further through a series of emails to the authors. Here is our correspondence:

Luck is an ambiguous term, yet an important focus in the book. How can a company recognize it, and what can it do to manage it?

Morten Hansen: In our book, we defined luck as EVENTS happening to your business; they are events outside of your control, unpredictable and can hurt you. There are good and bad luck events. Defined this way, you need to be good at three things.  First, be prepared for bad luck events, because they will come, you just don't know when and in what shape. That means not loading up on debt, for example. Second, be able to spot good luck events when they happen, and not to be so stuck in daily activities that you don't see them.  Third, once you see a good luck event, have the ability to execute brilliantly in the moment and to not squander it. Think of life as a river where good and bad luck events flow your way; you need to prepare for them, spot them, and take advantage of them. We call it getting a high return on luck.

Jim Collins: There are smart decisions and wise decisions.  One form of wisdom is to know when to let luck disrupt your plans (and when not to).  Getting a high ROL (return on luck) requires a new mental muscle, beginning first with a heightened awareness to recognize when a luck event happens.  Use the three tests we lay out in the book:

1)    Did the event happen largely or entirely independent of your own actions?

2)    Does it have a potentially significant consequence (good or bad)?

3)    Did some aspect of the event happen unexpectedly?

If yes, then ask: what—if anything—should we do to get a high return on this luck event?  This applies equally to good luck events and bad luck events.

One very important point about luck: it is asymmetric as a potential cause of success or failure.  Good luck cannot cause a great company, but huge strikes of bad luck can terminate a company.  That’s why productive paranoia that we write about in the book is so important: always preparing to endure a sequence of bad luck events that will someday hit, being able to absorb them and stay in game long enough to turn the tide in your favor.

What is a "10Xer" and by what criteria do you define them?

Morten Hansen: The leaders in our study led companies that didn't just do well; these companies won by a lot, their shareholder returns were at least 10 times the industry index during our observation period. That's why we call them 10Xers--these leaders generated 10 times the return of their peers. Pretty amazing.

We found that the 10Xers had certain leadership qualities that set them apart. They were NOT more visionary, NOT more charismatic, NOT more risk taking. No, they had fanatic discipline--an extreme commitment to make good on their plans, goals, and principles, no matter the circumstance.   They also had empirical creativity--having good ideas that were rooted in data, observations, trials, and not just analysis. Lots of people have good ideas, but not many root their ideas in empiricism. And finally, they had productive paranoia--being hyper-vigilant about the environment around them, spotting threats, and taking action to combat that threat.

Fanatic discipline keeps you on track in a tumultuous world; empirical creativity keeps you vibrant; and productive paranoia keeps you alive. That's a good cocktail for today's disruptive world.

Jim Collins: There are so many interesting aspects of these people, but let me highlight three (in addition to Morten’s observations above).  First, 10Xers fully accept, without complaint, that most things are outside of their control, yet they utterly reject the idea that forces outside their control will determine whether or not they achieve their objectives and build a great company.  Second, they are too disciplined to be conformists; they are non-conformists in the best sense—following their own values, principles, standards, empirical creativity, and staying on their 20 Mile March—even if other people might find them somewhat unusual or even strange.  Third—and this is a very important point—the 10Xer behaviors are largely learnable.  That’s why we call them behaviors, rather than traits.


In the book's discussion of success, it's clear that money is not the only goal. How can companies better adapt that philosophy in practice when the bottom line is such a concern?


Morten Hansen: From this research, and based on Jim's prior research in Good to Great and Built to Last, it is clear that creating great performance requires a long-term view. You can't do it by being fixated on the quarter. It takes years of constant marching, and amazing results may follow in the long run. All the companies we studied were public companies, so they too faced the short-term demands of a restless Wall Street. One good place to start: get investors and board members who take a long-term view.

Having said that, we discovered something fascinating. Our 10Xers often out-performed their peers even in the short- to- medium term. Why? They pursued what we call a "20 Mile March:" that's the principle of picking a progress marker (e.g., an annual income growth target) and fanatically meeting that target every year, year in and year out, no matter what. 20 Mile Marching produces results in the short- and long- run.

Jim Collins: We titled the book Great by Choice for a reason: because greatness is a first and foremost a function of the disciplined choices we make—of what we choose to do, and how well we do it—not what the world imposes upon us.  Every 10X leader chose to build for the long term, and figured out how to do it, despite the enormous short-term pressures.   Keep in mind, the 10X and comparison cases faced largely the same short-term pressures, but the 10X leaders made different choices in the face of those very same pressures.


The book talks at length about preparedness. Companies prepared to weather unexpected changes are the survivors. The magic question is how can a company know when it is prepared enough?


Morten Hansen: That's difficult to answer. I don't think there is a magic number. The key principle is to be prepared BEFORE the storms hit.  You should reduce debt and increase cash reserves. A weak balance sheet is not your friend in an uncertain world. You can put in safety margins in key projects. You can hedge on different products and technologies. And so on. The key is to be sufficiently prepared without going overboard and becoming paralyzed.

Jim Collins: I like to encourage companies to try to reach a point where they could survive an entire year without a penny of revenues.


Regarding innovation, how is being the first at something a bad thing? And how can the imitators succeed without looking like copycats?


Morten Hansen: We found in our study that being the most innovative is no guarantee for great performance. The great innovator doesn't always win. You need to innovate, that's clear, but only to a certain level (depending on your industry).  Beyond that, other things matter, such as scaling innovation.  The problem with being first (being very innovative) is that it's only one side of the coin; you also need to execute, to deliver on your innovations, that's the other side of the coin. As it turns out, many pioneers did not execute well, perhaps because they were first and so didn't know exactly what would work best. Imitators, or "improvers," can learn from the pioneer and do it better, often aided by their own experimentation. Apple's iPod was not the first portable hard-disk music player; they improved on existing offerings. Google was not the first search engine. Facebook was not the first online social network. The key is not to be the most innovative but to combine innovation and execution, a notoriously difficult thing to do.

Jim Collins: Creativity is natural and abundant, the natural human state.  We are creative beings.  Being creative is not the hard part.  The hard part is figuring out how to marry creativity to discipline so that the discipline amplifies the creativity, rather than squelching it.  Truly great entrepreneurs do not just have a great idea (and often, they copy their ideas from others).  The entrepreneurial path to greatness is to go from idea to business, then business to company, then company to great company, then great company into enduring great company.  To accomplish this entire journey requires much more than just a creative idea.  As Jerry Porras and I wrote in Built to Last, the task is to make the shift from being a creative visionary into building a visionary company that can remain great and resilient long beyond any single great idea or visionary leader.

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If you haven't yet read Great By Choice, I hope this post has encouraged you to do so. It inspires some deep thinking far beyond what's been covered here, and it reveals that despite the random variations and chaos that do exist, being a Great company is a choice, and we can control our path toward becoming one if we decide and dedicate ourselves to doing it. The good news is, we have a strong guide in the work that Collins and Hansen have presented in this book.