Good to Great – “Disciplined Thought”

This post is part 3 in my recap of Jim Collins’ 2001 book, Good to Great. My prior post was about Disciplined People. This one is about Disciplined Thought. Once again, I took two major concepts from this section.

First, to become a great organization you must confront the brutal facts. Even though your organization may be doing well today, by whatever standards you choose, there are always brutal facts that you need to recognize and embrace. Face the challenges of your existing markets, your customers’ opinions of your products and services, your profit margins, your ability to innovate, your financial situation, your infrastructure, your management team – everything. There is no value in ignoring any challenges. It’s critical to evaluate your situation exactly as it exists. Recognize the difficulties.  Avoid hoping and wishing. Identify your options. Be clear on what you truly can and cannot accomplish.

My observation – If your organization’s ‘brutal facts’ aren’t obvious to you, you need to find them because they are there.

But, even though this implies that you have to face the occasional situation where the challenges are daunting, you need an underlying belief that you will prevail in the end.  They coined this ‘the Stockdale Paradox’ relating to the late Vice Admiral James Stockdale. While a prisoner of war in Vietnam, subject to frequent torture, he accepted the brutal facts of his situation. However, he never wavered from his belief that he would eventually prevail. While he made it out of the prison camps, many others didn’t. He believed it was because they were optimists and failed to accept the brutal facts. These others hoped that they would be released by Christmas, then Easter, then Summer, then … These dashed hopes eventually broke their will. Stockdale said “This is a very important lesson. You must never confuse faith that you will prevail in the end—which you can never afford to lose—with the discipline to confront the most brutal facts of your current reality, whatever they might be.”

My observation – You need as many views and opinions as possible from those who are intimately or even tangentially related to your business or industry. You need as broad an understanding of your situation as possible. Optimism and hope has no place as you survey your landscape as it actually exists.

Second, you must develop a hedgehog concept. This refers to a simple understanding of how your organization can survive and thrive. The parable from the book related to the clever fox who was always devising schemes to triumph over the hedgehog. In contrast to the fox’s constantly shifting strategies and perceived cleverness, the hedgehog fully understood his own strategy. Regardless of what the fox tried, the hedgehog could always roll up into a ball and become unassailable. The hedgehog had a way of disregarding the irrelevant and remaining disciplined on what he knew would work for him.

The book then presents their key principles to developing a hedgehog concept.  I will recap these in my next post.

Good to Great – “Disciplined People”

In the first part of Jim Collins’s 2001 book Good to Great he presents the concept of  “Disciplined People”.

One piece of this is Level 5 Leadership. Those companies that outperformed the market for at least 15 years had it. This meant leadership at the very top that is intensely focused on the success of the organization. These individual leaders are not household names and they aren’t written about in major business journals; in fact, typically no one outside the organization has heard of them. They are humble, balanced, hard-working individuals with high individual and corporate standards.

They contrast this with other, very successful organizations, where the top leader is seemingly more focused on the success of the top leader, rather than the organization overall. These leaders, through their own talents, may very readily elevate the performance of an organization to very high levels, but a “great” organization needs to sustain this performance for at least 15 years. What the researchers found is that these charismatic leaders typically failed to build a strong management organization around them. Once these leaders moved on or retired, the organization was not able to sustain its level of performance.

My observation #1 – the concept of Level 5 Leadership relates to “good well-established” companies hoping to become great. If an organization is striving to simply become a “good well-established” company then a Level 5 Leader may not be their best choice. They may need a more charismatic individual with strong vision and forcefulness.

The second, related, part is First who, then What. This relates to the importance of building a solid team. As they describe it, you get the right people on the bus, the wrong people off the bus, and the right people in the right seats. They advocate being disciplined in moving people around to get the best possible management team. If you are convinced that a certain person will not be the right one long term, you do them no favors by delaying management decisions.

Also, notice that the phrase is ‘First who, then What’. They suggest that strategies evolve more naturally once the right people are involved. The variety of disciplines and expertise from a solid management team will help drive better strategy and greater commitment to the strategy. For an established company it is far less effective to develop a new strategy and then move people around to staff it.

My observation #2 – Practical experience bears out a related point. As they say, when people are committed to the organization and the strategy, you never need to worry about “motivation”. If motivation is a problem in your organization, you don’t have the right people. Think back on your own experience – have you ever needed to be “motivated” to do something you truly believed in?

These two ideas – “talented, focused, humble leadership” and “the management team is the first thing you need to get right” – are not profound. Often, the benefit comes from distilling and effectively articulating the intuitively obvious.

Good to Great

Lately I’ve been on a search to read more about business, success, strategy and performance. I just read Good to Great, by Jim Collins, which came out in 2001.

Although I had certainly heard of it (it was a huge publishing success) I didn’t read it at the time. When I ran across it a few weeks ago I grabbed it at the library. He and his team did significant research to identify those public companies that had been good performers and became great performers for at least 15 consecutive years. The team then tried to identify common factors that lead to this success.

The 11 companies they identified as manifesting Good to Great were:

  • Abbott Labs
  • Circuit City
  • Fannie Mae
  • Gillette Company
  • Kimberly Clark
  • Kroger
  • Nucor
  • Philip Morris
  • Pitney Bowes
  • Walgreens
  • Wells Fargo

This book starts on a solid data-driven foundation. It found those companies that met a (very rational) definition of great performance. Once those companies were identified, the team looked for commonalities in performance considering people, strategies, technology, finances, and everything else they could imagine. They came up with some very basic factors that correlated across these 11 during the time period of their greatness. They also compared these factors to other similar, but less successful, companies and determined that these factors did not correlate with those organizations.

A few of the 11 companies listed above  are obviously known to us as having gone through some problems since the book was published. This can lead a reader to question whether the basic findings are at all relevant since not all of the companies were able to sustain their success. Some have questioned the nature of this type of research — looking at past performance as a basic premise for identifying good performers.

Here’s my opinion. Of course they are backward looking. I think that’s our only real option for gathering data. The challenge  is to find correlations between actions and success. I think that this book does it admirably. Did some of these companies fall on hard times? Sure. But no matter how healthy you eat and how much you exercise, you can still get sick. Perhaps more to the point, if you stop your healthy activities and start new, unhealthy activities you can decline quickly. The trick is to recognize which activities are healthy ones, and which are unhealthy ones. It’s up to you to do the right things and avoid the wrong things. Mr. Collins points out the need for this discipline throughout the book. If the reader somehow missed this very clear point, that’s not the fault of the author.

In my next few posts I’ll write more about the individual factors. Let me just say that they strongly resonate as being solid common sense that we all too often forget when we’re trying to create the next ‘killer’ strategy.

For me: Good to Great is still an A+ read.

Risk Appetite vs Risk Attitude

These two terms – “risk appetite” and “risk attitude” – are often used as a foundation for engaging in high level risk discussions. They are frequently associated with Board or executive level activities.

Risk Appetite

This is a term from COSO’s Enterprise Risk Management – Integrated Framework. In it, they say it “is the amount of risk, on a broad level, an organization is willing to accept in pursuit of value.” COSO goes further to say “Each organization pursues various objectives to add value and should broadly understand the risk it is willing to undertake in doing so.”

Risk Attitude

This term is from the International Organization for Standardization’s ISO 31000 document. ISO indicates “An organization’s risk attitude defines its general approach to risk. An organization’s risk attitude (and its risk criteria) influence how risks are assessed and addressed. An organization’s attitude towards risk influences whether or not risks are taken, tolerated, retained, shared, reduced, or avoided, and whether or not risk treatments are implemented or postponed.”

Differing implications

Risk appetite implies quantity. From it, I get a sense of somehow building a risk model, plugging in my data, and raising the flag if the model indicates my organization exceeds a certain level. Because of its quantitative image, it leads to guidance like E&Y’s ‘The board should ask itself: “What are our three most profitable risks?”’ To me, this question seems off the mark. I don’t think that anyone has “profitable risks”. This implies that an organization drives strategy around exploiting a particular risk rather than its strengths. Sorry, I can’t see that conversation actually taking place at any board meeting I’ve ever attended.

On the other hand, risk attitude implies an approach. I get the sense of a conversation and culture-building. This more closely matches my own experience where various attitudes toward risk taking naturally evolve from the culture. An attitude allows the flexibility to deal with complex and competing concerns. By naturally having conversations about focusing on “this” over “that”, the organization is building its risk culture as part of its overall culture. This helps an organization deal with questions in strategy setting – things like “Should we take a strategy that minimizes shareholder volatility even if it increases employee turnover?” This approach also allows risk taking to shift quickly as broader attitudes shift. For example, if an organization has just had an extremely contentious visit from a regulatory agency, the organization’s risk attitude toward regulatory compliance needs to change – right now.

For me, COSO’s “risk appetite” doesn’t feel right. Risk isn’t generally quantifiable across all parts of an organization in the sense that they seem to imply. ISO’s “risk attitude” is a more comfortable concept because it passes my ‘practicality test’. However, the overall goal of each approach is the same. The important things is to engage your highest level management team in providing guidance regardless of whether it’s primarily quantitative or qualitative.