Recently, I had been reading Jim Collins' Good to Great, which is an easy-to-read book based on a five-year scientific project. While it is logically seen before Built to Last, it is interesting to see that the study was done subsequently. Also as an investor, it is certainly always important to be able to recognize a great company (and to be able to assess whether it will remain so). However, it is much more exciting (and in case of success certainly more profitable) to invest in a company that is developing from a good company into a great one.
The Flywheel Concept
One of the most handy facts about the study is the fact that the whole result can be expressed in one framework: The Flywheel. Jim Collins and his team found that every studied company, that made the leap followed the processes described below:
- Level 5 Leadership: Obviously, every great company needs great management. However, the usual picture of an extremely successful CEO is those of a self-confident, almost arrogant, and assertive manager. Nevertheless, the study found that transformation to great companies has always been led by so-called Level 5 leaders. They describe them as intelligent, self-effecting, quiet, and even reserved. None of the managers considered had the idea of attributing the company's success to themselves.
- First Who ... Then What: Even more surprising is the founding that for great transformations vision and strategy came only second place. First and far more important was to get "the right people on the bus ... and into the right seat". Then the strategy almost takes care of itself.
- Confront the Brutal Facts (but yet never lose faith): All of the companies observed had their backs to the wall before their transformation and admitted this to themselves instead of looking for escape routes and appeasement. Nonetheless, they never lost faith that everything would work out in the end if they worked hard enough.
- Simplicity excellently delivered: Just sticking what has always been core business is not enough. Good-to-great companies followed a Hedgehog Concept: They asked themselves always three important questions before taking any decision
- What are we deeply passionate about?
- What can we be the best in the world?
- What drives our economic engine?
- Hence, they did not only strive for a higher purpose (think of Disney trying to make families happy), because they knew, once they achieve that purpose, the profits gonna take care of themselves. Also, they knew their one (!) and only economic value driver (like profit per employee, profit per customer, profit per ton of finished steel, profit per local population, ... ) and did not base decision on standard industry benchmarks. Finally, they knew what is the field in which they can achieve outstanding performance. Only when those three circles intersect each other, the company can make the leap.
- Culture of Discipline: Many companies made it until that point, but only a few lasted till the end of the journey. Great companies have an intrinsically anchored culture of disciple and hence do not need bureaucracy, hierarchy, and control mechanisms. Disciplined and driven people keep the flywheel going.
- Technology is an Accelerator, but not an Enabler: Technology did never start a transformation toward greatness. Yet, good-to-great companies used carefully selected technologies as a first mover, well before the competitors thought about making huge investments into them.
- The Flywheel and the Doom Loop: No matter how dramatic the final transformation of the companies were, none of them entered those with big announcements. The goal can only be reached with uncountable, small, and incremental steps that accelerate each other.
Recommendation and Learnings
Overall, the book is an easy and interesting read. Nothing of it remembers of a boring scientific study. Yet, the reader finds herself as part of the research team and can truly comprehend the developments toward the just presented flywheel. Although the book was published in the early 2000s, it has not lost any of its importance today. Certainly, I will try to implement the Flywheel process within my investment research process. Especially when attempting to evaluate management (and their bold visions), the concept should be a very helpful tool. I recommend the book to anyone who wants to understand the exciting underlying factors of highly successful corporate transformations.