Great by Choice
by Jim Collins, our ActionCLASS Summary
Amundsen’s team makes it to the South Pole first, and make it back alive to tell the story. Scott’s team, on the other hand, are less fortunate. They make it to the South Pole weeks later, only to find Amundsen’s team had planted a flag to mark the occasion. They struggled mightily on the trip back, eventually succumbing to the elements and perishing on their way back to civilization.
The details of this incredible story seem to mimic the findings of Jim Collins’ research in his current book, Great by Choice. When Jim Collins wrote his best-selling book, Good to Great, he became an instant business hero. Executives from around the world aspired to be Level 5 leaders and focused intently on finding their hedgehog concepts.
But there was a question that remained unanswered: in a world that is increasingly in financial turmoil and constant change, how do you succeed? In a methodology similar to Good to Great, Collins and his team studied companies that were in industries where there was a constant state of change, and found that there were some companies that outperformed the marketplace by a significant margin.
He called these the 10x companies because they all had outperformed their “industry index” by more than 10 times throughout the study. In fact, on average, the 10x companies outperformed the marketplace as a whole by 32 times.
If it sounds to you like these would be some good companies to learn from, you’d be right. What Collins and his team concluded was that there were 4 main attributes of a 10x company – fanatical discipline, empirical creativity, productive paranoia and Level 5 ambition. In the following pages, you’ll find the keys to becoming more like Amundsen and less like Scott.
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Attribute #1 – Fanatical Discipline
The first attribute of a 10x company is that they have fanatical discipline. Collin’s gives us the metaphor of the 20-mile march. Starting on a cross-country journey, the metaphor goes, you’d be much better off walking 20 miles per day consistently than walking much more on the good days and much less on the bad days.
In business, the 10x companies realized that a similar principle applied – that you should do whatever you need to do to get results in the down years and resist the urge to grow too wildly in the up years.
A great example of a company that has done the 20-mile march consistently is Southwest Airlines – the celebrated anomaly of the dreaded airline industry. Southwest demanded a profit from its business every single year.
For entrepreneurs, this sounds obvious. But in the airline industry, which was losing $13 billion per year, this is a remarkable thought. Even in the months after 9/11, when the industry was in shambles, Southwest was turning record profits.
They also excelled at the flip side of the 20-mile march and controlled their growth in the up years. In 1996, for instance, there were over 100 cities that wanted Southwest to open operations there. Instead, they took a methodical approach and expanded to only 4 cities.
If you want to bring the 20-mile march to your organisation, here are the 7 elements you can learn from:
1. You should use performance markers to delineate lower bounds of performance you are willing to tolerate. It should be difficult to achieve, but not impossible.
2. You also need to create self-imposed constraints to understand how much you are willing to grow in the good times. This should create some discomfort as well – there should be the feeling that you should be doing more and growing faster. It takes discipline to look at opportunities and turn them down – a lesson that Starbucks and many other fast-growing companies learned the hard way.
3. These constraints should be tailored to the specific circumstances of your company and the market environment. For instance, a web company has different growth challenges than a coffee chain. Setting those upper and lower bounds appropriately is critical.
4. These targets should be largely within your control to achieve. Could those other airlines have set up their businesses so that they achieved profitability every single year? Yes, but it would have taken some significant planning and preparation as Southwest did.
5. You need to be thinking about the ‘Goldilocks’ time frame when setting these bounds – not too long and not too short. If you make the timeline too short you’ll be forced to deal with too much variability, set it too long and will lose all its power. A year worked for Southwest, and something that’s a year or less is probably the range you want to be hunting for.
6. These bounds should be designed and self-imposed by you, and not by outside forces or circumstances. For instance, if you are in a public company, choosing a bound for what your earnings per share need to be every quarter would be a lazy choice driven by the demands of Wall Street. Choose a performance marker that is a true reflection of the underlying business instead.
7. Lastly, the march needs to be achieved with great consistency over time. Hitting it every once in a while just doesn’t cut it. It’s the discipline to hit it time and time again that will determine your long-term success.
Attribute #2:Fire bullets, then cannonballs
It’s a great metaphor for the process of creative experimentation and planning that seems to be popular with web startups, but I bet that will now also become more popular with the mainstream business community.
The idea is that if you were down to your last bit of gun powder, and had an enemy ship bearing down on you, you’d need to be judicious in your use of last reserves. Take it all and fire a cannonball, and the chances are that you are going to miss and perish. But fire bullets first instead, and sooner or later you are going to find the right trajectory for your shots. Then, and only then should you load up the cannonball and take your shot.
Collins defines a bullet in the business context to be something that is:
1. Low cost – it shouldn’t cost you a lot of money to fire a bullet.
2. Low risk – the result, one way or another, shouldn’t have a major impact on your business.
3. Low distraction – it shouldn’t take much time away from the other major priorities the company has at the moment.
There are 5 steps to the process:
1. Fire a bullet. Make a hypothesis about a goal you are trying to achieve.
2. Assess whether or not you hit anything. Was your hypothesis correct?
3. Consider whether or not it’s worthwhile turning this bullet into a cannonball. This will depend largely on whether or not additional resources and money would lead to a big win for your company.
4. Convert it into a cannonball once you are convinced that you have calibrated the bullet correctly.
5. Terminate bullets that show no evidence of eventual success.
Attribute #3 – Productive Paranoia
It’s a great metaphor for the process of creative experimentation and planning that seems to be popular with web startups, but I bet that will now also become more popular with the mainstream business community.
Although Apple usually serves as a great example of creativity and hit products, the underlying story shows a great discipline in creating bullets, then cannonballs. It kept making investments in its’ “computer as the digital hub” strategy, first with the iPod, then iTunes as a platform and then the iPhone.
What the world saw as breathtaking innovation and big bets, Apple saw itself firing bullets and then turning them into cannonballs after they were sure that they were going to be a huge success.
All of the 10x companies seemed to be paranoid about something. But instead of acting like crazy people on the lookout for the next government conspiracy, they always have one eye out for the risks that could bring their companies down.
One of the things that each of the leaders of the 10x companies knew at all times was where their “death line” was, and they devised strategies for making sure they never got close to it. They knew that their company, like all companies, would run into a rough patch or ten along the way.
As the saying goes, you can afford to stay in business for as long as you can keep paying for your mistakes – once you cross the death line, that’s it. Game over.
There were 3 specific things that each of these companies did:
1. They had enough cash on hand to make sure they were prepared for any unforeseen events or bad luck before it happened. There’s a lot of bruhaha right now about the fact that Apple has tens of billions of dollars in cash reserves at the moment and that it’s an inefficient use of their money. But one thing is for sure – they are prepared for almost anything. And that economists and financial analysts for the most part don’t know what they are talking about.
2. They bound the risk they are willing to take on. Specifically, they pay attention to 3 kinds of risk – death line risk, asymmetric risk (where the downside is much, much greater than the upside), and uncontrollable risk. Only when they were comfortable with the risk they were taking on, would they move forward with a plan.
3. They zoom in and zoom out. In zooming out, they would sense a change in the marketplace, determine how long they had to respond to the change, and then take the appropriate action. By zooming in, they would focus on the extreme execution of plans and objectives.
The big question that they ask themselves is “how much time until our risk profile changes here?” A great case study of this in action is what Andy Grove did when he found out he had cancer. As stunning as this would be for anybody, Andy did something that most people wouldn’t even think to do in this situation – he sprung into action.
He knew that he had months before any major decision needed to be made about what course of treatment to pursue, and he took that time to assess all of his options. He saw himself as the only person responsible for his health and studied enough about his cancer and possible treatments that he could have probably passed a medical school exam. All the while running Intel.
That’s the hallmark of a great leader – truly understanding the timeframe in which you need to make a major decision, and then using that time to prepare yourself appropriately.
Attribute #4: Level 5 Ambition
Just like the leaders in Good to Great displayed Level 5 leadership (humility paired with professional will), the 10x leaders displayed a desire for their companies to succeed even beyond their tenure. The way they did this is through something that Collins calls SMaC. These are Specific, Methodical and Consistent operating principles as a recipe for success.
This is much different from core values or mission statements because these are specific criteria for how they will run their company.
A great example of this was Southwest and how they ran their airline much differently than the other carriers. For instance, they only flew 737 aeroplanes so they could save costs and time by learning how to maintain and fly one model of aeroplane. They would remain a low-cost carrier.
They would always have a high utilization rate and low turnaround time for their aircraft. As Collins pointed out, Southwest only changed their SMaC by 20% over 25 years. That’s quite remarkable when you think about it.
And the other 10x companies operated similarly. By having a business strategy that was articulated and that could stand the test of time, they were able to focus their attention on the execution of these plans. Of course, even when the companies did amend their SMaCs, they did it with either empirical creativity or productive paranoia, only changing direction when they needed to, or when they could prove that it would be a home-run.
There you have it: everything you need to start your own 10x journey. Good luck, and see you and your team in the next Jim Collins book!
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