Thoughts on ways to improve the management of professional services firms

Tuesday, October 10, 2006

Good to Great - The Conclusions

Bruce MacEwen's Adam Smith Esq had an interesting post reporting on the results of a McKinsey management study. However, his inclusion of "Good to Great" in a list of silver bullet books he contrasts with McKinsey brings me out in defence. To do this, I thought that I might repeat a review of the book I wrote a little while ago.

Book Review: "Good to Great"

This review covers a very useful management text, Jim Collins' "Good to Great. Why some companies make the leap..and others don't" (Random House Business Books). The book is useful because it provides a helpful correction to some current management fashions. We would encourage everybody to read it, but in the meantime a summary follows.The review is broken into two parts:
  • It starts by outlining Collin's methodology.
  • Then summarise his conclusions

Methodology

Collins and his team attempted to define what distinguishes a great company from a good one using an empirical approach. Key elements:

  • They used US public companies because data was readily available.
  • They culled through the records looking for companies that displayed the following basic pattern: fifteen year cumulative stock returns at or below the general stock market; punctuated by a transition point; then cumulative returns at least three times the market over the next fifteen years. Fifteen years was picked because it transcended lucky breaks and was longer than the average tenure of most CEOs. Three times market was picked because it exceeded the performance of the most widely recognised great companies.
  • Eleven companies were identified using this criteria. Two control samples were then picked.
  • In sample one, they picked direct comparison companies, one for each good to great company. The comparison company were in the same industry with the same opportunities and similar resources at the time of the transition, but had themselves failed to make the jump. Thus Abbott (good to great) was paired with Upjohn, Wells Fargo with Bank of America and so on.
  • In sample two they selected six companies that had made the transition from good to great but had then failed to sustain it.
  • They then examined the complete set of companies to try to identify those features that distinguished the good to great companies from the sample companies using published records and reports, previous published analysis and comment on the companies plus interviews.

In all, a reasonably rigorous approach with the methodology explained with sufficient clarity to allow others to attempt to refute/challenge.

The Results

The study's results came as a surprise to the team.

To begin with, many of the commonly held views about factors contributing to success simply did not stack up. Two immediate examples:

  • There was no difference in planning techniques between good to great and the sample companies. This does not mean that planning is not important, simply that planning on its own is not sufficient.
  • There was no link between remuneration and performance. The only discernable difference between the good to great and the rest was that the good to great companies in fact paid their senior executives slightly less!

At the end of the day, the team identified seven common distinguishing features between good to great and the rest. In summary they were:

Leadership: Every good to great company displayed what the team called level 5 leadership, a paradoxical mix of personal humility and professional will. More plough horse than show horse, they are ambitious for the company rather than themselves, look after people, downplay their roles and provide recognition for others, take responsibility for failure, build succession and are driven by the need to get sustained results. Ten of eleven CEOs were internal promotions.

In contrast, two thirds of the comparison companies had leaders with huge personal egos that contributed to their companies' mediocrity or even demise. Thereļ¾ was a clear negative correlation between larger than life celebrity CEO's recruited from outside and company performance.

First Who then What: When the study began, the team expected to find a clear correlation in the move from good to great between take-off and the creation of a new direction, a new vision and strategy and the alignment of people behind the direction. They found the opposite. The good to great companies first worried about getting the right people, getting rid of the wrong people, and only then worried about where to go.

In doing so, they adopted a rigorous but not ruthless approach. For example, the sample companies used lay-offs as a tool five times more frequently. Six of the eleven good to great had never laid off.

Interestingly, there was no real difference in average churn among senior executives in good to great as compared to the rest, but there was a difference in pattern. At senior level, executives in good to great either left quickly because they did not fit or stayed for a long time. So the good to great companies did not churn more, they churned better. The study also found that whether somebody is the "right person" has more to do with character traits and innate capabilities than with specific knowledge, background or skills. Competency as such is the enemy of greatness.

Confront the Brutal Facts: A dominant theme from the research was that breakthrough results came from a series of good decisions diligently executed. The good to great companies made many more good decisions than the comparison companies. Some key features here:

  • Good to great companies constantly focused on identifying and resolving immediate problems. They did not lose site of their vision for greatness - Collins uses the term unwavering faith - but continually refined the path to getting there.
  • Good to great companies had an open questioning culture. They engaged in dialogue and debate, not coercion, they conducted autopsies without blame, they sought to improve.
  • An unexpected conclusion was that spending time and energy to motivate people was a waste of time. If you have the right people, they will motivate themselves. The real challenge is not to de-motivate them.

The Hedgehog concept: In the classic story, the fox is all over the place developing brilliant strategies and plans to catch the hedgehog. The hedgehog just goes on about its business. The good to great companies were all hedgehogs. They created simplicity out of complexity.
In doing this, they operated in the overlap of three circles. They were passionate about what they did. They aimed to be best in the world. They completely understood what drove their economic engine.

The good to great companies did not develop their hedgehog concept over night. It took four years on average to evolve. Often the comparison companies simply did not stick at something for long enough to have any chance off doing the same thing. This is where stability in senior leadership also comes in, with much higher CEO turnover in comparison companies.

Another feature was that all the good to great companies experimented.

Importantly, the study found that you do not need to be in a great industry (most good to great companies were not) to produce truly superior returns.

A culture of discipline: The good to great companies were dominated by people with self discipline who were very focused on the hedgehog core. They displayed a duality: people were required to adhere to a consistent system, but then within this had great freedom and responsibility. Companies were not tyrannical. Unexpected results:

  • The more a company has the discipline to stay within its three circles, the more the opportunity for growth.
  • "Once in lifetime" opportunities are irrelevant. A great company will have many such opportunities.
  • The purpose of budgeting in good to great companies is not to decide how much each activity to get, but to decide which areas should be fully funded and which should not be funded at all. Stop doing lists are more important than to do lists!

Technology accelerators: Good to great companies think differently about the role of technology. They never use technology as the primary means of igniting a transformation, Technology was there to support. Paradoxically, they were pioneers in the application of carefully selected technology.

The study concluded that technology by itself is never a root cause of either greatness or decline.

The Flywheel and the doom loop: In the good to great group there was no single defining action, no grand program, no one killer innovation, no single lucky break, no miracle moment. rather the process resembled relentlessly pushing a giant heavy fly wheel in one direction, turn on turn, building momentum to a point of breakthrough and beyond.

Those who launch revolutions, dramatic change programs and wrenching restructurings (a feature of many comparison companies) will almost certainly fail to make the leap from good to great.

Conclusion

Collins' book is interesting because the conclusions effectively debunk many current management nostrums. It therefore forces all management professionals whether in management or advisory roles to question their advice and approaches

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