Good to Great and Winning Long-Term

I first encountered Good to Great (“G2G”) in the LinkedIn IPO deck. At LinkedIn, we applied Jim Collins’s concept of getting the right team on the bus into our product for customers and into our own culture. That is one of several lasting lessons in Collins’s playbook for building a “great” company.

G2G was written over 20 years ago and continues to be a lasting masterclass on how to drive long-term outperformance. What makes it a “great” book is the rare mix of exhaustive research-driven insights combined with easy-to-understand storytelling. Collins keeps it simple and limits himself to sharing six key lessons that any organization can implement.

More than anything, I love that this playbook points to culture as the central driver of long-term success. The proof is in the pudding; the companies Collins identifies outperformed the market by 6.9x over 15 years.

Brief overview

Collins and his team set out to identify how average companies become great over the long term. As with his other work, Collins uses a rigorous quantitative and qualitative research approach to identify companies and outperformance themes.

By contrast, many business writers and investment analysts often rely on qualitative observations and experiential learning to identify outperformance drivers. That most professional investors have only a 1% chance of beating the market* shows how differentiated the G2G work is vs. typical business analysis.

Collins' 21-person team set out simple parameters:

• Identify companies that a) had average market returns for 15 or more years, b) hit a transition point, and c) then produced returns 3x or greater than the market for 15 or more years.
• They chose 15 years because it was long enough to exceed the average CEO tenure and ruled out short-term duration winners.
• 3x was the return hurdle because it exceeded the performance of other top companies from the late '90s like Intel, Disney, and Boeing.

Collins' team identified just 11 long-term outperformers out of a sample set of 1,435 companies. What’s more, the list is full of what Collins calls “unheralded” companies in non-sexy industries: Abbott (health care); Circuit City, Kroger, Walgreens, Gillette, Philip Morris (consumer & retail); Fannie Mae & Wells Fargo (banking & financials); Nucor (steel); Pitney Bowes (business services); & Kimberley-Clark (paper).

The flywheel is the playbook

G2G is Moneyball for company building and investing. Just as Billy Beane quantified value in baseball players vs. relying on evaluation based on belief & experience, Collins has identified unexpected yet unsurprising factors that drive long-term outperformance.

Each of the 11 “great” companies created flywheels that methodically grew momentum over long periods of time. Transformation does not mean harnessing big waves of strategic, technology, leadership, M&A, or growth-market changes (we see you AI). Instead, transformation is about focusing on the basics and trusting your process day by day, quarter by quarter, and year by year.

Six factors contribute to building a flywheel, Collins’s umbrella concept. They slot into two** buckets:

• 1 - Build the right foundation
• 2 - Generate momentum

Build the right foundation

1 - Level 5 leadership → All 11 “great” companies had CEOs who exhibited “Level 5 Leadership,” defined as personal humility and professional drive. These “servant leaders” are modest, results-driven, and focused on building organizations with strong talent.

• Case study: Darwin E. Smith is the canonical Level 5 leader who rose from in-house counsel to become a 20-year CEO for Kimberly-Clark. With an appetite for inexpensive suits and vacations doing manual labor in Wisconsin, Smith transformed Kinberly-Clark into a consumer giant by building multi-billion dollar brands like Kleenex and Huggies and out-competing larger rival P&G. The company outperformed the market by greater than 4x.

2 - Get the right team on the bus → The right team drives transformation in organizations at scale. A few of the highlights for building the right team include:

• Get talent on the bus early: great people motivate each other and drive transformation at scale.
• Build a team of rivals: create an environment where leaders can debate strong points of view.
• Motivate through mission, not money: Collins’s team found zero correlation between compensation & performance; the right team is aligned on mission & culture.
• Maintain rigorous performance standards: full stop.
• Case study: Wells Fargo laid off the majority of acquired Crocker’s managers in one day because they didn’t embody the Wells Fargo culture (think eating cafeteria food vs. in a lavish executive dining room). Warren Buffett called Wells Fargo’s team the best ever assembled.

3 - Drive purpose alignment → Collins calls this idea the “Hedgehog Concept,” after the parable describing people in the world as either foxes (who know a great many things) or hedgehogs (who know one big thing really well). The hedgehog concept is one part hyper-focused strategy and one part masterful communications narrative. It consists of three elements:

• What can you be the best at in the world? Don’t do multiple initiatives or businesses you are good at. Instead, maniacally focus on what you can be best at.
• What is your economic engine? Create a single (yes, just one) economic denominator and align your strategy around that ratio.
• What is your most profound passion? Create a path that inspires your team.
• Case study: Walgreens outperformed the market by 15x market between 1975 & 2000 by focusing on building the most convenient drugstores and measuring profit per customer visit.

Generate flywheel momentum

4 - Truth & Data Management → Collins call this prioritizing “Facts Over Fantasy,” and it dovetails with having a low-ego results-oriented leadership team. Collins calls out four practices: 1 - questions first, then answers; 2 - debate for stakes not for show; 3 - analyze mistakes without blame; 4 - implement alarm bells. All four focus on creating an environment prioritizing psychological safety, understanding, risk-taking, and debate vs. creating a confirmation bias culture for leaders' decisions.

• Concept: “If you can’t measure it, you can’t fix it.” This was an oft-cited maxim @ Linkedin. We put this ethos into practice by measuring our core metrics & competitive environment with a broad group of leaders through specific meetings every week. We used the meetings to ask questions and better understand the reality of our business & market, and they often queued up deeper dives and important decisions. This weekly cadence was the heartbeat of our operational culture.

5 - Disciplined culture → For Collins, discipline = the ability to say no often to opportunities that don’t match your Hedgehog Concept. It comes down to empowering your team to make yes & no decisions, reinforcing and celebrating your hedgehog concept in your culture, and reinforcing a stop-doing list.

• Repetition Repetition: This was another LinkedIn best practice. The Hedgehog Concept and giving power to your team is not work you do once, but reinforcement that happens daily. Jeff Weiner often “repeated” that effective communication is repeating yourself until you make yourself sick. At LinkedIn we repeated our vision, mission, values, and key objectives at minimum as an entire company every two weeks through our bi-weekly all-hands. It wasn’t mandatory attendance, but was such a fun, spectacular event that nobody missed it, and by extension, our hedgehog concept was reinforced.

6 - Use accelerators → Collins talks about this idea through the lens of technology. Don’t pursue innovation and new technology for the sake of new technology, but instead, how it reinforces your hedgehog concept. The same principle applies to other big initiatives for your business oft-cited as transformation agents: M&A, leadership refactoring, & org changes. These should all be done to serve your core purpose and not to pursue change for change’s sake.

Conclusion - culture drives long-term outperformance

I’ve spent 25 years as an investor and operating leader in tech companies. In tech circles, most believe that success comes from a company generating product-market fit in big, growing markets. That’s the core of many venture capital investment strategies.

While it may be a place to start a tech company, your cultural foundation and operating momentum drive truly differentiated long-term outperformance. Investors often miss this. Because culture isn’t a line item in a financial statement or quantifiable in a market share analysis, it’s pushed to the side as a tertiary success driver.

That’s 100% backward. Good to Great shows that culture drives the bus to long-term outperformance.

Footnotes

* This 2022 NYT article describes the S&P Dow Jones research study showing that US mutual fund managers have close to a 0% chance of beating the market in two subsequent years.

** Good to Great categorizes these six outperformance themes in a different order than described in this review.