Good to Great

1. Good to Great Chapter 8 The Flywheel & the Doom Loop Group 2 Mitchell Stack Heather McMahon Scott Devore Cory Gregory Ryan White Brittany Thomason Jacob Western

2. Revolution means turning the wheel. -Igor Stravinsky

3. Buildup and Breakthrough • Flywheel image captures the overall feel of what it was like inside the companies as they went from good to great. • Never happens in one fell swoop • Step by step, action by action, decision by decision • Turn by turn of the flywheel • All add up to sustained and spectacular results

4. Media’s influence on our perceptions • Often, the media doesn’t cover a company until the flywheel is already turning at a thousand rotations per minute. • Skews our perception of how the transformation happens • Portrays the transformation as some sort of an overnight metamorphosis

5. Circuit City – turning the flywheel • Alan Wurtzel – CEO in 1973 • Struggling with a crushing debt load • Implemented a warehouse showroom style • 1982 – with 9 years of turning the flywheel • Within the next 5 years C.C. shifted entirely to this concept

6. Circuit City Cont. • Generated highest total return to shareholders of any company on the NYSE • Cumulative stock returns 22x better than the market (Intel, Wal-Mart, GE, Hewlett-Packard and Coca-Cola) • There were not any articles of significance in the decade leading up to the transition • After the transition there were 97 articles worth examining • 22 with significant information

7. What is this Transformation called? • The good to great companies had no name for their transformations • No launch event, no tag line, no programmatic feel whatsoever • Some say that executives weren't even aware that a major transformation was under way until they were well into it. • Often more obvious to them after the fact than at the time

8. There is no miracle moment! • It may look like a single-stroke breakthrough to those viewing it from the outside • People on the inside see it as a deliberate process of figuring out what needs to be done to create the best future results • Then take those steps, one after the other, turn by turn of the flywheel. • Consistent pushing of the flywheel over an extended point of time • Inevitably you will hit a point of breakthrough

9. No Miracle Moment • There is no “Miracle Moment” in going from a good company to a great company • The top companies that made the jump from good to great all agree that there was no miraculous jump to greatness

10. No Miracle Moment • Abbott- “Our change was a major one and yet in many aspects simply a series of incremental changes—this is what made our change successful” • Circuit City- “The transition to the superstore didn’t happen overnight…it took 10 years after we’d refined the concept and built enough momentum to bet our whole future on it” • Fannie Mae- “There was no magical event, no one turning point. It was more of an evolution”

11. No Miracle Moment • Gillette- “We didn’t really make a big conscious decision or launch a big program or initiate a major change or transition” • Kimberly-Clark- “These things don’t happen overnight. They grow. The ideas grow and mushroom and come into being” • Kroger- “The major thing the Lyle did was to say that we’re going to change beginning now, on a deliberate basis”

12. No Miracle Moment • Another example of this is coach John Wooden of the UCLA Bruins. • He had a basketball dynasty from the 1960’s to the 1970’s but it did not start that way. • It took fifteen years for John Wooden to bring in his first National Championship and from there went on to win ten in the next twelve years

13. Not Just A Luxury of Circumstance • Good-to-Great companies paid no attention to long term constraints. • Instead, they embraced those constraints • This also applies to the short-term pressures of Wall Street • The key is to harness they flywheel to manage these short-term pressures

14. “The good-to-great companies were subject to the same short-term pressures from Wall Street as the comparison companies. Yet, unlike the comparison companies, they had the patience and discipline to follow the buildup-breakthrough flywheel model despite these pressures. And, in the end, they attained extraordinary results by Wall Street’s own measure of success.”

15. Blue Plans • Blue Plans- One method for managing short-term pressures --- Abbot Labortories • Each year, Abbot would tell analysts that it expected to grow 15%, for example. At the same time, it would set an internal goal of a much higher growth rate, say 25% • Meanwhile, it kept a ranked-ordered list of proposed entrepreneurial projects that had not yet been funded, Blue Plans • Abbot would then take the difference between the analysts growth rate and the actual growth rate and channel those funds into the Blue Plans • This managed short term pressures while systematically investing in the future

16. Wall Street • Good-to-Great companies, such as Abbot, effectively managed Wall Street during their buildup-breakthrough years • These companies simply focused on accumulating results, often under promising and over delivering • As the results began to accumulate – as the flywheel built momentum – the investing community came along with great enthusiasm

17. The “Flywheel Effect”

18. Flywheel Effect Tremendous power exists in the fact of continued improvement and the delivery of results. Point to tangible accomplishments. When you do this in such a way that people see and feel the buildup of momentum, they will line up with enthusiasm. – This is the flywheel effect and it applies not only to outside investors but also to internal constituent groups.

19. Flywheel Effect

20. Flywheel Effect Collins found the question of alignment was not a key challenge faced by good to great companies. “Clearly, the good to great companies did get incredible commitment and alignment – they artfully managed change – but they never really spent much time thinking about it. It was utterly transparent to them. We learned that under the right conditions, the problems of commitment, alignment, motivation, and change just melt away. They largely take care of themselves.”

21. Flywheel Effect Kroger 50,000 employees How do you get employees to embrace a radical new strategy that will eventually change virtually every aspect of how the company builds and runs grocery stores? The answer is – You Don’t. Not in one big event or program anyway.

22. Flywheel Effect Kroger Jim Herring, the level 5 leader who initiated the transformation of Kroger avoided any attempt at hoopla and motivation. Instead Kroger began turning the flywheel, creating tangible evidence that their plans made sense. Herring understood that the way to get people lined up behind a bold new vision is to turn the flywheel consistent with that vision – from two turns, to four, eight, sixteen – then say – See what we are doing and how well it is working? Extrapolate from that, and that’s where we’re going.

23. Flywheel Effect When people begin to feel the magic of momentum – when they begin to see tangible results, when they can feel the flywheel beginning to build speed – that’s when the bulk of people line up to throw their shoulders against the wheel and push.

24. The Doom Loop

25. The Doom Loop • Instead of a quiet & careful process of figuring out what needed to be done and simply doing it… • Comparison Companies • Frequently Launched New Programs • Made it a big deal to Motivate • Programs failed to produce lasting results • Fell inside the doom loop

26. The Doom Loop Continued…

27. The Doom Loop Continued… • For Example: • Warner-Lambert ( Comparison Company to Gillette) • 1979 – Aimed to be a Consumer Products Company • 1980 – Decided aim towards Health Care (went after Merck) • 1981 – Went back to Consumer Products • 1987 – Once again went back to Health Care • 1990 – Went back AGAIN to Consumer Products

28. The Doom Loop Continued… • Warner Lambert Continued… • Went back and forth from 1979 to 1998 • Each CEO tried to make a mark with him own program • Fired 20,000 people in search of a breakthrough • They would get results, but slack off, and couldn’t sustain the momentum of a breakthrough flywheel. • Finally Stock Returns Flattened and they disappeared as an independent company to Pfizer.

29. The Doom Loop Continued… • Two common patterns of the Doom Loop from company to company: • The Misguided Use of Acquisitions • Leaders Who Stop the Flywheel

30. The Misguided Use of Acquisitions • “When the going gets tough, we go shopping!” • Pete Drucker observed that that the drive for mergers and acquisitions comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend your day than doing actual work.

31. The Misguided Use of Acquisitions • Why did the good-to-great companies have a substantially higher success rate with acquisitions, especially major acquisitions? • The key to their success was that they used acquisitions as an accelerator of flywheel momentum, not a creator of it. • In contrast, the comparison companies frequently tried to jump right to breakthrough via an acquisition or merger.

32. Leaders Who Stop the Flywheel • The other frequently observed doom loop pattern is that of new leaders who stepped in, stopped an already spinning flywheel, and threw it in an entirely new direction. • For example: In 1978, Joseph Boyd became the new CEO of Harris Corporation. His first key decision was to move the company headquarters from Ohio to Florida. In the early 80’s he also decided to divest the their printing division (their primary and very successful division) and go headlong into the office automation business. By 1988 the company had fallen over 70% behind its competitors.

33. The Flywheel as a Wraparound Idea • Each piece of the system reinforces the other parts. • An integrated whole that is much more powerful than the sum of the parts.

34. How to Tell if You're on the Flywheel or in the Doom Loop Flywheel Doom Loop • Follow a pattern of buildup leading to breakthrough. • Reach breakthrough by an accumulation of steps, one after the other, turn by turn of the flywheel; feels like an organic evolutionary process. • Confront the brutal facts to see clearly what steps must be taken to build momentum. • Attain consistency with clear Hedgehog Concept, resolutely staying within the three circles. • Skip buildup and jump right to breakthrough. • Implement big programs, radical change efforts, dramatic revolutions; chronic restructuring-always looking for a miracle moment or new savior. • Embrace fads and engage in management hoopla, rather than confront the brutal facts. • Demonstrate chronic inconsistency-lurching back and forth and out of the three circles.

35. Flywheel or Doom Loop cont’ Flywheel Doom Loop • Follow the pattern of disciplined people (“first who”), disciplined thought, disciplined action. • Harness appropriate technologies to your Hedgehog Concept, to accelerate momentum. • Make major acquisitions after breakthrough (if at all) • Spend little energy trying to motivate or align people. • Let results do the most of the talking. • Maintain consistency over time. • Jump right to action, without disciplined though and without first getting the right people on the bus. • Run about like Chicken Little in reaction to technology. • Make major acquisitions before breakthrough. • Spend a lot of energy trying to align and motivate people. • Sell the future. • Inconsistency over time.

36. How to Start • Level 5 Leaders • Getting the right people on the bus. • Completely understand the three circles of your Hedgehog Concept.

37. Takeaways • Buildup and Breakthrough • Not just a Luxury of Circumstance • Flywheel Effect • Doom Loop • What to Do and What to Avoid