Good to Great : A Culture of Discipline

Good to Great:A Culture of Discipline Group 1 Taylor Skidmore JT Lehosky Tara Ferguson Sunny To

Amgen • George Rathmann cofounded Amgen • Amgen creates blood products to improve lives of people suffering through chemotherapy and kidney dialysis • Stock price multiplied over 150 times between 1983 and 2000

Avoid the “Death Spiral” • The purpose of bureaucracy is to compensate for incompetence and lack of discipline a problem that largely goes away if you have the right people in the first place.

Rathmann on his time at Abbott • http://www.jimcollins.com/media_topics/culture.html#audio=76 • Responsibility Accounting (Bernard H. Semler) • Every item of cost, income, and investment would be clearly identified with a single individual responsible for that item.

What we’re going to say • Freedom within a Framework • A culture, not a tyrant • Fanatical adherence to the Hedgehog Concept • Start a Stop Doing List

Freedom Within a Framework Freedom and responsibility within the framework of a highly developed system • The good-to-great companies built a consistent system with clear constraints, but they also gave people freedom and responsibility within the framework of that system. They hired self-disciplined people who didn’t need to be managed, and then managed the system, not the people.

Freedom Within a Framework Cont. • Circuit City: Bill Rivas, “It was a combination of great store managers who had ultimate responsibility for their individual stores, operating within a great system.” • Google: Their commitment to innovation depends on everyone being comfortable sharing ideas and opinions. Every employee is a hands-on contributor, and everyone takes on several roles.

Creating a Culture of Discipline BREAKTHROUGH! BUILDUP… DISCIPLINED People DISCIPLINED Thought DISCIPLINED Action

Creating a Culture of Discipline • Disciplined People: The transition begins not by trying to discipline the wrong people into the right behaviors, but by getting self-disciplined people in the first place. • Disciplined Thought: You need the discipline to confront the brutal facts of reality, while believing that you will create a path to greatness. • Disciplined Action: Many companies try to jump right to disciplined action, but with out the first two steps it is difficult to sustain.

Culture of Discipline Cont. • Everyone would like to be the best, but most organizations lack the discipline to figure out with egoless clarity what they can be the best at and the will to do whatever it takes to turn potential into reality. • Example: Wells Fargo in contrast to Bank of America. • Carl Reichardt, “There’s to much waste in banking, getting rid of it takes tenacity, not brilliance.”

A Culture, Not A Tyrant • Approach to discipline: • Good-to-great companies had Level 5 leaders – built an enduring culture of discipline • Unsustained companies had Level 4 leaders – who personally disciplined the organization through sheer force • Ex. 1 – Burroughs Corp. – Ray MacDonald • Controlled conversations, told all the jokes, criticized those not as smart as he • 13 years reign – remarkable results • Left, and the company was frozen by indecision and had “an inability to do anything” (Business Week)

A Culture, Not a Tyrant • Ex. 2 – Rubbermaid – Stanley Gault • “Yes, but I’m a sincere tyrant” • Brought strict discipline – rigorous planning, competitor analysis, market research, hard-nosed cost control, etc • “There is an incredible thoroughness in Rubbermaid’s approach to life.” • Rose dramatically under Gault - declined just as fast when he left • Ex. 3 – Chrysler – Lee Iacocca • “Right away I knew this place was in a state of anarchy [and] needed a dose of order and discipline – and quick.” – Iacocca • Entirely overhauled the management structure • “I felt like an Army Surgeon…We had to do radical surgery, saving what we could.” - Iacocca • Distracted or not, it’s clear that being a folk hero is a demanding sideline

FANATICAL ADHEARENCE TO THE HEDGEHOG CONCEPT

Pitney Bowes • Close relationship to the U.S. Postal Service and its patents on postage meter machines  100% of the metered mail market, no competition, huge market, never a loss  monopoly • Forced to license its patents to competitors • Losing market, failing in investments, losing money

P.B. (cont.) • Level 5 Fred Allen: best in the world at servicing the back rooms of businesses, passion about the delivering messages • Model of disciplined diversification. 45% of high-end fax market, investment in new technologies and products, link backroom machines to the Internet • Point: what happens when a company lacks the discipline to stay within the 3 circles and what can happen when it regains that discipline

Other Companies • Not follow the rules of the 3 circles • Lacked the discipline to understand its 3 circles or lacked the discipline to stay within the 3 circles • R.J.Reynolds – tobacco company, cancer, diversify away from its circles; bought a shipping container company and an oil company  RJR failed, sold Sea-Land versus Philip Morris, stayed and redifined its circles • In events of crisis, companies need to react by redefining their Hedgehog Concept, not stepping out of their circles. • A great company is much more likely to die of indigestion from too much opportunity than starvation from too little.  opportunity selection.

Nucor v. Bethlehem Steel • Success of Nucor: • translate simple concept into disciplined action consistent with that concept • Four layers of management, 25 members, no better benefits for executives • Well paid workers, executives and workers on the same boat • Status and authority in Nucor come from the leadership capabilities, not the position • Crisis in Bethlehem: • Extravagant office, corporate aircraft, golf course, country club, shower priority based on exec. Rank • 70s & 80s, Bethlehem declined, for the culture (climbing social hierarchy rather than customers, competitors, or changes in external world) • Result: • 80s: Nucor = 1/3 size of Bethlehem • 90s: Nucor’s revenue surpassed, Nucor’s average 5-year profit per employee exceeded 10 times, $1 invested in Nucor beat $1 invested in Bethlehem by >200 times • Nucor’s workers’ loyalty to the company  simple, crystalline Hedgehog Concept about aligning worker interests and the extent to be consistent with that concept

Corp. • What are we best in the world at? - Search Engine: “better and faster at finding the right answer than any other search engines at the time” • Passion: “Great isn’t good enough” - “We see being great at something as a starting point, not an endpoint. We set ourselves goals we know we can't reach yet, because we know that by stretching to meet them we can get further than we expected.” • Denominator: “Focus on the customers and all else will follow” “The needs for information crosses all borders.” • All they did to build a billion dollar empire: STICK

Start a “Stop Doing” List • Display of a remarkable discipline to unplug all sorts of extraneous junk • Kimberly-Clark – Darwin Smith • Stop playing the annual forecast game with Wall Street • Unplugged titles within the company • Unplugged layers of reporting – if you couldn’t justify why you needed 15 people reporting to you, then you would have none • Unplugged from all paper industry trade associations to become a “consumer company”

Budget Mechanism • Good-to-great companies institutionalized the discipline of “stop doing” through a budget mechanism • What is the purpose of budgeting? • Which arenas should be fully funded and which should not be funded at all • Kimberly-Clark didn’t reallocate resources • They completely eliminated the paper business, sold the mills, and invested all the money into their emerging consumer business • Competitor of Kimberly-Clark • “What they did is not fair…We just have too much invested in it, and we couldn’t have brought ourselves to do it.”

Taking a Risk • Once a great company understands their 3 circles, they rarely hedge their bets • All had the guts to make investments – once they understand their Hedgehog Concept! • The most effective investment strategy is a highly undiversified portfolio when you are right. • Highly undiversified – investing fully in those things that fit squarely within the 3 circles and eliminating everything else • Being right – understanding the Hedgehog Concept

Being Right • How do you know when you are right? • If you have Level 5 leaders on the bus • If you confront the brutal facts of reality • If you create a climate where the truth is heard • If you work within the 3 circles • If you frame all decisions in the context of a crystalline H.C. • If you act from understanding and not bravado • Once you know the right thing, do you have the discipline to do the right thing and, equally important, to stop doing the wrong things?

A Culture of Discipline Wrap-Up • Need freedom (and responsibility) within a framework • Getting disciplined people who engage in disciplined though and who then take disciplined action • “Rinse your cottage cheese” • You want a culture, and not a tyrant • Culture of discipline vs. a tyrant who disciplines • Fanatical adherence to the Hedgehog Concept • Single most important form of discipline • Willingness to shun opportunities that fall outside the 3 circles • “Stop doing” list • Eliminates junk – Must know when! • More important than “to-do” lists

Good to Great : A Culture of Discipline