Good to Great: Chapter 5 THE HEDGEHOG CONCEPT (Simplicity within the Three Circles)

1. Good to Great: Chapter 5 THE HEDGEHOG CONCEPT(Simplicity within the Three Circles) Group 4 Carly Buell Ryan Buell Brian Cote Shana Hartford April Miller Brittany Snethkamp Austin Stewart

2. Are you a Hedgehog or a Fox? In his famous essay “The Hedgehog and the Fox,” Isaiah Berlin divided the world into hedgehogs and foxes, based upon the ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.”

3. Parable of The Hedgehog and Fox Jim Collins uses the parable to illustrate the need to organize a complex world into a few simple principles or actions. A fox is a clever animal able to devise many tactics for attacking the hedgehog. Everyday the fox looks like he has another brilliant strategy to win his prey. The hedgehog, is a slow creature who’s defense is the same no matter how the fox attacks. Everyday the fox thinks, “Aha, I’ve got you now!” But everyday no mater what approach, as soon as the hedgehog senses danger he thinks, “Here we go again. Will he ever learn?” and rolls into a ball of spikes. Because its defense is simple and consistent, the fox never gets the hedgehog. While the fox tried everything to succeed, the hedgehog focused on only one thing - the thing that he did best.

4. Hedgehogs vs. Foxes Hedgehog • Integrates thinking into one overall concept • Simplify a complex world into a single idea • Reduces all challenges and dilemmas to simple ideas • See what is essential to the concept and ignores the rest Business Characteristics: • Simple ideas • Letting abilities determine activities • Sustained cash flow and profit • Discovering what makes you passionate Fox • Pursue many things at once • Scattered or diffused, moving on different levels • See the world in all its complexity • Inconsistent Business Characteristics: • Snazzy and complex strategies for growth • Letting ego determine activities • Getting revenue wherever you can • Stimulating passion

5. What separates those who make the biggest impact from all the others who are just as smart?= They’re hedgehogs Famous Hedgehogs: -Einstein and relativity E=mc² -Freud and unconscious mind -Adam Smith and division of labor -Karl Marx and class struggle All took a complex world and simplified it.

6. What does hedgehogs and foxes have to do with good to great? Everything. “Those who built the good-to-great companies were, to one degree or another, hedgehogs. They used their hedgehog nature to drive toward what we came to call the Hedgehog Concept for their companies. Those who led the comparison companies tended to be foxes, never gaining the clarifying advantage of a Hedgehog Concept, being instead scattered, diffused, and inconsistent.”

7. Ex: Walgreens • Walgreens’ hedgehog concept was built on being the best, most convenient drug store chain while achieving the highest profit per customer visit. • This Good to Great company developed a strategy of clustering stores heavily and selecting the best accessible locations. By adding high margin services Walgreens increased its profit per customer visit. The company prospered while other drug store chains went bankrupt.

8. Anything that does not relate to the hedgehog concept is not relevant. Recall creating a Blue Ocean is made up for four different aspects: Eliminate, Reduce, Raise, Create It’s asking the questions of what assumptions are still relevant / what needs to be changed, and involves a constant re-examination of what constitutes an organization’s hedgehog concept. The things an organization can’t be best in should be eliminated or reduced. The things it can be the best in should be raised or created.

9. Development of the Hedgehog Concept • Developed when trying to make sense of Walgreen’s spectacular returns. • It was not just strategy to account for this, since Eckerd also had strategy. • Strategy did not distinguish the good-to-great companies from the comparison companies.

10. The Difference Between Good-to-Great and Comparison Companies Good-to-great companies: Founded their strategies on deep understanding along three key dimensions – the three circles. Translated that understanding into a simple, crystalline concept that guided all their efforts – the Hedgehog Concept.

11. Three Circles of theHedgehog Concept What You Are Deeply Passionate About What You Can Be The Best In The World At What Drives Your Economic Engine

12. Three Circles of the Hedgehog Concept • You need all three circles to have a fully developed Hedgehog Concept. • If you only meet one of the circles in your work life you may build a successful company, but not a great one.

13. Understanding what you can and cannot be the best at • “They stick with what they understand and let their abilities, not their egos, determine what they attempt” – Warren Buffett (Wells Fargo)

14. Wells Fargo • Had tried to run as a global bank • Figured out their hedgehog concept • What can we potentially do better than any other company, and equally important, what can we not do better than any other company? • And if we cant be the best at it, then why are we doing it at all? • What it could be the best at: running a bank like a business, focusing on Western US

15. Point of a Hedgehog Concept • Most crucial point of chapter: A hedgehog concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial.- Jim Collins

16. Abbott vs. Upjohn • Two companies • Identical: revenues, profits, product lines, both family management, both lagged behind in pharmaceutical industry • Abbott broke through 10 years later producing 4 times the market and 5.5 times that of Upjohn and continued over 15 years • Abbott had developed hedgehog concept on what it could be the best at: • Creating products that contributed to cost effective health care

17. Core business vs. hedgehog concept • Just because something is your core business, just because you’ve been doing it for years, does not necessarily mean that you can be the best in the world at it. And if you cannot be the best in the world at your core business, then your core business cannot form the basis of your hedgehog concept. –Jim Collins

18. Hedgehog Concept is not the same as a core competence. • To go from good to great requires transcending the curse of competence. It requires the discipline to say, “Just because we are good at it, just because were making money and generating growth, doesn’t mean we can become the best at it.” • Good-to-great companies understood that focusing on what you can potentially do better than any other organization is the only path to greatness.

19. Good-to-great companies:“Best in the world at” circle

20. The Good-To-Great Companies and the “Best in the World at” circle of the Hedgehog Concept

21. These are familiar companies that formed the foundation of their shift from good to great. • These examples don’t show what the companies were already the best at, which many were not the best at anything. • It shows what they came to understand they could become best in the world at.

22. Circuit City-could became the best at implementing the “4-S” model (service, selection, savings, satisfaction) applied to big-ticket consumer sales. • Gillette-could become the best at building premier global brands of daily necessities that require sophisticated manufacturing.

23. Walgreens-could become the best at convenient drug-stores. • Wells Fargo-could become the best at running a bank like a business, with a focus on the western United States.

24. Understanding Your Passion • Through-out the good-to-great companies, passion became a key part of the Hedgehog Concept. • You can’t manufacture passion or “motivate” people to feel passionate. • You can only discover what ignites your passion and the passions of those around you. • The good-to-great companies did not say, “Okay folks, lets get passionate about what we do.” They said, “We should only do things we can get passionate about.”

25. Example of Gillette’s Passion: • Gillette executives made the choice to build sophisticated, relatively expensive shaving systems rather than fight a low-margin battle with disposable razors. • A journalist wrote about the CEO: “Zeien talks about shaving systems with the sort of technical gusto one expects from a Boeing or Hughes engineer.” • Gillette has always been at its best when it sticks to businesses that fit the Hedgehog Concept. • Gillette only advertized for staff who were passionate about the company and a top business school graduate wasn’t hired because she didn’t show enough passion for their products.

26. You don’t have to be passionate about the mechanics of the business. • The passion circle can be focused equally on what the company stands for. • For Example: Fannie Mae was passionate about helping people from all walks of life live the American dream by owning their own home. Not necessarily passionate about the mechanical process of packaging mortgages into market securities.

27. Great companies are filled with passion and with individuals who feel passionately about the company’s products or services. Great companies ask themselves: • Do you have passion for your business, product, or service? • Are you excited to get out of bed in the morning to provide something of value to your customers? • Have you surrounded yourself with others who are like-minded and feel passionate about what you are doing as well? • Even with a most sinful collection of consumer products (Marlboro cigarettes, Miller beer, 67% fat-filled Velveeta, Maxwell House coffee for caffeine-addicts, Toblerone for chocoholics, etc.), having passion for the product is key to sustained greatness.

28. Insight to your economic engine – What is your denominator? • The second circle of the hedgehog concept is to attain a deep understanding of your economic drivers. • A good-to-great company will take this understanding and build its system in accordance with it. • How does a company find their economic driver? • “If you could pick one and only one ratio to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?” • ‘Profit per x’ or ‘cash flow per x’

29. A company does not need to be in a great industry in order to become great. • The study by Jim Collins and his group found that five of the G2G companies were in great industries and the other five were in bad to terrible industries. • The one thing that was found in common was that each company found the one single economic denominator that would drive the company. • Nucor and Pitney Bowes were in the bottom five percent of industries (in total returns) and both beat the market by over five times from their transition year until 1995 • Wells Fargo beat the market by four times while the banking industry was ranked in the bottom fourth quartile.

30. Choose a denominator that is subtle and sometimes un-obvious • Wells Fargo: • Profit per employee • Deregulation was changing the bank industry to a commodity and Wells Fargo found that profit per loan or profit per deposit would no longer drive their company so they were the first bank to focus on stripped down banking and ATM distribution. • Nucor: • Profit per ton of finished steel • Understanding that a combination of a strong work ethic culture and the application of advanced manufacturing technology. Profit per employee or profit per fixed cost, the obvious choices, would not capture the economic engine of both driving forces as well as profit per ton of finished steel. • Fannie Mae: • Profit per mortgage risk level • Understand risk of default in a package of mortgages better than anyone else. Then it makes money selling insurance and managing the spread of that risk. • Walgreens: • Profit per customer visit • Understand that driving profit per customer would allow them to make their stores convenient. Making stores convenient is expensive, however with increasing profit per customer they could allow for the convenience factor.

31. From good to great and back again: • Hasbro attained all three circles of the hedgehog concept and became the best at acquiring and renewing tried and true toys • They then became a good-to-great company by understanding that a portfolio of classic toys and games would drive their economics as opposed to one time big hits. (For example: G.I. Joe and Monopoly) • After the CEO of Hasbro unexpectedly passed away, Hasbro lost the discipline to stay within the boundaries of the hedgehog concept and moved from great back to good. • If you successfully apply these ideas, but then stop doing them, you will slide backward from great-to-good, or worse. The only way to remain great is to keep applying the fundamental principles that mad you great!

32. The Triumph of Understanding over Bravado • Pre-hedgehog • Like groping through the fog. Making progress but can’t see all that well • Hedgehog • Break into a clearing and can see for miles. Each juncture requires less deliberation • Post-hedgehog • Miles of trail move swiftly beneath you

33. Great Western and Fannie Mae • Great Western • All about wanting to grow any way it could • Continually found itself acquiring companies in an expansion binge • Fannie Mae • Had one simple understanding: that it could be the best capital markets player in anything related to mortgages • Inspired workers by its vital role in democratizing home ownership • After 1984 when Fannie Mae clarified its Hedgehog Concept, the company exploded upward while Great Western lagged around until its acquisition in 1997

34. The Council • Consists of a group of the right people who participate in dialogue and debate guided by the three circles. • Ask Questions • Dialogue and Debate • Executive Decisions • Autopsies and Analysis

35. Hedgehog Concept • Does every organization have a hedgehog concept to discover? • Most good-to-great companies were not the best in the world at anything • Infused with the Stockdale Paradox, every company prevailed in its search • When you get the concept right, it has the quiet ping of truth