What Else Makes a Company Great?
Collins discovered that truly remarkable companies are defined by aspects other than leadership. However, it is the responsibility of Level 5 executives to understand these elements and master them effectively.
Level 5 leaders understand the importance of putting people first and strategy second. This means finding the right people for the organization, getting rid of the wrong ones, and putting employees in the appropriate positions, all before addressing business tactics.
This element is named after Admiral James Stockdale, a POW during the Vietnam War who expressed a notably contradictory belief system. To survive, he told himself, “Life couldn’t be worse at the moment, and his life would someday be better than ever.” In business, this translates to accepting difficult realities of a business’s current condition, while believing that the organization will one day rise above them.
Collins refers to the building of a great company as a metaphorical “flywheel.” Truly great organizations gradually build up momentum until a “breakthrough” moment where overwhelming success clicks into place. This element is defined by a company’s commitment to a slow and steady build.
The Hedgehog Concept
Derived from an essay by the philosopher Isaiah Berlin, the “hedgehog concept” refers to a comparison between the abilities of a hedgehog and a fox. In the essay, foxes are characterized as knowing a little about a lot of subjects, while hedgehogs know a lot about a single thing. Collins believes businesses that act like hedgehogs are more likely to achieve greatness. Hedgehog behavior means understanding three things:
- What a company is capable of being best at
- How its economics can work most effectively
- What best makes its people passionate
Focusing on these three factors, Collins explains, eliminates unnecessary and unprofitable efforts elsewhere.
Great companies have a particular relationship with technology. On the one hand, they refrain from using technology simply because it’s trendy or cutting edge. However, they do make investments in technologies that help contribute to its mission. These decisions are made with a careful and discerning eye.
A Culture of Discipline
Collins believes great companies exhibit remarkable discipline in three areas: people, thought and action. Disciplined people, he explains, eliminate the need for hierarchy. Disciplined thought removes bureaucracy. And disciplined action eliminates the need for excessive control. Together, all three result in extraordinary business performance.
Gaining mastery and understanding in these areas isn’t quite enough, however. Level 5 leaders must also be cautious of pitfalls.
When Things Go Wrong
Even when the factors of success fall into place, Level 5 leaders must remain constantly vigilant. No company is invulnerable. Circuit City is a prime example of what can happen when a successful business becomes lax. One of Collins’s original 11 “great” companies, the electronics giant went out of business in 2009, directly impacting more than 250,000 people. Documentarian Tom Wulf identifies three causes of Circuit City’s remarkable downfall.
Overconfidence and Complacency
Wulf describes how Circuit City’s leaders, steering a company with the No. 1 performing stock on the New York Stock Exchange, failed to watch the progress of their competitors. Before long, Circuit City’s annual revenue was surpassed by its rivals.
Poor Decision-Making Processes
When faced with the reality of becoming No. 2 in their industry, company leaders tried to compensate through several untested initiatives. Doing so resulted in poor changes to their store layouts, the elimination of their highly successful employee training program and outsourcing of many operational processes. All of these factors contributed to additional falling revenue.
Favoring Stakeholders Over Customers and Associates
As revenue declined, the value of the company’s stocks followed. This resulted in pressure from stockholders for the company to buy back $920 million worth of stock. Company leaders did so, thus disregarding an opportunity to use that money to reinvest in operations.
These failings illustrate a certain combination of hubris and timidity that Level 5 leaders notably lack. On Collins’s leadership scale, executives at Circuit City were perhaps at Level 4. To reach Level 5 would have meant innately having — or else acquiring — certain crucial personal characteristics, attitudes and decision-making processes.
Level 4 vs. Level 5
So how does one get from Level 4 to Level 5? Doing so isn’t easy. As mentioned previously, Level 5 leaders possess a certain distinct combination of professional will and personal humility.
Professional will means:
- Doing what must be done, no matter how difficult
- Giving credit for your company’s success to others, to external factors and to good luck, instead of your own actions
- Generating excellence in a company’s outcomes
- Taking actions to ensure the company will endure beyond your tenure
Personal humility means:
- Never being boastful or welcoming of public praise
- Working with calm determination
- Emphasizing a standard of excellence over your ability to inspire through charisma
- Using personal ambition to make the company greater, rather than making yourself successful
- Looking to yourself when things go wrong instead of to others, external factors or bad luck
Essentially, Collins explains, Level 4 and Level 5 leaders are distinguished by what they choose to do with their ambitions and talent. While Level 4 leaders may run successful companies, they tend to do so in an egotistical, self-fulfilling manner. On the other hand, Level 5 leaders run their companies in the spirit of service. While one fails to prepare the company for success after his or her departure, the other takes great care in doing so.
Although reaching Level 5 leadership is a challenge, it is not without reward. Individuals who reach Level 5 leadership in their careers are compensated with tremendous responsibility, respect and perhaps best of all, a legacy of extraordinary influence on their companies.
Additional sources: Good to Great, Strategy + Business
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