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

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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

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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.

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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
  whos defense is the same no matter how the fox
  attacks. Everyday the fox thinks, Aha, Ive 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.

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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

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What separates those who make the biggest
impact from all the others who are just as
smart? Theyre hedgehogs

• Famous Hedgehogs
• -Einstein and relativity Emc²
• -Freud and unconscious mind
• -Adam Smith and division of labor
• -Karl Marx and class struggle
• All took a complex world and simplified it.

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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.

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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.

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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
• Its asking the questions of what assumptions are
  still relevant / what needs to be changed, and
  involves a constant re-examination of what
  constitutes an organizations hedgehog concept.
• The things an organization cant be best in
  should be eliminated or reduced. The things it
  can be the best in should be raised or created.

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Development of the Hedgehog Concept

• Developed when trying to make sense of Walgreens
  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.

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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.

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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
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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.

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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)

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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

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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

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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

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Core business vs. hedgehog concept

• Just because something is your core business,
  just because youve 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

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• 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, doesnt 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.

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Good-to-great companiesBest in the world at
circle
Abbot Laboratories Shifted focus to creating portfolio of products that contribute to lower cost health care
Circuit City Distinction not in 4-s model alone, but in consistent superior execution of the model
Fannie Mae Could be full capital market player, and develop a unique capability to asses risk in mortgage related securities
Gillette Ability to manufacture billions of low cost super high tolerance products and ability to build global consumer brands
Kimberly Clark Skill at creating category killer brands
Kroger Strength in grocery store innovation
Nucor Creating performance culture and making far sighted bets on new manufacturing technologies
Phillip Morris Diversify into non tobacco arenas, but stayed close to its brand building strengths in sinful products and food
Pitney Bowes Not just a postage company, had particular strength in supplying backrooms with sophisticated machines
Walgreens Not just a drug store, convenient store too, began seeking best sites for convenience
Wells Fargo A business that happened to be in the banking industry, couldnt be best it world, but could in Western United States
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The Good-To-Great Companies and the Best in the
World at circle of the Hedgehog Concept
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• These are familiar companies that formed the
  foundation of their shift from good to great.
• These examples dont 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.

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• 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.

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• 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.

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Understanding Your Passion

• Through-out the good-to-great companies, passion
  became a key part of the Hedgehog Concept.
• You cant 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.

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Example of Gillettes 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 wasnt hired because she didnt
  show enough passion for their products.

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• You dont 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.

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• Great companies are filled with passion and with
  individuals who feel passionately about the
  companys 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.

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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

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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.

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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.

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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!

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The Triumph of Understanding over Bravado

• Pre-hedgehog
• Like groping through the fog. Making progress but
  cant 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

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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

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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

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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