Title: Good to Great: Chapter 5 THE HEDGEHOG CONCEPT (Simplicity within the Three Circles)
1Good 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
2Are 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.
3Parable 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.
4Hedgehogs 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? 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.
6What 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.
7Ex 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.
8Anything 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.
9Development 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.
10The 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.
11Three 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
12Three 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.
13Understanding 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)
14Wells 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
15Point 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
16Abbott 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
17Core 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
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, 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.
19Good-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
20The 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 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.
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.
24Understanding 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.
25Example 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.
26- 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.
27- 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.
28Insight 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
29A 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.
30Choose 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.
31From 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!
32The 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
33Great 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
34The 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
35Hedgehog 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