Chapter 5 - The hedgehog concept (simplicity with the three circles)
- 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 cam eto call a 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.
- The essential strategic difference between the good-to-great and comparison companies lay in two fundamental distinctions. First, the good-to-great companies founded their strategies on deep understanding along three key dimensions - what we came to call the three circles. Second, the good-to-great companies translated that understanding into a simple, crystalline concept that guided all their efforts - hence the term HedgeHog Concept.
- This brings me to one of the most crucial points of this chapter: A Hedgehod 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.
- The Abbott versus Upjohn case highlights the difference betwwen a "core business" and a Hedgegod Concept. Just becayse something is your core business - just because you've been doing it for years or perhaps even decades - 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 you're core business cannot form the basis of your Hedgehog Concept.
- 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 we're making money and generating growth - doesn't nevessarily mean we can become the best at it. " The good-to-great companies understood that doing what you are good at will only make your good; focusing solely on what you can potentially do better than any other organization is the only path to greatness.
- Our study clearly shows that a company does not need to be in a great industry to become a great company. Each good-to-great company built a fabulous economic engine, regardless of the industry. They were able to do this because they attained profound insights into their economics.
- The denominator can be quite subtle, sometimes even unobvious. The key is to use the question of the denominator to gain understanding and insight into you econmic model.
- The good-to-great companies do not say, "Okay, folks, let's get passionate about what we do." Sensibly, they went the other way entirely: We should only do those things that we can get passionate about. Kimberly-Clark executives made the shift to paper-based consumer products in large part because they could get more passionate about them. As one executive put it, the traditional paper products are okay, "but they just don't have the charisma of a diaper".
- For the comparison companies, the exact same world that had become so simple and clear to the good-to-great companies remained complex and shrouded in mist. Why? For two reasons. First, the comparison companies never asked the right question, the questions prompted by the three circles. Second, they set their goals and strategies more from brovado than from understanding.
- The Fannie Mae vesus Great Western case highlights an essential point: "Growth!" is not a Hedgehod Concept. Rather, if you have the right Hedgehod Concept and make decisions relentlessly consistent with it, you will create such momentum that you main problem will not be how to grow, but how not to grow too fast.
- Characteristics of the Council
1. The council exists as a device to gain understanding abount important issues facing the organization.
2. The Council is assembled and used by the leading executive and usually consists of five to twelve people.
3. Each Council member has the ability to argue and debate in search of understanding, not from the egoistic need to win a point or protect a parochial interest.
4. Each Council member retains the respect of every other Council member, without exception.
5. Council members come from a range of perspectives, but each member has deep knowledge about some aspect of the organization and/or the environment in which it operates.
6. The Council includes key members of the management team but is not limited to members of the management team, nor is every executive automatically a member.
7. The Council is a standing body, not an ad hoc committee assembled for a specific project.
8. The Council meets periodically, as much as once a week or as infrequently as once per quarter.
9. The Council does not seek consensus, recognizing that consensus decisions are often at odds with intelligent decisions. The responsibility for the final decision remains with the leading executive.
10. The Counsil is an informal body, not listed on any formal organization chart or in any formal documents.
11. The Council can have a range of possible names, usually quite innocuous. In the good-to-great companies, they had benign names like Long-Range Profit Improvement Committee, Corporate Products Committee, Strategic Thinking Group, and Executive Council.
- To go from good to great requires a deep understanding of three intersecting circles translated into a simple, crystalline concept (the Hedgehog Concept).
[diagram] - Intersection of the following
1. What are you deeply passionate about
2. What you can be the best in the world at
3. what drives your economic engine.
- The key is to understand what your organization can be the best in the world at, and equally important what it cannot be the best at - not what it "wants" to be the best at. The Hedgehog Concept is not a goal, strategy, or intention; it is an understanding
- 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.
- The "best in the world" understanding is a much more severe standard than a core competence. You might have a competence but not necessarily have the capacity to be truly the best in the world at that competence. Concersely, there may be activities at which you could become the best in the world, but at which you have no current competence.
- To get insight into the drivers of your economic engine, search for the one denominator (profit per x or, in the social sector, cash flow per x) that has the single greatest impact.
- Good-to-great companies set their goals and strategies based on understanding: comparison companies set their goals and strategies based on bravado.
- Getting the Hedgehog Concept is an interative process. The Council can be a useful device.
- The good-to-great companies are more like hedgehogs - cimples, dowdy creatures that know "one big thing" and stick to it. The comparison companies are more like foxes - crafty, cunning creatures that know many things yet lack consistency.
- It took four years on average for the good-to-great companies to get a Hedgehog Concept.
- Strategy per se did not separate the good-to-great companies from the comparison companies. Both sets had strategies, and there is no evidence that the good-to-great companies spent more time on strategic planning than the comparison companies.
- You absolutely do not need to be in a great industry to produce sustained great results. No matter how bad the industry, every good-to-great company figured out how to produce truly superior economic returns.