Great by Choice Jim Collins and Morten Hansen Uncertainty, chaos and luck—Why some thrive despite them all!

South Pole Victory awaits him who has everything in order—luck people call it. Defeat is certain from him who has neglected to take the necessary precautions in time; this is called bad luck. -Roald Amundsen

Selection Criteria Spectacular results for an era of 15+ years relative to the stock market and industry Turbulent environment—uncontrollable, fast-moving, uncertain and potentially harmful Began from a position of vulnerability, being young and/or small at the start of its 10X journey

10X Study Companies 10X Case Comparison Dynastic Era of Study Value of $10,000 Invested Performance Relative to Market Performance Relative to Industry Amgen Genentech 1982-2002 $4.5M 24 X Market 77.2 X its industry Biomet Kirschner 1977-2002 $3.4M 18.1 X Market 11.2 X its industry Intel AMD 1968-2002 $3.9M 20.7 X Market 46.3 X its industry Microsoft Apple 1975-2002 $10.6M 56 X Market 118.8 X its industry Progressive Insurance Safeco 1965-2002 $2.7M 14.6 X Market 11.3 X its industry Southwest Airlines PSA 1967-2002 $12.0M 63.4 X Market 550.4 X its industry Stryker US Surgical Corporation $5.3M 28 X Market 10.9 X its industry

Myths Successful leaders in a turbulent world are bold, risk-seeking visionaries Innovation distinguishes 10X companies in a fast-moving, uncertain, and chaotic world A threat-filled world favors the speedy; you’re either the quick or the dead Radical change on the outside requires radical change on the inside Great enterprises with 10X success have a lot more good luck

Behaviors in 10X Leadership Fanatic DISCIPLINE Level 5 AMBITION Empirical CREATIVITY Productive PARANOIA

Fanatic Discipline Consistency of Action Consistency with: Values Long-term goals Performance standards Long-term aspirations Self Discipline=inner will to do whatever it takes to create a great outcome, no matter how difficult

20 Mile March Consistent performance no matter what Lower bound and Upper bound Discomfort Unwavering commitment to high performance in difficult conditions Discomfort of holding back in good conditions

20 Mile March Which company would you invest in, A or B? Both small companies Fast growing industry Spinning out disruptive technology Thriving on rapidly growing customer demand Company A: 25% average annual growth 19 years Company B: 45% average annual growth 19 same years

20 Mile March Additional information: Company A Company B Standard Deviation=15 percentage points Standard Deviation=116 percentage points Maintain consistent growth staying below 30% but achieving 20% or more almost every year Growth rate exceed 30% for13 of 19 years but ranged from +313% to -200%

Stryker: 350 times USSC: Fell below market and disappeared

Stryker’s 20 Mile March Achieve 20% net income growth every year Law—not an option Snorkel Award for those that lagged Behind for 2 years—CEO would “help” working around the clock No excuses

Elements of a Good 20 Mile March Performance markers—lower bound of acceptable achievement Self-imposed constraint—upper bound in exceptionally good conditions Tailored to enterprise Lies largely within your control to achieve Goldilocks time frame—not too short and not too long but just right Designed and self-imposed by the enterprise Must be achieved with great consistency. Good intentions don’t count

20 Mile March Accomplishing a 20 Mile March, consistently, in good times and bad, builds confidence. Tangible achievement in the face of adversity reinforces the 10X perspective: we are ultimately responsible for improving performance. We never blame circumstance; we never blame the environment.

20 Mile March Failure to 20 Mile March in an uncertain and unforgiving environment can set you up for catastrophe. Every comparison case had an episode in its history in which failing to 20 Mile March led to a devastating outcome. In contrast, only two 10X companies had episodes of failing to 20 Mile March, and neither of these episodes led to a catastrophe because the 10X companies self-corrected before a storm could rise up and kill them.

20 Mile March Like Amundsen and his team, the 10Xers and their companies use their 20 Mile Marches as a way to exert self-control, even when afraid or tempted by opportunity. Having a clear 20 Mile March focuses the mind; because everyone on the team knows the markers and their importance, they can stay on track.

Exercise Determine a good 20 mile march for your organization

Empirical Creativity Is innovation a key to successful companies? Don’t creative companies outperform other less creative companies?

Empirical Creativity Only 9% of pioneers end up as the final winners in a market 64% of pioneers failed outright. It seems that pioneering innovation is good for society but statistically lethal for the individual pioneer.

Empirical Creativity The evidence from our research does not support the premise that 10X companies will necessarily be more innovative than their less successful comparisons. And in some surprise cases, such as Southwest Airlines versus PSA and Amgen versus Genentech, the 10X companies were less innovative than the comparisons.

Innovation Each environment has a level of “threshold innovation” that you need to meet to be a contender in the game… Companies that fail even to meet the innovation threshold cannot win. But once you’re above the threshold, especially in a highly turbulent environment, being more innovative doesn’t seem to matter very much.

Discipline and Innovation Intel versus Advance Memory Systems—1970 AMS produced first 1000 bit memory chip Intel rushed to market its 1103 chip late 1970 but had problems In spite of these problems, by 1973 Intel crushed AMS Reason: “Intel Delivers”--Intel believed that innovation without discipline leads to disaster.

Discipline The great task, rarely achieved, is to blend creative intensity with relentless discipline so as to amplify the creativity rather than destroy it. When you marry operating excellence with innovation, you multiply the value of your creativity. And that is what 10Xers do.

Fire Bullets then Cannonballs Amgen was created to do great things but didn’t know what. So they tried many possible options until they had enough empirical evidence to put all of their efforts into one big project.

Empirical Creativity Amgen’s early days illustrate a key pattern we observed: fire bullets, then fire cannonballs. First, you fire bullets to figure out what will work. Then once you have empirical confidence based on the bullets, you concentrate your resources and fire a cannonball. After the cannonball hits, you keep 20 Mile Marching to make the most of your big success.

What Makes a Bullet? A bullet is an empirical test aimed at learning what works and that meets three criteria: Low Cost Low Risk Low Distraction

Empirical Combination of Activities Fire bullets Assess: Did your bullets hit anything? Consider: Do any of your successful bullets merit conversion to a big cannonball? Convert: Concentrate resources and fire a cannonball once calibrated Don’t fire uncalibrated cannonballs Terminate bullets that show no evidence of eventual success

Empirical Validation If an enterprise gets slammed by a series of shocks just as its uncalibrated cannonballs go crashing off into space, it’s more likely to have a catastrophic outcome (PSA). In the face of instability, uncertainty, and rapid change, relying upon pure analysis will likely not work, and just might get you killed. Analytic skills still matter, but empirical validation matters much more (Progressive). PSA took the entire travel experience as their domain. Bought hotels and rental car companies

Steps A big, successful venture can look in retrospect like a single-step creative breakthrough when, in fact, it came about as a multistep iterative process based more upon empirical validation than visionary genius. The marriage of fanatic discipline and empirical creativity better explains Apple’s revival than breakthrough innovation per se.

Exercise Determine two “bullets” that would apply to your business

Productive Paranoia Build cash reserves and buffers to prepare for unexpected events and bad luck before they happen Bound risk—Death Line risk, asymmetric risk, and uncontrollable risk—and manage time-based risk. Zoom out, then zoom in, remaining hypervigilant to sense changing conditions and respond effectively

Leading Above the Death Line

Productive Paranoia 1 Extra Oxygen canisters—it’s what you do before the storm comes Cash reserves—10X companies carried 3-10 times the ration of cash to assets (87,117 companies compared) 10Xers are “Paranoid, neurotic freaks”—even when they were small and starting out Black Swan events—Hard to predict but high probability they will occur

Southwest 2001 On 9/11, SW had $1B in cash on hand and highest credit rating in the industry Lowest cost-per-available-seat-mile Crisis plan in place No jobs cut No flights cut Turned a profit in 2001 including Q4 Turned a profit in 2002

Productive Paranoia 2—Bounding Risk Death Line risk--Kill you or severely damage the enterprise Asymmetric risk—Potential downside is much bigger than the potential upside Uncontrollable risk—Expose the enterprise to forces and events that it has little ability to manage or control

Risks

Speed—Time Based Risk

Acting on Risk Sometimes acting too fast increases risk. Sometimes acting too slow increases risk. The critical questions is, “How much time before your risk profile changes?” Do you have Seconds? Minutes? Hours? Days? Weeks? Months? Years? Decades? The primary difficulty lies not in answering the questions but in having the presence of mind to ask the question.

Productive Paranoia 3: Zoom Out, then Zoom In Gorilla in the room Zoom Out Sense a change in conditions Assess the time frame: How much time before the risk profile changes? Assess with rigor: Do the new conditions call for disrupting plans? If so, how? Zoom In Focus on supreme execution of plans and objectives

Intel’s Zoom Out then Zoom In Intel identified that Intel’s 8086 processor was falling behind Motorola’s 68000 chip—Intel becoming obsolete Dec 4, 1979 Special Task Force formed Analyzed the threat—Why is Motorola winning? How important is it? How can we counter Counterattack—Zoom In—2000 design wins within a year

Action When facing fast-moving threats, 10X teams neither freeze up nor immediately react; they think first, even when they need to think fast. Remember, not all time is equal. Live serves up moments that count much more than other moments. In 1910, Amundsen was planning to go to the North Pole. When he learned that Cook and Peary had already reached 90 degrees North he secretly changed plans to head South but didn’t tell his crew until they had set sail from Madeira, Portugal.

Level 5 Leadership Don’t define themselves by money, fame or power They define themselves by impact and contribution and purpose The central question is, “What are you in it for?” 10X leaders can be bland or colorful, uncharismatic or magnetic, understated or flamboyant, normal to the point of dull or just flat-out weird—none of this really matters, as long as they’re passionately driven for a cause beyond themselves.

SMaC Recipe Specific, Methodical and, Consistent Set of durable operating practices that create a replicable and consistent success formula—include things not to do Not strategy, culture, core values, purpose, or tactics

SMaC Advantages Keep bearings and sustain high performance in extreme conditions Creates confidence that the team can perform following the SMaC Establishes control in areas that you have control The more unforgiving your world, the more SMaC you need to be

SMaC Durable—lasts over time Comparison companies changed recipes 4X as much as the 10Xers Requires fanatic discipline—stay the course The signature of mediocrity is not an unwillingness to change; the signature of mediocrity is chronic inconsistency.

Exercise Create your SMaC Identify at least three durable operating practices for your company One must be a “do not”

Luck Definition—Must meet all three tests Some significant aspect of the event occurs largely or entirely independent of the actions of the key actors in the enterprise The event has a potentially significant consequence (good or bad) and The event has some element of unpredictability

Luck Did 10Xers have more good luck than comparison companies? No! Did comparison companies have more bad luck than the 10Xers? No! Did the 10Xers have a big “luck spike” that gave them a huge advantage? Only 1 (with reservations) Did the 10Xers get more luck early? No!

Luck Adding up all the evidence, we found that the 10X cases were not generally luckier than the comparison cases. The 10X cases and the comparisons both got luck, good and bad, in comparable amounts. The evidence leads us to conclude that luck does not cause 10X success. People do. The critical question is not “Are you lucky” but “Do you get a high return on luck?”

Defining Moments in 10X Journey Essential skill for 10X results Luck Don’t Confuse Luck with Return on Luck (ROL) Bad Luck Good Defining Moments in 10X Journey Essential skill for 10X results Can lead to hitting the Death Line A sure path to mediocrity Great Return on Luck Poor

Luck 10Xers exercise productive paranoia, combined with empirical creativity and fanatic discipline, to create huge margins of safety. If you stay in the game long enough, good luck tends to return, but if you get knocked out, you’ll never have the chance to be lucky again. Luck favors the persistent, but you can persist only if you survive.

Summary Fanatic DISCIPLINE Empirical Productive CREATIVITY PARANOIA Level 5 AMBITION Empirical CREATIVITY Productive PARANOIA

Questions? Leon Spackman Dir, Vendor Relations Lovelace Health Plan Leon.spackman@lovelace.com 505-727-5288 505-401-8850