Chapter 5 The Hedgehog Concept Katie Klingele John Stewart Heather Hignojos

History Behind Hedgehog vs. Fox Based upon an ancient Greek parable ◦ “The Fox knows many things, but the Hedgehog knows one big thing.” The Fox watches the Hedgehog for the opportunity to attack, but senses danger and curls up in self defense becoming a ball of spikes, only to defeat the Fox every time.

Fox vs. Hedgehog Foxes pursue many ends at the same time ◦ Scattered or diffused, moving on many levels Hedgehogs simplify a complex world into a single organized idea, principle or concept that unifies and guides the everything ◦ Focuses on one main point and work to make it the best

Famous Hedgehogs Freud and the unconscious Darwin and Natural Selection Marx and class struggle Einstein and relativity Adam Smith and division of labor All took a complex situation/ idea and turned it into simplicity

Walgreens Walgreens (Hedgehog) ◦ Over 25 years generated stock returns over 15 times more than companies such as Coca- Cola, GE, Merck and Intel ◦ Simplified the idea of the drugstore ◦ Figured out the most convenient locations to place the stores, sometimes 9 stores in one square mile; mainly on corners and intersections for easy-in and easy-out access

Walgreens Cont’d Pioneered the Drive-Thru Pharmacy Figured out that the more profit per customer = more cash for more stores ◦ One hour photo processing ◦ Every day groceries ◦ Simple toiletries

Eckerd Started out as a chain of drugstores but was eventually beat out by Walgreens Eventually moved into the home video market with the purchase of American Home Video Eckerd’s CEO felt that this acquisition would bring Eckerd back to the top Eckerd no longer exists as an independent company

The Three Circles What can you be the best in the world at (and what can you NOT be the best at) What drives your economic engine What are you deeply passionate about

The Three Circles Cont’d Must have all three to develop a Hedgehog concept A mix of what you absolutely love to do, what you are paid for doing, and what you are born to do

Understand What You Can (And Cannot) Be The Best At Wells Fargo began setting out to be a global bank, but started focusing on what they knew and did best Asked themselves what could they potentially do better than anyone else, and what they couldn’t Decided they could never beat Citicorp at global banking, but they could be the best at running a bank like a business; focused on the Western US This decision turned Wells Fargo into a Hedgehog

Understand What You Can (And Cannot) Be The Best At Cont’d The Hedgehog concept is not a goal to be the best… it is understanding what you can be the best at Abbott Labs vs. Upjohn ◦ Were almost identical up until the mid 1970’s ◦ Abbott decided it was too late to be the best pharmaceutical company, so it decided to be the best at creating products for cost-effective health care ◦ Upjohn never thought to find what they could be the best at, rather they thought they could take on giant Merck. ◦ Upjohn just kept falling more and more behind, going into chemicals and plastics

Best In The World Companies Abbott Laboratories- could become the best at creating a product portfolio that lowers the cost of healthcare Fannie Mae- could become the best capital markets player in anything that pertains to mortgages Kroger- could become the best at innovative super- combo stores Philip Morris- could become the best in the world at building brand loyalty in cigarettes and later, other consumables Walgreens- could become the best at convenient drugstores Wells Fargo- could become the best at running a bank like a business, with a focus in the western US

What Drives Your Economic Engine A company does not need to be in a great industry to be a great company What is your “economic denominator” ◦ Pick only one ratio  Profit per x  Cash flow per x  Coca-Cola’s ratio is profit per unit case volume Figure out which is going to systematically increase over time

What Drives Your Economic Engine Cont’d Walgreens switched from profit per store to profit per customer visit ◦ It was able to increase convenience AND profitability Wells Fargo went from profit per loan and profit per deposit to profit per employee ◦ This made WF rely primarily on local branches and ATMs You do not have to have only one denominator, but the fewer you have the easier it will be to decide on how to move forward in a good-to-great direction

Economic Denominators of Companies Abbott- per employee Fannie Mae- per mortgage risk level Kroger- per local population Philip Morris- per global brand category Walgreens- per customer visit Wells Fargo- per employee

Economic Denominators All good-to-great companies have found their own denominator while their comparison companies did not Hasbro is an exception ◦ Understands the Hedgehog Concept ◦ Focuses on its timeless classics such as Monopoly and GI Joe rather than coming up with new and innovative toys ◦ Why fix it if it isn’t broken

What You Are Deeply Passionate About Throughout the Good-to-Great companies, passion became a key part of the Hedgehog Concept You can’t manufacture passion or “motivate” people to feel passionate. You can only discover what ignites your passion and the passions of those around you. Phillip Morris vs. R. J. Reynolds

What You Are Deeply Passionate About You don’t have to just be passionate about the mechanics of the business, but you can be passionate about what the company stands for Fannie Mae ◦ Motivated by the idea of helping people realize the American dream of owning their home.

What You Are Deeply Passionate About Coca-Cola ◦ Passion- Committed in heart and mind ◦ Be the Brand- Inspire creativity, passion, optimism and fun ◦ It’s the passion of our people that make us who we are ◦ Support their communities, and dedicated to preserving and protecting the planet

The Triumph of Understanding Over Bravado “Pre-hedgehog” to “Post-hedgehog” ◦ Difficulties at pre-hedgehog ◦ At hedgehog ◦ Effortlessness at post-hedgehog Why comparison companies didn’t “get through the fog” ◦ They never asked the right questions ◦ They set their goals and strategies more from bravado than from understanding

The Triumph of Understanding Over Bravado Fannie Mae vs. Great Western ◦ Growth is not a Hedgehog Concept ◦ The right concept will have you figuring how to not grow too fast Coca-cola ◦ They create new markets in developing countries knowing that it will take a good amount of time before they start to see profits.

Getting the Hedgehog Concept: An Iterative Process THE COUNCIL Ask Questions Dialogue and Debate Executive Decisions Autopsies and Analysis

Characteristics of the Council 1. To gain understanding about important issues 2. Assembled and used by the leading executive and consists of 5-12 people 3. Each member can argue and debate in search of understanding 4. Each member retains the respect of every other Council member, without exception 5. It does not seek consensus 6. Each member has deep knowledge about some aspect of the organization and/or environment in which it operates 7. Includes key members of the management team 8. It is a standing body 9. It meets periodically 10. It is an informal body 11. It can have a range of possible names

Do All Organizations have a Hedgehog Concept to Discover? Every good-to-great company prevailed in its search for a Hedgehog concept Stockdale Paradox ◦ Retain faith that you will prevail in the end, regardless of the difficulties AND at the same time confront the most brutal facts of your current reality, whatever they might be.

Takeaways of the Chapter You might have a competence but not necessarily have the capacity to be the best in the world at that competence. Good-to-great companies set their goals and strategies based on understanding; comparison companies on bravado. The Hedgehog Concept takes time to form.