Kelly Bredensteiner Christine Cox Cailtin Greenwood Michele Haynes

Hedgehog or Fox Fox Knows many things See the world in all its complexity and pursue many things at one time Moving on many levels and are then scattered and are not unified on one concept Hedgehog Knows one big thing Simplify a complex into a single organized idea Reduces all challenges and dilemmas

Walgreens Took a simple concept and implemented with fanatical consistency …“The best, most convenient drugstores, with high profit per customer visit.” Replace all inconvenient locations with convenient ones Pioneered drive-through pharmacies Idea of profit per customer visit Tight clustering of stores - local economies of scale High-margin services - Increase profit per customer visit More convenience – more visits more profit per visit

The Three Circles “A hedgehog Concept is a simple, crystalline concept that flows form deep understanding about the intersection of the following three circles:” What you can be the best in the world at? What drives your economic engine? What are you deeply passionate about?

Three Circles Concept What you Are Deeply Passionate About What you Can Be the Best In The World At What Drives Your Economic Engine

Understanding what you can and cannot be the best at Put away the ego and understand: 1. What are you best at? 2. What are you not best at? 3. What do you need to change or dump? (outsource?)

Plans vs. Ability Hedgehog Concept is NOT what you plan or intend to be the best at It IS What you CAN be best at.

Wells Fargo- Keeping it Simple What it didn’t do well: International operations What it did well: Running a bank like a business esp. in the western US How it kept it simple: Dropped most of its IOs Conclusion: When deregulation occurred, Wells Fargo was king

Core vs. Ability Just because its your core. Just because it’s what you have been doing for years. Does NOT mean its what you’re best at.

Abbott vs. Upjohn: Changing Cores Both similar companies in 1964 Why did Abbott change so dramatically? How it employed the Hedgehog Concept: Lost chance to be best in pharmaceuticals to Merck Still chance to provide cost effective health care with Nutritional and diagnostic services

Money and Growth vs. Greatness Just because you’re growing and making money, Does NOT mean you are the best in the world. “Doing only what you are good at will only make you good.” (pg 101) Greatness focuses on your best attributes Ex: SAT’s and the exceptional math student vs. the average student

Companies Employing the Hedgehog Concept Gillette Kimberly-Clark Kroger Nucor Philip Morris Pitney Bowes Walgreens Wells Fargo

Insight Into Your Economic Engine- What is Your Denominator? A company does not need to be in a great industry to become a great company Each good-to-great company built an excellent economic engine They attained profound insights in their economies Attained a deep understanding of the key drivers in its economic engine and built its system in accordance with this understanding

Economic Denominator All good-to-great companies have an economic denominator Asking one question can lead to profound insight into the inner workings of an organization’s economics This question is “if you could pick one and only one ratio- profit per x (or, in the social sector, cash flow per x)- to systematically increase over time, what x would have the greatest and most sustainable impact on your economic engine?

Economic Denominator Example 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 your economic model You can have more than one economic denominator, but it is better for the company to strive for only one.

Examples of Economic Denominators Abbott: per employee Circuit City: per geographical region Fannie Mae: per mortgage risk level Gillette: per customer Kimberly-Clark: per consumer brand Kroger: per local population Nucor: per ton of finished steel Philip Morris: per global brand category Pitney Bowes: per customer Walgreens: per customer visit Wells Fargo: per employee

Successful Companies Without Economic Denominators Hasbro More sustainable cash flow than big one time hits Understood all three circles of the Hedgehog Concept Reintroduced classic brands at the right time Employees had a passion for the business Didn’t stay within the three circles after the CEO Stephen Hassenfeld Died 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 made you great.

Understanding Your Passion Many CEOs of companies are passionate consumers of their products In 1979, Ross Millhiser, then vice chairman of Philip Morris and a dedicated smoker, said, “I love cigarettes. It’s one of the things that makes life worth living.” Passion became a big part of the Hedgehog Concept in good-to-great companies You cant manufacture passion or “motivate” people to feel passionate. You can only discover what ignites your passion and the passion of those around you.

Understanding Your Passion Cont. You don’t necessarily have to be passionate about the product but more on what the company stands for. For example, employees of Fannie Mae were not passionate about the mechanical process of packaging mortgages into market securities. But they were motivated by the whole idea of helping people of all classes. Backgrounds, and races realize the American dream of owning their own home.

The Triumph of Understanding Over Bravado Pre-hedgehog State of fog creating a slow progression on a long march Hedgehog Fog lifts and less deliberation is required at each juncture Post-hedgehog Quickly make decisions

Great Western vs. Fannie Mae Great Western Focused on growing in every way possible Found itself in finance, leasing, insurance, and manufactured houses on an expansion binge Fannie Mae Focused on being 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’s stock charts exploded upward while Great Western lagged around until its acquisition in 1997

Acquiring a Hedgehog Concept It took about 4 years for the good-to-great companies to clarify their hedgehog concepts It is an inherently iterative process, not an event Essence of the process is to get the right people engaged in dialogue and debate, infused with the brutal facts and guided by the questions formed by the 3 circles The Council can be a useful device for stimulating the process of acquiring a hedgehog concept

The Council Consists of a group of the right people who participate in dialogue and debate guided by the three circles Ask the right questions Engage in dialogue and debate Make decisions Autopsy the results Learn

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 quite ping of truth