GROUP 1 TIMOTHY LOVELAND BRENT GAFFORD JOHN MENTH ZACHARY MAYOR Good to Great Chapter 6: A Culture of Discipline

A Culture of Discipline George Rathmann o Cofounded Amgen o Created blood products o Grew into a $3.2 billion company o Stock price multiplied over 150 times its public offering Few successful startups become great companies Entrepreneurial success is… o Fueled by creativity o Imagination o Bold moves into uncharted water (blue oceans) o Visionary zeal

A Culture of Discipline Many companies will change from a entrepreneurship into a bureaucracy o As a company grows, it becomes more complex o Professional management is put in place o Order is created out of chaos o Creativity and fun decline George Rathman avoided this o You need to have the right people first o Avoid bureaucracy and hierarchy o Create a culture of discipline

A Culture of Discipline Bernard H. Semler o Created mechanisms to drive cultural change o Responsibility Accounting  Each individual was accountable to what they spent  Responsible for his or her return on investment  Freedom within a framework Main point: Build a culture full of people who take disciplined action within the three circles, fanatically consistent with the Hedgehog Concept

Freedom within a Framework Picture an airline pilot. o Goes through checklist o Follows precise instructions o Operates within a strict system o But there is freedom within that system A Culture of Discipline starts with disciplined people o Disciplined thought o Discipline to persist o Disciplined action

Rinsing Your Cottage Cheese Dave Scott o Bike 75 miles o Swim 20,000 meters o Run 17 miles o Every day! Rinse the cottage cheese to get the extra fat out o Many companies lack this discipline

Rinsing Your Cottage Cheese Wells Fargo vs. Bank of America Carl Reichardt “too much waste in banking” Rinsing our own cottage cheese Froze executive salaries for two years Replaced executive dining room with a college dorm food-service caterer Closed the executive elevator, sold corporate jets, and banned green plants “who you spend your own money this way?”

Rinsing Your Cottage Cheese Bank of America didn’t have the discipline to rinse out their own cottage cheese. Lost $1.8 billion in the mid 1980’s Made changes (largely by hiring ex-Wells executives) Lacked discipline even through the darkest days.

A Culture, Not a Tyrant Discipline plays a role in success, but it was also apparent in comparison companies. The differences are not in the existence of discipline, but how they approach it.

A Culture, Not a Tyrant Good-to-Great Companies had Level 5 leaders who built an enduring culture of discipline Comparison companies had Level 4 leaders who personally disciplined their organization through sheer force. Ex: Ray MacDonald of Burroughs

A Culture, Not a Tyrant In every comparison case:  There was a spectacular rise under a tyrannical disciplinarian.  Followed by a spectacular decline when the disciplinarian stepped away. Discipline is essential for results, but disciplined action without disciplined understanding of the 3 circles cannot produce great results…

Fanatical Adherence to the Hedgehog Concept Pitney Bowes  Patents on postage meter machines  100% of the metered mail market  Monopoly  Required to license its patents to competitors, royalty free  In 6 years they had 16 competitors  Tried Acquisitions  1973 was the first year the company lost money

Level 5 Leadership in Pitney Bowes Fred Allen, CEO  Stayed in the 3 circles  Shifted operations to copiers and fax machines because these products could be sold and serviced to the same cliental they had serviced for years  Obtained 45% of total market for high end Fax Machines  ½ of their profits were derived from products introduced in the last 3 years  In 1973 they were 77% behind in the market  By 1999 they out performed the market by 11 times  All because Fred Allen had the theory of staying within the 3 circles

RJ Reynolds In 1960 their goal was to be the best Tobacco Company in the United States  Later a report by the Surgeon Generals’ Office linked cigarettes with cancer  Thought their market could go away 1970 RJR purchased a shipping container company and an oil company with 1/3 of corporate assets  After 3 years of sucking away tobacco profits to fund these new companies they admitted failure and sold off the 2 companies they purchased  Why? WANDERING OUTSIDE ITS 3 CIRCLES DEFIED ALL LOGIC Competitor Philip Morris stayed within it’s 3 circles  This is why Phillip and RJR diverged so drastically between 1964 and 1989  Out performed RJR by 4x

Nucor Built its success around the Hedgehog Concept of harnessing culture and technology to produce steel. Wanted to align worker interests with management and shareholder interests, avoiding class distinctions Did thing such as:  Executive benefits were the same as front line workers  Corporate office was small, efficient, and modest.  When profits were high workers pay was high on all levels. When the 1982 recession hit workers pay went down 25%, but executive pay went down 60%, and CEO down 70%. All of this kept class distinctions at bay.

Nucor’s Competition Bethlehem Steel Bethlehem Steel  Executives had lavish perks  Embraced a class system  After 34 years:  They lost money 12x  Cumulative profitability added up to zero  On the other hand…  Nucor Posted 34 years of consecutive profitability  Out performed Bethlehem by 200x over the 34 year time span

Important to Take Away Stay within your 3 circles and avoid outside temptation to move Running your company as a hierarchy or emphasizing a class system leads to a lack of motivation among low/mid level employees. This was a key difference between Nucor and Bethlehem.

Start a “Stop doing” List Those who built the good-to-great companies, used the “stop doing lists” as they did with the “to do lists” Darwin Smith Wall street The G-to-G companies institutionalized this discipline through the use of a unique budget mechanism.

“Stop Doing” list cont. Budgeting is a discipline to decide which arenas should be fully funded and which should not be funded at all. If you look back on the G-to-G companies, they displayed remarkable courage to channel their resources into only one or a few areas.  Hedgehog concept

Key Points A culture of discipline involves a duality.  It requires people who adhere to a consistent system; yet on the other hand, it gives people freedom and responsibility. The Good to Great companies appear boring on the outside but they’re full of people who display extreme diligence and a stunning intensity (they rinse their cottage cheese) The single most important form of discipline for sustained results is fanatical adherence to the Hedgehog Concept and the willingness to shun opportunities that fall outside the three circles

Un-expected findings A great company will have many once-in-a-lifetime opportunities if it fits within the three circles. “Stop doing list” are more important that “to do lists” The purpose of budgeting in a Good to Great company is not to decide how much each activity gets, but to decide which arenas best fits within the Hedgehog Concept and fully fund it.