Good to Great The Flywheel and the Doom Loop Team 2 Shawn Buck Ashley Burnett Whitney Horton Kelly Riester Jennifer Shotts Sam Snelling Mickea Smith

Build up and Breakthrough What was the one push that made the flywheel go so fast? All of the pushes are important, no matter how big or small. The media usually reports these cases as if they were overnight successes. This is not true.

Circuit City Example The first national story about Circuit City was August of 1984 by Forbes Magazine. The media reported this as if it were an overnight success. The truth was that this was a result of more than 10 years of hard work. There were zero articles written about Circuit City before 1982, and close to 100 articles within the following 10 years.

Circuit City Example Cont. 1973 Alan Wurtzel takes over CEO position. Company was near bankruptcy. Wurtzel rebuilt executive team and faced brutal facts. 1974 They began to experiment with showroom style retailing, selling appliances, and electronics. 1982 they fully committed to the new Circuit City Superstore. Success!

What's important about breakthroughs? From the outside of the company your breakthrough may seem big. To the inside of the company it is more of just a process to get to a breakthrough. Ex: a chicken hatching from an egg To people watching the egg turning into a chicken is a big breakthrough but to the chicken it’s a process of life.

What do executives think? Good to great executives could not pinpoint a single key event or moment in time that exemplified the transition. This process will not happen over night. A Kimberly Clark executive said, “ Darwin evolved it over time.” Selling their mill to become the number one paper based consumer product was just one push to becoming great.

Example Wal-mart When first opened it was just another discount store nothing like it is today. There is no defining moment in time when this change happened since “good to great” doesn’t happen instantly. This happened because the way that Wal-mart’s top executives ran the company and the decisions they made early on.

It does not happen immediately The book states, “lasting transformations from good to great follow a general pattern of buildup followed by breakthrough.”

Not Just A Luxury of Circumstance Its important to understand that following the buildup-breakthrough flywheel model is not just a luxury of circumstance. Good to great companies followed this model no mater how dire the short term circumstances. ex: wells fargo, nucor and circuit city This also applies to managing the short-term pressures of Wall Street.

Not Just A Luxury of Circumstance During Maxwell’s first two years, the stock lagged behind the market, but then it took off From the end of 1984 to 2000, $1 invested in Fannie Mae multiplied 64 times, beating the general market Ex: Abbott would tell wall street analysts to expect a 15% growth in the company but would set an internal rate of 25 to 30%.

Not Just A Luxury of Circumstance Upjohn ( “buy into our future”) investing for the long-term. Upjohn continually threw money after harebrained projects like Rogaine baldness cure. Not surprisingly, Abbott became a consistent performer and a favorite holding on Wall Street, while Upjohn became a consistent disappointment.

Not Just A Luxury of Circumstance Fannie Mae and Abbott, simply focused on accumulating results, often practicing the time honored discipline of under promising and over delivering.

The Flywheel Effect People see and feel tangible accomplishments Steps Forward, Consistent With Hedgehog Concept People see and feel tangible accomplishments Results in escalating momentum which increases enthusiasm as well. Accumulation Of Visible Results Flywheel Builds Momentum People Line Up, Energized By Results

Kroger Example Jim Herring, President Needed to change virtually every aspect of how Kroger grocery stores were run Avoided any attempts at ‘hoopla and motivation’ Instead, began turning the flywheel by creating tangible evidence that their plans made sense

Characteristics of G2G Companies and the Flywheel Effect Good-to-great companies: Do not publicly proclaim big goals at the beginning (or at all) People will infer this from the flywheel effect Spin the flywheel, all the while building momentum for their plan of action Have complete and selfless support from the executive team, as well as their Level 5 Leader Do not always have an obvious goal in mind when the flywheel effect engages Example: Nucor

Nucor Example Began turning their flywheel in 1965 Looked into making their own steel because they could not find a reliable supplier Realized they could make steel better and cheaper Took over two decades, but by continuously pushing their flywheel, Nucor eventually generated greater profits than any other steel company on the Fortune 1000 list. It wasn’t about speed to them. The flywheel effect can be a gradual one!

The Flywheel Needs People When the right people see tangible results and facts, they are likely to ‘get on the bus’ and help to achieve the company’s goals. The bulk of people begin lining up to help ‘push’ the flywheel after they’ve felt the momentum for themselves. The more people you have pushing, the faster the flywheel can rotate, making the company more and more successful

The Doom Loop Like we’ve talked about: Good-to-great transformations often look like dramatic, revolutionary events to those observing from the outside, but they feel like organic, cumulative processes to people on the inside. There is no single action, no grand program, no one killer innovation, no miracle moments. Sustainable transformations follow a predictable pattern of buildup and breakthrough.  Comparison companies skip buildup and jump immediately to breakthrough.  Then, with disappointing results, they'd lurch back and forth, failing to maintain a consistent direction. The comparison companies frequently tried to create a breakthrough with large, misguided acquisitions.  The good-to- great companies, in contrast, principally used large acquisitions after breakthrough, to accelerate momentum in an already fast- spinning flywheel.

Warner-Lambert vs. Gillette 1979: envisioned being leading consumer products company 1980: sighted health care industry and competition 1981: focused on diversification and consumer goods once again 1982: Ward Hagen CEO turned to hospital. 1985: Joe Williams CEO took a $550 million write off. 1990’s: focus was on R&D in an effort to once again beat out competitors. 1998: sold out to Pfizer- ironically a global health company. This was a time of heavy health care reform, yet the company backtracked and focused once again on consumer brands. 1901: birth of the Boston based personal hygiene products manufacturer. Long term focus has always remained true to their humble beginnings Variations of their original “Trac 2” razor have come about through generations. Marketed under P&G Part of both their household products and beautification lines. Product breadth: Razors, hair care, shave care, clinical strength, body wash SNL:

Inferences Porter would conclude: Lambert allowed external forces to prematurely dictate their business strategy. They were blinded by their immediate competition and rattled by consumers lack of demand. On the other hand, Gillette didn’t allow these same forces to change the course of their company culture. They are a true G2G company, abiding by the flywheel. Two patterns of the doom loop Misguided use of Acquisitions Leaders Who Stop the Flywheel

Misguided Use of Acquisitions “The drive for mergers and acquisitions comes less from sound reasoning and more from the fact that doing deals is a much more exciting way to spend your day than doing actual work” (Drucker) Why do G2G companies have a higher success rate with acquisitions? They use acquisitions as an accelerator of the flywheel rather than a creator. Done after the hedgehog concept You absolutely cannot buy your way to greatness Two big mediocrities together don’t make one great company

The Misguided Use of Acquisitions Peter Drucker observed that the drive for mergers and acquisitions comes from the fact that they are more exciting than every day work. Good to Great companies do not use mergers to make them a great company but to accelerate the flywheel not to create it. 2 Mediocar companies do not create a great company from just merging together. You need to have a sound reason for an acquisition to work.

Leaders Who Stop the Flywheel Another doom loop pattern is that the new leader of the company will change the path of where the firm is heading This causes the flywheel to be stopped drastically. After all the effort that was made into putting the flywheel into motion, this can cause major damage to the company. A company that was gaining in profits will suddenly lose money and fall behind in the market if the new leader changes the concept

Leaders Who Stop the Flywheel An example of a leader who stopped the flywheel is Joseph Boyd who was previously CEO of Radiation, Inc. which was acquired by Harris. He moved the company from the previous location to the hometown of Radiation, Inc. Where his home as well as boat was located At the time, Harris had a well known Printing business that created over a third of the total profit for the company. Boyd halted the flywheel by changing the direction of the company from printing to home office. This put them in a competitive group of companies including IBM and DEC putting them far behind the competition.

Acquisitions and Leadership By changing the direction of the company the CEO can damage the progress on the FlyWheel For Harris this is what put them on the Doom Loop. They were a company of everything but an office product. Good to Great Leaders will know not to change the direction of the company or to Merge with another direction to keep things interesting. There needs to be a good sound reasons to do either.

Flywheel as a Wraparound Idea Two Key Words Consistency Coherence Basic Idea Each piece of the system reinforces the other parts of the system to form an integrated whole that is much more powerful than the sum of the parts.

Signs That You’re on the Flywheel Follow a pattern of buildup leading to breakthrough Reach breakthrough by an accumulation of steps Confront the brutal facts to see clearly what steps must be taken to build momentum Momentum of flywheel is infectious

Signs that You’re in the Doom Loop Skip buildup and jump right to breakthrough Implement big programs, radical change efforts, dramatic revolutions; chronic restructuring-always looking for a miracle moment or new savior Embrace fads and engage in management hoopla, rather than confront the brutal facts Spend time trying to align and motivate people

What’s Important Remember to maintain level 5 leadership Get the right people on the bus Attain deep understanding of the Hedgehog Concept Have the discipline to make good decisions consistent with your hedgehog concept Accumulate momentum step by step

Takeaways Good-to -great transformations may look dramatic on the outside but really are organic, cumulative processes to the people on the inside No good-to-great transformation happened in one fell swoop Sustainable transformations follow a predictable pattern of buildup and breakthrough

Takeaways Comparison companies followed a different pattern known as the doom loop Comparison companies frequently tried to create a break through with large, misguided acquisitions Those inside the good-to-great companies were often unaware of the magnitude of their transformation

Takeaways Good-to-great leaders spent hardly any time trying to align or motivate employees