These Are the 11 Proven Characteristics of Great Companies

Good to Great: Why Some Companies Make the Leap…And Others Don’t, by Jim Collins

This book is a double-headed sword for investors and entrepreneurs. It is a book that, for our entrepreneurs and business owners, they should read and absorb if they want to build a great company. For our investors, Good to Great is a book that tells them what they should look for in an organization to determine if a company is worthy of their investment.

Good to Great teaches all of us what are the 11 proven characteristics of companies that went from “good” (average stock market performance) to “great” (exceptional stock market performance compared to their peers and the general market) and that were able to sustain that greatness for years after their transition.

Great companies – those that consistently outperform their peers and that provide opportunities worthy of investment – we know, after reading Good to Great, are all defined by the 11 common characteristics discussed below.

1 – A Leader

Great companies need great leaders. In writing and researching for the book, Jim Collins and his team found that the companies that made the transition from good to great all had leaders with the following traits: ambition for the cause, humility and will. These leaders, first, brought passion to the business they were in. Second, they never shied away from the brutal facts confronting their businesses and, often acknowledging that they did not know everything or were not the all-being, smartest person in the room, they fostered cultures where people across their organizations had a tremendous opportunity to be heard. And, finally, all the leaders of these good to great companies were blessed with optimism and fortitude in the face of challenges. They all had the stickwithitness that is required to push through obstacles and see greatness develop over time.

If you are an entrepreneur building your own company, would your team say that you have these characteristics? If you are an investor and evaluating a company, does the leader of that company have these traits? These are critical questions regardless whether you fall on the investor or entrepreneur side of the coin.

2 – A Farmer Mentality

I think this point is inarguable. The research behind Good to Great and, frankly, my own experience, teaches us that it is more important to have the right people in the company than to know exactly where the business is going. Think about it. You can have the greatest business concept in the world, but if you do not have the right people around you, what does it really matter?

So who are those right people? It comes down to values. The right people are those who are self-motivated and honest. The right people are those who do not have to be pushed to be great. Instead, the right people are those who have in their DNA the burning desire to work to be the best that they can at whatever they do. The right people are those who are fundamentally good.

Interestingly, the studies cited in the book demonstrated that you cannot count on being able to buy the right people. In other words, money alone does not fix a people problem. The statistics overwhelmingly showed that in the good to great companies, their teams were not defined by high compensation or any specific mix of compensation options (such as bonus, stock options, high salary, long-term compensation). Instead, the studies showed that once you had a reasonable and rational mix of compensation, a baseline, compensation did not have any impact on whether a company could go from good to great. Rather, the internal drive of the individuals on the bus, not the external influencers like cash and comp, drove people to greatness. Again, it is all about having the right people.

Having the right people means making sure you also get rid of the wrong people. The process? The book gives a more detailed explanation of the right person, wrong seat concept than I will here, but the recommendation generally is to first check if someone is simply in the wrong seat (role) as compared to just not being the right person. If they can thrive elsewhere, move them. If they cannot, then, as tough as it can be, they have to go. The book is right on the point – be rigorous, not ruthless. It is unfair to the person who needs to go to deprive them of their precious time and, if someone truly needs to be let go, you will not be the only one who sees that. Failing to step up and make the right personnel decisions is not fair to the right people and their respect for you will slowly decline. Rigorous, not ruthless, the book teaches us.

3 – Willingness to Confront the Brutal Facts

Great companies, the data shows, deal with realities head-on and quickly when they appear. You can, if you choose, ignore reality. However, you cannot ignore the consequences of reality.

4 – High Self-Awareness

Great businesses are those that can with time and trial and error answer honestly and realistically these three questions:

  1. What core business can we be the best in the world at?
  2. What denominator most drives cash flow and profitability?
  3. What are we deeply passionate about?

That can be a frustrating thought process for new and even longstanding businesses. On average, it took the good to great businesses in the book four years to be able to answer those questions such that they could find a business that lied at the intersection of those overlapping questions. An example to help frame these questions in your mind. Walgreen´s, which we all know. Best in the world at – convenient drug stores. Bottom line financial metric – revenue per customer visit. Deeply passionate about – the same business that, not surprisingly, they also decided that they could be the best in the world at.

If you are an entrepreneur, can you answer these three questions? If you are an investor, can your entrepreneur or the leadership of the company you are looking at, clearly answer these three questions for you? If so, and based on their actions, do you believe them? Again, it is good to keep this book close regardless of the hat you wear.

5 – Culture of Discipline Paired with an Ethic of Entrepreneurship

A culture of discipline – always working towards the core business that appears at the intersection of the answers to the three questions above (as the book calls it, your “Hedgehog”) – and an ethic of entrepreneurship characterized the good to great companies. In other words, tell people the mission, give them the framework in which to work, require discipline, then let them run with the talents they have to move the ship forward.

6 – Technology as an Accelerator, Not a Cause

Great companies do not become great, the data shows, from a cure-all reliance on technology. In fact, most of the leaders of the great companies in the book did not even name technology when they were interviewed as a key driver of their conversion from good to great. The end advice: use technology as an accelerator of your core “hedgehog” but it should never be viewed as the purchasable solution to the good to great equation.

7 – A Crawl – Walk – Run Philosophy

It worked for the good to great companies. Success will appear after disciplined persistence, not in a miracle moment.

8 – A Stop Doing List

The good to great companies focused heavily on saying no. Anything that did not relate to the business that they decided they could be the best in the world at and that would not contribute to their ultimate financial indicator was dropped immediately.

9 – Unwavering Commitment to Values, Whatever They May Be

Great companies know what they are passionate about and stick to that passion. This part of the book will fascinate you. There is, in fact, no correct formulation of passion and values that defines great companies. Rather, great companies are defined simply by choosing values and passions that are important to them and never wavering. The story of Phillip Morris in the book will put the exclamation mark on this point.

10 – Little Wins Versus Miracle Moments

Great companies believe in the compound effect of small wins gathered over time. Lazy companies and leaders are those who aim for the one big win or miracle transformational moment. Like anything in life, success is earned through daily, ritualistic habits and commitments.

11 – Unwavering Belief

Walmart is one of the good to great companies discussed in the book. Did you know that when Sam Walton started Walmart he began with one five & dime store and, although seeing the vision of what was to come, he did not open another store until seven years later? Challenges and timing mandated the delay. It was his unwavering belief and faith in where he would take Walmart that led to what Walmart is today.

For the entrepreneurs, do you believe so strongly in what you are doing that you will endure the inevitable setbacks? For the investors, do you see in your entrepreneurs and companies a relentless drive, or are they likely quitters?

A Couple Final Points

A couple nuggets from the book I could not leave out:

In response to, why build a great instead of just an average company: “It can actually be easier and more fun to be great than average, so why wallow in mediocrity?

Dedication to a cause, more than anything else, ensures that the short time we have here on earth will be well spent and matter.

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This book is a double-headed sword for investors and entrepreneurs. It is a book that, for our entrepreneurs and business owners, they should read and absorb if they want to build a great company. For our investors, Good to Great is a book that tells them what they should look for in an organization to determine if a company is worthy of their investment.

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