Chapter 5
The Hedgehog Concept
(Simplicity Within the Three Circles)
Buildup
Level 5
First Who… Confront the Hedgehog
Leadership Then What Brutal Facts
Concept
Disciplined People
Disciplined Thought
Culture of Technology
Discipline Accelerators
Disciplined Action
Group 4
Raul Guerrero
Melissa Dunlop
Laura Randall
Jose Medina
Alma Pena
Mona Shafer
Brief Overview
 Hedgehog Or A fox?
 The Three Circles
 --Understanding What You Can (And Cannot) Be Best At
 --Understanding What Drives Your Economic Engine- What Is Your
Denominator
 --Understanding Your Passion
 The Triumph Of Understanding Over Bravado
 The Council
Are You A Hedgehog
or A Fox?
 “Foxes pursue many ends at the same
time and see the world in all its
complexity. They are scattered and
diffused, moving on many levels, never
integrating their thinking into one
overall concept or unifying vision”
 “Hedgehogs, on the other hand,
simplify a complex world into a single
organizing idea, a basic principle or
concept that unifies and guides
everything”
 “Hedgehogs see what is essential and
ignore the rest”
Are You A Hedgehog
or A Fox?
 Greek Parable “ The fox
knows many things, but
the hedgehog knows one
big thing”
 ACCT 2300..A=L+OE….simple
concept as Einstein's theory of
relativity e=mc2
 Under Armour- Performance
Apparel
Walgreens Hedgehog
 Walgreens vs. Eckerd
 The simple concept was this:. The
best, most convenient drugstores,
with high profit per customer visit.
That’s it. That’s the breakthrough
strategy that Walgreens used to
beat Intel, GE, Coca-Cola, and
Merck.
 Simple economic idea: Profit per
customer visit
 Video
 Kevin Plank- CEO Under Armour
The Three Circles
 Walgreens vs. Eckerd
 Both had strategies
 Two Distinctions between good-to-great companies and
comparison companies
 Good-to-great companies founded their strategies on deep
understanding along three dimensions- what came to be
called the three circles.
 Good-to-great companies translated that understanding into
a simple, crystalline concept that guided all their effortsHence the term Hedgehog Concept.
 Thus the reason Walgreens was able to beat their competitor.
The Three Circles
 Hedgehog Concept- is a
simple, crystalline concept
that flows from deep
understanding about the
intersection of the following
three circles:
 Simplicity within the three
circles
 Hedgehog concept is not
the same as core
competence.
 Under Armour
Understanding What You Can
Be (An Cannot) Be The Best At
The technology behind Under Armour clothing is
complex, but it’s Hedgehog concept is simple, be the
best at making a superior gear for athletes.
What we can potentially do better than
any other company, and, equally
important, what can we NOT do better
than any other company?
(and if we can’t be the best at it, then
why are we doing it)
 “They stick with what they understand and let their abilities, not
their egos determine what they attempt”. –Warren Buffett
 Running a bank like a business,
with a focus on the western U.S
Hedgehog ConceptUnderstanding
 A Hedgehog Concept is not a goal to be the best, a strategy
to be the best, an intention to be the best, a plan to be the
best. It is an understanding of what you can be the best at. The
distinction is absolutely crucial.
 What you can potential be the best at is just as important as
what you cannot be the best at.
Ex. Abbott saw it’s opportunity at becoming the best company in
the world at creating products that make health care more
cost effective.
You can have the competence at
something but not necessarily have
potential to be the best in the world
at it.
 The Hedgehog Concept requires a severe standard of
excellence.
 It’s not about building on the strength and competence, but about
understanding what your organizational truly has the potential to be
the very best at and sticking to it.
Shifted From Good To
Great
 Abbott Laboratories:
at creating a product portfolio that
lowers the cost of health care.
 Circuit city:
Lower-cost health care, principally hospital
nutritionals, diagnostics, and hospital
supplies.
Consistent, superior execution of the
model.
At implementing the “4-S” model
applies to big ticket consumer sales.
 Fannie Mae:
Capital market player in anything that 1. It could be a full capital markets player
as a good as any on Wall Street.
pertains to mortgages.
2. Develop a unique capability to assess
risk in mortgage-related securities.
What Drives Your
Economic Engine?
What Is Your Economic
Denominator?
 Of the good – great companies in this book 5 were in good industries, 5
in bad industries and only 1 in a great industry
 A company does not need to be in a great industry to succeed
 The 11 good-great companies were able to be great from a building a
great economic engine
 Companies saw what their main drivers were and built a system around
them
 Common among them was a economic denominator, can be thought
of picking a ratio of profit per x and having increase over time
 Company needs to pick an x that has the greatest impact on the
company’s economic engine
Economic Denominator
 Denominator can be simple and sometimes unobvious,
but the main point of the economic denominator is to
have a better understanding of a company’s economic
engine
 A single denominator is not always necessary but having
too many at one time will allow a company to lose focus
on one main goal and therefore not having a good
understanding of its economic engine
 Failing to find a single denominator is not a bad thing
Examples
 Fannie Mae::switched from profit per mortgage to profit per
mortgage risk level
 They stuck to their main strong point of managing the risk on mortgages
instead of the mortgages themselves; and reduced the dependence on
the direction of interest rates
 Walgreens::went from using profit per store to profit per
customer visit
 Best locations were expensive so by choosing profit per customer visit they
were able to open more stores within a smaller distance and increase their
profitability
Understanding Your Passion
 “We should only do things we can get passionate about”
 Passion does not just exist for a product in the business world
 “I always wanted to be somebody. I should have been more
specific.”
-Lily Tomlin
Plank’s Passion
 “Passion" "Vision" and "People”
 "My passion is to build the biggest, baddest brand on the
planet," "My vision is that I want to stay focused.... We want to
make sure there is nothing that prevents us from doing what we
want to do with our brand. Finally, we want to have the best
type of people -- team, team, team. I can't underscore that
need [enough].“ –Kevin Plank
 "Under Armour begins with a vision that we are making athletes
better," and every product,, can't just be fashionable: It also
must enhance the athletic experience. The company's mouth
guards, for instance, have back-bites that level the head and
improve posture. "You do something so you can get a quick
buck and that may look good on the revenue chart, but only
for a little while. What you do must protect your brand or you will
ultimately fail. – Kevin Plank
The Triumph of Understanding
Over Bravado
 It is necessary that, to succeed, companies have simple and
clear ideas of their goals
 Nowhere is this more evident than in the comparison
companies mindless pursuit of growth
 Over two thirds of the comparison companies displayed an
obsession with growth without the benefit of Hedgehog
Concept.
Bravado
 Comparison companies have not reached what
the good-to-great have for two reasons
 They don’t ask the 3 circles questions
 Their goals are set more from bravado than
from understanding
3 Stages
 Pre-hedgehog State:
 It’s like groping through the fog, making progress in a long
march, while unable to see clear. At each juncture in a
trail, only a small portion is visible and must make each
move at a deliberate and slow crawl.
 Hedgehog State:
 Breaking into clearing the fog lifts, and being able to see
form miles. From then on each juncture requires less
deliberation and shift from crawl to walk, and from walk to
run, can be made.
 Post-hedgehog State:
 Miles of trail move swiftly beneath your feet, forks in the
road fly past as you quickly make decisions that could
have not been seen so clearly in the fog.
 Under Amour's method for marketing and retaining clients
The Council
Understanding The
Hedgehog Concept
 Simplifies a complex world and makes decisions
much easier
 Inherently iterative process, not an event
 The essence of the process is to get the right
people engaged in vigorous dialogue and
debate, infused with the brutal facts and guided
by questions formed from the three circles.
Ask Questions,
Guided By The Three Circles
Autopsies And Analysis,
Guided By
The Three Circles
The
Council
Dialogue And Debate,
Guided By
The Three Circles
Executive Decisions,
Guided By The Three Circles
The Council
 Characteristics of The Council
 5 to 12 people
 Each member has ability to argue and debate in
search of understanding, not egoistic need to win
 Each member retains respect of every other
member
 Each member come from a range of perspectives,
but has deep knowledge of the organization
The Council
 Characteristics of The Council
 Key members of the management team
 A standing body
 Meets periodically
 Does not seek consensus, final decision remains with
the leading executive
 Informal body
Understanding The
Hedgehog Concept
 How do we accelerate the process of getting a Hedgehog
Concept?
 Increase the number of times you go around that full cycle in a
given period of time
 Does every organization have a Hedgehog Concept to
discover?
 Most of the good-to-great companies were not the best in world at
anything and showed no prospects of becoming so. Infused with
the Stockdale Paradox, every good-to-great company, no matter
how awful at the start, prevailed in its search for a Hedgehog
Concept
Five Takeaways
 The Hedgehog Concept is not a goal, strategy, or intention; it is an
understanding of three things:
 What you can be the best in the world at
 What drives your economic engine
 What are you deeply passionate about
 If you cannot be the best in the world at your core business, then your
core business cannot form the basis of your Hedgehog Concept.
 To get insight into the drives of your economic engine, search for the
one denominator that has the single greatest impact
 Good-to-great companies set their goals and strategies based on
understanding; comparison companies set their goals and strategies
based on bravado.
 Getting the Hedgehog Concept is an iterative process. The Council
can be a useful device