Good to Great Companies
Picking Great Companies to Build the
Greatest Portfolio and Using Such
Techniques to Make You a Great
Executive
Eric Borzino, 4/11/2005
Today’s Objectives
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Show how an avg person can use non-financial
techniques to pick great long-term holds
Prove that “change” that leads to sustained
stock gains cannot be pinpointed in a “great”
company
Are you investing in hedgehogs or foxes?
Will YOU be a hedgehog or fox?
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These tips to identify companies are also
applicable to YOUR future management careers
Jim Collins
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Not as much of an idol as
Peter Lynch
Author of fine and popular
books as Built to Last and
Good to Great
Taught at Stanford’s
Graduate School of
Business
Founded his management
research laboratory back
home in Boulder
Collins’ Laboratory Results
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Started with 1,435 good companies
Found the companies that became great based
on certain criteria over 40 year performance
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Company had to show good stock performance,
capped with a transition point
After transition, company had to generate stock
returns that exceeded general market at least 3
times over 15 years independent of industry
Being Good, Ain’t Good
Enough
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Vast majority of good companies remain just that –
good, not great
11 “great” companies were identified
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$1 invested in the general market since 1970 would
yield $56 by year 2000
$1 invested evenly upon the 11 great companies would
have yielded $471 by year 2000
All 11 companies had decent performance, until a
transition occurred
11 “Great” Companies
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A few of the companies over the past 15 years
that have been identified as great:
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Abbot
Circuit City
Fannie Mae
Gillette
Kimberly-Clark
Wells Fargo
Walgreens
Philip Morris
Kroger
Nucor
Pitney Bowes
What factors do not lead to
greatness?
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Larger-than-life celebrity leaders
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Good to great companies did not principally
focus on what to do to become great
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Negative correlation
10 of the 11 good to great CEOs came from the firm
Equally focused on what NOT to do
And also what to STOP doing – diworsification
Technology can accelerate a transformation,
but cannot cause a transformation
What factors do not lead to
greatness – Part Duex?
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M&A played no role in igniting a transformation
from good to great
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Good to great companies had no specific action
or program to signify their transformations
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Two big ok companies joined together NEVER make
one great company
Sorry Sat for bursting the bubble
Only in retrospect did the magnitude appear
No outlandish, over published event or change
Good to great companies were not in great
industries, some were in terrible industries
The Flywheel Cycle to Greatness
People
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Thought
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Action
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Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
Buildup
BreakThrough
Be Humble Yet Cool
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There are five levels of leaders
Level 5 leaders, had one distinguishing
characteristic: humility
Level 5 leaders channel their ego needs away
from themselves
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Larger goal is building a great company
Ambition is first and foremost for the institution, not
themselves
Extreme blends of humility and intense will
Egos Can Kill
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Absence of Level 5 leaders was the consistent
factor that hindered greatness
Level 5 leaders set up successors for success
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Other level leaders set up their successors for failure
Or chose weak successors
Good to great leaders never wanted to be largerthan life
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Ordinary people producing extraordinary results due to
unwavering resolve to produce sustained results
Large personal egos contributed to the demise or
continued mediocrity of 2/3rd of comps
Are You Level 5 Worthy?
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Abraham Lincoln
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Personal modest and shy nature
Weren’t signs of weakness
Darwin Smith – CEO of Kimberly Clark 1971
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Generated stock returns 4.1 times the market
Demolished rivals Scott Paper and P&G
Resolve to do what’s best for company: sold the
paper mills to concentrate on consumer products
Wall Street called the move stupid – downgraded
“I never stopped trying to become qualified for the
job”
Great, How Do You Find
5spot?
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If you listen to a CEO and he boosts of how his
new ideas/programs will enhance returns
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Or how his strategies have already enhanced returns
AVOID – got an ego and wants credit
Level 5 leaders look outside the window to
accredit
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Thanked others and luck
Also never blamed bad luck when things when
poorly, took credit for mistakes (unlike other leaders)
The Flywheel Cycle to Greatness
People
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Thought
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Action
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Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
Buildup
BreakThrough
First Who NOT What
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Began achieving sustained success by first
getting the right people on the bus
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Get the wrong people off the bus
Then, figured out where to drive it
Isn’t Strategy and Product Mas
Importante?
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Why do it this way?
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Begin with “who” instead of “what, can more easily
adapt to a changing world
If you have the right people on the bus, problem of
motivation and people managing are diminished
If you have the wrong people, doesn’t matter
whether you have the right direction b/c company will
still not be great
Teamwork Baby
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Good to great companies build deep and strong
executive teams
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Decent companies followed a “genius” with a
“thousand helpers”
What happens if genius is wrong or leaves? Idiots…
People are NOT your most important asset. The
RIGHT people are.
Look for companies with distinguished
managers who have been in the company and
work together over time
Wells Fargo’s Success
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Early 1970s, then CEO Dick Cooley foresaw
changes in the banking world, but did not know
what or how
Assembled an endless stream of talent – best
team according to Warren Buffet
Hired outstanding people whenever and
wherever without a specific job in mind
The Flywheel Cycle to Greatness
People
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Thought
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Action
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Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
Buildup
BreakThrough
Who Says Honor Doesn’t
Matter
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All good to great managers first confronted the
brutal facts of their current reality
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Impossible to make good decisions without being
honest in the process
Look for executives who admit to the reality of their
industry – company to invest in
Comparison companies were afraid to confront
adversity, not the good to great companies
Got to Stay Stiff and Hard
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Stockdale Paradox:
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Absolute faith that you can and will prevail in the end
Same time, confront the most brutal facts of your
current reality
Leadership does not begin just with vision,
begins with the right people confronting reality
and sticking to a rigorous yet flexible plan
The Flywheel Cycle to Greatness
People
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Thought
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Action
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Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
Buildup
BreakThrough
The Hedgehog and the Fox
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Ancient Greek parable:
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The fox knows many things
The hedgehog knows one big thing
Foxes pursue many ends and see the world in
all of its complexity
Hedgehogs simplify the world into a basic
principle, see what’s essential, and ignore the
rest
The Big Three
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All good to great companies adhered to the
Hedgehog Concept (three questions)
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What you can be the best in the world at
What drives your economic engine
What are you deeply passionate about
Not the goal to be the best, but understanding
of what you can be the best at
Sometimes Need to Rethink
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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
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Best to look for companies that keep it simple
Exotic companies in many different industries are like
the fox and stretch themselves too thin
As a manager, want to focus solely on your core and
how to make it the best in the world
What the Hell You Saying?
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Takeaways for investing:
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Look for companies with humble, yet passionate
leaders
Research the background of management to
determine if the team was assembled with a “who”
instead of “what” mentality
Find out the culture of the firm, whether it is
bureaucratic, dominated by a few executives, or
open and willing to confront the brutal facts
Keep an eye out for simple companies, with great
people, hard-working culture, and not constantly
featured in CNBC or Wall Street Journal
Hedgehog Concept Most
Important
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To remain great over time requires to strictly
adhere to the Hedgehog Concept
If the firm slides outside its hole, it will slide
back down to mediocrity
Good to great transformations never happen at
once, unlike the WSJ likes to make it appear
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Happens slowly over time
And can easily be tracked by looking at qualitative
clues outside of ratios and DCFs