Good to Great Chapter 6: A
Culture of Discipline
GROUP 1
TIMOTHY LOVELAND
BRENT GAFFORD
JOHN MENTH
ZACHARY MAYOR
A Culture of Discipline
• George Rathmann
o
o
o
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Cofounded Amgen
Created blood products
Grew into a $3.2 billion company
Stock price multiplied over 150 times its public offering
Few successful startups become great companies
• Entrepreneurial success is…
o
o
o
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Fueled by creativity
Imagination
Bold moves into uncharted water (blue oceans)
Visionary zeal
A Culture of Discipline
• Many companies will change from a
entrepreneurship into a bureaucracy
o
o
o
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As a company grows, it becomes more complex
Professional management is put in place
Order is created out of chaos
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
o
o
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Goes through checklist
Follows precise instructions
Operates within a strict system
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:


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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.