We Study Billionaires - The Investor’s Podcast Network - TIP 111 : Good to Great - (Business Podcast)

Starting point is 00:00:00 We study billionaires, and this is episode 11 of The Investors Podcast. Broadcasting from Bel Air, Maryland. This is the Investors Podcast. They'll take complex things and make them seem insanely simple. They make your boring drive-to-work feel exhilarating. They give you actionable investing strategies. Your host, Preston Pish, and Stig Broderson. Hey, how's everyone?

Starting point is 00:00:31 doing out there. This is Preston Pish, and I'm your host for The Investors Podcast. And as usual, I'm accompanied by my co-host, Stig Broderson, out in Seoul, South Korea. And today we have a book for you. And this book is a book that I probably should have read a very long time ago. And I'm embarrassed to say that I have not. And Stig, I'm curious, had you read this before, or did you just read it recently with me? Yeah, I just read it recently. and I think it was Tony Shea, the author from Delivering Happiness, and I actually brought that into the mix. It seems like it's a book everyone knows, but no, I haven't read it before.

Starting point is 00:01:08 Yeah, there's so many people that have recommended this book. It's Good to Great by Jim Collins. This book was fantastic. I went into reading this book thinking I wasn't going to like it and kind of came out with a very different opinion, which I like it when I'm surprised like that. The reason I was really hesitant to read this book was simply because I had read reviews and I had heard from people some of the different companies that were used to demonstrate

Starting point is 00:01:39 some of the ideas in the book. Like, for example, one of the companies was Circuit City. And I had this bias that I didn't want to read the book. It was like, how can the book be talking about good to great companies in Circuit City and a couple others that had gone bankrupt were the ones that were being used as the case study. That didn't make any sense to me. So I just immediately wrote the book off as something that wasn't worth my time to read. But, you know, here we are. We read this book, and I can tell you, this is a fantastic book. This is a really, really thought out and well-researched book. So

Starting point is 00:02:12 just a little bit of background here. Jim Collins wrote this back in 2001. It came out, and he had 20 people on his team working on this. And here's the stat that I'm saying, saying that there were 6,000 articles generated and more than 2,000 pages of interviews and transcripts that were conducted by this team in order to conduct all the research that was done that went into this book, which in itself is pretty darn impressive to let you know how thorough they were in the research that they did. So how they kind of went about this methodology is they found comparable companies in an industry.

Starting point is 00:02:52 And now these two companies aren't being used, but I think that they're a really good example for what I'm trying to talk about. Let's say you have Coke and Pepsi. Very, very similar companies. Now, they weren't used in the book, but they're very similar companies to give you this idea. And what Jim and his team did is they went back and they looked at these companies that kind of had from a stock price standpoint had very similar results. Maybe they were climbing at 2% annually or whatever the numbers were. And then one of them just kind of skyrocketed and just took off. They focused on that disparity. And they said, why did that? happen. What did that company do right there at that particular point in time that allowed them to take off when all their competition just remained flat? And so he did this comparison with all these

Starting point is 00:03:39 different companies in the book and they dissected the key elements that caused this to occur. And that's what Stig and I are really going to go through are those key elements and what they were that helped cause that to all happen. So I'm going to throw it over to Stig to see if he has any opening comments on the book and anything like that. Like Preston, I really like the book. I think that the book was very insightful. Preston mentioned before that some of the case studies that have been using, companies that might have not been doing so well since the book was written,

Starting point is 00:04:13 but I think he talks about that in a really nice way and explains that in terms of the principles that the book outlines, they're timeless. It's just like engineering, that engineering as such will change, but the law of physics are the same. And I think that's the way of looking at it. And I think that if you look at the companies and we'll go more into depth with 11 companies later, you can probably also see how some of these companies recently

Starting point is 00:04:37 have deviated from the core principles outlined for really great companies. And that's the reason why. Because clearly it's very courageous to select so-and-so-many companies because some of the companies will clearly always do bad some point in the future. So I think it's really courageous that he's actually talking about real companies. And I think that when reading this, you need to think about the principles all the time and not the specific companies whenever you're reading through it. All right.

Starting point is 00:05:07 So the first chapter kind of hit at something that I already addressed, which was kind of the methodology of how they were determining which companies to focus on and at what points in time. The second chapter is all about, and drum roll, leadership, as you probably suspected. And we're not going to spend too much time on this because I think this one's really kind of obvious. And this is something that we've talked about on a lot of other shows. But the real quick high points that he has with respect to leadership is that great leaders, and he breaks them into level one through five. And he's saying that all these companies had level five leaders running them. And one of the key attributes for level five leadership was this idea of just this humble,

Starting point is 00:05:50 calm leader that is constantly trying to increase their depth of knowledge that's easily approachable, that makes decisions, that takes care of their people. All those things that you know are great leadership traits that for anyone that's out there, you've had great leaders and you've had bad leaders. The people that are the great leaders are the ones that he's really trying to talk about all those traits that I think, in my personal opinion, that are somewhat obvious. but I think the humble part of it and being calm and being the person who's really trying to understand all those different perspectives and make informed decisions. One thing that really surprised me in terms of leadership was how important they said that not the leader in self-war, but in terms of his ability or her ability to find a successor. That was something he talked a lot about because you see so often that a company have a great leader.

Starting point is 00:06:44 and then when he steps down, everything just falls into pieces. And I think this is really profound because what he actually found, and sadly this might be true, was that a lot of the good leaders but not great leaders, they had intended to find successes that were not as good as them because then their legacy would actually be better because then people could see, well, after Jack or whoever stepped down, now you can really see how important he works for that company. And I found that discouraging, but also very interesting, that that was what the research showed. So as Stig was talking there, I thought of one other thing that I wanted to highlight here because I loved this conversation in the book. And what he's talking

Starting point is 00:07:28 about when he's interviewing some of these level five leaders is that there was something that kept coming up that the level five leaders were saying that none of the other level one through four leaders were saying. And you're going to laugh when I say this, but hear me out because this really, I think, is profound. So he said that the level five leaders, when asked why they were able to succeed, a very common response was because they were lucky, because they were at the right place at the right time.

Starting point is 00:07:58 And then the individuals who weren't the level five leaders would constantly say that there was this external factor of why they might not have been able to achieve results or they always were able to place the blame somewhere. So what he was getting at was that when these level five leaders were saying that it was luck, it was more of a mindset that they displayed, that they were open to circumstances that would be more beneficial for them to use as they were trying to grow or develop in a certain direction. So I had this thing that I read in another book. This was a from years ago. And this was out of a book by Katie Kirk, where she went around and got the best advice from all these different people that were influential. And one of the people was Tony Shea,

Starting point is 00:08:46 who we were talking about earlier, who's the billionaire founder of Zappos. And in the book, Tony Shea wrote his best advice that he felt that he could give to people, and it had to do with luck. So this is what Tony Shea wrote, and this is his best advice. And it was only like five paragraphs. I'm going to read this to you because I think that this is absolutely. amazing. So Tony Shea's advice is be lucky, and this is what he said. At Zappos, we try to hire the luckier job candidates. In fact, one of our interview questions is, on a scale from one to 10, how lucky are you in life? Many years ago, I read about a study in which researchers pose that same question to a random group of people. Each participant was then handed a newspaper and asked

Starting point is 00:09:31 to count the number of photos inside. With the participant's didn't know was that it was actually a fake newspaper. Sprinkled throughout or the headlines such as, if you're reading this, the answer is $37, collect $100. Researchers found that the participants who considered themselves unlucky in life generally never noticed the headlines. They diligently completed the assigned task and eventually came up with the answer. But the people who considered themselves lucky in life, they generally stopped early and made an extra $100. The takeaway here is not so much about being inherently lucky or unlucky in life. Rather, luck is more about being open to opportunities beyond how the task or situation presents itself.

Starting point is 00:10:20 So try to be more creative, more adventurous, and more open-minded as you go through your life. Try to notice opportunities in disguise. Try to think more outside the box. and in short, be lucky. And that was what Tony Shea had wrote as his best advice. And it totally goes with what Jim Collins is talking about here, with leadership and these level five leaders talking about luck. It's a mindset. This is how these people are thinking.

Starting point is 00:10:48 They're open to these possibilities. They're open to these circumstances that may benefit them in unforeseen ways, whereas sometimes the level 1 through 4 leader is much more rigid. and is not open to these outside forces that might be actually beneficial to them. So I found that discussion absolutely amazing. I found it really an interesting discussion that you normally don't ever see anybody bringing up because it's very taboo. Let's take a quick break and hear from today's sponsors. All right. I want you guys to imagine spending three days in Oslo at the height of the summer.

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Starting point is 00:15:34 But actually, this very book starts off by saying, you might think that Jack Wells did a great job at GE, but he actually didn't compare to the great companies. And I think that was actually a good point because one of the things that Jack Wells talks a lot about is how everything is intentional that he's doing. And I think that was very profound whenever reading his book winning. And then when you read about some of these CEOs and one person that comes to mind would be someone like Warren Buffett, he might be the person to talk most about how lucky he is and how much he has been handed from lucky jeans, lucky parents. And he was just so fortunately a lot of things. And he acknowledged that. And I think someone like Warren Buffett, you might be thinking that he would say more than anyone that he really deserved his success. And then you have these CEOs thinking and talking like CEOs, not like, owners that more or less claim that they're there because they deserve it more than anyone else because it's their accomplishment.

Starting point is 00:16:32 And I think that was something that really was really profound whenever I read about the level five leaders. Yeah, I love this conversation in the book. So let's go on the chapter three and this one's titled First Who, Then What? So for me, this was a really simple and profound idea that I think a lot of companies mess up. And it's this. get the right people on the bus first. And don't start moving until you absolutely positively have the right people on the bus and in the right seat.

Starting point is 00:17:06 And I could not agree with this anymore. He even went on to say something that I think I might have said in a previous episode that I just totally agree with him on this, is leave a seat vacant before you just go to fill it with potentially the wrong person. person for the job. Double down on workloads. Do whatever you've got to do, but make sure you get the right people in the right job. All right. With that said, let's go on to chapter four. And the title of the chapter is, confront the brutal facts yet never lose fate. And Preston, you'll kick this off. So in this chapter, there was a really interesting story that I really enjoyed and it had to do with a prisoner of war. And the prisoner of war was stuck in a person.

Starting point is 00:17:52 prison cell. He was the highest ranking military officer in the prison cell, which made him kind of the guy responsible for trying to keep morale high and to assist in some of the other prisoners of war that were there. And this is called the Stockdale paradox. So Jim Collins was talking to this prisoner of war, who I believe now was also a professor at Stanford with him. And he asked the gentleman, what was the thing that separated the people who did well through the situation and the ones that didn't? And the way he responded, it was quite simple. He said, the optimists were the ones that had the hardest time. And when I heard this in the book, I was kind of like raised my eyebrow and I was like, was that said correctly? Because that just kind of goes against what you would intuitively

Starting point is 00:18:40 think. And his argument was that the optimists were constantly telling themselves, we're going to be out by Thanksgiving. And then when Thanksgiving would roll around and they weren't out, they'd then say, we're going to be out by Christmas. And they always had this optimistic point of view. And they were placing it on a timeline that needed to happen. And he said that that was very detrimental to the endurance that was required. And I forget the timeline that he said they were in the prison cell, but it was a very long time. I want to say seven years or something like that, I might be off on the numbers, but it was a very long period of time. time. And he said, so when you're constantly mentally going through this and you're saying,

Starting point is 00:19:21 I'm going to have the breakthrough in a month, I'm going to have the breakthrough in a month and a half. And it doesn't happen and it doesn't happen. That will break a person's mind. But he said, well, the guys that did well, and the guys who made it were the ones who always had the faith that they were eventually going to get out, that they were eventually going to get their day to walk out those doors. And those are the guys that were able to sustain it. And when you relate this to business, heck, I know Stig and I, we can definitely empathize with this one because there's a lot of things that we're trying to accomplish at the moment.

Starting point is 00:19:59 And it feels like we are a freaking turtle in our ability to make these things happen. And when we read this in the book, I actually called Stigai's like, I am so glad I'm reading this book because I really needed to hear that because it's, stick, we can both attest to basically taking on that first approach, just like, hey, by next summer, we're going to be at this point and we're going to be doing this and these kind of numbers and this and that. And that was really hard because I think there wasn't one time where we actually accomplished what we wanted to accomplish. No, it never happened. And we're still at that point with some of the things that we're trying to do. And so this was a very important thing that I took

Starting point is 00:20:38 away from this book was this idea of always keeping faith that you're going to get there, but it's maybe not in the timeline that you necessarily think is going to happen. Yeah, I thoroughly enjoyed this chapter. And another example that they come up with, and a business example, looking at how grocery shopping was doing historically and how it's done here in more modern times. And the way that the talk about this was to compare A&P with Kroger. And in this situation, Kroger did the right thing because they were talking to consumers and they were doing a lot of market research in terms of figuring out what is the future landscape of grocery shopping. And they found out that it's actually the mega store. It's not just about it basically groceries.

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Starting point is 00:25:41 All right, so moving on to chapter five, this one's titled The Hedgehog Concept, Simplicity, within the three circles. So when you're comparing a hedgehog and a fox, and this is how he demonstrated this in the book, he said that while some people were clever and cunning like a fox, others were simple, but determined like the hedgehog. So for instance, the fox tries to devise new ways to capture the hedgehog every day. But no matter how many times the fox tries to attack, the hedgehog only does one thing, the one thing that it knows best, which is its defense to curl up like a bull.

Starting point is 00:26:16 ball of spikes, and it wins every single time. What he's saying here is that companies should rely on this hedgehog concept to transform from an average to a good to something that is spectacular by doing that one thing really well and doing it so well that there isn't anybody on the planet that can beat you. And so he describes this in the idea of building blocks, and we're going to kind of get to that more in a different chapter. So I'm not going to really talk about that right now. But I love this idea of doing small things extraordinarily well and just totally mastering them and optimizing them before you move on to the next step that might be more progressive and that overarching goal that you're working towards. So this is building good fundamentals. It's almost like a person learning to hit a baseball.

Starting point is 00:27:07 If you don't learn the right fundamentals up front, it will just slowly progress into more mistakes or tennis or you could, use a lot of sports analogies with this, that if you don't start off with the right fundamentals, you are never going to be able to compete at a very high level because you have to have that building block and that foundation and do that one little thing really, really well before you can move on to that next step. Yeah, and one thing that Jim Collins was really adamant about was this is not something that happens overnight. He said that on Emirates, they found that it took four years for the great companies to come up with a hedgehard concept. The interesting thing here is that he says that the really great companies, they actually don't spend more time

Starting point is 00:27:50 on strategy than worse companies. Because you might be thinking, okay, they probably have like a strategic group always figuring out, are we on the right track, or which plan should we set into motion right now. But that's really not the case. It's more about being deliberate with what you want to do. And then when you face adversity, you still stick with that. And I think a good example he came up with was Walgreens, and he actually uses wall green several times throughout the book. And he says that what they're really good at is basically two things. They're really good at being located in a convenient location, which basically means that you would have a lot of Walgreens located very close to each other if that is the convenient

Starting point is 00:28:33 thing to do. And you also see the Walgreens would close down the store and then open up in a location very close to it, simply because that might be a corner shop. It might come at a higher cost, but the convenience is so important in what they do very well. And the other thing was the process in terms of optimizing the profit per customer. And that was what they did really well. And they couldn't be changed. They shouldn't be changed because the simplicity and the consistency of what they were doing was really their head-shod concept. And I found that really profound.

Starting point is 00:29:06 This kind of goes with the next chapter, which is a culture of discipline. and this is chapter six, where whenever this company develops this hedgehog strategy where they have these building blocks that they do these things just extraordinarily well, what you find is that the company kind of becomes somewhat of a boring organization because there's not really much to manage that's outside of the standard protocol and process that is now established and that's taking place that's extremely efficient due to this strategy. And so that culture of discipline and getting to that point where they're constantly optimizing and becoming the best at each one of those smaller tasks really creates this environment of just total discipline within the company. And it's kind of hard to say which one comes before the other.

Starting point is 00:29:53 I would argue that they're cohesive in the way that they're being designed and built within these companies that are just doing extraordinarily well. And I think one really great concept is bureaucracy here because bureaucracy is definitely the enemy. of a culture of discipline. And he has this metaphor, and we talked about this before, that you need to get the right people on the bus. Because what he's saying is that the more wrong people you have on the bus, the more bureaucracy you need to manage the people, which in turn leads to the right people leaving the bus,

Starting point is 00:30:25 and then you will bring more wrong people on the bus, and you will need more bureaucracy. And so it goes. All right, so chapter seven is technology accelerators. I really like the way that he went about this discussion in the book because he's saying that technology is obviously very important for any company to progress and take advantage of new opportunities. But the thing that he caveats that idea with is that it has to make sense and it has to be done in a phased and methodical and thoughtful approach. Some of the examples that he provides in the book is that you have these companies that know new technology is emerging and they just go all in. and they're acting more in a fearful manner of, we're going to be left in the past,

Starting point is 00:31:10 we're not going to be able to compete if we don't move to this right now. And they don't even fully understand the implications of how it can even be properly used. He provides another example with respect to Walgreens in the book on this idea as well. I think that the gradual approach, thinking through this, I mean, sometimes it might require that you move faster than others, but I think that's probably more of the anomaly than the 80% solution for most companies. I think most companies need to really think about how they're going to go about it in a really strategic way more than a fearful and hair on fire kind of approach. And the way the Jim Collins explained this is that he's saying that technology should be an accelerator,

Starting point is 00:31:50 not a creator. And I think this is really a nice way of looking at it. And the way he explains this is by comparing Drugstore.com and Walgreens in the late 90s. And back then, Drugsdot.com was trading at all almost 400 times of revenue, which is completely insane. And it was just nine months in, whereas Walgreens, on the other hand, was trading at one point four times revenue. And they were penalized because the market thought that they was lacking in terms of technology. But really the difference was that Walgroom was a lot smarter about this because they were sticking to the headshot concept of that. and they only used technology to do what they do best faster.

Starting point is 00:32:35 So again, that was convenience and that was profit per customer visit. So they applied technology to reach the goals that they have in terms of convenience and profit per customer visit better. What Jim Collins is really saying here is that you should by all means avoid technology adaptation fast, rather stay within your concept and figure out what's the right technology to support that. And that's two very, very different things. All right.

Starting point is 00:33:03 So in chapter eight, this is titled the flywheel and the doom loop. And I really think that this was value add back for us from a personal level as well. Because what he's getting at is when you're doing these hedgehog type actions that you've optimized and you have mastered, these building blocks are acting as more and more momentum for you to basically get your company moving in the right. direction. And once you get so much momentum moving forward, it's harder to stop it. This would almost be like the comparison of like a small little motorcycle moving forward at 20 miles an hour versus like a freight train that's moving forward at 20 miles an hour. The one has just significant momentum and that would be like a company that's based on these really solid foundational building blocks in order to get them going. Now, the thing that he also talks about is if you are creating building

Starting point is 00:33:56 blocks within your organization that aren't optimized, that actually kind of create a negative value stream for your company. And you're slowly building upon those. That's the thing that's going to be your doom loop and it's actually going to take you in the opposite direction of where you're trying to go. And it's very important that you get those building blocks done right and optimized. Yeah. And the way this is explained is that if you look at a corporation from the outside. It might look like something just happened overnight. But it actually turned out that they're very great companies. They didn't have a strategic plan or they didn't have like a breakthrough idea. It was not like cut cutting 2.0 or whatever they launched. It was a consistent

Starting point is 00:34:39 process that slowly created momentum. And it's really the consistency that's really central here. Okay. So in the last chapter, I'm not going to talk about this one too much because it's just a transition and maybe even a selling point for one of his other books, which was built to last. And what he's really getting at here is just kind of bridging the gap between good to great is finding that company that went from marginal performance to superior performance. And then once they reach that superior performance, how do they sustain it? And so he was basically given a plug for, that's why I wrote this other book, Built to Last, which then talks about that second piece of how you sustain these results into the long term.

Starting point is 00:35:19 So that would conclude our summary of the book. You heard us say up front that we both liked it and we really did. I think that this is definitely worth your time to read. One thing that we wanted to highlight here at the end of the show is we had a member of our audience, Rich Schener, who recommended a book that we did on the last episode. And we wanted this show, Rich, our appreciation. So we're going to give him a free subscription to our Intelligent Investor video course, which goes video by video, chapter by chapter. through the intelligent investor. And we're also going to give you a free subscription to our ETF course.

Starting point is 00:35:55 Both of those are paid courses and you're going to get them completely for free, Rich. So thank you so much for your recommendation and for all your contributions to the community. And we had a really fun time with you at the Berkshire meeting as well. So I want to throw that out there. All right, guys, and the last announcement that I have that I want to make here is, and we're going to have more information about this coming out in subsequent episodes, but we are doing an event in the UK with the Central Bank of England. And I think this is going to be something that is really, really awesome for anyone out in the UK to attend.

Starting point is 00:36:29 And we're going to be opening this up to the audience. So we're going to provide more information about this on our website. It's not up right now, but check back with us in a week or two. And we'll probably have some more information up there for you. And we'll be talking about more of what this is on subsequent episodes. but just so you guys know, that's going to be something that we're really excited about. It's going to be coming up with. And it's going to be happening in January of 2017, so just a few months out.

Starting point is 00:36:55 And both Preston and I thoroughly enjoy meeting up with the audience. So Preston had a chance to meet up with the audience. In Baltimore, I had a chance to meet up with the audience here in Seoul. And in late December, I'll be hosting an event in Manila in the Philippines. So that's something I'm super thrilled about as well. So both Preston, I really hope that we have a chance to meet you in person. So if you can meet us in any other occasions, it doesn't have to be in London, Baltimore, and Manila.

Starting point is 00:37:19 We are constantly updating our webpage in terms of hosting new TEP events. So definitely stay tuned on that. That was all that we have for this week's episode, guys, and we'll see each other again next week. Thanks for listening to The Investors Podcast. To listen to more shows or access to the tools discussed on the show, be sure to visit www.w.w.com. Submit your questions or request a guest appearance to the Investors podcast by going to www. www. asktheinvestors.com.

Starting point is 00:37:50 If your question is answered during the show, you will receive a free autographed copy of the Warren Buffett Accounting Book. This podcast is for entertainment purposes only. This material is copyrighted by the TIP Network and must have written approval before a commercial application.

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