We Study Billionaires - The Investor’s Podcast Network - TIP372: Identifying A Great Company w/ Jim Collins

Starting point is 00:00:00 You're listening to TIP. On today's episode, we have a very special guest, and that is researcher and author Jim Collins. Jim is most well known for his books such as Good to Great, Built to Last, How the Mighty Fall, Great by Choice, Turning the Flywheel, and B2.0, which have sold a total of over 10 million copies worldwide. I've been having a lot of conversations lately about the global macro environment. And while it can be an endlessly fascinating topic and a fun spectator sport, I think it's important to never lose sight of the fact that as investors, we are investing in companies. And it's important to study the different species of companies and what makes them great. So there is no better expert on this topic than Jim Collins.

Starting point is 00:00:43 To prove my point, I'd like to take a moment and highlight a segment of Great by Choice regarding Southwest Airlines. If we look at Southwest Airlines over 30 years from 1972 to 2002, you would find that the company endured everything from labor strife, fuel shocks, deregulation, interest rate spikes, air traffic control strikes, hijackings, crippling recessions, bankruptcies, and even, yes, 9-11. And yet, had you invested $10,000 in 1972, it would have grown to over $12 million, 63 times better than the S&P 500. I took the opportunity to explore how Jim thinks as a researcher. We discuss the definition of greatness, what makes up a level 5 leader, how much weight to put into

Starting point is 00:01:27 innovation, what exactly is the flywheel effect, how luck plays into success and so much more. Jim was very generous with this time and I very much enjoyed our conversation. So, without further ado, please enjoy this discussion with the wonderfully brilliant Jim Collins. You are listening to The Investors Podcast, where we study the financial markets and read the books that influence self-made billionaires the most. We keep you informed and prepared for the unexpected. All right, everybody, welcome to the Investors Podcast. I'm your host, Trey Lockerbie, and today we have a very special guest on our show. This man doesn't do a lot of interviews, and we are honored to have him. It is Mr. Jim Collins. Jim, thank you so much for coming on

Starting point is 00:02:25 the show today. I really look forward to our conversation, Trey. You know, Jim, I've noticed on a few of the other interviews that you've done, you start off typically asking the host a few questions. And we did this offline a little bit ago as well. And I've heard you refer to it as exercising your curiosity. I'm reminded of a quote by Dale Carnegie who said, to be interesting, be interested. This is something I have personally struggled with. I tend to be more introverted in social settings unless there's, a topic of discussion that I'm particularly interested in, then I kind of light up. But I found that the practice of interviewing others on this podcast in particular has helped me work the curiosity muscle a bit more. And I'm seeing some benefit to it. But I'm curious. Well, I'm curious. Have you always been naturally curious or was there a point in time or someone maybe you learned from that made you realize that curiosity could be a bit of a superpower? That's a nice question, actually, because as you're asking it, I'm reflecting here, like, where did my curiosity begin? And that is very hard to pin down because I think it probably showed up quite early. I am voraciously curious. If I have an addiction, it is curiosity. And it isn't really bounded necessarily by my areas of expertise. In fact, it very much isn't. I just learn.

Starting point is 00:03:56 constantly about things. And I'll just share with you one way that I exercise my curiosity, well, two ways, actually. One is I have found that everyone is potentially very interesting. And if you're interested, you find something interesting about them. And I'm like you. I'm kind of what I describe as a socially adept introvert. I'm naturally introverted. I really enjoy spending time in my research cave. We'll probably talk about that, about how I like to put moats around and just go deep into the research and to think and to make sense of things. That's my natural mode. But over time, I learned something about just the real power of questions. One of my mentors was Rochelle Myers, who was kind of a cross between Yoda and Socrates. And she taught me the power of

Starting point is 00:04:51 letting questions be this way to just really open up marvelous conversations. And one thing she taught me is that if you're at like a dinner table and you're genuinely interested, I like that your phrase, it's John Gardner also used to really challenge with that. He used to challenge and say, Jim, you know, don't try to be interesting, be interested. If you then go back and you're at a dinner table where you were just interested and everybody there is potentially interesting. And then you replayed a tape of that dinner conversation. there is one. People might say, that was a marvelous conversation. That person is a marvelous conversationalist. But then if you actually looked at it, you hardly said anything. You listened and asked.

Starting point is 00:05:34 And questions or invitations, and then people begin to really create a marvelous conversation by those questions. I really don't like the question, what do you do? Because that's kind of a hierarchical question. It's almost a question that is, geez, are you worth my time or something like that? I was like the question, where are you from? And that's an invitation. Because if you think about that question, where are you from? You're giving somebody many ways they can answer that. They can answer with, well, I'm from a given company, or I'm from a given university, or I'm from a given town, but you have a choice. Well, somebody might say, you know, I'm actually originally from Ireland. somebody might say, just randomly picking that.

Starting point is 00:06:19 Well, interesting. Well, how did you end up here? What's the story? And you start unwrapping it and very interesting things happen. And one question I just would have always found a wonderful way to very quickly start to connect with people is simply this. So what's changing in your life? It's a marvelous question because it's not what have you been doing.

Starting point is 00:06:41 It's what's changing because we're all living in a world where something in our life is changing, and that's probably what's really on our mind, and that will begin a marvelous, marvelous conversation. The other way I maintain my curiosity is there's this thing called the Great Courses series, and it's actually not the only way that I be on because my research is all ultimately driven by curiosity, but a way to just learn about a lot of different things. And a friend of mine named Tom Rollins started a company way back in the 1980s, and it's called the teaching company, and they do this thing called the Great Courses.

Starting point is 00:07:15 And what Tom figured out is that every university campus has a professor that everybody takes that professor's course, not because of the material, but because of the professor is such a marvelous teacher. And when you take the course, then that person, he or she ignites in you a passion for the subject. And so then what happens is if his idea was, I'm going to go to all these university campuses and I'm going to find who those professors are independent of what they're teaching. I'm going to find the right who's. And then we're going to have them do versions of their course that people can, back then it was on audio tape and then CDs and now it's streaming and whatever. And I've probably done, I don't know, probably 250 of those courses and everything from

Starting point is 00:08:03 neuroscience of and evolutionary biology up to how. the brain works, to theories of history, to why time goes forward, to the psychology of why you are, to discrete mathematics, to theories of logic and logical inference, to statistics, to world philosophy, to the history of the black death, to you name it. And you can just basically be a kid in the candy store, ooh, I want to learn about this. Oh, I want to learn about that. Oh, I want to learn about that. everything is just like going into a gigantic store where every single aisle is this flashing light of, oh, you could learn about this and that, and that. And one day, your life will expire. And I want the last thing ever to be on my lips before my lights go out is a question. I just want to sit there

Starting point is 00:08:50 and kind of go, huh, I wonder how this works, and it'll be over. That's incredible. It brings up a lot of questions, mainly around leadership of companies, which I think we'll get to a little bit later. But, you know, when we talk about great conversationalists, the word great just stood out to me. And you've written a lot about greatness that I kind of want to touch on, especially what makes a great company. It's important to define what great means. I'm reminded of Zen and the art of motorcycle maintenance because the protagonist spends that entire cross-country trip on the definition of quality.

Starting point is 00:09:24 It's an equally hard word to pin down. What is greatness? And going back to that research cave, you mentioned, what was your process of narrowing down a great company into only three distinct attributes? Let me just start with this story. Actually, I can really begin the journey of wanting to understand what makes great companies tick, which has been kind of a 30-year research journey for me. First is some early seeds that were laid down when I was about 22 or 23 years old.

Starting point is 00:09:54 I had studied mathematical sciences, and I was good at coding and doing algorithms and stuff like that and figuring out how to create spreadsheets before there were spreadsheets so we could run scenarios and et cetera. And before I'd gone back to graduate school, I went to work doing that kind of analysis at McKinsey and Company. And this is around 1980. And I was in the San Francisco office of McKinsey. And in that office, I'd been hired by a fellow named Bob Waterman and a fellow named Tom Peters had his office right across the hall from me. And they were, unbeknownst to me, working on a book that would later become in search of excellence. They were doing the research on it. And I was just working in the back room doing my coding on a microcomputer, an eight-inch floppy's doing some kind

Starting point is 00:10:39 of an analysis on some Saturday. And I walked out and I looked down the hall. And I saw the Xerox machine and there were these orange binders. And McKinsey always had blue binders, but these were orange binders. And I thought, I wonder what that is. So curious, I walked down there and I pick up and up and the orange binder said the excellence project. And I was really taken with that. I thought, well, that's interesting. What's what's that about? And it started looking at it and what they were doing was really asking the question that led to the book in search of excellence. What really makes for a truly excellent company, not a successful company? In order to be excellent, you have to be successful. There was kind of like an X factor of a company that might have

Starting point is 00:11:17 some shaping impact on the world, something you could admire, something exquisite. And so that planted a seat. And then about eight, nine years later after that, I threw a great stroke of good luck of a great mentor named Bill Azir. I had the opportunity to return to where I'd done my graduate work, the Stanford Graduate School of Business, to begin teaching a course on entrepreneurship and small business. And I think that seed of like really not settling for just, oh, let's just cash out, let's just make some money, let's just be successful entrepreneur, but doing something really extraordinary, building something really exquisite had been in my mind. And I took over this course on entrepreneurship and small business and I had a syllabus in front of me from the original

Starting point is 00:12:00 versions of the course, from one other folks who taught it. And the syllabus said this will be a course on the challenges of the new venture entrepreneur and the mechanics and challenges of the small business, our mid-sized company manager, something like that, fairly mechanical description. I remember looking at it and thinking, wow, that just seems so small. I think I want to challenge my students to do more. And I impulsively crossed out that sentence and replaced it. And I replaced it with something along the lines of this will be a course on how to take a new venture or small to midsize company and turn it into an enduring great company, period. And that was going to be the course. And so I looked at that and I thought to myself, wow, I don't know anything about that. that, but I'm going to figure it out. And that's what really launched the 30 years of very rigorous research. Now, let me just for a moment, just step back and then we'll kind of move on as how that research unfolded and the key things that we learn that are the inputs that really do correlate with building a truly enduring great company. But what is a great company? What would you

Starting point is 00:13:08 look to to say are your criteria that if it has A, B, and C, you would call it a great company? And there are three outputs a company has to achieve to be considered truly great the way we came to understand it. And I say we because I had great research mentors. Number one, you have to have superior results. If you're a sports team and you have the most marvelous culture and the most marvelous sense of purpose in the world and all these wonderful things, but you don't win championships, you are not a great team. You have to win at the game you play. And in business and in a company, that would mean you have superior return on invested capital. I mean, it is like if you put a dollar into this company,

Starting point is 00:13:51 there are very few other places that you could have put that dollar that would have generated a better long-term return than in that company. Independent of industry, dollar in, long-term, dollar out, this company won, right? So that's superior results. And the return on invested capital is they deploy it internally, if it was, say, a purely private company. Number two, though, is a distinctive impact. And what this means is, you have to ask yourself the question, if our company disappeared,

Starting point is 00:14:22 would it matter? What are we doing that is either so distinctive or unusual in its contribution or is so supreme in its excellence and how well we do it, that if we disappeared, it would leave an unfillable hole. We could not be replaced in a matter of years. It would take decades for somebody to replace what it is that we have built and how will we do it, if ever. So if you go back to, say, in the early days of building a company like Disney, once it reached a certain point, if Disney had disappeared, sure, you might still have theme parks and you would still have animated films. But you would have lost something, you would never have Disneyland again.

Starting point is 00:15:03 You would never have those characters again. You would have something that was like, wow, that's a gap. That can't be replaced. And then the third output is lasting endurance. You have to be able to do this through multiple generations of leaders so that you know you're a visionary company versus just a company with a visionary leader, that you have to be able to do it through multiple economic cycles, through multiple technology cycles. And greatness is not measured in quarters, but in quarter centuries. That last one is really interesting to me, because I know that you've taken a lot of time to do. distill this down into these three concepts and fully vetted them. And when I was hearing you talk

Starting point is 00:15:44 about it, one idea I had that I'm sure you thought through was, is there a world where something has an enduring impact instead of just the company enduring for a long time? I think of like the Beatles who were only a band for, you know, say 10 years, but the records and songs have lasted decades. I can't think of any example of that necessarily for a business, but I'm curious if you came across anything like that that you had to kind of sort through. It's actually a really interesting question because there's different kinds of impact. So what I was really interested in is how you build a company that has this kind of lasting quality and the ability to make distinctive impacts over a very long period of time,

Starting point is 00:16:27 independent of any given product, any given idea. So one of the concepts, one of the inputs that we found. So I gave you the outputs, right? we'll probably get to what are some of the really key inputs that lead to creating a company that accomplishes those outputs. One of the inputs is that we found that those who built those kinds of companies made this shift from being time tellers to being clock builders. And a time teller, they have like a great idea. And by the way, let me say it once and I'll repeat it. There is a negative correlation we found in our research with starting a company with a great idea and ending up as a

Starting point is 00:17:02 great company. There's a negative correlation we found in our research, starting a company with a great and successful idea and becoming an enduring great company. And it actually turns out that many of the greatest companies started with failures, setbacks, things that were catastrophes early on. And it was the very fact that they had not success at the start that played a big role in them building the muscle strength to say, you can think of it as I'm going to be, I'm going to have a successful innovation versus I'm going to build the muscle to innovate, right, which would be more durable. The muscle to innovate is far more durable than having an innovation. And the thing we found that the clock builders understood is like the time tellers like, I know what time it is. It's time

Starting point is 00:17:51 for this innovation. They can look up at the sun, the moon, the stars in the sky, and they can tell you precisely what time it is. It's 3.30 in the morning on August 23rd and 1401 and everybody bows down and reveres the timeteller, the great entrepreneur, the far-shying visionary, who knows always what time it is and everybody will follow them. And somebody else says, you know, I think it's far more impressive instead of just being the time teller on who everything depends. I'm going to build a clock. And I'm going to build a clock that can tell the time even if I'm not here. And so that ability to make the shift to say I'm going to ultimately build a clock as opposed to be the time teller. Now, let me just link this in to this idea that sometimes the company itself

Starting point is 00:18:30 is kind of the ultimate creation because then it goes on to create and create and create. If you think about the evolution and the journey of Steve Jobs, I got to know Steve back in 1988 when I was teaching my course at Stanford, and I didn't know what I was doing, and I wanted to have it be about building great companies. And I thought, well, I want to bring some heft into the classroom to help my students see what they could do. And I picked up the phone, and out of the blue, I called Steve Jobs. And Steve, who was a little bit older than me, he was, I think, 36 and I was 30 or 31. He very graciously agreed to come to my class and spent some time with me really talking with my students about. starting and building great companies and so forth. But notice the date. It's 1988. In 1988,

Starting point is 00:19:19 he was in the wilderness. He was three years after having been essentially lost out in a boardward battle lost his company, lost out. He even said in the class at one point, just kind of quick, while I got booted out of my last company. And then he went on talking about his incredible passion for the things that he was trying to do with this company called Next. And then later, of course, it would come his involvement with Pixar and so forth. But eventually, to come back to Apple in 1997, which no one knew would ever happen. Early in the journey of Steve Jobs, there was very much the Time Teller. He would learn from others, but very much that early sense of, I'm the far-seeing visionary, and as long as I'm here to be a visionary, the company can be,

Starting point is 00:20:01 will have these great ideas like the Macintosh, right? And I can take the ideas that I saw with all the Xerox Star and all that, and I can create the Macintosh, and we're going to have a great impact on the world. And then the Time Teller leaves, and what happens? to Apple. It runs into great difficulty. Finally, in 1997, he comes back. The company is on the verge of disappearing, either into some other company or maybe failing outright, and it begins to rebuild Apple. But he comes back with a different philosophy, which is, I really need to take the lessons I learned from before and go from being that sort of early entrepreneur to somebody who can really build a company that ultimately doesn't need me or need any given specific idea to be great.

Starting point is 00:20:42 And he makes that shift, there's kind of a Steve Jobs 1.0 and a Steve Jobs 2.0. And he makes that shift from time telling to clock building. And he starts thinking about really building Apple to be truly enduring. And in 2007, I got a call from him to talk about that and about building it beyond him and things like Apple University and a variety of other things. It would make it such that this is an enterprise that could not just have something like the Macintosh computer, but could be this incredible organism that over time could do many great products. And of course, we lost Steve Jobs in 2011. It's now been a decade. And near as I can tell, there continues to be a whole sort of momentum around the entire ecosystem of products that go

Starting point is 00:21:32 from Macintosh to iPods to iPhones to iPads to the ecosystem surrounding it that is allowing it to continue to build tremendous compounding momentum. And the value creation that has happened after he was there exceeds the value he created while he was there, even just from a financial standpoint. And so the idea being that if you think about it, what was Steve Jobs' greatest creation? Was it the Macintosh computer? Was it the iPhone? Or was it Apple Computer, the company that could then generate creation after creation and continued to build its flywheel over a long period of time that would create tremendous compounding returns, contributions. And I'd ask you a very simple question. If Apple disappeared today,

Starting point is 00:22:21 what would be lost in the world? Well, probably a lot of us would really miss our Apple product. I was going to say my whole life. Yeah, exactly. But why is that stuff there? It's because they built a great company that could do it. And it wasn't a company that needed just one great leader. 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. You've got long days of daylight, incredible food, floating saunas on the Oslo Fjord, and every conversation you have is with people who are actually shaping the future.

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Starting point is 00:26:55 of the company and systemizing it. And that's an incredible skill set to have. referring back to the inputs you mentioned earlier, it also brings up the idea of people. And one of the hardest things to do as a leader, borrowing this from Reid Hoffman, who said that you have to, you know, in an early startup, you've got pirates, right? Because you have people who don't really want to work at a big conglomerate type company. And they're kind of very driven people that are somewhat autonomous. But eventually you have to turn them into sailors. And that can be a very difficult thing to do. So you have to lead people into the idea of building systems that

Starting point is 00:27:30 can endure beyond themselves. And one of the most counterintuitive discoveries, I think, in my opinion, from your research, is that it appears that having the right people and the right seat on the bus is actually more important than knowing upfront where the bus is even going. So how did you come across that? So let me back up a little bit and I'll answer that because the principle is called first who, then what? And it's a very deep principle that came from our work that we found that that we found that

Starting point is 00:28:00 that those who make the shift from being first what, what are we going to do, what's our vision, what's our direction, what's our strategy, what's our method, what, what, what, what, what. We make that shift to saying, you know, actually, that's a secondary question. The primary question is who? Who do we want on the bus? Who do I want to work with? Who can we rely on? The question is not, how should we solve this problem?

Starting point is 00:28:21 What should we do? It should be who should I have work on it? If I get a cancer diagnosis, the question is not what's my diagnosis, my treatment, at my schedule. The real question is, who's my oncologist? Who's the radiologist? Who's the surgeon? Who's the expert in this field? I got to find the who's to get the best what's. And it's a shift in the world to basically kind of as you think about it, to basically say it's part of making the shift from being a time teller to a clock filter, right? You make the shift from, I'll figure out the what's and tell people what to do to I'm going to figure out the who's. And if I get the who's

Starting point is 00:28:57 right, we'll figure out a lot of great what's to do. Right. It's a first who strategy. So how do we come up with that? Where do that come from? Back up here for a moment. Everything we're going to talk about today of key ideas to come from our research, come from research. It's a research-driven approach.

Starting point is 00:29:15 And it's done with a very specific methodology that was given to me or we really co-developed, Jerry Porras, my research mentor at Stanford. And what Jerry really had the insight to push us to work really hard to embrace is the idea that you have to have a comparison set so that you can always say what is different about those that build something truly great, what are in those companies from those that don't make it. And the really key question is not what do successful entrepreneurs or successful companies or enduring companies share in common. It's what do those who built something truly great share in common that is different from those that could have but did not. And so the idea being that if you go to any given industry to any given kind of time in history, you can very likely find matched pairs.

Starting point is 00:30:10 So you can find companies that were in the same spot, same time, same resources, same potential at the same moment in history. And they have the same customers. They have similar scale. They have similar access to capital. they know the market's equally well. They're like twin. There's this almost like a controlled historical experiment.

Starting point is 00:30:28 And then what happens is one separates out and becomes a much better or maybe even great company. And the other one that was starting from the exact same place with the same opportunities and everything else, as much as possible, you're zeroing down to very controlled variables at that point. Then from that point, didn't do as well and maybe even die. But in most cases, just didn't do as well over time. And then you contrast them.

Starting point is 00:30:52 And you say systematically, what did one do different than the other? And then you replicate that across a range of types of companies and industries and eras and technologies. And we've done that for about 6,000 years of combined corporate history and a research database across four major research studies that have used that method through different lenses. Now, one of those studies was the good to great research study. And we were looking at companies that made this point of inflection. where you had two companies, right, think of multiple match pairs, companies that were equally

Starting point is 00:31:26 average performers for a significant period of time. And they were in the same industry, same time, same resources. Classic example from our research, historical case, Kroger and A&P. And if you rewind the tape of history, there was a point in history when these two grocery chains, and it's, you know, it's retail, it's grocery, but it's very interesting pair because they both were relatively average performers in the same era heading into a major seismic change, which was going to be the shift from old style grocery stores into what became super stores, they had either one of them could have made that shift brilliantly and then gone on to have the great results over time. They were virtually equal in their strength and capability

Starting point is 00:32:10 to make this transition and that good to greatly at that moment. But today, with the passage of time, Kroger is still here and actually doing very well in its world, A&P has gone. Then you ask, step by step, year by year, what did they do different? How did they think different? What were the ways that they went about doing things at Kroger that were different than the way they did things at A&P? And from that kind of analysis, rigorous, data-driven analysis, going back in time and watching the tape of history unfold and to figure it out, you begin to get insight. The comparison leaders, comparison cases had leaders who would often come in, they would be like a genius with a thousand helpers. They would come in and say, I know the vision, I know the direction, I know the strategy. I've figured out what to do and where to go, and I'm going to

Starting point is 00:33:03 motivate people to go there. And I would have thought that that's what our great cases would do, but that's not what happened. They took a different approach. The people like Everingham at Kroger, they asked a different question. They said, you know, I don't necessarily know where to drive the bus. know is this, is if I get the right people on the bus, and I get the wrong people off the bus, and they get the right people in the key seats, if I get that done first, then with a great group of people, we'll figure out where to drive the bus. And then you've got one other giant advantage. There's a history professor by the name of Edward T. O'Donnell. And he has a fantastic quote that I've always loved from, it came from one of the great courses I mentioned earlier.

Starting point is 00:33:43 It's a course on the history of the United States from 1865 to 1920, America in the Gilded Age and the Progressive Era, as it's called. And Professor O'Donnells says, history is the study of surprises. I think about that. Isn't that wonderful? And it is. And we're living history. I don't know about you, Trey, but I sure as heck was surprised by COVID when it came 18, 24 months ago. It's not like I knew that was coming, so I better get prepared.

Starting point is 00:34:09 We have no idea what's coming next. And all we know is we're going to have surprise after surprise after surprise. All we know is there will be no new normal. There are just going to be a continuous series of not normal events. And this is just the nature of history that we will live through. If we can't predict the what. And one thing I'm sure all of your great investors have told you is no one can predict much of anything. If you can't predict the what, what is your ultimate hedge against uncertainty if you're building a company?

Starting point is 00:34:41 It's the who. It's having people who can adapt to whatever the world throws at you. And if I got a bunch of people on the bus for a specific strategy, a specific direction, a specific expectation of what the world will be, and our idea fails, or that particular strategy doesn't work, or the world throws us a surprise as it will that wipes all that out. If I only got people on the bus because of the what, and now the what's changed, I'm I'm in trouble. But if instead I got people on the bus because they're the right who's who can adapt to multiple kinds of whats and they share the values that we're trying to build to, and they're incredible people that I can rely upon, and we can navigate this together, well, then you're in a very strong position to adapt to that uncertainty. So in the more uncertain the world, the more you want to bet on the who, not the what, because the what's are going to change. And one thing I love about your research is that it drills down all the way to the point where you have an actionable takeaway, right? So you could just as easily say the right people and

Starting point is 00:35:48 you go, okay, what does that mean? Carl's good at his job. But it's no, is Carl coded to do that job, which I found incredibly fascinating. And it leads me to the lead back to the leadership as far as finding those who are encoded to be leaders. And I want to talk a little bit about how you've discovered the level five leader. So talk to us about the pyramid of leadership and how you uncover that pinnacle of leadership. And again, as we go through this and for all of the people who gravitate to your show, who I know are very smart, thoughtful and analytic people, that's kind of their ethos, right? Why they'd be attracted to the show. I want to constantly underscore that the ideas that we're talking about are not something that, like, we sat off in a room

Starting point is 00:36:32 and said, oh, this is a cool idea. They bubbled up from an empirical and rigorous process to gain these insights. And then sometimes they would distill into something quite provocative and very, very interesting that we'd crystallize in something like the level five leader. So briefly, one thing is, we found that building a great company, one that can produce these kinds of results and make this distinctive impact and do it over a long period of time, sort of unfolds in stages, sort of stage one is about the people, disciplined people, and stage two is about discipline thought, and stage three is about disciplined action, and then stage four about building greatness to last and kind of more or less follow that trend. And notice we're

Starting point is 00:37:09 starting with people. And part of the people equation was a certain type of leadership ethos that we found. So what we found is this. Let me just tell a little story about how this surprising finding came about. It was surprising to me because I didn't want it. I did not want to find this. I have always had an anti-leadership bias or had one for a very long time. And the reason is because I find the notion of leadership worship and the idea that, oh, it's all about just having a great leader is actually very intellectually sloppy. And it leads us in a big circle because when we say, well, the company was successful, because it had a great leader.

Starting point is 00:37:53 And then if the company is not as successful, well, the leadership must not have been as great. We're just kind of going around in a circle. And so I said to the research team at the beginning of the good to great study, we're not going to have a leadership answer in good to great. And remember we were talking about companies that make this inflection, right? So something happened in this inflection time. And the research team one day, I came in, they'd all kind of joined hands. And I said, well, what's that about? And they said, today, Jim, is the day we're going to challenge you. We're going to tell you that you are wrong. Well, what about? About your anti-leadership bias? We're working with you systematically deeply studying the evolution of these companies to understand how someone

Starting point is 00:38:33 from good to great and why and others didn't. And you can't remove these extraordinary leaders from that inflection. That's ignoring the evidence. And you tell us to pay attention to the evidence. And so I said, well, let me ask you a question. Do you remember your high school algebra where if you have the same, it's a ratio when you have the same variable in the numerator as the denominator, the variable crosses out, isn't relevant. So I went to the whiteboard and I drew on the board, good to great companies in the numerator. Comparison companies in the denominator, I said, okay, we can accept that there were leaders and some exceptional leaders in the good to great companies. But how about the comparison companies? Well, actually turns out that a lot of the

Starting point is 00:39:15 comparison companies had towering, often charismatic, extraordinary leadership personalities in those companies, everybody would look at it and say, well, those are clearly exceptional leaders, but they were in comparison companies. So then I just took the little marker and I crossed out the word leadership. You got leadership in the numerator. You got leadership in the denominator. It doesn't differentiate. It goes away. It's not relevant. So I put down the marker and I said, so let's go back to work and do something useful. And the team kind of joined hands, tightened their hands and said, Jim, we thought you would say that. So we came prepared. And this is when the team had this marvelous moment of challenging me with the evidence, right? They said, we agree with you completely.

Starting point is 00:40:00 And they had marshaled the evidence. The key is not leadership versus not. We all agree that there was leadership in both sets of companies, but there was something different that the good to great leaders were kind of cut from the same cloth that was different from the comparison leaders. That became interesting. It wasn't about having leaders. leadership, it was about having some type of leadership. And so as we began to explore it, we eventually came to see this thing called the level five leader. So think of it as like a Maslow's hierarchy, except it's a leadership hierarchy.

Starting point is 00:40:33 And level one in that hierarchy is individual skills, right? You become a really good individual contributor. And if that's what you are, you're a good level one. Level two is you layer on top of that really good team skills. And if you have level two and level one, you're a good level two, really good contributing team member. Then you add layer three, which is management skills. And you really learn how to manage, not just to be a team member, but really manage a team and make that be really effective and outstanding. Now you're level three. Then level four is leading. And you really learn how to lead.

Starting point is 00:41:04 You don't just manage preexisting objectives. You sort of figure out what must be done. And you figure out the art of getting people to want to do it. And you're really good at that, right? You're a good level four, but there was a higher level, and there was the level five. And what we found in our work is that the comparison leaders had level four leaders, comparison companies, and the good great companies had level five leaders. And the difference between the five and the four was a surprise. It was this very strange combination of a personal humility combined with an utter indomitable will, humility and will. Now, the humility is a very special kind of humility because it's not necessarily self-effacing. Many of them were people who didn't draw a lot of attention to themselves. They

Starting point is 00:41:55 might have had had a charisma bypass. They were sometimes not the sorts of person that you would necessarily notice walking into a room. But some others were very colorful characters, right? So it's not necessarily about the personality, like you're having to be a self-effacing person. It's humility defined as your ability to recognize the flaws and faults that you have that you have to grow past with honesty and humility. Hence, you see the journey of Steve Jobs from 1.0 to 2.0. Losing your company is a very humbling experience. That became the seed of the kind of growth that allowed them to become the kind of leader who could build that next generation of Apple. But the other is that it is ultimately that you channel your ambition, your ambitious

Starting point is 00:42:40 anyone else, but the ambition's not about you. It's not about what you get, what you make, how you look, about how you're a hero, about how people look up to you, about any of that stuff. It's about all your ambition is going into something that is not about you, that is bigger than you, that is more important than you, that is more purposeful than you. And you are as ambitious as anyone else, but you're channeling it outward. And so when you begin to say what really matters is not that I am a great leader, but that this is a great company. It's not a matter of how people look up to me. It's how I built great people who did great things. That kind of ambition and the willfulness around it is what made the level five. I bring it up especially because as investors,

Starting point is 00:43:30 I think it's important to filter through the universe of companies, not only by the products and the company's mission, et cetera, but also with leadership, I do think it plays an important role, the comparison of finding the right jockey with the right horse. I do think the horse is probably the most important, but the leadership is an important piece of the puzzle. And a couple of leaders that we study a lot on the show, one would be Warren Buffett, who, as you were speaking, I was reminded of because he comes across with a lot of humility, I would say. And then I'm kind of juxtaposing it in my mind with someone like an Elon Musk who maybe doesn't have that first value, but is at least advertising a mission much bigger than himself,

Starting point is 00:44:10 these big hairy goals of sorts of getting to Mars, et cetera. And there's actually been an intersection between these two, and it was around the idea of innovation, which you've written about as well. I'd like to just kind of resolve this with you, because I'm conflicted still on the idea of how much innovation. So, for example, Elon teased Buffett about his idea of having motes, and he was calling them quaint, you know, and went on to basically say that what matters is the pace of innovation, that it is a fundamental deterrent of competitiveness. What has been your most surprising takeaway after studying innovation in top performing companies? All right. So everybody hang on for a little bit of a ride on this and Trey and I'll go back and forth because actually I would take from our

Starting point is 00:44:57 research that that's actually innovation is a term that has to be a term that has to be a lot. And I'll helps us kind of get our heads around things a little bit, but I've actually really come to understand that what really matters and innovation plays into this, but kind of a perhaps a more helpful way to think about it is building a flywheel of momentum and then renewing and extending that flywheel with bullets and cannibals. So if you were kind of going to say, what did our research show about over time allows companies to not only win in their game, but then to continue to win and grow and evolve as the world around them is constantly changing and all kinds of new stuff and opportunities for coming along and things that can kill them are coming along and so forth.

Starting point is 00:45:45 This notion of sort of the flywheel that is renewed and extended with bullets and cannonballs. And I think if we unpack that, I think that that, by the way, would explain many people that folks might see what sort of contradictory or puzzled by. So, Tray, maybe you and I together could kind of unpack this because I think that in the end, the great, great, great machines, momentum machines are a flywheel. And they are a flywheel that is renewed with bullets and cannibals. And before we go into this thing about the innovation piece, let me just say one thing. It's fascinating if you go back and you actually ask the question, as this researcher's name Tellus and Golder did, Morton Hanson and I wrote about them, I think, in Grate by Choice as kind of really having a

Starting point is 00:46:30 similar finding to some stuff that we found. But they did this really neat piece of analysis in a book called Will and Vision. And they basically said, we want to go back to the start of given industries and find out who was the early innovative pioneer. And then we want to ask the question, who won? And it turns out that it's almost never the early innovative pioneer, that the people who won, the people who ended up as the big winners in a given field, were almost never the ones who pioneered that field. Now, there are a small number of exceptions to that, but the dominant pattern is that the winners do not pioneer

Starting point is 00:47:12 and are not the pioneering innovators of the field. Morton and I found, in our research, corresponding to that, that when we sort of looked and we basically just said, well, one reason why some companies do really well in highly turbulent environments is they just shear out, innovate their competitors. They do both sets. It's like both had leaders. Both our winners in comparisons had innovation. So it was something about the way they thought about momentum and innovation and extension that was different. Yeah, I'm so glad you brought up the flywheel. This concept was born out of your book, good to great. And it's become saturated to the point, in my opinion, where almost every company

Starting point is 00:47:52 claims to have a flywheel. I hear it a lot in the venture capital world where it's almost reminiscent of when companies, every company was disruptive or every company was the Uber of X, right? Every company seems to have this flywheel. So now that we have you, the source of this concept on the show, I really wanted to talk about what actually is a flywheel and almost more importantly, what it is not. So in good to great, we were looking at these inflections. And I started thinking to myself, you know, just what was the miracle moment? What was the key aha? What was the big breakthrough? What was the thing that then once they got it, it was like, bang, wow, we made this great big breakthrough. And it turned out that

Starting point is 00:48:32 looking in from the outside, I could see a point of inflection. But on the inside, it didn't feel that way. We kept sort of asking the executives who had been part of the teams that made that leap from good to great, you know, what was the miracle moment? What was the breakthrough? Right. And they would kind of say, well, I can't really answer that question because it was a more organic process than that. It sort of happened over time. It was no one big thing. And so we were going back and forth and finally, as it began to put together how all this happened, again, we're putting together the historical record to really understand how something happened. This image of the flywheel came to mind. And imagine you got this giant heavy flywheel and you start pushing in an intelligent direction.

Starting point is 00:49:10 It's not random, right? But you start pushing on that flywheel. And after a lot of effort, a lot of work, you finally get one giant, slow, creaky turn. And you don't stop. You keep pushing, and you add a second turn, and it's kind of now compounding, one turns to two turns on this big flywheel. And then you keep pushing, and you eventually get four and eight and 16 and 32, and then 100, and then a thousand, and then a million, and then 100 million turns on that flywheel.

Starting point is 00:49:33 And it's just like turn upon turn and push upon push, compounding over time. And then at some point you just feel bang, breakthrough momentum. And somebody comes in and says, so what was the one big push that made it go? Well, you can't really answer the question because it's a series of good decisions, supremely well executed, adding up one upon another, compounding over a long period of time, the flywheel effect. And so we wrote about the flywheel in Good to Great. And it was one of the key principles that came out of it is that you build flywheel momentum and that's what better explains great long-term results rather than sort of explosive moments or singular breakthroughs. Shortly after Good to Great was published, actually, it was right as Good to Great was being published.

Starting point is 00:50:19 I think it was like the fourth week of September of 2001. I had been invited to go up to a small company in Seattle. It was named Amazon.com. And I was invited to teach the ideas. I love to just share them and to teach them and teach the ideas to Amazon executives, but also to meet with the board and to meet with a young chief executive by the name of Jeff Bezos. And so I go there and I just taught the ideas. I didn't say this is what Amazon should do or anything like that. They know their business better than I do. I just wanted to share with them to teach the ideas and

Starting point is 00:50:53 challenge a bit. But if you remember 2001 in the fall, that was right after the dot-com crash. And there were a lot of people wondering what was going to happen to Amazon. And there were all this carnage in the dot-com world. And people wondered what Amazon and the others survive and who is going to make it through this. And on top of that, of course, we had just come through 9-11, just a few weeks before. It felt like dark times. And as I left Seattle, I basically made one real challenge, which is don't respond to this as a crisis. Respond as a flywheel. And then the folks at Amazon grabbed the flywheel idea from good to great.

Starting point is 00:51:28 And they did something brilliant with it. They made it their own. And they said, okay, if we're going to build a flywheel, well, then what is our flywheel? and they took the idea of the flywheel, and they then sort of sketched out the architecture, and this is what's powerful about a flywheel, it's an architecture of momentum. It's not like a business idea. It's a momentum architecture. The Amazon sketch of the Amazon flywheel early on was very simple.

Starting point is 00:51:57 Essentially, if we offer lower prices on more things for these customers we're obsessed with, then we can't help it. That's the key word. we can't help but bring more visits to the site. And if we bring more visits to the site, then we can't help but attract more third-party sellers. And if we attract more third-party sellers, then we can't help but expand the store and extend distribution. And if we expand the store and extend distribution with all those other pieces, then we can't help but grow revenues per fixed cost, which we can then redeploy right back into the top of the flywheel to offer more lower prices on even.

Starting point is 00:52:35 been more stuff for our customers, which will bring more customer visits, more third-party sellers, more renew and extend the store and distribution, more revenues per fixed cost, bang, right back to the top of the flywood. Now, notice, now, if you ask the question, what is Amazon, it's a flywheel? And that flywheel compounded and built momentum, and it's been compounding and building with renewals and extensions, what we're going to get to the innovation piece in a few minutes, how that ties in, because it's the renewal and extension of a flywheel. that better explain great long-term results than just the word innovation. It's get the flywheel of momentum going, understand it, have that architecture, and then renew

Starting point is 00:53:18 and extend in a very deliberate way such that that flywheel keeps building ever momentum in very imaginative ways over time, and you disrupt the world by turning your flywheel, not by blowing up your flywheel. And if you get a great flywheel architecture, it has A will drive B and B will drive C. If we do A, we can't help but do B. And if we do B, we can't help but do C, right? And it drives. You can just sort of feel the momentum building because the logic underneath, the logic of momentum underneath, if when you execute on each component, creates an inevitable momentum, which then builds upon itself over time. It requires the intellectual rigor to nail the architecture, and then it requires the fanaticism to execute on each component over time to produce the momentum, and then the

Starting point is 00:54:12 discipline to renew and extend it, and to stay with it long enough to get the greatest compounding impact. Your world, do you think a lot about compounding returns? This is strategic compounding, very similar to the idea of financial compounding, except ultimately it is strategic. And there are lots of different types of flywheels we could talk about. There are innovation flywheels. There are cost flywales. There are people flywheels. There are education flywheels.

Starting point is 00:54:39 There are music flywheels, right? But the key is, what is the flywheel? And then we would get to the question of how one renews and extends that flywheel over time. So we could take almost any company over time and ask those exact questions. Let's take a quick break and hear from today's sponsors. No, it's not your imagination. Risk and regulation are ramping up, and customers now expect proof of security just to do business. That's why VANTA is a game changer.

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Starting point is 00:58:31 If we go to your hedgehog example, right, of a company being really good at one thing, you start to wonder, okay, well, where does it make sense to grow into something else? And Amazon's done that with a number of industries now and grown its hedgehog of sorts. And so it brings up the question, is it the flywheel that's driving the decision to enter into new industries for companies such as Amazon? Yes. And also, though, kind of a specific way of coming at it. So you asked the question earlier about innovation. And so in one of our books, which is great by choice, we spent nine years actually asking the question, it was a kind of a study after good degree. And we knew about the flywheel. But we were asking the question, why does some companies? companies go to become 10 times better performers in their industries from a base of being, say, early startups in the most turbulent industries we could find. So they're full of all kinds of disruption and change and technology innovations. And we were looking at biotech and software

Starting point is 00:59:31 and computers and semiconductors and airlines and a whole bunch of industries that are sort of like climbing at 29,000 feet on Everest type of environments. They're just really difficult and turbulent and unpredictable environments. Who does well and why? And what Morton and I, found in that work was that we asked the question about innovation. And what we found is that far more important than innovating is the ability to place the right big bets into scale innovation. And we ended up calling it fire bullets, then fire cannonballs. And so imagine you have a ship bearing down on you, and you have a certain amount of gunpowder. And one approach to that would be, I'm going to take all my gunpowder. I'm going to put it in a big cannibal. I'm going to

Starting point is 01:00:12 fire to that ship. And I'm going to take my best shot. I sure hope it hits. But the cannibal sails out and splashes in the water. Now you're turning and you look, you're out of gunpowder and here comes the ship and you're in trouble because you're out of gunpowder. But suppose instead you took a little bit of gunpowder and put it in a bullet and you took your best shot. You fired it. It's 30 degrees off.

Starting point is 01:00:34 You take another bullet. You recalibrate. You fire again. You're 10 degrees off. Take another bullet. You recalibrate, fire again and ping. You hear the side of the ship. Now you know you have a calibrated.

Starting point is 01:00:46 line of sight. Now what I'm going to do is I'm going to convert the gunpowder, which I have, into a cannonball and fire it on the calibrated line of sight. What we found in our research is that you're turning your flywheel and you're building momentum, but along the way, you're also firing bullets. You're firing bullets on things that might become your next big bets. And not all of them hit things, right? A number of them just splash in the water. They're never going to hit anything. you know that they're not necessarily going to pay off and you don't pursue them. But every once in a while, you get some tremendous calibration on something, and you have empirical validation that this will work.

Starting point is 01:01:25 If we bet big on this, this could renew and extend us into something where we had not been participating before. And we talked earlier about the hedgehog of doing what we're passionate about, what we can be the best in the world at, and what drives our economic engine. Well, that's not a static idea because you can discover by firing bullets and then judicious cannonballs, new things that you didn't know before fit those three circles. So returning to our Amazon example, just to flesh this out a bit, you have to provide services for your own website. And then you basically say, gosh, what if we fired a bullet? What if actually

Starting point is 01:02:02 it turns out that some of our customers might like this too? And you fire a bullet, essentially providing a service you provided for yourself for your customers, and then you calibrate that, and you find that that approach works really, really well. And eventually, what do you have the basis of? It's incredible renewal and extension into Amazon Web Services. And that organic process of bullet to cannonball renewal doesn't mean you abandon the sort of underlying momentum architecture or flywheel. It's a renewal and extension. And that's what we found over and over again in history. You're doing memory chips. You fire a bullet. You have this thing called a microprocessor. And then you fire that and turn that into a cannonball and boom, as Intel, you went from memory chips and now you got

Starting point is 01:02:47 this whole new extension of your Moore's Law, semiconductor flywheel in microprocessors. Or you have, do you realize that in Marriott, for the first couple decades of its history, wasn't a hotel company. It did restaurants, but they fired a bullet to do a hotel. And in Washington, D.C., it actually turned out that their ability to create hospitality could extend beyond a restaurant. They could do it Well, in a hotel, they proved it. They validated it. It was then comes the cannonball to begin to move and extend into the hotel business, Disney from animated films into theme parks, right? And we could go company after company in history. You have this flywheel architecture or momentum. You're firing bullets to get calibration on new things that could renew and extend it. You validate that, in fact,

Starting point is 01:03:37 we could do that with passion. We could be the best at it. It does make economic sense. we then fire the cannonball and we renew and extend the flywheel again. And that ability to understand what our flywheel is and how we can extend it and renew it in this very disciplined bullet cannonball way, when you look over the arc of decades, is a, from our research, a much better explanation of who wins, who disrupts, who compounds than simply who innovated and who didn't. It's a much richer, deeper, true explanation of what happens. It doesn't mean you're not innovating. Bullets to Cannonballs is innovating, but it's really flywheel renewal extension. I'm really glad you brought up great by choice because all of your concepts and all of your

Starting point is 01:04:24 books are evergreen, in my opinion. I mean, they keep me grounded as a leader of my own business. Every time I go back and reread it, it's like, oh my gosh, okay, yes, this is the right thing to do. But one of the more topical concepts, I think, comes out of great by choice, given that we just are seemingly coming out of this global pandemic. And a lot of companies have been beaten down. You know, we go back to the history of surprises. This was a big one for a lot of companies. And one of the identifiers or key indicators you've discovered is the idea of the 20-mile march. And I just want to share that that is basically set.

Starting point is 01:05:04 these achievable hurdles as a company, whether it be profitability or otherwise, but also having the discipline and restraint when faced with the opportunity for outsized growth. And you've covered that elsewhere. So I wanted to touch on it because I'm almost more curious as to how Jim Collins, how he incorporates that into his own life. What is your personal 20-mile march? First, let me just say something about discipline and momentum. People tend to think sometimes that, Well, being really disciplined about stuff is kind of antithetical to the idea of doing creative and innovative work. And what we actually found is that creativity and discipline go hand in hand.

Starting point is 01:05:45 They're a genius of the end, not a tyranny of the war. And I mean, a lot of really productive artists are very disciplined about what they're doing, but they're also very creative. And discipline enables creativity if it's done right. And we found that in our research. Remember we talked about the flywheel that if you do A, then you can't help it do B. If you do B, can't help but do C. And it compounds on itself because A is driving B, driving C.

Starting point is 01:06:07 The upside of that is that creates momentum. But the downside is this. Suppose you fail to execute with discipline on any single component of the flywheel. Let's say you get execution scores of, say, six components, something like 10-10, 993, 9. Well, that three is going to stop the whole flywheel because the flip side of that compounding momentum machine is everything depends on everything else. So if you fail to have discipline on some part of the flywheel, the whole flywheel stall. And that's why being disciplined to execute on all the key parts helps to accelerate momentum, not stall momentum. In the 20 Mile March, what we found is that those who

Starting point is 01:06:51 basically say, I have something or we have something as a company or as a person or organization, that we're going to hit with great consistency over time. We're going to do it consecutively. That that drives you to make very far-sighted investments and decisions. It's because it's not an average. If I said to you, what would it take for you to achieve 20% growth? Well, you would say we do X and Y and Z. But if I said to you, what would it take to achieve 20% growth for 20 consecutive years without a miss?

Starting point is 01:07:24 Well, now you've got to start thinking, okay, we're going to do 20% percent. and growth this year, what do I need to do next year and the following year and the following year to have in place so that I never miss? And the idea of it, we call it the 20 Mile March because it's the idea of like walking across a gigantic continent where every day you get up and no matter what the weather is, no matter how hot, how cold, no matter how windy, no matter how nice, no matter how blissful, no matter where it's spring or fall or winter or summer, doesn't matter. You get up every day and you make sure you hit your minimum 20 mile march. Intel with Moore's law, double components at affordable cost every 18 to 24 months, no matter what's

Starting point is 01:08:01 happening, no matter what the economic conditions, no matter who's in the White House, we 20-mile march on that, right? We're constantly doing that to eventually hit the limits of quantum physics. 20-mile marching is this self-imposed consecutive driving discipline. Now, there are lots of types of marches, and they're very powerful, but you asked about mine. I do use a 12th. 20 Mile March, it really guides me. When I launched off to kind of do my own intellectual career, I had been teaching at Stanford. And when I left to launch out on my own, I wanted to remain true to really doing research and developing ideas. I didn't want to become a consultant, didn't want to build a training firm, didn't want to build a consulting firm. I wanted to be a university

Starting point is 01:08:46 professor without the university. I wanted to do research to ideas and to teach those ideas in the world. And the problem was that this weird thing happened. It was a wonderful thing that happened, but I didn't know how to manage it, which is the books became successful. And in my early days, when I was working on, say, built to last with Jerry Porras, it was wonderful because no one knew who I was. So I could just sit in, do my research, and the phone never rang, and nobody bothered me, and I could just work to get to the bottom of things. But then all of a sudden, You have this very weird thing that happens called success. And I found that came with all these opportunities, things that, you know, you could draw you off.

Starting point is 01:09:27 You could fly off to six continents and speak to all these groups or you could sort of build this army of trainers or all these sorts of things that are like these distractions from. But how's that exercising my curiosity to do a next piece of creative intellectual work? And I was really worried that I would wake up 10 years down the road or 15 years down the road and have done no new work, no new real work. No, no real work, creative work, foundational work. Because all these opportunities had sucked my life away. And success went up, but creativity went down. Curiosity went down. I didn't want that to happen.

Starting point is 01:10:00 So I came up with this march. We don't have to go through all the details of how I got there. There's sort of some steps along the way. But the essence of it is this. I realize that for me, it has to do with the number of creative hours I get. And if I protect those, then I will be able to create over time. So at the end of every single day, I open a spreadsheet. And in that spreadsheet, I write down a basic for the day, kind of what happened, that day, what was in the day.

Starting point is 01:10:27 I also write down a number on how the day felt from plus two to minus two or minus two or bad days and plus two are good days and plus one minus one and zero. So I can kind of correlate, you know, what sorts of activities correlate with more plus two days and how I can do fewer of the minus two days. But the critical number I write down is the number of creative hours. And then the spreadsheet calculates back over the last 365 days and gives me a number every single day. Literally every single day, I know the total number of creative hours I've had in the last 365 days. And here's the march. It's very simple. That number has to be above 1,000.

Starting point is 01:11:07 Every single day, 365 days a year for 50 consecutive years. that's the march. And if I am above a thousand creative hours every single day for the last 365 days of every single year for 50 consecutive years, creative work will happen no matter what distractions are in life. That's my 20 mile march. I find that to be so fascinating and also topical from myself at the moment because I think as business leaders and if we get to the level five leadership, you find that they're often working more on the business than in the business. And it can be so easy to get drawn into the business as a leader. And I find that when you're oftentimes, for myself at least, when I'm in the business, I am not in a creative type of flow

Starting point is 01:12:01 state. And outlining that creative flow state time for yourself every day is a fascinating concept to me. And just even comparing your systematic approach with the idea of creativity shouldn't be, but it seems somewhat counterintuitive. So it kind of brings up the question for me, how do you prime yourself every day to get into those creative workflows? I think there's two elements of this. And I'm reminded of one of the great leaders who I've known for many years, Anne Baker and she took over her father's company when she was 29 years old. Her father had died from an adverse medical event. And she took over her father's company. And Ann and I have remained close over the years. She's a company builder. She works on the company and building the company

Starting point is 01:12:55 over time. And she's still going really strong. And I kind of maintain my research side. But we've remained very close. And she's done a spectacular job turning her father's company from a small psychiatric services business into this really remarkable company called Telecare, whose purpose is to help people with mental impairments realize their full potential. Anne is a great level five leader. But what's really interesting is in talking with Anne is how we were talking about this notion of kind of getting into the flow state and getting into the creativity of what you do and sharing how she and I are very different, but we both find that and at our age were both

Starting point is 01:13:29 comparable ages and have been doing what we do for decades. Well, why? Well, one reason is, in a certain sense, we don't actually have to prime ourselves to go into it because we're very lucky, and this is the conversation I had with you, each found one of the things in life that were made to do. And that when you find what it is that you're made to do, anything that you're made to do. And I think that there's never just one. It's just luckily if you find at least one in your life, then every time you kind of put yourself into working on that thing, there's a natural orientation to getting lost into the sort of absorbed state of what it is that you're doing. But it isn't a matter of, I can pick something and then I'll figure out how to force myself into flow state for doing it. It's a matter actually of discovering what it is that you're really encoded for, what you're really wired for. And Anne was really encoded for building a company, very different world than mine. And she just is still in flow state decades later because she's like a musician that has to compose. She's like a painter that has to paint. And so if you're a painter that has to paint,

Starting point is 01:14:37 the challenge is actually that you want to spend most of your time in the studio. You don't necessarily want to go deal with all the other things in life because you really love what you do. And you're also just, you're made for it, you're wired for it. I'm supposed to be painting. I'm supposed to be composing. I'm supposed to be building this company. And I find for me that if I follow my curiosity into questions and you can tell what I love to do is to take a question, then turn that into research, turn that research into a methodology for gaining insights and concepts, putting that together in frameworks and then sharing it with the world, right? That process is so, it's composing. If I were a musician, I'm sure that was my encoding. I'd probably feel the same

Starting point is 01:15:17 way about composing music. If I were a painter, I'd feel the same way about painting. But this just happens to be the art form that I found. And so I think that the key for any of us is, and this is I think about my conversation with Anne Baker and how she became this great level. level five leader. I'm not a level five leader to build companies. I'm somebody who studies things, but she is. So what's the secret? The secret is finding one of those things that in a certain sense, you can't help yourself, but go into flow state in it, because you were sort of somehow encoded to be there. And when you're there, it takes you over because it's activating something that you deeply actually are, not something you've forced yourself to be.

Starting point is 01:16:02 If I'm remembering correctly, I think you've said this stems out of your favorite chapter you've ever written, and it was around how luck impacts the success of companies. I'm a big believer in the idea of creating your own luck and the old saying that luck is opportunity beats preparation. And basically, if you survive long enough, you can get lucky. But how does this compare to the impact of luck that you've discovered in the 10x companies? So I think this is a great question to spend a little bit of time on, because, especially for your listenership, because with Morton Hanson, we knew that at some level, we had to address the question of luck in our framework of inputs that create those great outputs of a great company.

Starting point is 01:16:47 If you didn't ultimately address that question, you were going to have an incomplete framework. and is also kind of not intellectually honest because we all know that there is luck in life. And to ignore that fact is simply to sort of like pretend there's not gravity. Luck is a very real variable. But the question is, how would you study its role? And how would you study whether it makes a difference and how much of a difference it makes and how people come at it differently? Is there anything about the leaders that we studied in their relationship to luck?

Starting point is 01:17:19 Well, this became one of the most fascinating, joyful pieces of research, certainly in my 30 years of doing this kind of research. So let's just pause for a moment and think for a moment. So first of all, what is luck? And I always felt very dissatisfied with the kind of normal definitions of luck. So where preparation meets opportunity, well, there's not, I'm not saying that's wrong, but I always think about, well, how the heck does that deal with getting cancer? And that's luck too.

Starting point is 01:17:49 It's just bad luck. And my wife had a cancer event. She had a double mastectomy. I didn't experience that as preparation meets opportunity. I experienced that as one of the unlucky breaks in our life that I wouldn't frame it that way. But it's very clearly luck, but it's bad luck. And I think about the incredible strokes of luck, good and bad that can happen in our lives. And so I started thinking, I need a more satisfying answer to this.

Starting point is 01:18:15 And so Morden and I sat down. And the two of us together, Morton had one piece of the equation, and I had the other, and then we figured out how to do it. Morton said, let's define luck as an event, a specific concrete event. And then I went off and thought, well, what would be the dimensions of a luck event? That if you could look at any given event, you could say, was that luck or does it not meet the test of being a luck event? And so then together, we ended up sort of saying a luck event is one that meets three tests. One, you didn't cause it. Two, it has a potentially significant consequence good or bad.

Starting point is 01:18:55 Good luck being the ones that have potentially good consequence. Bad luck being the ones that have potentially bad consequence. And third, it has some significant element of surprise. You couldn't have known that it was going to happen, when it was going to happen, what form it would take. Something about it was a surprise. Now, any event in your life or in your company that means so sweet test, you didn't cause it, it has a potentially significant consequence, good or bad, in some significant way, it came

Starting point is 01:19:20 as a surprise. Now, you have a luck event. Now, once you know what a luck event is, you can then look at the history of the companies. Remember, we're always doing comparative, right? Company A versus company B over a long period of time, and you can rewind the tape of history, and then you can begin to identify the luck events. You can identify, say, in the early days of Microsoft, the luck event of IBM walking in looking for an operating system. They didn't cause that. It has potentially huge consequence, and it was actually a surprise. Why was it a surprise? Because another company called Digital Research down in Pacific Grove, California, got the exact same luck of it. IBM walking in looking for an operating system, and they actually had one called CPM,

Starting point is 01:20:02 potentially huge significant consequence. They didn't cause it to happen. They happened to have the operating system. Microsoft didn't have one. The surprise for Microsoft was that the digital digital research people managed the meeting in such a way that the IBM people came to Microsoft and said, we'd like to talk with you. So all of a sudden, now you've got these luck events, two different companies dealing with essentially a very similar luck event at the exact same moment in history. So was Microsoft luckier? No, they had the same luck. And what we found when you've played this out over time and you look at all the luck events, there is no evidence from our research that the big winners were lucker. They did not get more good luck. They did not get

Starting point is 01:20:44 less bad luck. They did not get bigger spikes of luck. They did not get better timing of luck systematically. It was a wash. So we knew that for building a great company, there was no evidence that a big differentiator was the winners were luckier. That was an empirical finding. It surprised me, because I expected otherwise, but that was the empirical finding. But what did we find? It's not luck, it's return on luck. It's not what luck you will get or whether you will get luck, because you will, good and bad. The question is, what you do with the unexpected. Digital research and Microsoft's same luck event, the difference was Microsoft's return on that luck was much higher than digital research's return on the same luck. There's one last aspect of luck that's

Starting point is 01:21:38 very, very important. And this is really true in building great companies. Remember I said earlier that we found that very few of our great companies began with a great and successful idea. It was often their second, third, or fourth thing they did that eventually made the company work. What you find is that any given ideas is unlikely to work. But if you can keep the company alive long enough, You can persist through all the things that happen. You stay at the table long enough. You're more likely to eventually get some good hands if so long as you don't get knocked out of the game.

Starting point is 01:22:10 What we found in our research is definitely luck favors the persistent, but you can only persist if you survive. And so there's a key thing about luck as of cause. Good luck cannot cause a great company. Bad luck can cause the end of a great company. And so bad luck can be, causal. If you get enough bad luck at the wrong time, it can knock you out and then you're out of the

Starting point is 01:22:35 game and you can never come back, right? Because it's over. You hit the death line. It's over. Whereas good luck is not something that actually causes the great company. So what that means is part of the secret to managing luck, getting a high return on luck, is to practice productive paranoia where you always have so many buffers, so many reserves. There's a certain people think entrepreneurs or risk takers, yes, but entrepreneurs also understand that you can't get knocked out of the game. You have to stay alive. And so as a result, they tend to, over time, want to make sure that whatever happens, they have enough reserves and buffers or position such that when those bad luck times come, they're the strong one that can endure. And that's part of why over

Starting point is 01:23:22 time they're able to continue to compound. So it's a very, very interesting analysis. And the last thing about it is goes all the way back to one of the first things we talked about. One of the most important kinds of luck you can get, it turns out, is not what luck. Like IBM walking in is a what, right? We could have good luck and bad luck of what, but is who luck. The luck of a great mentor, a great friend, a great partner, finding a great, you know, the person you fall in love with and you build a great life together. the Huluk, a wonderful, wonderful person who intersects with your life and changes your life forever is probably the best kind of luck to get.

Starting point is 01:24:05 Well, I have to ask, given that you've had such an amazing career and interacted with so many amazing people, I'd like to maybe ask you, what is the biggest who luck experience for you professionally? professionally, boy, I have had so many who lucks. Oh gosh, there's just so many. That's a really hard question to answer because singling out one is like choosing between your parents. I mentioned Rochelle Myers earlier was one, but I would identify two for us. The first is the closest thing to a father I ever had. I had the bad luck, by the way, of having kind of a father who was MIA. It really wasn't ever into being a father. And then he died young and I was only 22 when he

Starting point is 01:24:53 died. So we never even got a chance to even have a later shot at having anything resembling of father and son relationship. But I got really lucky on the other side because this remarkable man named Bill Azir. I recently re-released my very, very first book, which I wrote with Bill, based on our course at Stanford and entrepreneurship and small business, called Beyond Entrepreneurship, but brought it out as VE 2.0. I wrote a whole chapter about Bill in that, and I brought the book out to really honor and extend the legacy of Bill,

Starting point is 01:25:23 who was this great, great mentor of me. And Bill, the who luck I had was, without any empirical evidence that I could see, he just bet on me and believed in me. Here I am, I'm coming up on 30 years old, and there was this luck event that happened, which was that there was this offering of the entrepreneurship and small business class at Stanford,

Starting point is 01:25:45 all of a sudden needed somebody to fill a section and teach the course because a star professor had had a family tragedy and couldn't teach. And the deans were trying to figure out, like, who could we have teach the section of this course? Bill, who had been a professor of mine when I was in graduate school there, had invested in me and believed in me and always kind of encouraged me to think about an intellectual career and teaching and things like that. He'd already kind of invested in me, but I don't know what he saw. That gave him that much confidence. He goes into the deans and puts his whole reputation on the line and says, I'd like to give Jim Collins a chance to do this. And he's never done it before. I'm teaching the alternate section. I'll take full

Starting point is 01:26:26 responsibility if he messes up and opens up this opportunity for me to teach at the Stamper Business School, which changed the arc of my life. And then Bill doing that for me, putting himself completely on the line and then putting me in. He also came to me though and he essentially kind of gave me this little lecture, which is essentially the idea that not all time and life is equal. This was the return on luck part of it. It's like, you know, you have to make the most of this. You didn't see this coming, but you have to make the most of this. And the image I always had in my head was imagine you're a minor league picture way, way down in the minor leagues. And you happen to be in Yankee Stadium one day. Unexpectedly, for some strange reason, the bus with all the other pitchers

Starting point is 01:27:07 where the game gets like stuck in traffic or breaks down or something, but there's no one to pitch. and somebody says, well, hey, you, kid, grab a glove, grab a ball, go out there on the mound and pitch in Yankee Stadium. Because we got to have somebody pitch until the real pitchers get here. And Bill's kind of view was, you got one shot to go pitch in Yankee Stadium. But if you pitch really well, if you pitch a no-hitter, you're going to be able to pitch again. And this is going to change your whole life. And I got to pitch for the next seven seasons in the Stanford Business School classroom. And so that, if I hadn't had this great mentor, and I was even lucky to meet Bill because I only ended up as his student when I was in graduate school because I tried to get into another class section.

Starting point is 01:27:53 The lottery system, I didn't make it in. And I ended up assigned to Bill's section simply because the computer allocated me there. And that's where I met this great mentor of my life. I mean, that is sheer, pure, probabilistic chance total. And then Bill takes an interest and he bets his right. reputation. That's who luck. That is incredible who luck. The last one is, was Peter Drucker, the great management thinker. Who luck of somebody who knew Peter and who knew me, asked if Peter would meet with me when I was at a pivotal stage of my life when I was 36 years old. And Peter invited me down to his house and invested in me. And that day was one of those days that changed my entire life. Because it was at the end of that day when having been impacted by not only all of his writings, but him investing these hours in me, that he ended our day with

Starting point is 01:28:45 a very simple challenge. Don't spend your life trying to be successful. It's the wrong question. The question is, how can you be useful? What an amazing thought to perhaps leave with. I am experiencing a lot of Hula personally right now, having talked to you today. Jim, all I can say is thank you. Thank you so much for the books you've written.

Starting point is 01:29:08 And thank you so much for even going above and beyond those to developing what is called the map on your website, which is the most digestible format, I think, for your concepts and such a great place for our listeners to begin with. If you're just discovering Jim's work on this show for the first time, I highly encourage you to start there with the map and dig into all these amazing books you've written. So Jim, thank you for being so generous with your time. and I know our listeners are going to glean a lot of wisdom from this conversation. So I really hope we can do it again.

Starting point is 01:29:41 But thank you so much for today. I really appreciate it. You're very welcome. And I do appreciate the preparation and time that you put into preparing for this. And yes, for your listeners, thank you for mentioning the map. Our website is open to anyone. There's no paywalls or anything like that. It's there purely as a resource for people who want to learn.

Starting point is 01:29:59 And there is at the concepts page is Jim Collins.com a real summary of how all the concepts fit together and anyone can go there and use it as a guide. So it's there for all of you. Thank you, Trey. I really have enjoyed our conversation. Thank you, Jim. All right, everybody, before I let you go, please go on your app and follow us. And if you'd be so kind to leave us a review, we always love to hear from you. You can reach me on Twitter at Trey Lockerby. And as always, don't forget to go to the investorspodcast.com or just Google TIP Finance to find all the resources we have available for you there. And with that, we'll see you again next time. Thank you for listening to TIP.

Starting point is 01:30:37 Make sure to subscribe to millennial investing by the Investors Podcast Network and learn how to achieve financial independence. To access our show notes, transcripts or courses, go to theinvesterspodcast.com. This show is for entertainment purposes only. Before making any decision consult a professional, this show is copyrighted by the Investors Podcast Network. Written permission must be granted before syndication or rebroadcasting.

We Study Billionaires - The Investor’s Podcast Network - TIP372: Identifying A Great Company w/ Jim Collins

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