With Creative and Paranoid Leaders, Great Companies Thrive in Chaotic Times

Nov. 27, 2011
In his new book, "Great by Choice," co-author Jim Collins finds that the best-performing companies are led by executives who exhibit fanatic discipline, productive paranoia and empirical creativity.

Your share price is rising and falling like a roller coaster. Your supply chain is long, complex and uncertain. Raw materials prices spike and fall. The view ahead on taxes and regulations is clear as mud. You're scrambling to hire and keep the best engineers and skilled workers.

In his new book, "Great by Choice," co-written with Morten Hansen, Jim Collins finds that chaos and uncertainty may be nerve-wracking, but they don't spell doom for companies. In fact, he says, some companies positively thrive in such conditions.

To show how, Collins and Hansen contrasted the performance of seven companies that exceeded the financial performance of their peers by a factor of 10 for 15 years with seven competitors that did not do as well. They picked companies that were young or small and rose to have great results despite operating in environments subject to rapid shifts that were potentially harmful. The 10X companies profiled in the book are Stryker, Southwest Airlines, Progressive Insurance, Intel, Microsoft, Amgen and Biomet.

Collins and Hansen found that the 10X cases were not led by executives who were the most daring, visionary or creative. The companies were not the most innovative. Perhaps most surprisingly, these companies didn't react to a changing world by changing the most or the fastest.

Instead, the 10X companies were led by executives who exhibited three common traits: fanatic discipline, productive paranoia and empirical creativity.

IndustryWeek interviewed Collins recently to find out what he and Hansen had discovered during their nine years of research.

IW: The question you address in "Great By Choice," "Why do some companies thrive in uncertainty, even chaos, and others do not?" suggests choppy waters ahead for companies. Your message seems to be, "Better get used to it and deal with it."

Collins: Both Morton and I believe the era in which many of us grew up, the second half of the 20th century, was a relatively unusual historical time.

If you think back in history, how often do you get a time like that when you have a dominant superpower during a time of almost unprecedented rising prosperity? The Roman Empire, the Egyptian kingdom, England in the1800s. They happen but they are not normal. The sense of a world full of uncertainty and chaos and turbulent disruption, big fast-moving forces -- our belief is that is normal history. What we are doing is returning to what is normal. This is normal.

I would not place the bet that things are going to become stable, predictable, calm, comfortable. I think we are going to be in a period of uncertainty, and experience episodes of chaos for the rest of our lives. I don't think that is bad, anymore than I think gravity is bad. It just is. Uncertainty and chaos and disruption are just going to be the context and the reality in which we operate.

IW:10Xer leadership is characterized by fanatical discipline, productive paranoia and empirical creativity. They sound very extreme.

Collins: They come from the evidence and data. We looked at these companies from when they started as small enterprises to when they rose up to become great winners in their fields - Southwest when it had three aircraft or Amgen when it was in a small building or Intel when it had three employees. They were small enterprises that were heading out into a very uncertain world and ultimately achieved 10x their industry or better. They had extraordinary results.

We wanted to know how the leaders were behaving differently because they had such a huge influence on what happens in these small, growing enterprises. We needed to start the book there. We started considering all sorts of things. Were they more visionary? Were they more risk taking? We needed to start with how the leaders were behaving differently from their comparisons. Were they more creative or more charismatic?

We couldn't find any evidence that they were systematically any of those things.

There were these three behaviors that were systematically different in how they led. They were not just disciplined, they had fanatic discipline. You don't achieve 10X results or 15x or 30x your industry, by being of average intensity.

When you get to the productive paranoia piece, look, this is a very uncertain world. It is full of storms -- economic crises, global competition, technological disruption, all kinds of political risk or other kinds of risk that could hit us. They are all things that could potentially hurt you. If you are not genuinely afraid, then you are not awake.

Notice we put the word productive on paranoia. Unproductive paranoia is you are just frozen by they were afraid. 'Fear should guide you' is a phrase that Bill Gates has, but guide you to what? The answer is towards very productive action, calm, clear-headed decisions and action, extensive preparation, building buffers to absorb shocks.

In the long run, if you don't survive the shocks, you can't build a great enterprise. Productive paranoia is very much about being able to endure shocks and to be in a very good position to be able to seize opportunities when they come.

The Signature of Mediocrity

IW: Consistency and discipline seem to be major themes of your latest research. Are these undervalued attributes?

Collins: We have almost 7,000 years of combined corporate history. What distinguishes great companies from good ones?

Highly correlated are things that are undervalued in our society. If we go back to "Good to Great," the best leaders had a real stroke of humility within them. They were often not particularly charismatic. They had this personal humility combined with a very stoic willfulness to do whatever it takes to produce great results. That notion of sheer dogged will combined with personal humility isn't very sexy to write about. It just happens to correlate with building great results.

In "Great by Choice," when you look at discipline and consistency, you come to realize that the signature of mediocrity is not unwillingness to change. If you do refuse to change, you will eventually become obsolete, but that is not the signature of mediocrity.

Change is actually not that hard to do. The signature of mediocrity is chronic inconsistency. If you look over any period of time at a great enterprise, there are key elements of its approach that are incredibly consistent.

Is Intel an innovation story? Yes, in part, but ultimately it is a consistency story of driving down Moore's law year after year. The original Gordon Moore article appeared in 1965. The early articulation of Moore's law wasn't just double the number of components on a chip, but do so at affordable cost. That was the critical thing -- at affordable cost.

What was Intel's ultimate success variable? It wasn't Intel innovates but intel delivers. It had this incredible reputation for delivering consistently and getting its cost in line and making good on its promises to customers consistently and then its customers could rely on them consistently. If Intel had only had innovative chips but hadn't had that incredible consistency in the way it went about building things, it would not have been Intel.

Look at the consistency of the system that Southwest built -- consistently turn planes in 20 minutes, consistently fly 737s, consistently stay with their low-cost model. They consistently reinforce their culture and they consistently protect their balance sheet and they have done it for 40 years. That consistency is incredibly powerful once you know what works. It is the consistency that distinguishes you over time.

That said, as you go along, every once in a while there are changes or amendments that you need to make in the recipe you have that allows you to be successful. We write in the book about the analogy to the U.S. Constitution. One of the things that has allowed the United States to be the United States for 200 years is that we have had a very consistent constitution. We didn't have a new constitution or a new form of government every 50 years. We have had a very consistent constitution which has guided us over time and it is very practical and it is our recipe.

We also have an amendment mechanism which allows us to make specific and concrete changes on a very selective basis. There have only been 17 since the late 1700s. That is not very many, but it was enough to keep it vibrant as the world changed.

Imagine if you had gone back to the framers and said in 1787, "How is this constitution going to handle Facebook or the NBA strike or jet aircraft or nuclear weapons?" They could never envision any of these changes. Yet they knew they had to write a document that could potentially last hundreds and hundreds of year. That idea that we have to have a consistent methodology and we need to be able to very selectively amend it was a stroke of genius. People who built our 10X companies had the same approach.

In Part II of his IndustryWeek interview, Collins discusses the need for companies to be "innovative enough," follow durable operating practices and achieve the best return on luck.

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