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Great Companies Innovate Just Enough and Get the Biggest Bang for Their Luck

Nov. 29, 2011
In 'Great by Choice,' Jim Collins examines how companies can thrive by being 'innovative enough,' following durable operating practices and achieving the best return on luck.

Note: This is the second article in a two-part series. In the first article,"With Creative and Paranoid Leaders, Great Companies Thrive in Chaotic Times," Collins notes that leaders of great companies exhibit fanatic discipline, productive paranoia and empirical creativity.

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 achieve extraordinary results in such conditions.

To show how, Collins and Hansen contrasted the performance of seven 10X companies (those exceeding 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.

IW: Innovation is a topic at every corporate meeting. You found that great companies are innovative but not the most innovative. Can you explain?

Collins: They do innovate. It is very important to underscore that innovation is important. I wouldn't want our work to be misinterpreted as it isn't. It is.

However, what we found is that innovation alone or above a certain threshold will not (a) guarantee you become a great company or (b) necessarily keep you alive. Any given industry has a threshold level of innovation. You need to be at the threshold of your industry, be innovative enough to be a contender.

Innovative enough is very different from the most innovative. In the case of airlines, that is a relatively low threshold. In the case of biotechnology, it is a very high innovation threshold. To be innovative enough to be a biotech company means a very high level of innovation. However, the most innovative biotech company isn't necessarily the 10X company. In our case, the comparison company [Genentech] was more innovative than the 10X winner [Amgen].

Intel was not always the most innovative semiconductor company but it was innovative enough to be a contender and it was disciplined enough to make good on its innovations. It is really the combination of the creativity and the discipline, being able to scale your innovations, that allows these companies to become exceptional.

Let me talk about that from a manufacturing standpoint.

My read of our research is that we have fallen in love with the idea that innovation alone will be our trump card, the thing that ultimately allows us to compete. Certainly entrepreneurship and innovation is very important, but what if, in fact, the great American strength has been our ability to scale innovation. What if that has been our ultimate trump card -- our ability to take an entrepreneurial idea and scale it into a great company?

Take the motor car. Ford didn't invent it, but his contribution was to scale it. Microsoft was a scaling story. Even Apple is a story of being able to take some really creative ideas, but then to scale them up and do it over and over again as an organization.

That is what is truly distinctive. An idea just by itself doesn't do very much for you. Intel was a scaling story. Southwest was about scaling. Even for a biotech company, it involves how you take the genesis of an idea and scale it into a really powerful organization that is able to scale the R&D process in a way that is multiplicative in its effect.

Scaling innovation is a very distinctive capability. My question for us as Americans is, "Have we put too much emphasis on just the innovation question and not enough emphasis on how we scale our innovations?" If we let others scale our innovations for us, where does that leave us?

We are very good at building organizations that can scale and there is no reason we have to give up on our ability to do that.

IW: You say that a devotion to speed and fast decisions can get a company killed. We constantly hear that companies move too slowly. What was the role of speed in the 10X companies' success?

Collins: One of analyses that Morten really led us to do was on speed.

Let's go back through the years and years of historical data we have and let's take a look at time-sensitive events. These are events where there is something in the environment or something in the situation that is happening quickly; there is a time sensitivity to it.

It could be a technology change, a market change, perhaps some sort of financial change that is happening. You don't have an infinite amount of time to figure out what to do. At a personal level, you could have a disease diagnosis. It's time-sensitive. You can't wait forever to decide what you are going to do about it, or not do about it.

We decided to look at the really big time-sensitive events. We found 115 time-sensitive events in the history of the companies. A good example is the race to get your recombinant DNA product through FDA and patented before anyone else. That is a time-sensitive situation. If you lose that race, you've lost.

Another might be the time-sensitive period in Intel's history where it was racing to establish some microprocessors as a contender for being a standard. If you lost that race, you might really be out of the game.

We found the 10X cases did not always decide and act fast. They were very good at sensing dangers and changes and opportunities earlier than others. Data would lead them to conclude that something was afoot here and they should be concerned. They were quicker to detect a time-sensitive threat or opportunity. They were quicker to react. What they would do is, instead of saying what should we do and how fast should we do it, they would ask a different question: "How much time do we have before our risk profile changes?"

If they have days, they'll take days, but if they have months or years, they will take months or years to let things unfold so they have a more considered decision. The critical thing is not fast or slow but how much time before your risk profile changes and then make your decision in the context of how long or short that is.

Go slow when you can and fast when you must.

IW: Being able to do that is quite an art, is it not?

Collins: It is a certain awareness of your conditions. We call it zooming out.

It is the ability to, when you're hit with something unexpected or something fast moving, zoom out and take a really big-picture view before you react and then you zoom back in and adapt. I think it is training yourself to zoom out when it is not our natural instinct to do so.

Something happens, I have to act right away. Or there is a financial crisis, so I have to do something immediately with all my financial assets. Whoa, whoa, whoa. Zoom out. How much time do you have before your risk profile changes? are you really at risk here? that's where it begins -- the discipline to always first zoom out before you zoom in.

IW: In "Great by Choice," you discuss the value of a SMaC (specific, methodical, consistent) recipe, a set of operating procedures. How does it differ from a set of corporate goals?

Broad goals might be something [for Southwest] like, we are going to be the best low-cost, high-spirit airline, steadily increasing profit per aircraft.

Over time, we are going to grow at a controlled rate and end up with a dominant market share. Those could be some of your company goals. The recipe is a translation of that broad understanding of how you compete and win into very specific, concrete and durable approaches. OK, so how do we go from that goal of the best low-cost, high-spirit airline, steadily increasing profit? How do we do that? Well, we will only fly only 737s. We will turn our planes in 20 minutes. We are not going to have first-class seating. We are not going to have food service. We are not going to interline. These are very specific and concrete translation of goals.

Here's what is interesting about the SMaC recipe. You would think that this is nothing but tactics. Tactics are something that can change a lot from condition to condition. What is striking about SMaC elements is they tend to have tremendous durability. They usually last 20 to 30 years if you good SMaC recipe elements. We will fly only 737s. That has been since 1972. It is now 2011. Is that a tactic? No, it is a SMaC recipe item.

Eventually, they did do interlining, which is something they hadn't done earlier. They did add internet booking. Those were amendments to the recipe.

What really stands out is the consistency of the recipe over time. We quantified it. The comparison companies tended to change their recipe 60% to 70% over the era we analyzed. The 10X companies tended to change 10% to 20% over that same period. Once they had their recipe, they did change it but they changed it a lot less frequently.

Return on Luck

IW: The book devotes an entire chapter to the role of luck in the rise of these companies and introduces the concept of return on luck. What did you find?

Collins: That was probably the most exciting analysis in this book.

We have almost 7,000 years of combined corporate history in our database. We have a massive amount of analyses. What one excited me the most? It's luck.

We all know luck is out there. if you don't believe in luck, then you don't believe in disease or accidents. Luck happens. Once you put the lens on bad luck as well as good luck, you realize how much luck does happen. It is like background radiation. We know it is there but we don't know what to do with it. We tend to ignore it. And then there are all these definitions that are not particularly helpful like the harder I work, the luckier I get. How does that fit with getting cancer? Luck is where preparation meets opportunity. How does that fit with cancer? It doesn't apply.

Morten had this brilliant idea of using event analysis. Let's not look at it as an aura, like a lucky person. You can't quantify it. It's a little like quality. Quality used to have this sense of being an indefinable thing that you could never work with. Then people began to realize there are ways you can quantify it and study it.

We can do same thing with luck. We defined it as a luck event. It is an event that meets three tests. One, it is largely independent of your own actions. You didn't actually cause it to happen. Two, it has potential significant consequence, good or bad. And third, there was some element of unpredictability. You couldn't have known for certain that it was going to happen or when it was going to happen or what form it could take.

Any event that meets those three tests is a luck event and some are more significant than others.

We looked at 230 significant luck events in the histories of our companies. We asked a number of questions. Could it be the 10X winners just were a lot luckier? Maybe that's really the answer. Maybe everything comes down to, yeah, you can lead and manage and have discipline in the organization but maybe that just adds up to 20% and the 80% really is just luck. It's not the answer.

However you slice it, we could not marshall evidence that the 10X winners were luckier. They didn't have more good luck or less bad luck or better timing of luck. Singular luck spikes don't explain the difference. If they are not luckier, what happens?

That's where we came upon this idea that it is about the return on luck. Given the moment when a luck event happens, these folks are really good at zooming out and recognizing the luck event and making the most of that luck event when it comes, that is sort of a multiplicative moment in your trajectory and your history.

You could meet a person who could be great mentor. You might put a lot into that relationship and cultivate that relationship and give back to your mentor or you don't not put anything into the relationship and you squander it or you abuse it. That would result in a poor return on luck of meeting someone who could undeniably be a great mentor.

What we found is the folks who did really well recognized the luck event and processed the question: "Should I let this luck event disrupt my life or my plans and, if so, how do we extract the most out of it?" When we looked at winners, they made the most of good-luck events and also made a lot out of bad-luck events. They take a bad-luck event and try to get the best return out of it.

We write about Progressive insurance and how they got hit with bad luck of Prop 103 in California. Peter Lewis used that as catalyst to challenge the whole company. He said, "The voters are telling us. This is telling us something." The question is what are we going to do about it that allows us to end up as a better company. That is where they got their return on bad luck. The comparisons in contrast would tend to squander their good luck. They get great breaks and they wouldn't execute when those great breaks would come. Or, they would have poor execution when they had bad luck and that is a very bad place to be.

Luck is very interesting as a cause. It is asymmetric.

Good luck cannot make a great company by itself. Take Amgen or 3M or Boeing. No way you can argue that the reason they are successful is because it is just good luck. Good luck is not the cause of them being great.

But bad luck can be a cause. It can cause the end of your enterprise. Think of good-luck events as heads and bad-luck events as tails. This is why productive paranoia is so important -- you always have to assume you are going to get a string of 10 tails in a row.

You have to have the preparation and the buffers in place. It doesn't matter if eventually with a 100 more flips it evens out, if you get 10 in a row and the seventh one kills you. That is why the productive paranoia is not a disease; it is a very functional response to a world that has a lot of chance and a lot of complexity and a lot of things that can hit you that you didn't cause.

IW: You warn against an "increasingly prevalent view that greatness owes more to circumstance, even luck, than to action and discipline -- that what happens to us matters more than what we do." What prompted you to include that?

Collins: There are two views of the world that have started to unfold.

One view is the real determinant of how we do is the circumstances that imprison us -- the difficulties of our industry, the short-term pressures of Wall Street, the fact that we face global competition, whatever it happens to be. Our circumstances are the determinant of how we do. What we do is a variable on the edges, but it is really all these forces. That is a very debilitating view of the world. I don't how you get out of bed with that view?

The other view is you may or may not have been born into the best family, you may or may not have had the same lucky breaks early, you may or may not be in an industry that is particularly well-timed but in the end, you are still responsible for making a series of choices and decisions and taking action and looking in the mirror and saying, "I do not control a lot of what happens to me, but I am still responsible for making decisions and choices and I am ultimately accountable for my performance."

The people we studied, they often come from very difficult circumstances. Their response has been, "I don't control very much but I am still responsible for a great outcome and I am not going to shirk from that responsibility." That is their psychology. They fully acknowledge there could be things bigger than them. If we have a major natural disaster, sure, those things can get you. As a general philosophy, their general approach is, " I am responsible."

IW: You have addressed the issue of greatness repeatedly. Do you find many people who aspire to greatness?

Collins: I think there are a lot of people who would like the good things that come from greatness, but I am not sure they are willing to endure and suffer to achieve it. I think the really interesting question is, "Are people willing to suffer to achieve it?"

I have had the great privilege to know and spend time with a number of very remarkable people who have built greatness. I wouldn't describe these people as relaxed or necessarily as happy or as folks who are just sitting around aspiring. They are afflicted with an almost artistic drive to make something -- whatever they touch -- the very, very best it can possibly be.

If you ask them why, they don't have an answer. It's just because I can and because we should. It's the idea of building something great or making music as beautiful as it can be or a piece of art as exquisite as it can be or make the words just right to have the most impact. If you say, "Why do you care about this product being so great? it will sell as is," they would say, "You don't get it. We can make it better."

I think there are a lot of people who have that and a lot aren't necessarily the people at top of enterprises. I meet people who are running a plant or single retail store and they just care at a really deep level.

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