'Great by Choice': Jim Collins and Morten T. Hansen on Excelling in Uncertain Times, Part OnePublished: November 22, 2011 in Knowledge@Wharton
In today's radically changing world, where uncertainty and chaos often reign, it can feel as if we have little control over business performance. But in a new book from Jim Collins and Morten Hansen, the two authors suggest that even in the most tumultuous business conditions, we can choose to be great. Over a period of nine years, Collins, a bestselling author, and Hansen studied businesses that excelled and compared them to those that failed. As they note in part one of an interview with Knowledge@Wharton and Wharton management professor Michael Useem, they learned that the most successful business leaders displayed "three distinctive behaviors: fanatic discipline, empirical creativity and productive paranoia." Further, the businesses that succeeded didn't simply succeed: They delivered returns that were a minimum of 10 times the industry index over a 15-year period. In Great by Choice, Collins and Hansen explain why some businesses thrive in uncertain times while others do not. They also share what these "10Xers" have to teach other business leaders.
Following is an edited transcript of the first part of the interview. Read part two here.
Michael Useem: Early in the book, you pose a question: Why do some companies thrive in uncertainty and chaos and others do not? I like the way you have phrased that: It's not that they thrive on chaos, but they can thrive in chaos and uncertainty. One of your appealing and graphic illustrations is from 1911 when two explorers raced to the South Pole. One succeeded in getting there first; the other did get there, but did not return safely. Please talk through the differences in their approaches and the lessons that those two different approaches to the South Pole have for companies.
Jim Collins: Let me just give you some background on this and then get right into the essence of the analogy. After we had finished our research, I was out rock-climbing with a friend of mine, a guy named Chris Archer, and we were puzzling over how these leaders were different. He asked, "What have you seen?" I started describing these leaders and how they were different from their comparison leaders, and he said, "Wow, they sound just like Amundsen versus Scott." I said, "Who?" He said, "[Roald] Amundsen -- the great Norwegian explorer to the South Pole." I called up Morten, who is Norwegian, and I said, "You ever heard of this guy Amundsen?" He said, "Yes, he's our national hero."
We decided to look more into how these two leaders operated. In October 1911, exactly 100 years ago, these two teams of explorers left the coast of Antarctica to try to be the first people in history to reach the South Pole. The Norwegian team, [led by] Amundsen, got to the South Pole first. [British naval officer Robert Falcon] Scott and the British team reached the pole second, 34 days later. Amundsen and his team made it back to their base at Polheim on the exact date that Amundsen had put in his planning journals when he was making his plans in Norway. Meanwhile, Scott and every member of his team died on the way back, about 10 or 11 miles from a supply depot.
It turns out that the way that Amundsen led his team maps very directly to the way our leaders led their companies. This is especially true in how he was different in his behaviors from the way Scott led his team, which is more like our comparison leaders. It was an almost perfect metaphoric mapping.
Morten T. Hansen: I think it is very important that we point out that we first looked at our leaders, and we were able to distinguish or to characterize the differences of the leaders.... Then we backed into the Amundsen and Scott story. In Norway, of course, I grew up with Amundsen. But when Jim and I started looking in detail at what he did, that is when it became fascinating.
In the book, we talk about the 20-mile march. The idea is that ... you have a lower threshold and then you have an upper limit. You must hit the targets you set for yourself no matter what. You don't go too far on any day, month or quarter.
When we looked at Amundsen, the fascinating part is that he had, literally, a 15-mile march target. He was going to go 15 miles every day toward the South Pole... .He built a system around that. On the good days, he held back; he didn't go the distance he could have gone. He just stopped in the early afternoon and rested. On the very difficult days, he made maybe five, six, seven miles, but nevertheless, he traveled on those days where Scott and the other team would sit in their tents. Both of them had a very interesting approach. Underlying that is what can only be described as fanatic discipline. Amundsen was extraordinary in his discipline, preparing his whole life for this particular moment. That really stands out among the leaders that we have studied.
Collins: In the book, we write about three distinctive behaviors: fanatic discipline, empirical creativity and productive paranoia. Amundsen, relative to Scott, really displayed all three behaviors.
For example, Scott would try to bet on unproven things. [To reach the South Pole first] he bet on motor sledges, which was a disruptive technology of the time. The problem was that they weren't fully tested. They weren't empirically validated in those [extreme weather] conditions. The motor sledges broke down, leaving [Scott's expedition] to rely on ponies. When the ponies didn't make it, they ended up man-hauling their sleds with shoulder harnesses a distance roughly equivalent to New York to Chicago and back.
Amundsen, on the other hand, was a consummate empiricist. The first thing he did was to say, "I'm not going to try to out-innovate the South Pole. I'm going to try to first figure out what works and what's been empirically validated." He went and lived with Eskimos who had hundreds of years of empirical experience. They taught him all about the right kind of clothing to wear and that you should use dogs and sleds because dogs don't sweat and they paddle on the top of the snow. Amundsen learned first what was empirically validated and based his strategy upon that. Scott bet on this unproven technology and left himself exposed.
As for productive paranoia, Amundsen was truly a great productive paranoid. He always worried about the contingencies of things that could go wrong. He put three times the amount of supplies he calculated he needed in the supply depots. He put extra pennants on either side of his supply depots for ten kilometers, so if he were to get caught a little bit off track on his way back, he could always hit his supply depots. Everything he was doing was to give himself margins of safety and buffers and contingencies in the event that he'd get hit with something unexpected or get a little bit off course.... Because it's one thing to get to the South Pole; you've got to get back alive. Amundsen built everything into the system for that. He had all three: fanatic discipline, empirical creativity and productive paranoia.
Knowledge@Wharton: You have referred to three core behaviors. I was wondering if you could explain those three core behaviors in a little more detail and how they contribute to the performance of companies that you call 10Xers. In fact, what exactly are 10Xers?
Hansen: When we looked at companies ... we discovered that [winners] beat their industry 10 times in terms of cumulative total shareholder return. They just didn't win by a little; they won by a lot. That's why we call these companies 10Xers. It is shorthand for what these companies did and what they stood for. We also looked at their leaders and called them 10X leaders. That's where the moniker 10X comes from.... It is based on that exceptional performance of 10 times the industry.
Let me flesh out each of the three core behaviors that Jim mentioned. Let's start with productive paranoia. We talk in the book about Bill Gates. He was very much like Amundsen, hypervigilant about what could possibly go wrong with Microsoft. In 1994, he said, "Fear should guide you." That's an apt description. He wrote what became known as the "nightmare" memo, outlining everything that could possibly go wrong with Microsoft. At the time, things were going pretty well. Now that is being very fearful or hypervigilant about what's going around you in your environment as the leader. But you can't just be fearful, you often need to be productive, and you need to channel that fear into something concrete. For example, these companies built buffers. They built cash reserves because they wanted to make sure that if those storms hit them ... [they're] prepared. You prepare yourself and you take clear-headed actions. That is how we channel the paranoia into something productive. That's the first principle here.
Again, it stood out that the leaders of the great companies had this and the others did not. Jim, do you want to talk about the second one?
Collins: One of the things that I found especially fascinating in all of this is this orientation to empirical evidence, and then based upon that, doing things that, in retrospect, look very, very creative. We know from social psychology research that ... when we're facing uncertainty ... we tend to look to other people for clues as to how to behave, right? We are very influenced by what other people think and say and what experts think and say. [The 10x leaders] seem to have a kind of a different approach. Their first response is to go to empirical evidence. That doesn't necessarily mean analytic data; it can also be experiential data. I mentioned with Amundsen earlier, of course, that he said, "I'm not going to bet our expedition and bet our life on an unproven technology, so I'm not going with motor sledges. I'm going with skis and dogs and sleds because we know they work." That empirical approach. But what's also interesting about this is that by being empirical, they sometimes are able to make what appear to be very, very bold moves, when in fact, they are empirical moves.
There's this wonderful point when Amundsen makes what strikes others as a rash decision. That decision was to land at the Bay of Whales. Now everybody thought the Bay of Whales was moving ice, and therefore, very dangerous. But Amundsen had gone back and read all the actual journal entries of the explorers who had been to that part of the world, dating back to, I believe, 1841. In those journal entries, he noticed that there was this fixed, dome-like structure at the Bay of Whales, and it had been there since 1841. Conclusion? It is not moving. It has been there since 1841. Because he had this orientation to putting his hands deep in evidence himself and reading all the journal entries himself, he has this empirical observation: "That is not moving ice. We can confidently put our base there," which gave them a head start. He put their base at the Bay of Whales rather than at the standard place, which would be McMurdo Sound.
When we look at [10Xers], what's interesting is that, in retrospect, you see these things that look like really big, giant visionary breakthroughs. But if you follow the historical process (and our research method is always historical; we go back in time and then track step by step by step what actually happened), you find that it was a process of more what we came to call bullets than cannonballs, right? You fire small bullets to finally get your line of sight calibrated, and then you concentrate your resources into a big cannonball. We write at the end of the chapter on empirical creativity about the evolution of the iPod. The iPod looks like this great, giant visionary cannonball fired into the world, but in fact, MP3s had been invented outside of Apple's walls, and they were behind. They started firing bullets. They did one for themselves. They thought it was just an extension of a Mac digital hub strategy and never saw it as a gigantic revolutionary market. They made a file-sharing system for themselves because they didn't like what was in the world, and they solved the problem of the fact that we want to have a way to be able to buy music easily without having to steal it. Bullet, bullet, bullet, bullet, bullet. Finally, the whole thing is proven, calibrated and clearly going to work. Then they fire the big cannonball of moving it over to Windows and opening the iPod and iTunes possibilities to the entire world. That process looks, in retrospect, like a single-stroke, visionary breakthrough, but in fact, it was empirical bullets leading to a cannonball. We see that over and over again in the way we see this history unfold.
Useem: Jim and Morten, let's go back to the reference you made to a 20-mile march. It is literal in the case of those in Antarctica, but also, it is a metaphor for how business leaders might run their companies for very good, even 10X performance. Within the business firm, what makes for a really good 20-mile march?
Hansen: We mentioned that the third leadership trait was fanatic discipline, and that is essentially consistency of action. The way you implement that is through the 20-mile march. Number one, you set a progress standard for yourself. Secondly, you [have] a lower boundary, what you must hit, and an absolute commitment to hitting it in bad times and good times. Then there is an upper boundary, and you have the discipline to hold back and not just maximize growth because you can, because that is going to expose you to possible storms coming your way down the road. Then the fourth characteristic is that you must hit it. It's not about good intentions: They don't really count here. It is about hitting it. So those are the principles of a 20-mile march.
A good example from our research: John Brown was the CEO of Stryker, the medical device company. When he took over that company in the late 1970s, he thought for a moment, "What should I do as a marker of progress for this company?" He chose to grow this company -- a small, family-based company at the time -- 20% in net income growth every year, year in and year out. It doesn't matter if it's a good condition or a bad condition. You grow the company or that income 20% year in and year out. He built an entire system around that commitment. When times were bad, they were very disciplined about hitting this. He had a very interesting approach. If you were below the 20% mark for your particular division, he would show up in your office and he would give you the "Snorkel Award" and put it up on the wall. The Snorkel Award is for [when] you are under water and you are not hitting your 20% mark. You don't want that award sitting on your wall. People worked very hard to hit the mark. What is surprising about John Brown is when times were booming in the industry, he left growth on the table. It happened with some new technology breakthroughs when competitiveness was growing.... The whole idea was to have reliable growth, not crazy growth. That served him really well because suddenly there was an industry downturn not long after, and he was in good shape. They were marching on a 20-mile march, and the competitors were falling apart.
If you're doing a 20-mile march in an uncertain, chaotic world, what does that give you? First of all, you are making progress when things around you are changing all the time. You are showing your results. It gives people confidence that you are, in fact, making a steady march toward greatness, and that confidence that we are making the numbers and we are producing the results. And another aspect, what it gives you is a certain order, a certain control in a world out of control. You're posing a certain order by focusing on this one thing, which gives you that tranquility that ... you are marching along. Those are some of the benefits that you get from the 20-mile march.