'Great by Choice': Jim Collins and Morten T. Hansen on Excelling in Uncertain Times, Part TwoPublished: November 30, 2011 in Knowledge@Wharton
In Great by Choice: Uncertainty, Chaos, and Luck -- Why Some Thrive Despite Them All, Jim Collins and Morten Hansen 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 did not. In an interview with Knowledge@Wharton and Wharton management professor Michael Useem, they note that 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.
The interview has been published in two parts. In part one Collins and Hansen discuss "three distinctive behaviors: fanatic discipline, empirical creativity and productive paranoia" of 10X leaders. In part two, which follows, they explain why companies don't have to be the most innovative but instead, can be "innovative enough"; the critical importance of "zooming out" and "zooming in" to get your bearings in any situation; and when and how to introduce change in an organization for 10X success.
The following is an edited transcript of the second part of the interview.
Knowledge@Wharton: You have explained why it is important for companies to have the discipline of the 20-mile march. But when times are tough, people often say that now is the time to make bold and innovative moves. You speak in the book about the need to blend creativity with discipline. Could you tell us what broader insights about innovation your research turned up?
Hansen: Here's an interesting finding. One of the companies in our research is Southwest Airlines. It is a well-researched company people have been studying for a while, and ultimately, it's a very innovative company. It is widely considered to be the inventor of the low-cost business model in the airline industry of essentially providing buses on wings; it's a commuter airline with frequent departures that offers low fares all the time.
But if you go back to the founding of Southwest Airlines, it turns out they didn't really innovate anything at that moment. The founders essentially copied the entire business model from another airline, Pacific Southwest Airline (PSA), which had invented this model in California. PSA had backed into the model out of necessity, but nevertheless, they had perfected that model flying up and down the West coast. When the Texas entrepreneurs from Southwest Airlines saw this model, they essentially said, "Our business plan is to copy PSA in Texas."
Here you have an interesting dilemma or a finding, which is that the copier -- Southwest Airlines -- is the one that ultimately won. It is the one that rose to greatness in that industry [while] PSA faded. How can that be? How can it be that the innovator did not win? That started us thinking about the fact that maybe there is more to the question of innovation. It's not necessarily just the most innovative company that will win in an uncertain world.
Collins: We want to be very, very clear that our finding does not say, "Do not innovate." It does not say that innovation is unimportant. What it does say is that any given industry has a threshold level of innovation. In order to be a contender in the game at all, you would have to be at the threshold of that industry.
If you take an industry like biotechnology, the innovation threshold is very high. If you do not have patent-protected biotechnology products that have either recombinant DNA or some of the new, more advanced stuff that allows you to make a real fundamental breakthrough that will get through the U.S. Food and Drug Administration, you are not even a contender and you don't even exist as a company. The innovation threshold there is very high. But in an industry like airlines, the innovation threshold turns out to be quite low. You don't have to do that much innovating to actually be in the game at all. Once you reach the threshold of innovation in your industry or in your environment, being more innovative is not what accounts for 10X results. It is rather the ability to blend creativity with discipline.
To put those two together, let me briefly share what for me was a real "aha" moment on this, and that is Intel in the early days of the microprocessor industry. If you go back and do your historical analysis, you find that with the first DRAM chips, Intel, in fact, was not the innovation leader. There was another company called Advanced Memory Systems, and they had a product out earlier than Intel. At first, it was seen as a better product, a more innovative product. Intel was behind. This was going to be a standards game, and yet in the end, Intel won. Why?
Because if you think about what Intel became known for, it wasn't "Intel innovates," it was "Intel delivers." If you go back to the early days of that industry, Intel knew how to put together a disciplined process of making the chips, getting them to customers reliably at affordable costs and having people depend upon them so that they could then begin to build their franchise. They even began to call themselves McIntel. The other company didn't have that ability.
So here you've got Advanced Memory Systems, a company that's more innovative and ahead. And then you've got Intel, which is a little bit behind, but it has the ability to actually deliver because it's a much more disciplined organization. Which one, then, began to win in the market place? It was Intel. It was innovative enough, but it won because it had the plus of the discipline.
Now let's go out to the selection of the architecture, Intel's architecture for the IBM PC. There were competitor products at the time, some of which were viewed as better microprocessors, but Intel won. Why? Imagine you're IBM: You're sitting there and you're thinking, "What is our worst nightmare? Would our worst nightmare be that somebody says, 'You don't have the most innovative chips?' Or would your worst nightmare be that you don't have any chips?" They look at those choices and say, "We've got Intel, it's innovative enough, but Intel will actually come through for us. We know they will come through for us. We can bank on them as a company. We go with Intel."
As we went through the history of the companies, what we found over and over again is that at any given moment, rarely would our companies be the most innovative. They were innovative enough to be contenders, but it was because they had all the other disciplines built around innovation that they actually ended up winning.
Useem: I'm going to pick up on another distinction that you draw out -- and that is between zooming out and zooming in and their relationship to productive paranoia. Could you briefly explain that distinction and its power?
Collins: This is one of those wonderful things you come across by examining the different lenses on life, when you realize there's this tool-kit you need to have mentally for how to deal with the unexpected. I always look at my research and say to myself, "How is it changing me? How am I becoming a different person for having done this research?" One of the things I now have in my life is a very simple thing -- when hit with something unexpected, zoom out. It's a simple mantra. When hit with something unexpected, zoom out.
What does "zoom out" mean? I'll speak about this as a rock climber for a moment just to make it visceral. Imagine you're trying to do an on-site climb, which means you don't know what holds are coming. You're in the middle of the climb. From below, you thought that you were going to have a sequence of good holds that you could grab, but then you get up there and your forearms are getting pumped and the unexpected happens -- boom. All of a sudden, you can't get your grip. At that moment, our natural tendency is to zoom in. You start zooming in on that hold and try to grip it tighter and try to hang on to the holds you've got in your hands. You get more pumped, and maybe, fall off.
Firefighters talk about this as tunnel vision. You're in a burning building, and all of a sudden, something happens. Instead of zooming out and trying to get above the building mentally, and then zoom back in, you get tunnel vision and zoom in on the door in front of you -- and get killed by the fire behind you.
What you have to do when you're in that climb situation or an unexpected, duress situation and your heart rate is elevated and you're scared is to do the exact opposite of zooming in. You have to view the situation through a wide-angle lens: "What holds am I missing? What am I not seeing? How should I think about this?" Once you've done that, then you come in and execute on the moves. If you do this, you'll see you may have missed a big foothold or something that's just off to the left.
What we found when we studied our company leaders is that they were really good at responding to the unexpected. Our leaders did that repeatedly. They would be hit with something unexpected, they had the ability to zoom out and then they would zoom in.
There's one specific way they did this that I have also found has helped me think about things. When you're hit with something fast, you tend to think you have to react fast. What we found is that the leaders don't necessarily react fast. When hit with something unexpected, their first question is not, what do we do? Their first question is, how much time do we have to make a decision before the risk profile of this situation changes?
Suppose you're hit with a cancer diagnosis. You could immediately go in for an operation tomorrow because you just want to get rid of it. Or you could say, "I need to zoom out." You ask, how much time do I have before my risk profile changes? Do I have hours, days, weeks, months or years? If the answer is that I've got months, I'll take months to do my empirical research and come up with my treatment program. If it is days, I'll only take days. If it is hours, I'll only take hours. But that ability to zoom out and assess that before you react is a useful skill in an uncertain world. It is a way to keep yourself alive.
Knowledge@Wharton: How could companies use the notion of a SMaC (Specific, Methodical, and Consistent) recipe?
Hansen: We started seeing this in every company: They had some specific operating rules. We weren't quite sure what to call it. It wasn't a set of strategies or tactics; it was something different.
We first saw this in Southwest Airlines, when they were facing deregulation of the airline industry in 1978. [Howard] Putnam, the CEO at the time, said, "We have a great model for thriving in the new airlines industry." He wrote down what we call Putnam's List -- 10 points that are crystal clear about what Southwest Airlines is supposed to do: Fly only 737 planes, no food, no interlining, things of that nature. Think about those rules. They are very specific. They're very durable. They're not going to change for a long, long time. They're very concrete and they give exact guidance to people. Embodying all these rules is an economic logic as to why this is working so well.
When we looked at this list of 10 points, we saw these operating, guiding rules in every company, and we labeled this the SMaC recipe. It's not a strategy and it's not a tactic; it's something else. It's systematic, logical and consistent over time. What does this give you? It gives you very clear guidance on how to operate going forward. And that's the interesting paradox. We think that tactics are only relevant for, say, this year or this quarter. When we have long-term goals, they have to be vague to accommodate what might be happening that you haven't anticipated. But here we see the opposite: We see specific yet durable principles that guide the company and its operations. And that's one of the key benefits.
Collins: There's another thing that is worth highlighting, though, about the SMaC recipe. What I find exciting about it is that it doesn't change much over time. And the real finding was when we went back and we asked, "When we looked at the comparison companies, did they have a SMaC recipe, also?" Many of them, in fact, did. Most -- all except one -- did during times when they were successful. What's different is that the 10X companies changed their recipe less than the comparison companies. To me, that is truly a mind-stretching idea. We've selected for companies facing environments that were full of uncertainty, chaos, disruption, violence -- and yet, we find that those who do very well are more consistent with their recipe over time than those that weren't.
PSA is the classic example. They have the same recipe -- that's the key point -- the exact recipe right down to the little details. The difference is that Southwest only changed this recipe about 20% over the course of 30 years. PSA changed it around 60% -- much, much more than Southwest Airlines. Now what we hear is the really big idea that came from this. You tend to think of a choice between incremental change or radical change. But that is an artificial choice. Is it about being a wave or a particle? Which is it? The beauty of a SMaC recipe change is it's like an amendment to the Constitution of the United States. There have been 17 amendments since the late 1700s, so there's not a lot of change. But any single amendment, like, say, the 13th Amendment or giving votes to women -- would you call that incremental change? No, it is huge change and yet most of the recipe remains intact.
So when Intel made the huge change to go from memory chips to microprocessors, is that incremental change? No, that is a massive change for Intel. But then if you look at their recipe at that time and you see how much of their recipe changed when they made that huge change, all the other elements of the recipe around Moore's Law, their pricing model, their competition-free zone and all that stuff remained intact. Then you would say, "Okay, well, wait a minute. Which is it here? Are they making fundamental change? Or are they keeping things intact? And the answer is -- it's a wave and a particle. It's both at the same time -- just as most of the Constitution remains intact, but any single amendment can be a really significant change.
By having that, you get this beautiful power of consistency, which you must have to be great, and fundamental change, when needed, which you must have to remain great. When you put the two together, you get this absolutely marvelous idea. For me, that is just a gigantic "Aha!" You can actually have something that is almost a completely different answer than either incremental or radical change. It's consistency with amendments.
Hansen: What we show in the comparison companies, those that had only average performance, is not that they changed because they were in trouble. They start changing when they were in a good position. Like PSA, they had a very good model going into deregulation. They had the same model as Southwest, as Jim said. But at that point in time, PSA said, "Maybe it's time for us to change our model. We should morph and become something else." In fact, they looked around and said, "Let's morph and become United Airlines, just cheaper." Instead of saying, "We have the right model. We should stick to it and amend certain components of it," they said, "Let's throw it all out and morph because now times are different."
Their logic was that since the airline industry was facing radical change because of deregulation, PSA needed to change. But just because there's radical change on the outside does not mean you need radical change on the inside. Southwest Airlines said, "Hey, we've got the right model; just amend it a little." That is a very important point.
Collins: It is. There's kind of an adage out there that says, "In order to deal with the changing world, you have to be changing as much or more in the inside than the world is changing on the outside." This research just destroys that idea.
Useem: I'm going to ask one final question here, which goes to the final chapter in the book, keeping in mind that the title of the book is "Great by Choice." On first look, the title of your last chapter is a bit ironic. The title is "Return on Luck." So can you walk through your notion of a return on luck and in particular, how can a leader of a business or a government agency or a nonprofit organization maximize their ROL?
Collins: First of all, I want to shine a light on Morten here about something. With every book that I've done or been associated with, one of the goals has always been to advance our research method and to make things better. Morten had a really spectacular contribution in this piece of research that I think deserves special note. That was the idea that we could take questions and disaggregate and break things into events. Rather than just comparing X number of 10X companies versus Y number of comparison companies, you could take a given item, like speed, and have 115 speed events. You could take innovation. You have 290 innovation events or you could have 230 luck events and you can put them into bat and then begin to do correlations on larger data sets around a specific kind of lens that we were doing. That was a huge contribution to our research method. I'm very impressed with how Morten came up with that and helped advance our research.
We had always known that luck was there like background radiation, or you tend to think of somebody as lucky, like they have some sort of aura. Do you get the luck crystals or something? I mean, how would you actually, really rigorously study this? When you break [the moment down], now it's an event model, and you can identify discrete luck events. You can count them, you can quantify them, you can look at them on timelines and think about contingencies. Do they come early? Do they come late? You can look at the scale -- luck spikes versus not. When you do all that, of course, however you slice it, if you believe that the explanatory variable of the difference between 10X and 1X success is [luck], you cannot support that with the data, period.
Now with that in mind, to recognize that a luck event has just happened, you then go to the next question, which is to ask, "Should we allow this luck event to disrupt our plan?" Now sometimes the answer to that is yes and sometimes the answer to that is no. We could spend a lot of time on how you tell, but that's the critical question. Once you've zoomed out and done that, you come back in and say, "If it allows us to disrupt our plans, then how do we channel our incredible intensity, when we zoom in, to get the most out of that luck event, whether it's a good luck event or a bad luck event?"
There are multiple cases in our book about this. But let's take one of them. You could look at someone like Bill Gates and say, "Well, he was just lucky. You know, when he was born and he can program and Harvard had computers." Yeah, that's all true, except there were thousands of other people who could have done exactly what he did at the exact same moment. But they didn't. They didn't quit Harvard. They didn't defy their parents. They didn't move to Albuquerque. They didn't work 20 hours a day. They didn't sleep on the floor. They didn't inhale junk food. They didn't get BASIC written for the Altair in time for the first release. And they didn't relentlessly march day in and day out with almost no rest for two consecutive decades of utterly mono-maniacal focus.
Then the next "luck event" comes along: IBM walks in the door, looking for an operating system, and the other company gets the same opportunity and doesn't handle it well. Microsoft does. It's return on luck. From one lens you can look at someone like Bill Gates and say he was lucky. But he's not; that's not the answer. He is a return on luck story. That is what we found in our research.
Knowledge@Wharton: Are there any final thoughts you would like to add?
Collins: I guess the only thought that I might add is that Morten and I had a tremendous amount of fun doing this project together. It was nine years of work, and the one thing that guided us all the way through was that whatever the answers would be, it would always be where the data takes us, not where we want to go -- let the data win and use the methodology, which we did. We followed that, but in the end, we ended up in a place where some of the findings in here were surprises to both of us. But we're very excited to share them with the world. For me, they've changed the way I go about a lot of things. I guess that means we learned something.
Hansen: That's true for me, too. It has changed the way I think about the world. When you have these principles that these leaders follow, it gives you confidence and hope -- because the world is out of control, but this enables you as a leader or a manager, whatever you are, to exert control and chart your own destiny in this uncertain world.