GROUP 1

TIMOTHY LOVELANDBRENT GAFFORDJOHN MENTHZACHARY MAYOR

Good to Great Chapter 6: A Culture of Discipline

A Culture of Discipline

• George Rathmanno Cofounded Amgeno Created blood productso Grew into a $3.2 billion companyo Stock price multiplied over 150 times its public offering

Few successful startups become great companies

• Entrepreneurial success is…o Fueled by creativityo Imaginationo Bold moves into uncharted water (blue oceans)o Visionary zeal

A Culture of Discipline

• Many companies will change from a entrepreneurship into a bureaucracy o As a company grows, it becomes more complex o Professional management is put in placeo Order is created out of chaoso Creativity and fun decline

• George Rathman avoided thiso You need to have the right people firsto Avoid bureaucracy and hierarchyo Create a culture of discipline

A Culture of Discipline

• Bernard H. Semlero Created mechanisms to drive cultural changeo Responsibility Accounting Each individual was accountable to what they spent Responsible for his or her return on investment Freedom within a framework

• Main point: Build a culture full of people who take disciplined action within the three circles, fanatically consistent with the Hedgehog Concept

Freedom within a Framework

• Picture an airline pilot.o Goes through checklisto Follows precise instructions o Operates within a strict systemo But there is freedom within that system

• A Culture of Discipline starts with disciplined people o Disciplined thoughto Discipline to persisto Disciplined action

Rinsing Your Cottage Cheese

• Dave Scotto Bike 75 mileso Swim 20,000 meterso Run 17 mileso Every day!

• Rinse the cottage cheese to get the extra fat out

o Many companies lack this discipline

Rinsing Your Cottage Cheese

Wells Fargo vs. Bank of America

Carl Reichardt “too much waste in banking” Rinsing our own cottage cheese Froze executive salaries for two years Replaced executive dining room with a college dorm food-

service caterer Closed the executive elevator, sold corporate jets, and

banned green plants

“who you spend your own money this way?”

Rinsing Your Cottage Cheese

Bank of America didn’t have the discipline to rinse out their own cottage cheese.

Lost $1.8 billion in the mid 1980’s Made changes (largely by hiring ex-Wells

executives)Lacked discipline even through the darkest

days.

A Culture, Not a Tyrant

Discipline plays a role in success, but it was also apparent in comparison companies.

The differences are not in the existence of discipline, but how they approach it.

A Culture, Not a Tyrant

Good-to-Great Companies had Level 5 leaders who built an enduring culture of discipline

Comparison companies had Level 4 leaders who personally disciplined their organization through sheer force.

Ex: Ray MacDonald of Burroughs

A Culture, Not a Tyrant

In every comparison case: There was a spectacular rise under a tyrannical

disciplinarian. Followed by a spectacular decline when the

disciplinarian stepped away.

Discipline is essential for results, but disciplined action without disciplined understanding of the 3 circles cannot produce great results…

Fanatical Adherence to the Hedgehog Concept

Pitney Bowes Patents on postage meter machines 100% of the metered mail market Monopoly Required to license its patents to competitors,

royalty free In 6 years they had 16 competitors Tried Acquisitions 1973 was the first year the company lost money

Level 5 Leadership in Pitney Bowes

Fred Allen, CEO Stayed in the 3 circles Shifted operations to copiers and fax machines because

these products could be sold and serviced to the same cliental they had serviced for years

Obtained 45% of total market for high end Fax Machines ½ of their profits were derived from products introduced

in the last 3 years In 1973 they were 77% behind in the market By 1999 they out performed the market by 11 times All because Fred Allen had the theory of staying within

the 3 circles

RJ Reynolds

In 1960 their goal was to be the best Tobacco Company in the United States Later a report by the Surgeon Generals’ Office linked cigarettes with cancer Thought their market could go away

1970 RJR purchased a shipping container company and an oil company with 1/3 of corporate assets After 3 years of sucking away tobacco profits to fund these new companies

they admitted failure and sold off the 2 companies they purchased Why? WANDERING OUTSIDE ITS 3 CIRCLES DEFIED ALL LOGIC

Competitor Philip Morris stayed within it’s 3 circles This is why Phillip and RJR diverged so drastically between 1964 and 1989 Out performed RJR by 4x

Nucor

Built its success around the Hedgehog Concept of harnessing culture and technology to produce steel.

Wanted to align worker interests with management and shareholder interests, avoiding class distinctions

Did thing such as: Executive benefits were the same as front line workers Corporate office was small, efficient, and modest. When profits were high workers pay was high on all levels.

When the 1982 recession hit workers pay went down 25%, but executive pay went down 60%, and CEO down 70%.

All of this kept class distinctions at bay.

Nucor’s Competition Bethlehem Steel

Bethlehem Steel Executives had lavish perks Embraced a class system After 34 years:

They lost money 12x Cumulative profitability added up to zero

On the other hand… Nucor Posted 34 years of consecutive profitability Out performed Bethlehem by 200x over the 34 year time

span

Important to Take Away

Stay within your 3 circles and avoid outside temptation to move

Running your company as a hierarchy or emphasizing a class system leads to a lack of motivation among low/mid level employees. This was a key difference between Nucor and Bethlehem.

Start a “Stop doing” List

Those who built the good-to-great companies, used the “stop doing lists” as they did with the “to do lists”

Darwin Smith Wall street

The G-to-G companies institutionalized this discipline through the use of a unique budget mechanism.

“Stop Doing” list cont.

Budgeting is a discipline to decide which arenas should be fully funded and which should not be funded at all.

If you look back on the G-to-G companies, they displayed remarkable courage to channel their resources into only one or a few areas.

Hedgehog concept

Key Points

A culture of discipline involves a duality. It requires people who adhere to a consistent system; yet on the

other hand, it gives people freedom and responsibility.

The Good to Great companies appear boring on the outside but they’re full of people who display extreme diligence and a stunning intensity (they rinse their cottage cheese)

The single most important form of discipline for sustained results is fanatical adherence to the Hedgehog Concept and the willingness to shun opportunities that fall outside the three circles

Un-expected findings

A great company will have many once-in-a-lifetime opportunities if it fits within the three circles.

“Stop doing list” are more important that “to do lists”

The purpose of budgeting in a Good to Great company is not to decide how much each activity gets, but to decide which arenas best fits within the Hedgehog Concept and fully fund it.