What can you be best in the world at? - Good to Great Part III

Hey there!

Today, we are talking about the Hedgehog Concept by Jim Collins. I believe this to be the most important chapter in the book. If you are able to figure this out, it will make it very easy for your organization to make decisions.

Estimated read time: 5 minutes

Hedgehog concept

Jim Collins asks, are you a hedgehog or a fox? He's referencing an essay by Isaiah Berlin, who split people into two types, using this ancient Greek story about a clever fox and a simple hedgehog. The fox is always trying to catch the hedgehog, but no matter how smart the fox is, the hedgehog always wins just by rolling up into a spiky ball.

Berlin thought people are like that too. Foxes are super smart and see the world in all its complexity, but they're all over the place and don't have one big idea. On the other hand, hedgehogs take all that complexity and boil it down to one simple thing that guides everything they do.

Marvin Bressler, a Princeton professor, said the biggest game-changers in history were hedgehogs. Think Freud, Darwin, Marx, Einstein, and Adam Smith. They all took complex stuff and made it simple. Hedgehogs aren't dumb; they just get to the heart of things and ignore the rest.

So, what's that got to do with companies going from good to great? Well, the leaders of those great companies were like hedgehogs. They had a simple idea that guided their business, while the not-so-great companies had leaders more like foxes, who couldn't focus on one main thing.

Walgreens

Take Walgreens for example. Walgreens had this simple idea of being the best, most convenient drugstore with high profit per customer visit. They stuck to that idea and did it really well.

Walgreens nailed their concept and opened stores in super convenient locations, even clustering them together in cities. They added stuff like drive-through pharmacies and one-hour photo development to make more money per customer visit. They just kept it simple and focused, and it paid off big time.

On the other hand, Eckerd didn't have that clear idea, so they jumped around and made moves like buying a home video company. That didn't work out so well, and they lost a lot of money. In the end, Walgreens became a huge success, and Eckerd disappeared.

Understanding the three parts of the hedgehog.

The team took a closer look at the concepts behind the good-to-great companies and comparison companies. What they found was that the Hedgehog Concept in the successful companies wasn't just any simple idea. It was based on a deep understanding of three key areas, or circles:

• What they could be the best in the world at (and what they couldn't).

• What drives their economic engine (basically, how they make money and keep profits up).

• What they're really passionate about.

When you find the sweet spot where these three circles intersect, that's when you get the Hedgehog Concept. It's not just about having a simple idea; it's about having a simple idea that comes from a deep understanding of these three areas.

Best at

Warren Buffett once wrote about how important it is to stick with what you understand and let your abilities, not your ego, decide what you do.

Remembering that a Hedgehog Concept isn't about wanting to be the best or making plans to be the best. It's about understanding what you can actually be the best at. So many companies want to be the best at something, but only a few really get what they have the potential to be the best at. And that's the big difference between good-to-great companies and the others.

Take Abbott Laboratories and Upjohn, for example. In 1964, they were pretty much the same, but by 1974, Abbott took off while Upjohn lagged behind. Abbott realized they couldn't be the best pharmaceutical company, so they focused on creating products for cost-effective health care. Upjohn, on the other hand, kept trying to beat Merck and even went into businesses they couldn't possibly be the best at. They just couldn't let go of their core business, even though it wasn't their Hedgehog Concept.

A core competence isn't the same as a Hedgehog Concept. You can be good at something but not be the best at it. It's like someone who's great at math but could never compete with naturally gifted people. It's important to focus on what your organization can actually be the best at, not just what it's good at. The good-to-great companies got this and put all their resources into the few things they could really excel at. The others? Not so much.

Economic engine

Jim Collins, the author, talks about how great companies often make huge profits in not-so-great industries. He explains that these successful companies deeply understand their economic drivers and build their systems around them. One interesting insight he shares is the idea of a single "economic denominator." This can be thought of as the one key ratio that, if increased over time, would have the most significant and lasting impact on a company's financial performance.

For instance, Walgreens shifted its focus from profit per store to profit per customer visit. By doing this, they could open more stores in convenient locations, which increased their overall profitability. Similarly, Wells Fargo focused on profit per employee, which led them to rely more on efficient branches and ATMs.

Collins highlights that the economic denominator can sometimes be subtle and not very obvious. The important thing is to use this concept to gain better insight into your company's economic model. For example, Fannie Mae's key denominator was profit per mortgage risk level, while Nucor's was profit per ton of finished steel.

Trying to identify this key denominator often sparks intense discussions among executive teams, which ultimately helps them gain a deeper understanding of their company's economic drivers. In the end, it's all about gaining that insight to achieve more robust and sustainable financial performance.

Understanding your passion

Jim Collins talks about how a company's passion plays a significant role in its success. He shares an interesting example of Philip Morris, where the execs were so passionate about their products that they saw themselves as the independent cowboys from their Marlboro ads. Even though the company made products that weren't exactly healthy, the people at Philip Morris loved their company and believed in what they were doing.

Collins points out that passion isn't something you can force on people – it's something you discover within yourself and your team.

Great companies didn't try to make their employees passionate; instead, they focused on doing things that they could genuinely feel passionate about. For example, Kimberly Clark shifted to paper-based consumer products because their execs were more passionate about them than their traditional paper products.

Another example is Gillette, which decided to build high-quality shaving systems instead of competing in the low-margin disposable razor market. The reason? They just couldn't get excited about cheap disposable razors. As one Wall Street Journal reporter put it, people who didn't share the same passion for Gillette's products need not apply.

You might wonder how someone can be passionate about something like diapers, deodorant, or even pharmacies. The point is that it doesn't matter what others think – what's important is that the people working in these companies feel deeply passionate about their work. Collins also explains that passion doesn't always have to be about the business mechanics; it can also be about what the company stands for.

Fannie Mae, for instance, was driven by the idea of helping people from all walks of life achieve the American dream of homeownership.

In short, passion is a crucial element in a company's success. It can't be forced or manufactured – it must be discovered and genuinely felt by the people working in the company.

So there you have it – the Hedgehog Concept is all about simplicity, focus, and understanding your company's strengths, economic drivers, and passion. By diving deep into these three key areas and finding the sweet spot where they intersect, you can unlock the potential for greatness in your company.

Remember, it's not just about having a simple idea; it's about having a simple idea rooted in a profound understanding of what you can excel at, how to maximize profits, and what truly ignites passion within your team. After all, great companies aren't built overnight; they're nurtured by leaders who embrace the hedgehog mentality, cutting through the noise and distractions to focus on what matters most.