Business Ideas w/ Jim Collins (TIP372)
Trey Lockerbie (00:00:02): On today’s episode, we have a very special guest and that is researcher and author Jim Collins. Jim is most well-known for his books such as Good to Great, Built to Last, How the Mighty Fall, Great by Choice, Turning the Flywheel, and BE 2.0, which have sold a total of over 10 million copies worldwide. Trey Lockerbie (00:00:22): I’ve been having a lot of conversations lately about the global macro environment. And while it can be an endlessly fascinating topic and a fun spectator sport, I think it’s important to never lose sight of the fact that as investors, we are investing in companies. And it’s
important to study the different species of companies and what makes them great. Trey Lockerbie (00:00:39): So, there is no better expert on this topic than Jim Collins. To prove my point, I’d like to take a moment and highlight a segment of Great by Choice regarding Southwest Airlines. If we look at Southwest Airlines over 30 years, from 1970 to 2002, you would find that the company endured everything from labor strife, fuel shocks, deregulation, interest rate spikes, air traffic control strikes, hijackings, crippling recessions, bankruptcies, and even, yes, 9/11.
Trey Lockerbie (00:01:07): And yet, had you invested $10,000 in 1972, it would have grown to over 12,000,063 times better than the S&P 500. I took the opportunity to explore how Jim thinks as a researcher. We discuss the definition of greatness. What makes up a level five leader? How much weight to put into innovation? What exactly is the flywheel effect? How luck plays into success and so much more. Jim was very generous with his time and I very much enjoyed our conversation. Trey Lockerbie (00:01:37): So without further ado, please enjoy this discussion with the wonderfully brilliant, Jim Collins. Trey Lockerbie (00:02:08): We have a very special guest on our show. This man doesn’t do a lot of interviews and we are
honored to have him. It is Mr. Jim Collins. Jim, thank you so much for coming on the show today. Jim Collins (00:02:25): I really look forward to our conversation, Trey. Trey Lockerbie (00:02:29): You know, Jim, I’ve noticed on a few of the other interviews that you’ve done, you start off typically asking the host a few questions. And we did this offline a little bit ago as well. And I’ve heard you refer to it as exercising your curiosity. I’m reminded of a quote by Dale Carnegie who said, “To be interesting, be interested.”
Trey Lockerbie (00:02:51): This is something I have personally struggled with. I tend to be more introverted in social settings. Unless there’s a topic of discussion that I’m particularly interested in, then I kind of light up. But I found that the practice of interviewing others, on this podcast in particular, has helped me work the curiosity muscle a bit more. And I’m seeing some benefit to it. But I’m curious. Well, I’m curious. Jim Collins (00:03:13): That’s good. I’m glad you’re curious. Trey Lockerbie (00:03:16): Have you always been naturally curious? Or was there a point in time or someone maybe you learned from that made you realize that curiosity could be a bit of a superpower? Jim Collins (00:03:27): That’s a nice question, actually, because as you’re asking it, I’m reflecting here, I was like, where did my curiosity begin? And that is very hard to pin down because I think it probably showed up quite early. I am
voraciously curious. If I have an addiction, it is curiosity. And it isn’t really bounded necessarily by my areas of expertise. In fact, it very much isn’t. I just learn constantly about things. Jim Collins (00:03:58): And I’ll just share with you one way that I exercise my curiosity. Well, two ways actually. One is, I have found that everyone is potentially very interesting. And if you’re interested,
you find something interesting about them. And I’m like you, I’m kind of what I describe as a socially adept introvert. I’m naturally introverted. I really enjoy spending time in my research cave. We’ll probably talk about that, about how I like to put moats around and just go deep into the research and to think and to make sense of things. Jim Collins (00:04:35): That’s my natural mode. But over time,
I learned something about just the real power of questions. One of my mentors was Rochelle Meyers, who was kind of a cross between Yoda and Socrates. And she taught me the power of letting questions be this way to just really open up marvelous conversations. And one thing she taught me is if you’re at a dinner table, and you’re genuinely interested, I like your phrase, John Gartrell also used to really challenge with that. He used to challenge and say, “Jim, don’t try to be interesting, be interested.” Jim Collins (00:05:12): If you then go back and you’re at a dinner table where you were just interested, and everybody there is potentially interesting. And then, you replayed a tape of that dinner conversation, if there is one, people might say, “That was a marvelous conversation, that person is a marvelous conversationalist.” But then, if you actually
looked at it, you hardly said anything. You listened and asked and questions are invitations, and then people begin to really create a marvelous conversation by those questions. Jim Collins (00:05:42): I really don’t like the question, what do you do? Right? Because that’s kind of a hierarchical question. It’s almost a question that is, jeez,
are you worth my time or something like that. I always like the question. Where are you from? And that’s an invitation. Because if you think about that question, where are you from? You’re giving somebody many ways they can answer that. They can answer with, well, I’m from a given company, or I’m from a given University or I’m from a given town with somebody. You have a choice.
Jim Collins (00:06:12): Somebody might say, I’m actually originally from Ireland, somebody might say, just randomly picking that. Well, interesting. Well, how did you end up here? What’s the story? And you start unwrapping it and very interesting things happen. Jim Collins (00:06:27): And one question I just have always found a wonderful way to very quickly start to connect with people is simply this. So, what’s changing in your life? It’s a marvelous question because it’s not what have you been doing? It’s just saying, what’s changing because we’re all living in a world where something in our life is changing. And that’s probably what’s really
on our minds. And that will begin a marvelous, marvelous conversation. Jim Collins (00:06:52): The other way I maintain my curiosity is, there’s this thing called the Great Courses Series. And it’s actually not the only way that I’d be on because my research is all ultimately driven by curiosity, but a way to just learn about a lot of different things. And a friend of mine named Tom Rollins started a company way back in
the 1980s and it’s called the Teaching Company. And they do this thing called the Great Courses. Jim Collins (00:07:15): And what Tom figured out is that every university campus has a professor that everybody takes that professor’s course, not because of the material, but because the professor is such a marvelous teacher. And when you take the course, then that person, he or she, ignites in you a passion for the subject. And so then what happens is, if his idea was, I’m going to go to all these university campuses and I’m going to find out who those professors are independent of what they’re teaching. I’m going to find the right who’s and then we’re going to have them do versions of their course that people can, back then it was on audiotape, and then CDs, and now it’s streaming and whatever. Jim Collins (00:07:59): And I’ve probably done, I don’t know, probably 250 of those courses and everything from neuroscience and evolutionary biology, up to how the brain works, to theories of history to why time goes forward to the psychology of why you are to discrete mathematics to theories of logic and logical inference to statistics to world philosophy to the history of the Black Death, to you name it, and you can just basically be a kid in the candy store. “Oh,
I want to learn about this.” “Oh, I want to learn about that.” “Oh, I want to learn about that.” Jim Collins (00:08:33): Everything is just like going into a gigantic store where every single aisle is this flashing light of, oh, you could learn about this and that and that. And one day, your life will expire. And I want the last thing ever to be on my lips before my lights go out is a question. I just want to sit there and kind of go, “I wonder how this works.” And then it’ll be over.
Trey Lockerbie (00:08:55): That’s incredible. It brings up a lot of questions, mainly around the leadership of companies, which I think we’ll get to a little bit later. But when we talk about great conversationalists, the word great just stood out to me. And you’ve written a lot about the greatness
that I kind of want to touch on, especially what makes a great company. Trey Lockerbie (00:09:14): It’s important to define what great means. I’m reminded of Zen and the Art of Motorcycle Maintenance because the protagonist spends that entire cross-country trip on the definition of quality. It’s an equally hard word to pin down, right? What is greatness? And going back to that research Katie mentioned, what was your process of narrowing down a great company into only three distinct attributes? Jim Collins (00:09:38): Let me just start with a story. Actually, I can really begin the journey of wanting to understand what makes great companies tick, which has been kind of a 30-year research journey for me. First is some early seeds that were laid down when I was about 22 or 23 years old, that studied mathematical sciences and I was good at coding and doing algorithms and stuff like that and figuring out how to create spreadsheets before there were spreadsheets so that we could run scenarios and et cetera.
Jim Collins (00:10:07): And before I had gone back to graduate school, I went to work doing that kind of analysis at McKinsey & Company. And this was around 1980. And I was in the San Francisco office of McKinsey. And in that office, I’ve been hired by a fella named Bob Waterman and a fella named Tom Peters had his office right across the hall from me. And they were, unbeknownst to me, working on a book that would later become In Search of Excellence. They were doing research on it. Jim Collins (00:10:32): And I was just working in the backroom doing my coding on a microcomputer in eight-inch floppies doing some kind of analysis on some Saturday. And I walked down and I looked down the hall
and I saw the Xerox machine and there were these orange binders. And McKinsey always had blue binders but these were orange binders. And I thought, “I wonder what that is.” So curious, I walked down there and I picked it up. And the orange binder said The Excellence Project. Jim Collins (00:10:58): And I was really taken with that. I thought, “Well, that’s interesting. What’s that about?” And I started looking at it and what they were doing
was really asking the question that led to the book, In Search of Excellence. What really makes for a truly excellent company, not a successful company? In order to be excellent, you have to be successful. There was a kind of an X factor of a company that might have some shaping impact on the world, something you could admire, something exquisite. Jim Collins (00:11:21): And so, that planted a seed. And
then about eight, nine years later after that, I threw a great stroke of good luck. I have a great mentor named Bill Azir. I had the opportunity to return to where I’ve done my graduate work at Stanford Graduate School of Business to begin teaching a course on entrepreneurship and small business. And I think that seed of really not settling for just,
oh, let’s just cash out, let’s just make some money, let’s just be successful entrepreneurs. Jim Collins (00:11:49): But doing something really extraordinary, building something really exquisite had been in my mind. And I took over this course on entrepreneurship and small business. And I had a syllabus in front of me from the original versions of the course, from when other folks had taught it. And the syllabus said, “This will be a course on the challenges of the new venture entrepreneur and the mechanics and challenges of the small business, midsize company manager,” something like that fairly mechanical description. Jim Collins (00:12:15): And I remember looking at it and thinking, “Wow, that just seems so small, I think, I want to challenge my students to do more.” And I impulsively crossed out that sentence and replaced it.
And I replaced it with something along the lines of, “This will be a course on how to take a new venture or small to midsize company and turn it into an enduring, great company.” And that was going to be the course. And so I looked at that and I thought to myself, “Wow, I don’t know anything about that. But I’m going to figure it out.” Jim Collins (00:12:47): And that’s what really launched the 30 years of very rigorous research. Now, let me, just for a moment, just step back, and then we’ll kind of move on as to how that research unfolded and the key things that we’ve learned that are the inputs that really do correlate with building a truly enduring great company. But what is a great company? What would you look to say, are your criteria that if it has a, b, and c, you would call it a great company. And there are three outputs a company has to achieve to be considered truly great the way we came to understand it, and I say we because I had great research mentors.
Jim Collins (00:13:24): Number one, you have to have superior results. If you’re a sports team, and you have the most marvelous culture and the most marvelous sense of purpose in the world and all these wonderful things, but you don’t win championships, you are not a great team. You have to win at the game you play. And in business and in a company that would mean you have a superior return on invested capital. I mean, it is like if you put a dollar into this company, there are very few other places that you could have put that dollar that would have generated a better long term return than in that company, independent of industry, dollar in, long term dollar out, this company won, right? Jim Collins (00:14:06): So, that’s superior results. And the return on invested capital is they deployed internally, if it was, say, a purely private company. Number two, though, is a distinctive impact. And what this means
is you have to ask yourself the question if our company disappeared, would it matter? What are we doing that is either so distinctive or unusual in its contribution, or is so supreme in its excellence and how well we do it, that if we disappeared, it would leave an unfillable hole? Jim Collins (00:14:37): We could not be replaced in a matter of years. It would take decades for somebody to replace what it is that we have built and how will we do it, if ever. So, if you go back to, say, in the early days of building a company like Disney, once it reached a certain point if Disney had disappeared, sure, you might still have theme parks and you would still have animated films. But you would have lost something, you would never have Disneyland again, you would never have those characters again. You would have something that was like, wow, that’s a gap that can’t be replaced.
Jim Collins (00:15:09): And then, the third output is lasting endurance. You have to be able to do this through multiple generations of leaders. So that you know you’re a visionary company versus just a company with a visionary leader. That you have to be able to do it through multiple economic cycles, through multiple technology cycles. And greatest is not measured in quarters, but in quarter centuries. Trey Lockerbie (00:15:32): That last one is really interesting to me. Because I know that you’ve taken a lot of time to distill this down into these three concepts and fully vetted them. And when I was hearing you talk about it, one idea I had that I’m sure
you thought through was, is there a world where something has an enduring impact, instead of just the company enduring for a long time. I think of the Beatles, who were only a band for, say, 10 years. But the records and songs have lasted decades. Trey Lockerbie (00:16:01): I can’t think of any example of that necessarily for business. But I’m curious if you
came across anything like that that you had to kind of sort through? Jim Collins (00:16:08): It’s actually a really interesting question because there’s different kinds of impacts. So, what I was really interested in is how you build a company that has this kind of lasting quality and the ability to make distinctive impacts over a very long period of time, independent of any given product, any given idea. So, one of the concepts, one of the inputs that we found. So I gave you the outputs, right, we’ll probably get to what are some of the really key inputs that lead to creating a company that accomplishes those outputs.
Jim Collins (00:16:42): One of the inputs is that we found that those who built those kinds of companies made this shift from being time tellers to being clock builders. And a time teller, they have a great idea. By the way, let me say it once and I’ll repeat it, there is a negative correlation we found in our research, with starting a company with a great idea and ending up as a great company. There’s a negative correlation we found in our research of starting a company with a great and successful idea and becoming an enduring, great company.
Jim Collins (00:17:12): And it actually turns out that many of the greatest companies started with failures, setbacks, things that were catastrophes early on. And it was the very fact that they had no success at the start that played a big role in them building the muscle strength to say, you can think of it as I’m going to have a successful innovation versus I’m going to build the muscle to innovate, right, which would be more durable. Jim Collins (00:17:40): The muscle to innovate is far more durable than having an innovation. And the thing we found that the clock builders understood is like that the time tellers are like, “I know what time it is, it’s time for this innovation.” They can look up at the sun, the moon, the stars, and the sky, and they can tell you precisely what time it is. It’s 3:30 in the morning on August 23rd and 14:01. And everybody bows down and reveres the time teller or the great entrepreneur,
the far shining visionary who knows always what time it is and everybody will follow them. Jim Collins (00:18:08): And somebody else says, “You know, I think it’s far more impressive, instead of just being the time teller on who everything depends, I’m going to build a clock. And I’m going to build a clock that can tell the time even if I’m not here.” And so, that ability to make the shift, to say, “I’m going to ultimately build a clock as opposed to be the time teller.” Now, let me just link this into this idea that sometimes the company itself is kind of the ultimate creation because then it goes on to create and create and create. Jim Collins (00:18:36): If you think about the evolution and the journey of Steve Jobs, I got to know Steve back in 1988, when I was teaching my course at Stanford. And I didn’t know what I was doing and I always wanted to have it be about building great companies. And
I thought, “Well, I want to bring some heft into the classroom to help my students see what they could do.” And I picked up the phone and out of the blue I called Steve Jobs. And Steve, who is a little bit older than me, he was I think 36 and I was 30 or 31. He very graciously agreed to come to my class, and spend some time with me really talking with my students about starting and building great companies and so forth. Jim Collins (00:19:15): But notice the date, it’s 1988. In 1988, he was in the wilderness. He was three years after having been essentially lost out in a board word battle, lost his company, lost out. He even said in the class, at one point,
just kind of quip, “Well, I got booted out of my last company,” and then he just went on talking about his incredible passion for the things that he was trying to do with this company called NeXT. And then later, of course, would come his involvement with Pixar and so forth. Jim Collins (00:19:41): But eventually come back to Apple in 1997, which no one knew would ever happen. Early in the journey of Steve Jobs, there was very much the time teller who had learned from others but very much that early sense of, I’m the farseeing visionary and as long as I’m here to be a visionary, the company will have these great ideas like the Macintosh, right? I can take the ideas that I saw with all the Xerox stars and all that and I can create the Macintosh and we’re going to have a great impact on the world. Jim Collins (00:20:10): And then, the time teller leaves, and what happens to Apple? It runs into great difficulty. Finally, in 1997, he comes back, the company is on the verge of disappearing either into some other company or maybe failing outright. And he begins to rebuild Apple. But he comes back with a different philosophy, which is, I really need to take the lessons I learned from before and go from being that sort of early entrepreneur to somebody who can really build a company that ultimately doesn’t need me or need any given specific idea to be great.
Jim Collins (00:20:43): And he makes that shift. There’s kind of a Steve Jobs 1.0 and a Steve Jobs 2.0. And he makes that shift from time telling to clock building. And he starts thinking about really building Apple to be truly enduring. And in 2007, I got a call from him to talk about that about building it beyond him and things like Apple University and a variety of other things that would make it such that this is an enterprise that could not just have something like the Macintosh computer but could be this incredible organism that overtime could do many great products.
Jim Collins (00:21:17): And of course, we lost Steve Jobs in 2011. It’s now been a decade and near as I can tell, there continues to be a whole sort of momentum around the entire ecosystem of products that go from Macintosh to iPods to iPhones to iPads to the ecosystem surrounding it that is allowing it to continue to build tremendous compounding momentum. And the value creation that has happened after he was there exceeds the value he created while he was there, even just from a financial standpoint. Jim Collins (00:21:50): And so, the idea being that if you think about it, what was Steve Jobs’ greatest creation? Was it the Macintosh computer? Was it the iPhone? Or was it Apple Computer, the company, that could then generate creation after creation and continue to build its flywheel over a long period of time that would create tremendous compounding returns, contributions.
Jim Collins (00:22:16): And I’d asked you a very simple question. If Apple disappeared today, what would be lost in the world? Well, probably a lot of us would really miss our Apple product. Trey Lockerbie (00:22:28): I was going to say my whole life. Jim Collins (00:22:30): Yeah, exactly. But why is that stuff there? It’s because they built a great company that could do it. And it wasn’t a company that needed just one great leader.
Trey Lockerbie (00:22:39): What I think you’re touching on there is this idea of eventually operationalizing the values of the company and systemizing it. And that’s an incredible skill set to have. Referring back to the inputs you mentioned earlier, it also brings up the idea of people. And one of the hardest things to do as a leader, borrowing this from Reid Hoffman, who said that in an early startup, you’ve got pirates, right? Because you have people who don’t really want to work at a big conglomerate type company and there are kind of very driven people that are somewhat autonomous. Trey Lockerbie (00:23:12): But eventually, you have to turn them into sailors. And that can be a very difficult thing to do. So, you have to lead people into the idea of building systems that can endure beyond themselves. And one of the most counterintuitive discoveries, I think, in my opinion, from your
research is that it appears that having the right people in the right seat on the bus is actually more important than knowing upfront where the bus is even going. So, how did you come across that? Jim Collins (00:23:40): So, let me back up a little bit. And I’ll answer that because the principle is called first who, then what? And it’s a very deep principle that came from our work that we found that those who make the shift from being first what. What are we going to do? What’s our vision? What’s our direction? What’s our strategy? What’s our method? What, what, what, what will make that shift to saying, actually, that’s a secondary question. Jim Collins (00:24:02): The primary question is who. Who do we want on the bus? Who do I want to work with? Who can we rely on? The question is not how should we solve this problem? Or what should we do? It should be, who should I have work on it? If I get a cancer diagnosis, the question is not what’s my diagnosis, my treatment, my schedule? The real question is, who’s my oncologist? Who’s the radiologist? Who’s the surgeon? Who’s the expert in this field? I got to find the who’s to get the best what’s? Jim Collins (00:24:30): And it’s a shift in the world to basically kind of as you think about it to basically say, it’s part of making the shift from being a time teller to a clock builder, right? You make the shift from, I’ll figure out the what’s and tell people what to do to. I’m going to figure out the who’s, and if I get the who’s right,
we’ll figure out a lot of great what’s to do, right? It’s a first who strategy. Jim Collins (00:24:51): So, how do we come up with that? Where did that come from? Back up here for a moment. Everything we’re going to talk about today of key ideas come from our research, come from research. It’s a research-driven approach. And it’s done with a very specific methodology that was given to me, or we really co-develop. Jerry Porras, my research mentor at Stanford. Jim Collins (00:25:14): And what Jerry really had the insight to push us to work really hard to embrace is the idea that you have to have a comparison set so that you can always say, what is different about those that build something truly great? What’s in those companies from those that don’t make it? And the really key question is not what do successful entrepreneurs or successful companies or enduring companies share in common? It’s, what do those who build something truly great share in common that is different from those that could have but did not? Jim Collins (00:25:51): And so, the idea being that if you go to any given industry at any given kind of time in history, you can very likely find matched pairs. So,
you can find companies that were in the same spot, same time, same resources, same potential, at the same moment in history. And they have the same customers, they have similar scale, they have similar access to capital, they know the markets equally well. They’re like a twin. They’re almost like a controlled historical experiment. Jim Collins (00:26:18): And then what happens is, one separates out and becomes a much better or maybe even great company. And the other one that was starting from the exact same place with the same opportunities and everything else, as much as possible, you’re zeroing down to very controlled variables at that point, then from that point, didn’t do as well, and maybe even die. But in most cases, it just didn’t do as well over time. Jim Collins (00:26:40): And then you contrast them and you say, systematically, what did one do differently than the other? And then you replicate that across a range of types of companies and industries and areas and technologies. And we’ve done that for
about 6,000 years of combined corporate history in our research database across four major research studies that have used that method through different lenses. Jim Collins (00:27:03): And one of those studies was a good to great research study. And we were looking at companies that made this point of inflection, where you had two companies, right, think of multiple match pairs. Companies that were equally average performers for a significant period of time. And they were in the same industry, same time, same resources. Classic example from our research, historical case, Kroger, and ANP.
Jim Collins (00:27:26): And if you rewind the tape of history, there was a point in history when these two grocery chains, and it’s retail, it’s grocery, but it’s very interesting pair because they both were relatively average performers in the same era heading into a major seismic change, which was going to be the shift from old-style grocery stores into what became superstores. Jim Collins (00:27:48): Either one of them could have made that shift brilliantly and then gone on to have great results over time. They were virtually equal in their strength and capability to make this transition in that good to great league at that moment. But today, with the passage of time, Kroger is still here and actually doing very well in its world. ANP is gone.
Jim Collins (00:28:13): Then you ask step-by-step, year-by-year, what did they do different? How did they think different? What were the ways that they went about doing things at Kroger that were different than the way they did things at ANP? And from that kind of analysis, rigorous, data-driven analysis, going back in time and watching the tape of history unfold. Jim Collins (00:28:36): And to figure it out, we began to get insight, the comparison leaders, comparison cases, had leaders who would often come in, they would be like a genius with a thousand helpers. They would come in and say, “I know the vision. I know the direction I know the strategy.
I’ve figured out what to do and where to go. And I’m going to motivate people to go there.” Jim Collins (00:28:54): And I would have thought that that’s what our great cases would do. But that’s not what happened. They took a different approach with people like Everingham at Kroger. They asked different
questions. They said, “I don’t necessarily know where to drive the bus. What I know is this is, if I get the right people on the bus and I get the wrong people off the bus and I get the right people in the key seats. If I get that done first, then with a great group of people, we’ll figure out where to drive the bus. And then you’ve got one other giant advantage.” Jim Collins (00:29:23): There’s a history professor by the name of Edward T. O’Donnell. And he has a fantastic quote that I’ve always loved. It came
from one of the great courses I mentioned earlier. It’s a course on the history of the United States from 1865 to 1920, America and the Gilded Age, and the Progressive Era as it’s called. And Professor O’Donnell says, “History is the study of surprises.” Think about that. Jim Collins (00:29:47): Isn’t that wonderful? And it is and we’re living history. I don’t know about you, Trey, but I sure as heck was surprised by COVID when it came 18, 24 months ago. It’s not like I knew that was coming so I better get prepared. We have no idea what’s
coming next. And all we know is we’re going to have surprise after surprise after surprise. All we know is there will be no new normal. There will just be a continuous series of not normal events. Jim Collins (00:30:10): And this is just the nature of history that we will live through if we can’t predict the what. And one thing I’m sure all of
your great investors have told you is no one can predict much of anything. If you can’t predict the what, what is your ultimate hedge against uncertainty, if you’re building a company? It’s the who. It’s having people who can adapt to whatever the world throws at you. Jim Collins (00:30:37): And if I got a bunch of people on the bus for a specific strategy, a specific direction, a specific expectation of what the world will be, and our idea fails, or that particular strategy doesn’t work, or the world throws us a surprise as it will, that wipes all that out. If I only got people on the bus because of the what and now the what’s changed, I’m in trouble.
Jim Collins (00:31:01): But if instead, I got people on the bus because they’re the right who’s who can adapt to multiple kinds of what’s, and they share the values that we’re trying to build to. And they’re incredible people that I can rely upon. And we can navigate this together, well, then, you’re in a very strong position to adapt to that uncertainty. And the more uncertain the world,
the more you want to bet on the who not the what, because the what’s are going to change. Trey Lockerbie (00:31:28): And one thing I love about your research is that it drills down all the way to the point where you have an actionable takeaway, right? So, you could just as easily say, the right people, and you go, okay, what does that mean? Carl is good at his job. But it’s no, it’s, is Carl coded to do that job, which I found incredibly fascinating. And it leads me back to the leadership as far as finding those who are encoded to be leaders. Trey Lockerbie (00:31:54): And I want to talk a little bit about how you’ve discovered the level five leader. So,
talk to us about the pyramid of leadership and how you uncovered that pinnacle of leadership. Jim Collins (00:32:03): And again, as we go through this, and for all of the people who gravitate to your show, who I know are very smart, thoughtful, and analytic people, that’s kind of their ethos, right, why they’d be attracted to the show. I want to constantly underscore that the ideas that we’re talking about are not something that we sat off in a room and said, “Oh, this is a cool idea.” They bubbled up from an empirical and rigorous process to gain these insights. Jim Collins (00:32:28): And then, sometimes, they would distill into something quite provocative and very, very interesting that would crystallize in something like the level five leader. So, briefly, one thing is we found that building a great company,
one that can produce these kinds of results and make this distinctive impact and do it over a long period of time, sort of unfolds in stages. So, stage one is about the people, discipline people. And stage two is about disciplined thought. And stage three is about discipline to action. And then stage four is about building greatness to last and kind of more or less follow that trend. Jim Collins (00:32:58): And notice, we’re starting with people. And part of the people equation was a certain type of leadership ethos that we found. So,
what we found is this, let me just tell a little story about how this surprising finding came about. It was surprising to me because I didn’t want it. I did not want to find this. I have always had an anti-leadership bias, or had one for a very long time. And the reason is because I find the notion of leadership worship and the idea that, oh, it’s all about just having a great leader is actually very intellectually sloppy.
Jim Collins (00:33:37): And it leads us in a big circle. Because when we say, well, the company was successful because it had a great leader. And then, if the company is not as successful, well the leadership must not have been as great. We’re just kind of going around in a circle. Until I said to the research team at the beginning
of the good to great study. We’re not going to have a leadership answer from good to great. Jim Collins (00:33:55): And remember, we were talking about companies that make this inflection, right. So, something happened in this inflection time. And the research team, one day, I came in and they’d all kind of joined hands. And I said, “Well, what’s that about?” And they said, “Today, Jim, is the day we’re going to challenge you. We’re going to tell you that you are wrong.” “Well, what about?” “About your anti leadership bias. We’re working with you systematically, deeply studying the evolution of these companies to understand how someone from good to great and why others didn’t. And you can’t remove these extraordinary leaders
from that inflection. That’s ignoring the evidence that tells us to pay attention to the evidence.” Jim Collins (00:34:34): And so I said, “Well, let me ask you a question. Do you remember your high school algebra where if you have the … It’s the ratio when you have the same variable in the numerator as the denominator, the variable the crosses out is irrelevant.” So, I went to the whiteboard and I drew on the
board of good to great companies in the numerator, comparison companies in the denominator. I said, “Okay, we can accept that there were leaders and some exceptional leaders in the good to great companies, but how about the comparison companies?” Jim Collins (00:35:03): Well, actually, it turns out that a lot of the comparison companies had towering often charismatic, extraordinary leadership personalities in those companies. Everybody would look at and say, “Well, those are clearly exceptional leaders,” but they were in comparison companies. So, then, I just took the little marker and I crossed out the word leadership. You got leadership in the numerator, you got leadership in the denominator, it doesn’t differentiate, it goes away. It’s not relevant.
Jim Collins (00:35:29): So, I put down the marker. And I said, “So, let’s go back to work and do something useful.” And the team kind of joined hands tightens their hands and said, “Jim, we thought you would say that so we came prepared.” And this is when the team had this marvelous moment of challenging me with the evidence, right? They said, “We agree with you completely.” And they’d marshal the evidence. Jim Collins (00:35:51): The key is not leadership versus not, we all agreed that there is leadership in both sets of companies. But there was something
different that the good to great leaders were kind of caught from the same cloth. That was different from the comparison leaders. That became interesting. It wasn’t about having leadership, it was about having some type of leadership. And so, as we began to explore it, we eventually came to see this thing called the level five leader. Jim Collins (00:36:18): So, think of it as like Maslow’s hierarchy, except it’s a leadership hierarchy. And level one in that hierarchy is individual skills, right, you become a really good individual contributor. And if that’s what you are,
you’re a good level one. Level two is you layer on top of that really good team skills. And if you have level two and level one, you’re a good level two, really good contributing team member. Jim Collins (00:36:40): Then you add layer three, which is management skills. And you really learn how to manage not just to be a team member but to really manage a team and make that be really effective and outstanding. Now, you’re level three. And level four is leading. And you really learn how to lead, you don’t just manage pre-existing objectives, you sort of figure out what must be done. And you figure out the art of getting
people to want to do it. And you’re really good at that, right, you’re good level four. Jim Collins (00:37:06): But there was a higher level, and there was the level five. And what we found in our work is that the comparison leaders had level four leaders, comparison companies, and the good to great companies had level five leaders. And the difference between the five and the four was a surprise. It was this very strange combination of a personal humility combined with an utter indomitable will. Humility and will. Jim Collins (00:37:34): Now, humility is a very special kind of humility because it’s not necessarily self-effacing. Many of them were
people who didn’t draw a lot of attention to themselves. They might have had a charisma bypass. They were sometimes not the sort of person that you would necessarily notice walking into a room. But some others were very colorful characters, right. So it’s not necessarily about the personality, like having to be a self-effacing person. Jim Collins (00:37:59): It’s humility defined as your ability to recognize the flaws and faults that you have that you have to grow past with honesty and with humility. And hence, you see the journey of Steve Jobs from 1.0
to 2.0. Losing your company is a very humbling experience, that became the seed of the growth that allowed him to become the kind of leader who could build that next generation of Apple. Jim Collins (00:38:24): But the other is that it is ultimately that you channel your ambition whereas you’re ambitious as anyone else but the ambition is not about you. It’s not about what you get, what you make,
how you look, about how you’re a hero, about how people look up to you, about any of that stuff. It’s about all your ambition is going into something that is not about you. It is bigger than you. It is more important than you. It is more purposeful than you. Jim Collins (00:38:50): And you are as ambitious as anyone else, but you’re channeling it outward. And so when you begin to say what really matters is not that I am a great leader, but that this is a great company. It’s not a matter of how people look up to me. It’s how I built great people who did great things.
That kind of ambition and the willfulness around it is what made the level five. Trey Lockerbie (00:39:16): I bring it up, especially because, as investors, I think it’s important to filter through the universe of companies, not only by the products and the company’s mission, et cetera but also with leadership. I do think it plays an important role, the comparison of finding the right jockey with the right horse. I do think the horse is probably the most important but the leadership is an important piece of the puzzle. Trey Lockerbie (00:39:40): And a couple of leaders that we study a lot on the show, one would be Warren Buffett, who as you were speaking, I was reminded of because he comes across with a lot of humility, I would say. And then, I’m kind of juxtaposing it in my mind with someone like an Elon Musk, who maybe doesn’t have that first value, but is at least advertising a mission much bigger than himself. These big hairy goals of sorts of getting to Mars, et cetera.
Trey Lockerbie (00:40:03): And there’s actually been an intersection between these two. And it was around the idea of innovation, which you’ve written about as well. I’d like to just kind of resolve this with you because I’m conflicted still on the idea of how much innovation. So, for example, Elon teased Buffett about his idea of having moats. And he was calling them quaint. And went on to basically say that what matters is the pace of innovation that is a fundamental determinant of competitiveness. Trey Lockerbie (00:40:33): What has been your most surprising takeaway after studying innovation in top-performing companies? Jim Collins (00:40:39): All right, so everybody, hang on for a little bit of a ride on this and Trey and I will go back and forth. Because actually,
I would take from our research that actually, innovation is a term that helps us kind of get our heads around things a little bit. But I’ve actually really come to understand that what really matters, and innovation plays into this, but perhaps a more helpful way to think about it is building a flywheel of momentum. And then renewing and extending that flywheel with bullets and cannonballs.
Jim Collins (00:41:14): So if you were kind of going to say, what did our research show about overtime, allows companies to not only win in their game but then to continue to win and grow and evolve, as the world around them is constantly changing. And all kinds of new stuff and opportunities are coming along and things that can kill them are coming along, and so forth, this notion of sort of the flywheel that is renewed and extended with bullets and cannonballs. Jim Collins (00:41:39): And I think if we unpack that, I think, that by the way, would explain many people that folks might seem contradictory or puzzled by. So, Trey, maybe you and I together could kind of unpack this because I think that in the end, the great, great, great machines, momentum machines, are a flywheel.
And they are a flywheel that is renewed with bullets and cannonballs. And before we go into this thing about the innovation piece, let me just say one thing. Jim Collins (00:42:08): It’s fascinating if you go back and you actually ask the question, as these researchers named Tellis and Golder did, Morton Hanson and I wrote about them in Great by Choice as kind of really having a similar finding for some stuff that we found. But they did this really neat piece of analysis in a book called Will and Vision. And they basically said, “We want to go back to the start of given industries and find out who was the early innovative pioneer. And then we want to ask the question, who won. And it turns out that it’s almost never the early innovative pioneer, that the people who won, the people who ended up as the big winners in a given field, were almost never the ones who pioneered that field.” Jim Collins (00:42:53): Now, there are a small number of exceptions to that. But the dominant pattern is that the winners do not pioneer and are not the
pioneering innovators of the field. Morton and I found in our research corresponding to that, that when we sort of looked at it, we basically just said, “Well, if one reason why some companies do really well in highly turbulent environments is they just sheer out-innovate their competitors, they do both sets, it’s like both had leaders. Both are winners and comparisons had innovation.” Jim Collins (00:43:24): So, it was something about the way they thought about momentum and innovation and extension that was different. Trey Lockerbie (00:43:32): Yeah, I’m so glad you brought up the flywheel. This concept was born out of your book Good to Great and it’s become saturated to
the point, in my opinion, where almost every company claims they have a flywheel. I hear a lot in the venture capital world where it’s almost reminiscent of when every company was disruptive or every company was the Uber of X. Right? Every company seems to have this flywheel. Trey Lockerbie (00:43:53): So, now that we have you, the source of this concept, on the show, I really wanted to talk about what actually is a flywheel and almost more importantly, what it is not. Jim Collins (00:44:04): So in Good to Great, we were looking at these inflections. And I started thinking to myself, what was the miracle moment? What was the key aha? What was the big breakthrough? What was the thing that once they got it, it was like, bang, wow, we made this great, big breakthrough. And it turned out that looking in from the outside, I could see a point of inflection. But on the inside, it didn’t feel that way.
Jim Collins (00:44:27): We kept sort of asking the executives who had been part of the teams that made that leap from good to great. What was the miracle moment? What was the breakthrough, right? And they would kind of say, “Well, I can’t really answer that question because it was a more organic process than that. It sort of happened over time. It was no one big thing.” And so, we were going back and forth. Jim Collins (00:44:45): And finally, as it began to put together how all this happened, again, we’re putting together the historical record to really understand how something happened. This image of the flywheel came to mind. And imagine you’ve got this giant heavy flywheel and you start pushing in an intelligent interaction. It’s not random, right? But you start pushing on that flywheel. And after a lot of effort,
a lot of work, you finally get one giant, slow, creaky turn. Jim Collins (00:45:07): And you don’t stop, you keep pushing and you add a second turn. And it’s kind of now compounding one turns to two turns on this big flywheel. And you keep pushing and eventually you get 4 and 8 and 16 and 32,
and then 100, and then 1000, and then a million and then 100 million turns on that flywheel and it’s just like turn upon turn and push upon push compounding over time. And then, at some point, you just feel, bang, breakthrough momentum. Jim Collins (00:45:30): And somebody comes in and says, “So, what was the one big push that made it go?” Well, you can’t really answer the question, because it’s a series of good decisions, supremely well-executed, adding up one upon another, compounding over a long period of time, the flywheel effect. And so, we wrote about the flywheel in Good to Great. And it was one of the key principles that came out of it is that you build flywheel momentum. And that’s what better
explains great long-term results rather than sort of explosive moments or singular breakthroughs. Jim Collins (00:46:03): Shortly after Good to Great was published, actually, it was right as Good to Great was being published, I think it was the fourth week of September of 2001, I had been invited to go up to a small company in Seattle. It was named amazon.com. And I was invited to teach the ideas. I love to just share them and to teach them and teach the ideas to Amazon executives. But also to meet with the board and to meet with a young chief executive by the name of Jeff Bezos. Jim Collins (00:46:32): And so, I go there. And
I just taught the idea. I didn’t say this is what Amazon should do or anything like that. They know their business better than I do. I just wanted to share with them and teach the ideas and challenge them a bit. But if you remember 2001, in the fall, that was right after the.com crash. And there were a lot of people wondering
what was going to happen to Amazon. There are all this carnage in the.com world. Jim Collins (00:46:53): And people wondered would Amazon and the others survive? And who is going to make it through this? And on top of that, of course, we had just come through 9/11 just a few weeks before. It felt like dark times. And as I left Seattle, I basically made one real challenge, which is, don’t respond to this as a crisis, respond as a flywheel. And then, the folks at Amazon grabbed the flywheel idea
from Good to Great, and they did something brilliant with it. They made it their own. Jim Collins (00:47:21): They said, “Okay, if we’re going to build a flywheel, well, then, what is our flywheel?” And they took the idea of the flywheel and they then sort of sketched out the architecture. And this is what’s powerful about a flywheel, it’s an architecture of momentum. It’s not like a business idea.
It’s a momentum architecture. The Amazon sketched the Amazon flywheel early on. It was very simple. Jim Collins (00:47:46): Essentially, if we offer lower prices on more things where these customers were obsessed with, then we can’t help but, that’s the keyword. We can’t help but bring more visits to the site. And if we bring more visits to the site, then we can’t help but attract more third-party sellers. And if we attract more third-party sellers, then we can’t help but expand the store and extend distribution. And if we expand the store and
extend distribution with all these other pieces then we can’t help but grow revenues per fixed costs, which we can then redeploy right back into the top of the flywheel to offer more lower prices and even more stuff for our customers, which will bring more customer visits more third-party sellers, more revenue and extend the store and distribution, more revenues for a fixed cost, bang, right back to the top of the flywheel. Jim Collins (00:48:36): Now if you ask the question, what is Amazon? It’s a flywheel. And that flywheel compounded and built momentum. And it’s been compounding and building with renewals and extensions, we’re going to get to the innovation piece in a few minutes how that ties in. Because it’s the renewal and extension of a flywheel that better explain great long-term results than just the word innovation. It’s, get the flywheel of momentum going,
understand that, have that architecture, and then renew and extend in a very deliberate way, such that that flywheel keeps building ever momentum in very imaginative ways over time. Jim Collins (00:49:17): And you disrupt the world by turning your flywheel not by blowing up your flywheel. And if you get a great flywheel architecture, it has A will drive B and B will drive C. If we do A we can’t help but do B. And if we do B we can’t help but do C, right? And it drives, you can just sort of feel the momentum building because the logic underneath, the logic of momentum underneath. When you execute on each
component creates an inevitable momentum, which then builds upon itself over time. Jim Collins (00:49:51): It requires the intellectual rigor to nail the architecture and then it requires the fanaticism to execute on each component overtime to produce the momentum and then the discipline to renew and extend it. And to stay with it long enough to get the greatest compounding impact. Jim Collins (00:50:08): In your world, you think a lot about compounding returns. This is strategic compounding, very similar to the idea of financial compounding, except ultimately, it is strategic. And there are lots of different types of flywheels we can
talk about. There are innovation flywheels, there are cost flywheels, there are people flywheels, there are education flywheels, there are music flywheels, right? But the key is, what is the flywheel? And then we would get to the question of how one renews and extends that flywheel over time. So, we could take almost any company overtime and ask those exact questions. Trey Lockerbie (00:50:44): What’s coming to my mind is what you just said about renewing the flywheel because Amazon is also a great example, I would say, of kind of growing their circle of competence. And that’s another concept that’s hard to get your head wrapped around. If we go to your hedgehog example, right, of a company being really good at one thing, you start to wonder, okay, well, where does it make sense to grow into something else? And Amazon’s done that with a number of industries now and grown its hedgehog of sorts.
Trey Lockerbie (00:51:13): And so, it brings up the question, is it the flywheel that’s driving the decision to enter into new industries for a company such as Amazon? Jim Collins (00:51:22): Yes. And also, a specific way of coming at it. So, you asked the question earlier about innovation. And so, in one of our books, which is Great by Choice, we spent nine years actually asking the question, it was a kind of a study for Good to Great. And we knew about the firewall. But we were asking the question, why do some companies go to become 10 times better performers in their industries from a base of being, say, early startups, in the most turbulent industries we could find? So they’re full of all kinds of disruption and change and technology innovations. And we were looking at biotech and software and computers and semiconductors and airlines, and a whole bunch of industries that are sort of climbing at 29,000 feet on Everest type of environments. Jim Collins (00:52:06): They’re really difficult and turbulent and unpredictable environments. Who does well and why?
And what Morton and I found in that work was that we asked the question about innovation. And what we found is that far more important than innovating is the ability to place the right big bets into scale innovation. And we ended up calling it fire bullets than fire cannonballs. And so imagine you have a ship bearing down on you, and you have a certain amount of gunpowder. And one approach to that would be, I’m going to take all my gunpowder. I’m going to put it in a
big cannonball. I’m going to fire to that ship and I’m going to take my best shot. Sure hope it hits. Jim Collins (00:52:43): But the cannonball sails out and splashes in the water. Now, you’re turning, you look, you’re out of gunpowder, and here comes the ship. And you’re in trouble because you’re out of gunpowder. But suppose instead, you took a little bit of gunpowder and put it in a bullet and you took your best shot, fired it, it’s 30 degrees off, you take another bullet, you recalibrate, you fire again, you’re 10 degrees off. Take another bullet, you recalibrate, fire again, and ping, you hear the side of the ship. Jim Collins (00:53:11): Now you know you have a calibrated line of sight. And now what I’m going to do is I’m going to convert the gunpowder, which I have, into a cannonball and fire it on the calibrated line of sight. What we found in our research
is that you’re turning your flywheel and you’re building momentum. But along the way, you’re also firing bullets. You’re firing bullets on things that might become your next big bets. And not all of them hit things, right, a number of them just splash in the water. They’re never going to hit anything. You know that they’re not necessarily going to pay off and you don’t pursue them. Jim Collins (00:53:45): But every once in a while, you get some tremendous calibration on something and you have empirical validation that this will work if we bet big on this. This could renew and extend us into something
where we had not been participating before. And we talked earlier about the hedgehog. We’re passionate about it. We can be the best in the world. And what drives our economic engine. Well, that’s not a static idea, because you can discover by firing bullets and then judicious cannonballs, new things that you didn’t know before fit those three circles.
Jim Collins (00:54:15): So, returning to our Amazon example, just to flesh this out a bit. You have to provide services for your own website. And then you basically say, gosh, what if we fire the bullet? What if, actually, it turns out that some of our customers might like this too? And you fire a bullet, essentially, providing a service you provided for yourself, for your customers, and then you calibrate that and you find that that approach works really, really well. And eventually, what do you have the basis of? This incredible renewal and extension into Amazon Web Services. And that organic process of bullet to cannonball renewal doesn’t mean you abandon the sort of underlying momentum architecture or your flywheel, it’s a renewal and extension.
Jim Collins (00:55:00): And that’s what we found over and over again in history. You’re doing memory chips, you fire a bullet, you have this thing called a microprocessor. And then, you fire that and turn that into a cannonball. And boom, as Intel, you went from memory chips. And now you’ve got this whole new extension of your Moore’s Law semiconductor flywheel in microprocessors. You realize that Marriott for the first couple decades
of its history wasn’t a hotel company, it did restaurants. But they fired a bullet to a hotel in Washington DC. It actually turned out that their ability to create hospitality could extend beyond a restaurant, they could do it well in a hotel. They proved it, they validated it, then comes the cannonball, to begin to move and extend into the hotel business. Jim Collins (00:55:48): Disney from animated films into theme parks, right? We could go company after company in history. You have this flywheel architecture momentum, you’re firing bullets to get calibration on new things that could renew and extend it, you validate that impact. We could do that
with passion. We could be the best at it. It does make economic sense. We then fire the cannonball and we renew and extend the flywheel again. And that ability to understand what our flywheel is and how we can extend it and renew it in this very disciplined bullet cannonball way when you look over the arc of decades is a, of our research, a much better explanation of who wins, who disrupts, who compounds than simply who innovated and who didn’t. Jim Collins (00:56:33): It’s a much richer, deeper true explanation of what happens. It doesn’t mean you’re not innovating.
Bullets to cannonballs is innovating. But it’s really flywheel renewal extension. Trey Lockerbie (00:56:46): I’m really glad you brought up Great by Choice, because all of your concepts and all of your books are evergreen, in my opinion. I mean, they keep me grounded as a l