Business Ideas w/ Jim Collins (TIP372)

Business Ideas w/ Jim Collins (TIP372)

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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 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  crash. And there were a lot of people wondering  

what was going to happen to Amazon. There  are all this carnage in 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

2021-08-29 12:00

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