Read: December 2017
Rating: 3.7 (scale: 1 – 5)
Brilliant amount of research went into this book and findings. I enjoyed that Jim Collins went into detail on the research methodology and how they selected their 10x companies and the 10 comparative companies.
Tim and his team compared the following 14 companies:
|Industry||10x Company||Comparative company|
|Orthopedic medical devices||Biomet||Kirschner|
|Airline||Southwest Airlines||Pacific Southwest Airlines|
|Surgical-devices||Stryker||United States Surgical Corporation (USSC)|
The 10x companies displayed the following characteristics:
• Fanatic discipline (“20-Mile March”)
• Empirical creativity (“bullets then cannonballs”)
• Productive paranoia (“Effective management of risk”)
Two additional comments:
• SMaC recipe (Specific, Methodical and Consistent) – set of durable operating practices that create a replicable and consistent success formula
• Make the most use of their luck (ROL – “Return on Luck”)
I often prefer the factors that were not found to be significant. They were:
• Not more creative
• Not more visionary
• Not more charismatic
• Not more blessed with luck
• Not more risk seeking
• Not more heroic
This is the finding I resonated with the most. It relates to how 10x companies (teams, projects) had incredible consistency and discipline to stick to predefined specific performance benchmarks. Is was displayed resilience in bad times and restraint in good times.
The story of Roald Amundsen and his team’s expedition to the South Pole was used to highlight the point. The comparative case in this instance was the expedition of Robert Falcon Scott and his team. Both parties pursued the goal of reaching the South Pole in 1911 for the first time. Roald, following a consistent 20 miles per day (no matter the conditions), comfortable achieved the objective, were Roberts team arrived 34 days after and all did not make it back home.
Characteristics of a good 20-mile march:
• Clear performance markers
• Self-imposed constraints
• Appropriate to the specific entity
• Largely within the control of the entity
• A proper timeframe
• Imposed on itself
• Achieved with high consistency
Fire bullets, then cannonballs
This finding relates to the approach to innovation and allocation of R&D capital. The suggestion is to try a number of smaller initiatives (“experiments”) before more expressively pursuing one on a larger scale.
Another key point is that once a bullet displays empirical evidence of success, you must act quickly calibrate and then “fire the cannonball”.
A surprising finding is how some of the “less” innovative companies did much better. For me, a great example was how Southwest Airlines copied, almost to a T, the processes and procedures from Pacific Southwest Airlines
This relates to the management of risks and having the ability to see the “trees” and the “forest”. The three core sets of practices:
1. Build cash reserves and buffers before unexpected events happen
2. Bound risk: Death line risk (risk that can destroy the company), asymmetric risk (downside is greater than upside) and uncontrollable risk
3. Remaining hypervigilant to changing conditions and responding effectively (zoom out, then zoom in)
SMaC recipe (Specific, Measurable and Consistent)
The finding here related to the very specific and measurable action steps a company will follow or operate with. Hence a recipe. Not a vision or mission but more of an operating manual (SOP) or set of rules to operate with.
A key differentiator between the 10x companies and the comparative companies is the number of times the SMaC changed. The recipe does need to change periodically but the aim should be to keep it as consistent as possible.
Example from Southwest Airlines:
1. Remain a short-haul carrier, under two-hour segments.
2. Utilize the 737 as our primary aircraft for ten to twelve years.
3. Continued high aircraft utilization and quick turns, ten minutes in most cases.
4. The passenger is our #1 product. Do not carry air freight or mail, only small packages which have high profitability and low handling costs.
5. Continued low fares and high frequency of service.
6. Stay out of food services.
7. No interlining … costs in ticketing, tariffs and computers and our unique airports do not lend themselves to interlining.
8. Retain Texas as our #1 priority and only go interstate if high-density short-haul markets are available to us.
9. Keep the family and people feeling in our service and fun atmosphere aloft. We’re proud of our employees.
10. Keep it simple. Continue cash-register tickets, ten-minute cancellation of reservations at the gate in order to clear standbys, simplified computer system, free drinks in Executive service, free coffee and donuts in the boarding area, no seat selection on board, tape-recorded passenger manifest, bring airplanes and crews home to Dallas each night, only on domicile and maintenance facility.
Research methodology. Steps:
1. Identifying the research questions and unit of analysis
Research question: “Why do some companies thrive in uncertainty, even chaos, and others do not?”
2. Selecting the appropriate research method: Matched-Pair methodology
3. Selecting the Study population: Companies that went public in the US
4. Identifying exceptionally performing companies
5. Selecting comparison companies
6. Collecting data: Major articles, Business school case studies, Annual reports, financial data, etc.
7. Conducting analysis:
• Within-pair analysis
• Cross-pair analysis
• Concept generation
• Financial analysis
• Event history analysis
8. Limitations and issues
10x Company selection:
Cut 1: Select companies from CRSP (Chicago Center for Research in Security Prices) database 1971 – 1995. (n – 15,852)
Cut 2: Companies still in existence after 2002. (n – 3,646) [77% of potential participants eliminated. Does this suggest that only +/- 20% of companies last for more than 20 years?]
Cut 3: Performance at least 3x by 2002 (n – 368)
Cut 4: Real US company IPO 1971-1990 (n – 187)
Cut 5: Exclude small companies as at 2001 (n -124) [< $500 million in revenue]
Cut 6: Performance at least 4x 15 years after IPO (n – 50) [Cumulative return ratio to market]
Cut 7: Eliminate inconsistent performance patterns (n – 25)
Cut 8: Company in Uncertain & Chaotic industry only (n – 12)
Cut 9: Red flag test (n – 9)
Cut 10: Exclude too large and old IPO (n – 8)
Cut 11: Outperform industry (n – 7)