Preston Pysh  5:07  

Alright, so the first chapter kind of hit at something that I already addressed, which was the methodology of how they were determining which companies to focus on and at what points in time. The second chapter is all about leadership as you probably suspected. We’re not going to spend too much time on this, because I think this one’s really kind of obvious, and this is something that we’ve talked about on a lot of other shows. The real quick high points that he has with respect to leadership is that great leaders, and he breaks them into level one through five, and he’s saying that all these companies had level five leaders running them. 

One of the key attributes for level five leadership was this idea of just this humble, calm leader that is constantly trying to increase their depth of knowledge, easily approachable, makes decisions, and takes care of their people. All those things that you know are great leadership traits. 

For anyone that’s out there, you’ve had great leaders, and you’ve had bad leaders. The people that are the great leaders are the ones that he’s really trying to talk about all those traits that I think, in my personal opinion, are somewhat obvious. I think [these include the] humble part[s] of it, being calm, and being the person who’s really trying to understand all those different perspectives and make informed decisions.

Stig Brodersen  6:27  

One thing that really surprised me was when they said that in terms of leadership, what was more important was not the leader himself, but his or her abilities to find a successor. That was something he talked a lot about. You see so often that a company has a great leader, but then, when he steps down, everything just falls to pieces. I think this is really profound because what he actually found, and sadly this might be true, was that a lot of the good leaders were not great leaders. 

They had the [tendency] to find successors that were not as good as them, because then, their legacy would actually be better. People could see after Jack or whoever stepped down, how important [his/ her leadership] really was for that company. I found that discouraging, but also very interesting that that was what the research showed.

Preston Pysh  7:19  

As Stig was talking there, I thought of one other thing that I wanted to highlight here, because I loved this conversation in the book. What he’s talking about when he’s interviewing some of these level five leaders is that there was something that kept coming up that the level five leaders were saying that none of the other level one through four leaders were saying. You’re going to laugh, when I say this, but hear me out, because I think this is really profound. He said that the level five leaders when asked why they were able to succeed, a very common response was because they were lucky. It was because they were at the right place at the right time. 

Then, the individuals, who weren’t the level five leaders would constantly say that there was this external factor of why they might not have been able to achieve results, or they always were able to place the blame somewhere. What he was getting at was the fact that when these level five leaders spoke about luck, it was more of a mindset that they displayed. They were open to circumstances that would be more beneficial for them to use as they were trying to grow or develop in a certain direction. 

I remember this thing that I read in another book. This was from years ago, and this was out of a book by Katy Kirk, where she went around and got the best advice from all these different people that were influential. One of the people was Tony Hsieh, who we were talking about earlier, who’s the billionaire founder of Zappos. In the book, Tony Hsieh wrote his best advice that he felt that he could give to people, and it had to do with luck. This is what Tony Shea wrote, and this is his best advice. It was only like five paragraphs. I’m going to read this to you because I think that this is absolutely amazing. Tony Hsieh’s advice is, “Be lucky.”

This is what he said, “At Zappos, we try to hire the luckier job candidates. In fact, one of our interview questions is, ‘On a scale from 1 to 10, how lucky are you in life?’ Many years ago, I read about a study in which researchers posed that same question to a random group of people. Each participant was then handed a newspaper and asked to count the number of photos inside. What the participants didn’t know was that it was actually a fake newspaper, sprinkled throughout were the headlines such as, ‘If you’re reading this, the answer is 37. Collect $100.’ 

Researchers found that the participants who considered themselves unlucky in life generally never noticed the headlines. They diligently completed the assigned task and eventually came up with the answer, but the people who considered themselves lucky in life, they generally stopped early and made an extra hundred dollars. 

The takeaway here is not so much about being inherently lucky or unlucky in life. Rather, luck is more about being open to opportunities beyond how the task or situation presents itself, so try to be more creative, more adventurous, and more open minded as you go through your life. Try to notice opportunities in disguise. Try to think more outside the box, and in short, be lucky.”

That was what Tony Hsieh had written as his best advice, and it totally goes with what Jim Collins is talking about here with leadership and these level five leaders talking about luck. It’s a mindset. This is how these people were thinking. They’re open to these possibilities. They’re open to these circumstances that may benefit them in unforeseen ways, whereas sometimes the level one through four leader is much more rigid, and is not open to these outside forces that might be actually beneficial to them. I found that discussion absolutely amazing. I found it a really interesting discussion that you normally don’t ever see anybody bringing up because it’s very taboo.

Stig Brodersen  11:18  

I really hate to be bashing on Jack Welch because I think we did that more than enough at The Outsiders, but this very book starts off by saying, “You might think that Jack Welch did a great job at GE, but he actually didn’t compare to the great companies.” I think that was actually a good point, because one of the things that Jack Welch talks a lot about is how everything he’s doing is intentional, and I think it was so profound, whenever I read his book, Winning. 

Then, when you read about some of these CEOs and one person that comes to mind would be someone like Warren Buffett. He might be the person to talk most about how lucky he is, and how much he has been handed with lucky genes, lucky parents, etc. He was just so fortunate with a lot of things, and he acknowledged that. I think someone like Warren Buffett, you might be thinking that he would say more than anyone that he really deserved the success. 

Then, you have these CEOs thinking and talking like CEOs and not like owners, who more or less claim that they’re there because they deserve it more than anyone else because it’s their accomplishment. I think that was something that was really profound, whenever I read about the level five leaders.

Preston Pysh  12:28  

I love this conversation in the book. Let’s go on to Chapter Three, and this one’s titled, “First Who, then What.” For me, this was a really simple and profound idea that I think a lot of companies mess up, and it’s this, “Get the right people on the bus first, and don’t start moving until you absolutely, positively have the right people on the bus and in the right seat.” I could not agree with this more. He even went on to say something that I think I might have said in a previous episode that I just totally agree with him on this is, “Leave a seat vacant before you just go to fill it with potentially the wrong person for the job.” Double down on workloads. Do whatever you have to do, but make sure you get the right people in the right job.

Stig Brodersen  13:20  

All right, with that said, let’s go on to Chapter Four. The title of the chapter is “Confront the Brutal Facts, Yet Never Lose Faith,” and Preston, you’ll kick this off.

Preston Pysh  13:32  

In this chapter, there was a really interesting story that I really enjoyed, and it had to do with a prisoner of war. The prisoner of war was stuck in a prison cell. He was the highest ranking military officer in the prison cell, which made him kind of the guy responsible for trying to keep morale high and to assist in some of the other prisoners of war that were there. This is called the “Stockdale Paradox.” 

Jim Collins was talking to this prisoner of war, who I believe now was also a professor at Stanford with him. He asked the gentleman, “What was the thing that separated the people who did well through the situation and the ones that didn’t?” 

The way he responded, it was quite simple. He said, “The optimists were the ones that had the hardest time.” When I heard this in the book, I kind of raised my eyebrow. I thought, “Was that said correctly?” because that kind of goes against what you would intuitively think. His argument was that the optimists were constantly telling themselves, “We’re going to be out by Thanksgiving.” Then, when Thanksgiving would roll around, and they weren’t out, they’d then say, “We’re going to be out by Christmas.” They always had this optimistic point of view, and they were placing it on a timeline that needed to happen. He said that that was very detrimental to the endurance that was required, and I forget the timeline that he said they were in the prison cell, but it was a very long time. I want to say, seven years or something like that. I might be off on the numbers, but it was a very long period of time.

He said, when you’re constantly mentally going through this, and you’re saying, “I’m going to have the breakthrough in a month. I’m going to have the breakthrough in a month and a half.” And it doesn’t ever happen. That will break a person’s mind. However, he said, “The guys that did well and the guys who made it were the ones who always had the faith that they will eventually get out. They believed they would eventually get their day to walk out those doors. Those are the guys that were able to sustain it.” 

When you relate this to business, I know Stig and I, we can definitely empathize with this one because there’s a lot of things that we’re trying to accomplish at the moment. It feels like we are a freaking turtle in our ability to make these things happen. When we read this in the book, I actually called Stig. I told him, “I am so glad I’m reading this book because I really needed to hear that because, Stig, we can both attest to basically taking on that first approach. We said, “Hey, by next summer, we’re going to be at this point. We’re going to be doing this and these kinds of numbers and this and that.” That was really hard because I think there wasn’t one time where we actually accomplished what we wanted to accomplish. 

Stig Brodersen  16:18  

No, it never happened. 

Preston Pysh  16:20  

We’re still at that point with some of the things that we’re trying to do. This was a very important thing that I took away from this book. It was this idea of always keeping faith that you’re going to get there, but it’s maybe not in the timeline that you necessarily think is going to happen.

Stig Brodersen  16:38  

Yeah, I thoroughly enjoyed this chapter. Another example that they came up with, and this was a business example. They looked at how grocery shopping was done historically and how it’s done here in more modern times. The way that they talked about this was to compare A&P with Kroger. In this situation, Kroger did the right thing because they were talking to consumers, and they were doing a lot of market research in terms of figuring out what was the future landscape of grocery shopping. 

They found out that it’s actually a mega store. It’s not just about basic groceries. This should be an experience, and you should have a ton of other opportunities, where you can get everything you want in one place. 

Now, this was the thing. They confronted the brutal facts, because this was not an easy transition. At this point in time, in the old business model, they had 100% of the revenue. They actually had a strategy to get away from that. Now, A&P, on the other hand, did not. Their data actually showed the same thing that the American consumers were transitioning away from the old business model. However, since they had 100% of the revenue in that business model, they felt that they couldn’t leave that. 

What happened later, A&P tried to compete on prices. They figured out that is what they needed to do. They competed on all the parameters, but basically, they ignored the one thing, the brutal fact about consumer preferences, and that was why they eventually couldn’t compete anymore.

Preston Pysh  18:08  

Alright, so moving on to Chapter Five. This one’s titled, “The Hedgehog Concept: Simplicity Within the Three Circles.” When you’re comparing a hedgehog and a fox, and this is how he demonstrated this in the book, he said that while some people were clever and cunning like a fox. Others were simple, but determined like the hedgehog. 

For instance, the fox tries to devise new ways to capture the hedgehog every day. But no matter how many times the fox tries to attack, the hedgehog only does one thing. The one thing that it knows best, which is its defense to curl up like a ball of spikes, and it wins every single time. What he’s saying here is that companies should rely on this hedgehog concept to transform from average to good to something that is spectacular by doing that one thing really well and doing it so well that there isn’t anybody on the planet that can beat you. 

He describes this in the idea of building blocks. We’re going to get to that more in a different chapter, so I’m not going to really talk about that right now, but I love this idea of doing small things extraordinarily well, and just totally mastering them and optimizing them before you move on to the next step that might be more progressive in that overarching goal that you’re working towards. This is building good fundamentals. 

It’s almost like a person learning to hit a baseball. If you don’t learn the right fundamentals upfront, it will just slowly progress into more mistakes or tennis or you could use a lot of sports analogies with this. If you don’t start off with the right fundamentals, you are never going to be able to compete at a very high level because you have to have that building block in that foundation, and do that one little thing really, really well before you can move on to that next step.

Stig Brodersen  19:58  

One thing that Jim Collins was really adamant about was, this is not something that happens overnight. He said that on average, they found that it took four years for the great companies to come up with a Hedgehog Concept. The interesting thing here is that he says that they are really great companies. They actually don’t spend more time on strategy than worse companies. Because you might be thinking, “Okay, they probably have like a strategic group always figuring out: Are we on the right track, or which plan should we send into motion right now?” That’s really not the case. It’s more about being deliberate with what you want to do, and then when you face adversity, you still stick with that. 

I think a good example he came up with was Walgreens, and he actually used Walgreens several times throughout the book. He said that they’re really good at basically two things. They’re really good at being located in a convenient location, which basically means that you would have a lot of Walgreens located very close to each other. If that is the convenient thing to do, you’ll also see the Walgreens would close down the store, and then open up in their location very close to it simply because that might be a corner shop. 

It might come at a higher cost, but the convenience is so important in what they do very well. The other thing was the process in terms of optimizing the profit per customer. That was what they did really well, and they couldn’t be changed. They shouldn’t be changed, because the simplicity and the consistency of what they were doing was really their Hedgehog Concept. I found that really profound.

Preston Pysh  21:32  

This kind of goes with the next chapter, which is, “A Culture of Discipline.” This is Chapter Six, where this company develops this Hedgehog Concept. It’s a strategy wherein they have these building blocks, wherein they do these things just extraordinarily well. What you find is that the company kind of becomes somewhat of a boring organization, because there’s not really much to manage that’s outside of the standard protocol and process that is now established and that’s taking place that’s extremely efficient due to this strategy. 

That culture of discipline and getting to that point where they’re constantly optimizing and becoming the best at each one of those smaller tasks, really creates this environment of just total discipline within the company. It’s kind of hard to say which one comes before the other. I would argue that they’re cohesive in the way that they’re being designed and built within these companies that are just doing extraordinarily well.

Stig Brodersen  22:27  

I think one really great concept is bureaucracy here, because bureaucracy is definitely the enemy of culture of discipline. He has this metaphor, and we talked about this before that you need to get the right people on the bus. Because what he’s saying is that the more wrong people you have on the bus, the more bureaucracy you need to manage the people, which in turn leads to the right people leaving the bus. Then, you will bring more wrong people on the bus, and you will need more bureaucracy, and so it goes. 

Preston Pysh  22:56  

All right, so Chapter Seven is “Technology Accelerators.” I really like the way that he went about this discussion in the book because he’s saying that technology is obviously very important for any company to progress and take advantage of new opportunities, but the thing that he caveats that idea with is that it has to make sense, and it has to be done in a phased, methodical, and thoughtful approach. 

Some of the examples that he provides in the book is that you have these companies that know new technologies emerging, and they just go all in, and they’re acting more in a fearful manner of we’re going to be left in the past, we’re not going to be able to compete if we don’t move to this right now. They don’t even fully understand the implications of how it can even be properly used. 

He provides another example with respect to Walgreens in the book on this idea as well. I think that the gradual approach to thinking through this I mean, sometimes it might require that you move faster than others, but I think that’s probably more the anomaly than the 80% solution for most companies. I think most companies need to really think about how they’re going to go about it in a really strategic way more than a fearful and hair-on-fire kind of approach.

Stig Brodersen  24:11  

The way that Jim Collins explains this is that he’s saying that technology should be an accelerator, not a creator. I think this is really a nice way of looking at it. The way he explains this is by comparing drugstore.com and Walgreens in the late 90s. Back then, drugstore.com was trading at almost 400 times revenue, which is completely insane. It was just nine months in, whereas Walgreens, on the other hand, was trading at 1.4 times revenue. They were penalized because the market thought that there was lack in terms of technology. 

However, the real difference was that Walgreens was a lot smarter about this because they were sticking to the Hedgehog Concept of the [past], and they only used technology to do what they do best faster. Again, that was convenience and that was profit per customer visit. They applied technology to reach the goals that they have in terms of convenience and profit per customer visit better. 

What Jim Collins is really saying here is that you should by all means avoid technology adaptation fast, rather stay within your concept and figure out what’s the right technology to support that. That’s two very, very different things.

Preston Pysh  25:29  

All right, so in Chapter Eight, this is titled, “The Flywheel and the Doom Loop.” I really think that this was a value add back for us from a personal level as well, because what he’s getting at is when you’re doing these hedgehog type actions that you’ve optimized, and you have mastered. These building blocks are acting as more and more momentum for you to basically get your company moving in the right direction. 

Once you get so much momentum moving forward, it’s harder to stop it. This would almost be like the comparison of a small little motorcycle moving forward at 20 miles an hour versus a freight train that’s moving forward at 20 miles an hour. The one has just significant momentum, and that would be like a company that’s based on these really solid foundational building blocks in order to get them going. 

Now, the thing that he also talks about is if you are creating building blocks within your organization that aren’t optimized, which actually create a negative value stream for your company, and you’re slowly building upon those. That’s the thing that’s going to be your doom loop, and it’s actually going to take you in the opposite direction of where you’re trying to go. It’s very important that you get those building blocks done right and optimized.

Stig Brodersen  26:46  

The way this was explained was that if you look at a corporation from the outside, it might look like something just happened overnight. In reality, it turned out that the very great companies, they didn’t have a strategic plan, or they didn’t have a breakthrough idea. It was not like cost cutting 2.0, or whatever they launched. It was a consistent process that slowly created momentum, and it’s really the consistency that’s really central here.

Preston Pysh  27:12  

Okay, so in the last chapter, I’m not going to talk about this one too much, because it’s just a transition, and maybe even a selling point for one of his other books, which was Built to Last. What he’s really getting at here is just kind of bridging the gap between good to great is finding that company that went from marginal performance to superior performance, and then, once they reach that superior performance, how do they sustain it. He was basically given a plug for that’s why I wrote this other book, Built to Last, which then talked about that second piece of how you sustain these results into the long term. 

That would conclude our summary of the book. You heard us say up front that we both liked it, and we really did. I think that this is definitely worth your time to read. One thing that we wanted to highlight here at the end of the show is we had a member of our audience Rich Shaner, who recommended a book that we did on the last episode. 

We wanted to show Rich our appreciation, so we’re going to give him a free subscription to our Intelligent Investor Video Course, which goes video by video, chapter by chapter through the Intelligent Investor. 

Also, we’re going to give you a free subscription to our ETF course. Both of those are paid courses, and you’re going to get them completely for free, Rich. Thank you so much for your recommendation and for all your contributions to the community. We had a really fun time with you at the Berkshire meeting as well, so I want to throw that out there. 

All right, guys! The last announcement that I have that I want to make here is, and we’re going to have more information about this coming out in subsequent episodes, but we are doing an event in the UK with the Central Bank of England. 

I think this is going to be something that is really, really awesome for anyone out in the UK to attend. We’re going to be opening this up to the audience, so we’re going to provide more information about this on our website. It’s not up right now, but check back with us in a week or two, and we’ll probably have some more information up there for you. 

We’ll be talking more about what this is in subsequent episodes, but just so you guys know that’s going to be something that we’re really excited about. It’s going to be coming up, and it’s going to be happening in January of 2017. So, just a few months out.

Stig Brodersen  29:22  

Both Preston I thoroughly enjoy meeting up with the audience. Preston had a chance to meet up with the audience in Baltimore, while I had a chance to meet up with the audience here in Seoul. In late December, I’ll be hosting an event in Manila in the Philippines, so that’s something I’m super thrilled about as well. 

Both Preston and I really hope that we have a chance to meet you in person, so if you can meet us in any of the locations. It doesn’t have to be in London, Baltimore, Manila. We are constantly updating our web page in terms of hosting new TIP events, so definitely stay tuned on that. 

That was all that we have for this week’s episode, guys, and we’ll see each other again next week.

Preston Pysh  29:58  

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Outro  31:51  

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