Fanatic Discipline: Lesson #1 From Jim Collins Great

By Choice
15Tweet16PrintEmail

J im Collins and Morten Hansens latest book, Great By Choice, is the

result of a nine-year research project aimed at answering one

question: Why do some companies thrive in uncertainty, even chaos,
and others do not? Our world is unstable, uncertain, and filled with
unanswered what ifs. And while we cannot predict the future, as the authors
observe, we can create it. And a handful of companies have done so
exceptionally well.
Collins and Hansen identified what they call 10x Companies. They write: We set out to find
companies that started from a position of vulnerability, rose to become great companies with
spectacular performance, and did so in unstable environments characterized by big forces, out of
their control, fast moving, uncertain, and potentially harmful (p. 7).
Starting with 20,400 companies, their rigorous research identified seven 10x companies
includingAmgen, Biomet, Intel, Microsoft, Progressive Insurance, Southwest Airlines,
and Stryker. These 10x companies beat their industry index by at least 10 times. And they did it
during chaotic environments.
For example, in the chaotic airline environment from 1972 to 2002 filled with fuel shocks,
deregulation, labor strife, air-traffic-control strikes, interest-rate spikes, hijackings (including 9-
11), recessions, and multiple bankruptcies, Southwest Airlines had a stock return 63 times better
than the general stock market. Had you invested $10,000 in Southwest Airlines on December 31,
1972, it would have been worth $12 million by the end of 2002.

How did the 10x companies achieve such astounding results in such uncertain environments?
Collins and Hansens extensive research reveals three core behaviors that set the 10x
companies apartfrom their comparison companies. Over the next three posts, Ill explore each
of these behaviors.
The first behavior is FANATIC DISCIPLINE. Discipline is consistency of action (p. 23). Its not
the same as regimentation, measurement, hierarchical obedience, or adherence to bureaucratic
rules. For a 10xer, the only legitimate form of discipline is self-discipline, having the inner will to
do whatever it takes to create a great outcome, no matter how difficult (p. 23).
The authors compared Fanatic Discipline to a 20 Mile March. Imagine you start in San Diego with
a goal to march all the way to Maine. Your goal is to march 20-miles per day, everyday,
regardless of the weather. You dont do less (you have ambition to achieve), and you dont
overreach and do more (you have self-control to hold back). 10x companies identify what their
20-mile march is.
Collins and Hansen observe, The 20 Mile March creates two types of self-imposed discomfort: (1)
the discomfort of unwavering commitment to high performance in difficult conditions, and (2) the
discomfort of holding back in good conditions (p. 45). For example, despite all of the chaos in
Southwest Airlines environment, they generated a profit for 30 consecutive years. However, they
were self-disciplined to hold back in good times so as not to extend beyond its ability to preserve
profitability and the Southwest culture (p. 45).

So what does a good 20 Mile March look like? It has seven characteristics:
 A 20 Mile March uses performance markers that delineate a lower bound of
acceptable achievement.
A 20 Mile March has self-imposed constraints.
A 20 Mile March is tailored to the enterprise and its environment. Theres no
all-purpose 20 Mile March for all enterprises.
A 20 Mile March lies largely within your control to achieve.
A 20 Mile March has a Goldilocks time frame, not too short and not too long but
just right. Make the timeline of the march too short, and youll be more exposed
to uncontrollable variability; make the timeline too long, and it loses power.
A 20 Mile March is designed and self-imposed by the enterprise, not imposed
from the outside or blindly copied from others.
A 20 Mile March must be achieved with great consistency. Good intentions do
not count.
Collins and Hansen observe that a 20-Mile March might be tied to earnings growth but it can also
be tied to non-financial areas. For example:

A school might have a student-performance march. A hospital might have a patient safety march. A church

might have a number-of-converts march. A government agency might have a continuous-improvement

march. A homeless center might have a getting-people-housed march. A police department might have a

crime-rate march. Corporations, too, can choose a non-financial march, such as an innovation march. (p. 51)

Strykers 20 Mile March was 20% annual earnings growth and innovation via lots of product
iterations and extensions. Intels 20 Mile March was to double the complexity of components per
integrated circuit at minimum cost every 18 months to two years. Microsofts 20 Mile March was
an innovation march that consisted of continuous iterations of software products.

Organizations can survive without a 20 Mile March when times are good. But failure to embrace a
20 Mile March in good times makes the organization that much more vulnerable during the bad
times. Collins and Hansen observe, The 20 Mile March helps you exert self-control in an out-of-
control environment (p. 61). A good 20 Mile March keeps you from over extending yourself and
thus making you susceptible during an unexpected downturn.

In my next post, well explore the second behavior of the 10x companies. Until then, Collins and
Hansen offer a concluding key question: What is your 20 Mile March, something that you
commit to achieving for 15 to 30 years with as much consistency as Stryker,
Southwest Airlines, Intel, and Progressive?

Empirical Creativity: Lesson #2 from Jim

Collins Great By Choice
28Tweet17PrintEmail
I n my last post, I shared lesson #1, FANATIC DISCIPLINE, from Jim

Collins and Morten Hansons book, Great By Choice. Its the first of
three core behaviors that mark the 10x companies shared in Collins and
Hansons latest research. The second behavior that allowed 10x companies
to thrive during chaotic and uncertain environments is EMPIRICAL
CREATIVITY.
There is a common perception in leadership that innovation is the key to success. Or, put more
plainly, the more innovative you are, the more successful youll be. However, Collins and Hansen
discovered a different reality:

The evidence from our research does not support the premise that 10x companies will necessarily be more

innovative than their less successful comparisons. And in some cases, such as Southwest Airlines versus PSA

and Amgen versus Genentech, the 10x companies were less innovative than the

comparison.were not saying that innovation is unimportantWe concluded that each environment has a

level of threshold innovation that you need to meet to be a contender in the game; some industries such as

airlines, have a low threshold, whereas other industries, such as biotechnology, command a high threshold.

Companies that fail even to meet the innovation threshold cannot win. Butand this surprised usonce youre

above the threshold, especially in a highly turbulent environment, being more innovative doesnt seem to

matter very much. (p. 65, 67)

Whats essential is that creativity and discipline exist together. Intels founders believed that
innovation without discipline leads to disaster (p. 69). In fact, Intels #1 core value isnt
innovation or creativity, its discipline. Collins and Hansen observe, The great task, rarely
achieved, is to blend creativity intensity with relentless discipline so as to amplify the
creativity rather than destroy it (p. 70).
But the key is not just creativityits EMPIRICAL CREATIVITY. In other words, 10x companies
dont innovate blindly, throwing huge amounts of resources at new ideas. They employ what
Collins and Hansen call, Bullets, Then Cannonballs.
The idea is to fire small bullets (test new products, technologies, services, and processes) to see
what works and what doesnt. Only after new ideas have been tested and proven should the
organization fire a cannonball. Bullets dont sink the ship, but a cannonball can. Organizations
should fire cannonballs (put large amounts of organizational resources and energy into ideas)
ONLY AFTER they have fired lots of small bullets (testing new ideas to prove whether or not they
will work).
Collins and Hansen describe a bullet as, An empirical test aimed at learning what
works and that meets three criteria:
A bullet is low cost (the size and cost of the bullet grows as the organization grows)
A bullet is low risk (there are minimal consequences if the bullet goes awry)
A bullet is low distraction (it will not pull the organization as a whole off focus)
A cannonball fired before you gain empirical validation is an uncalibrated cannonball. Collins
and Hansen observe:

The 10xers were much more likely to fire calibrated cannonballs, while the comparison cases had

uncalibrated cannonballs flying all over the place (the 10x cases had a 69 percent calibration rate on

cannonballs versus 22 percent for the comparisons). Whether fired by the 10x case or the comparison case,

calibrated cannonballs had a success rate nearly four times higher than uncalibrated cannonballs, 88 percent

to 23 percent. (p. 74)

This doesnt mean the 10x companies never fired an uncalibrated cannonball. But the few times
that they did, they were quick to learn from their mistakes and returned to a bullets-then-
cannonballs approach (p. 77).

The big idea is that organizations must be creative, but their creativity must be
validated by empirical experience. Sometimes this means simply learning from others so you
dont have to fire a single bullet. Other times youll fire bullets, testing a new idea, product,
service, or process. Then you might fire more bullets, and then more bullets. Only after validating
your creativity do you fire the mother load cannonball. Once you find out what works, the key is
to turn it into a 20 Mile March.
One of the comparison companies, believe it or not, was Apple. Remember, this research looked
at 1972-2002, and Steve Jobs didnt return to Apple until 1997. But consider Jobs first move:

What did jobs first do to get Apple back on track? Not the iPod, not iTunes, not the iPhone, not the iPad.

First, he increased discipline. Thats right, discipline, for without discipline thered be no chance to do

creative work. He brought in Tim Cook, a world-class supply chain expert, and together Jobs and Cook formed

a perfect yin-yang team of creativity and discipline. They cut perks, stopped funding the corporate sabbatical

program, improved operating efficiency, lowered overall cost structure, and got people focused on the

intense work all day and all of the night ethos thatd characterized Apple in its early years. Overhead costs

fell. The cash-to-current-liabilities doubled, and then tripled. Long-term debt shrunk by two thirds and the

ratio of total liabilities to shareholders equity dropped by more than half from 1998 to 1999. Now, you might

be thinking, Well, all that financial improvement naturally follows breakthrough innovation. But in fact,

Apple did all this beforethe iPod, iTunes, or the iPhone. Anything that didnt help the company get back to

creating great products that people loved would be tossed, cut, slashed, and ruthlessly eliminated. (p. 83)

Did it work? I think you know the answer. From 1997 to 2002, Apple outperformed the stock
market by 127 percent and by 2010 became the most valuable technology company in the world.

The 10x companies fired a great number of bulletsmany never hitting anything. They had no
idea what would be successful. But as pockets of success appeared, they fired more bullets,
validating their creativity, and eventually firing a cannonball. What looks like an overnight
success is often a long, empirical process of try, fail, try, fail, try succeed.
In my next post Ill share Collins and Hansens final core behavior. Until then, consider their
closing question:

Which of the following behaviors do you most need to increase: Firing enough
bullets, resisting the temptation to fire uncalibrated cannonballs, or committing, by
converting bullets into cannonballs once you have empirical validation?

Productive Paranoia: Lesson #3 From Jim

Collins Great By Choice
20Tweet19PrintEmail

J im Collins and Morten Hansen have written a book titled, Great By

Choicein which they explore three behaviors that allow companies and
organizations to thrive in chaotic and uncertain environments. I wrote about
the first behavior, FANATIC DISCIPLINE, and the second
behavior, EMPIRICAL CREATIVITY. In this post Ill tackle the third core
behavior employed by what they call 10x companies: PRODUCTIVE
PARANOIA.
Collins and Hansen make it clear: The only mistakes you can learn from are the ones you
survive (p. 91). The idea of Productive Paranoia is not for leaders to walk around scared, afraid
to make decisions and suspiciously paranoid about their employees. Rather, the authors note
that leaders in the 10x companies constantly ask What If. They state, The 10x winners in
our research always assumed that conditions canand often dounexpectedly change,
violently and fast. They were hypersensitive to changing conditions, continually
asking, What if?' (p. 91)
Collins and Hansen examine three dimensions of productive paranoia employed by 10x
organizations:
1. Build Cash Reserves and Buffers Companies rarely hoard cash but rather deploy it,
working hard to take advantage of new opportunities. However, the 10x companies were careful
to build cash reserves and create a buffer against unpredictable environments. They were careful
to prepare for the worst before it happened. This was a pattern since the early days of the 10x
companies. Collins and Hansen observe:

When it comes to building financial buffers and shock absorbers, the 10x cases were paranoid, neurotic

freaks! And it wasnt just an industry effect. When we sliced the data comparing the 10x cases to their

comparisons, we found that the 10x cases were more conservative in how they managed their balance
sheets than their direct comparisons; 80 percent of the time, the 10x cases carried a higher cash-to-assets

ratio and a higher cash-to-liabilities ratio than their comparisons. (p. 93)

The 10x companies didnt wait for the storm to hit. They knew it was comingthey just didnt
know when. So they prepared carefully and methodically for its arrival.

In 1991, Herb Kelleher of Southwest Airlines captured this principle best when he explained why
Southwest always maintained an extremely conservative balance sheet:

As long as we never forget the strengths that enable us to endure and grow in the midst of economic

catastrophe; as long as we remember that such economic catastrophes recur with regularity; and as long as

we never foolishly dissipate our basic strengths through shortsightedness, selfishness, or pettiness, we will

continue to endure; we will continue to grow; and we will continue to prosper. (p 94)

Turbulent times will come. Herb Kelleher understood this and planned for chaos. He couldnt
define what the turbulence would look like, but he could prepare his response to the turbulence.
Collins and Hansen observe, When a calamitous event clobbers an industry or the
overall economy, companies fall into one of three categories: those that pull ahead,
those that fall behind, and those that die. The disruption itself does not determine
your category. You do (p. 95).
2. Bound Risk Collins and Hansen questioned whether the success of 10x companies was due
to a willingness to take high risks. However, their research actually showed the opposite. The
leaders of 10x companies were more conservative in their approach to risk. They constrained
growth in the 20 Mile March. They fired bullets before firing cannonballs. They displayed financial
prudence, building a cache of extra oxygen cannisters (p. 96).
Collins and Hansen identified three types of risks: Death line risk (risks that could severely
damage the organization), asymmetric risk (risks with a greater potential downside than
upside), anduncontrollable risk (risks that expose the organization to things they have little
ability to manage or control). In all three types of risk, the 10x companies took less risk than their
comparison companies.
Timing also affects risk. After careful research, Collins and Hansen observed:

Sometimes acting too fast increases risk. Sometimes acting too slow increases risk. The critical question

is, How much time before your risk profile changes? Do you have seconds? Minutes? Hours? Days? Weeks?

Months? Years? The primary difficulty lies not in answering the question but in having the presence of mind

to ask the question.

3. Zoom Out, Then Zoom In The 10x companies possessed a dual-lens capability in which
they could zoom out to see changes in the environment and assess risk and then zoom in to
focus on the superior execution of plans and objectives.
For example, when Intels position with one of their microprocessors weakened against Motorola,
a task-force of six Intel managers and a marketing expert spent three days in intense discussions.
TheyZoomed Out (carefully evaluating the situation and developing a five-point competitive
positioning strategy). Their plan of counterattack was called, Operation CRUSH. But then
they Zoomed In(executing the plan by garnering 2,000 design victories over the next year).
So, as you reflect on Productive Paranoia as an essential behavior for navigating chaotic and
uncertain environments, consider Collins and Hansens closing question: Regarding the
biggest threats and dangers facing your enterprise, how much time before the risk
profile changes?