The Counter-Intuitive Business Model

A View of Business from an Analyst's Point of View

Jim Collins, author of Built to Last, continued his business analysis research and came to some startling conclusions. In his latest offering, Good to Great, most of the winning business principals he discovered can be applied to all aspects of life, not just business success.

When Collins, author of Good to Great, began his research he was mainly looking for stock performance leaders. But as his research went on, finding which company was the leader in stock performance didn't really supply the most important answer.

Why?

Short term performance is not always the best indicator of serious long term investment. In fact companies built on charismatic leadership or an interesting idea don't fare all that well.

So Collins and his staff of researchers began weeding through box after box of corporate data trying to determine who lead, who didn't and why. The important point in the research, of course, was to find companies that did well (a baseline of eleven was chosen) and an equal number of companies in the same industries that were simply mediocre.

The wealth of data available to Collins' team made this a daunting task. In fact there were many times when the team felt that they were going to spend years of work-hours to end up with no conclusive answers.

Yet, they did indeed find trends and as with most research, the results were both startling and interesting.

Companies that did well started out with the right people and then the right idea. First Who then What. Just the opposite of the commonly held idea of the ideal business model.

Companies that also held to core principles and refused to change course at "opportune" moments also fared better. In fact considerably better than just average. Jim called this the Hedgehog Concept*.

Finally a company that was in it for the long haul. A company that was Built to Last had the best stock performance that the vast majority of listed companies.


First Who then What

Jim Collin's first revelation was that the most successful businesses do not start out with a great idea or a charismatic leader. Instead the primary focus is on the people who will populate the business.

He uses "riders on the bus" analogy. The best performing companies put the best people on the bus, remove the non-essential people from the bus, and make sure the right people are in the right seats.

Ideas come from the right people. Collins used Amgen as a primary example. The company decided to start with the best people. Reasoning that in this particular field, first tier PhDs in science would be the best people. There was no product or even a primary market focus at startup. Instead Amgen hired the best in their field and those people came up with the ideas.

The Hedgehog Principle

Collins also found that businesses that adopt one core principle and adhere that that principle are on the short list of most successful businesses.

The Hedgehog concept compares two animals; a fox, which is very clever and knows many creative ways to get a meal, and the hedgehog, a somewhat dull animal that knows one, and only one, thing. To roll into a spiked ball for protection.

In this animal scenario the hedgehog always wins, because despite the fox's many clever tricks and high intelligence, there's no getting around a spiky ball.

Jim used Southwest Airlines and Starbucks Coffee as examples here. When Southwest began service the core principle or idea was to put more people in the sky on "short-haul" trips.

Southwest Airlines

When the major airlines concentrated on getting their customers across the country or from the U.S. to other countries, Southwest (founded in 1971) concentrated on getting their passengers from point A to point B often within the same state. In order to be profitable in this market, short "turn-around" times were required for airplanes and flight personnel. It also required bare-bones in-flight service which consisted of snacks, but no in-flight meals or first-class service.

Reasoning that they would have to make a forty percent investment in a potential of only twenty percent Return On Investment for First Class, Southwest opted to not offer this service. Southwest holds the distinction of being the largest airline in the United States and the world by raw passenger count. It is also the sixth largest airline company in terms of revenue.

The Hedgehog principle even applies to their choice of planes. Southwest uses only the Boeing 737 which reduces pilot training and maintenance costs, Southwest also buys fuel futures hedging to keep it's fuel costs down.

Starbucks

Founded in 1971 by Jerry Baldwin, Zev Siegel, and Gordon Bowker, Starbucks originally sold roasted beans to consumers, but no drinks. Starbucks bought their beans from Alfred Peet, but later established ties directly with bean suppliers. In 1982 Howard Shultz joined the company and after a trip to Milan suggested that Starbucks sell beverages. The core owners rejected the idea because it strayed too far from the original plan.

In 1984 Baldwin, Siegel, and Bowker bought Peets. In 1987 the three sold the Starbuck's brand to Shultz who promptly began opening coffee bars around the country. The core principles were based upon employee training. To this day Starbucks spends more money on training than on advertising. It currently has almost seven thousand stores in the U.S. and has began global expansion with twenty-six hundred stores around the world.

At the root of this expansion is what Shultz calls the "Starbuck's Experience." Shultz insists that every store have the distinctive Starbucks setting.

Please see the updates regarding Starbucks.

Build to Last

Collin's final discovery was that businesses that succeed do so because they are designed to provide reliable, consistent product for decades; they are built to last.

The four attributes Collins found with these companies was toward this goal is disciplined people, disciplined thought, disciplined action, and building greatness to last.

Disciplined People: These are people who will work toward the goal defined by the hedgehog concept. They are typically selfless, self motivated, and supportive of efforts to build and sustain the company.

Disciplined Thought: This means that there is an acceptance of things that work and a rejection of things that won't. An attitude of "we will attain our goals" is paramount though a target date for attaining the goal may not be very definite. It also means a line of thinking that can accept and confront brutal facts without glossing them over or ignoring them.

Disciplined Action: Repeated concerted efforts to attain company goals.

All of these disciplines are firmly in line with the one product or service defined by the Hedgehog Concept and exercised together create a company that is built to last.

Update

September 9, 2009: Since Starbucks is now in so much trouble financially I'm embarrassed to mention it here; however, the company is mentioned in Collin's book.

I would like to point out that what I've heard from the inside is that in Shultz' driving need to open more stores little attention was paid to whether or not the new locations actually had enough foot traffic to justify a store-front. I don't know how true this is, but I did hear this from an insider...who will remain unnamed...for obvious reasons.

September 18, 2009 Thanks and a tip-o-the-tamoshanter to "GuitarGuy" for alerting me to the new Jim Collins' work titled "How the Mighty Fall & Why Some Companies Never Give In." I haven't read this yet, but apparently Collins discusses Starbuck's decline...in phases.

Thanks GuitarGuy. I'll be picking that up soon.

Disclaimer

The author owns no stock in Harper-Collins publishing. The author received no money, consideration, freebies, or discounts for this review. The author read the book and felt it worth writing about.

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Comments 4 comments

LiamBean profile image

LiamBean 7 years ago from Los Angeles, Calilfornia Author

Thanks Guitarguy. Look above for the update.


Guitarguy 7 years ago

Regarding your 2009 update regarding Starbucks, you may want to read Collins' new book, "How the Mighty Fall". Starbucks fell into Stage 2 of the stages of decline. They went through Stage 1, Hubris born of success, by being overconfident. They then proceeded to Stage 2, Undisciplined pursuit of more, and they overexpanded, failing to examinine the facts. More may not be better. Now, Starbucks is said to be refocusing back on it's core principles, "The Hedgehog Principle", and they will probably succeed.


LiamBean profile image

LiamBean 8 years ago from Los Angeles, Calilfornia Author

Collin's claims, and I can verify, that of all the NYSE companies listed Southwest (LUV) has had the best stock performance of any company listed on NYSE.


Peter M. Lopez profile image

Peter M. Lopez 8 years ago from Sweetwater, TX

Intriguing. I'm especially fascinated by the hedgehog principle. This is a good hub.

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