by Jim Collins
LEVEL 5 LEADERSHIP: Gerstner came in as a savior CEO yet clearly had the discipline to make difficult decisions (and to resist making panicky decisions). While it is not entirely clear if Gerstner began his IBM tenure as a Level 5 leader, he grew to have a Level 5 passion for the company, noting at the end of his tenure that he “fell in love with IBM.” He dedicated his book, Who Says Elephants Can’t Dance? “to the thousands of IBMers who never gave up on their company, their colleagues, and themselves. They are the real heroes of the reinvention of IBM.” In the end, Gerstner was clearly ambitious for IBM first and foremost, beyond himself.251
FIRST WHO, THEN WHAT: Gerstner first focused on rebuilding his team, describing his focus on getting the right people in key seats as “my top priority during those first few weeks.” He retooled the compensation system so that he would not lose any key people. He rebuilt the team around himself with people he knew he could trust—a new communications executive, a new head of corporate marketing, a new CFO, a new general manager of the personal computer division—and removed executives who did not share his sense of urgency or who failed to deliver on their responsibilities.252
CONFRONT THE BRUTAL FACTS: Gerstner believed that assessing the brutal facts—where IBM was failing, where IBM couldn’t be excellent, why IBM was losing market share, how IBM’s cost structure had become bloated, what IBM’s critical customers really thought, how the competition had come to see IBM as irrelevant, and so forth—however hard that might be, preceded developing a vision. “If the last thing IBM needed in July 1993 was a vision, the second last thing it needed was for me [Gerstner] to stand up and say that IBM had basically everything right.” Gerstner and his team met with customers to get candid feedback, kicking off a transition to return IBM once again to being an externally focused, customer-driven enterprise. They confronted the fact that IBM had been milking the mainframe business by keeping prices high and losing market share. (The Gerstner team dramatically lowered the price per unit of mainframe processing power by 96 percent over the next seven years.) They confronted the fact that IBM had to cut $7 billion in costs in order to survive. They confronted the fact that OS/2 had failed and Windows had won. They confronted the fact that IBM faced competition more threatening than it had faced for most of its history.253
HEDGEHOG CONCEPT: The cornerstone of IBM’s transition rested on one central idea: an obsessive passion for the customer would be at the center of IBM’s universe. This shift then led to a crucial insight—customers desperately needed someone to integrate all the disparate pieces of information technology, individually tailored to solve their specific problems, into a single package, and this need would grow as technological change and the shift to networked computing accelerated. From this came the essence of IBM’s hedgehog concept: IBM could be the best in the world at technology-integration services. “The idea that all this complicated, difficult-to-integrate, proprietary collection of technologies was going to be purchased by customers who would be willing to be their own general contractors made no sense.”254
CULTURE OF DISCIPLINE: Gerstner exemplified the principle of turning a culture of bureaucracy into a culture of discipline, one in which people had freedom within a framework of demanding performance standards, values, and accountability. “‘Respect for the individual’ had devolved to . . . a culture of entitlement, where ‘the individual’ didn’t have to do anything to earn respect—he or she expected rich benefits and lifetime employment simply by virtue of having been hired.” He laid out a framework of eight principles of IBM performance, and any business leader who failed to deliver results consistent with this framework would no longer hold a position of significant responsibility. The Gerstner team maintained focus on the hedgehog concept, noting “a good portion of our success was due to all of the deals we didn’t do.”255
FLYWHEEL, NOT DOOM LOOP: Gerstner resisted reactive moves, taking time to rigorously analyze IBM’s problems. Despite the general view held by analysts, the press, and other experts that IBM needed to be broken into pieces, Gerstner chose to keep the company together. He unplugged activities that did not fit with the hedgehog concept: stopped OS/2, stopped developing applications software, and sold the Federal Systems division. He kept a low profile with the media, never allowing hype to precede results; he engaged in the disciplined practice of underpromising and overdelivering. He turned away big acquisitions that did not fit with the strategy or that would fail to deliver significant profit. As IBM’s integration-services concept gained traction, the Gerstner team capitalized on the rise of the Internet and shift to networked computing to launch IBM e-services.256
CLOCK BUILDING, NOT TIME TELLING: Gerstner wrote, “I came to see, in my time at IBM, that culture isn’t just one aspect of the game—it is the game.” To reinforce the idea that executives were responsible for creating value rather than simply being entitled to wealth, executives would no longer receive stock options unless they concurrently bought IBM stock with their own cash. Gerstner constructed a senior leadership group capped at 300 people. There was no year-to-year tenure on the group; every year, Gerstner reconstituted the group based on each member’s performance; only 71 of the original 300 remained in the senior leadership group in 2002. Gerstner engaged in rigorous succession planning for the next CEO.257
PRESERVE THE CORE/STIMULATE PROGRESS: Gerstner unraveled the mix-up between core values and operating practices. He overturned hidebound traditions and stupid rules, while simultaneously revitalizing IBM’s core values and semineurotic passion for excellence and success—“You’re IBM, damn it!” He set the audacious goal to build the largest, most influential information technology-services enterprise in the world, betting heavily on the insight that networked computing would replace distributed computing; from this, he launched e-business as IBM’s “moon shot” in the 1990s and early 2000s. The Gerstner team reengineered almost all aspects of business processes, removing more than $14 billion in inefficiencies from 1993 to 2002.258
Appendix 6.B:
Decline and Recovery Case Nucor
SYNOPSIS: Nucor earned a position as one of the most remarkable good-to-great cases in the last fifty years. Facing possible bankruptcy in 1965, the board turned the company over to Ken Iverson. Under Iverson, Nucor built its first steel mills because it could not find a reliable supplier. Nucor people discovered that they had a knack for making steel better and cheaper than anyone else, so they built additional minimills. Nucor eventually generated greater profits than any other steel company on the Fortune 1000 list. From 1975 to 1990, its stock outperformed the general stock market by more than five times. The cornerstone of the company’s success was its marrying a performance-oriented culture with advanced steel-making technology, which steadily drove down the cost per finished ton of steel. In the mid-1990s, Nucor began to falter during a period of executive turmoil at the end of Iverson’s career. He retired in 1996 after a messy boardroom showdown, and his chosen CEO successor resigned in 1999. In 2000, the board put longtime insider Daniel DiMicco into the CEO role and Nucor regained its footing; its stock performance once again took on a beat-the-market trajectory, and Nucor proceeded to have the most profitable years in its history.259
I’ve outlined Nucor’s recovery through the lens of the good-to-great concepts below. (For an explanation of these concepts, see Appendix 7.)
LEVEL 5 LEADERSHIP: DiMicco displayed long-term dedication to Nucor and its culture, having joined the company in 1982, eighteen years before becoming CEO.260 He maintained Nucor’s egalitarian, no-class-status culture, flying commercial, taking phone calls from all employees, making more coffee when he poured the last cup, and operating out of a drab, cheap-looking headquarters in a strip-mall-style, low-rise office building. DiMicco continued to cultivate a culture in which management was in service to employees, not the other way around.261 He practiced giving credit to others and taking little credit for himself. Despite the executive turmoil associated with the end of the Iverson era, DiMicco highli
ghted the debt he owed to his predecessors: “Who we are today is the culmination of the efforts and the dedication of our leadership—in particular, Ken Iverson and his team.”262
FIRST WHO, THEN WHAT: DiMicco continued the tradition of putting every employee’s name—all 18,000 of them in 2007—on the cover of the annual report, reflecting the idea that Nucor’s strength was based first and foremost on having the right type of people who fit with the Nucor culture. DiMicco and his team retained the philosophy that it is better to hire people with the right work ethic and character and teach them how to make steel than to hire people who know how to make steel but lack the Nucor work ethic and character traits. Under DiMicco, Nucor increased attention to developing, rather than just selecting, the right people, creating customized leadership-development programs for each and every manager.263
CONFRONT THE BRUTAL FACTS: DiMicco and his team confronted the rising threat of Chinese steel and paid increased attention to the risks of facing unfair trading practices.264 They confronted the risks associated with volatile energy prices and created a hedging strategy for its natural gas purchases.265 They employed conservative financial accounting practices and maintained a strong balance sheet to be able to weather storms and seize opportunities to gain market share over weaker competitors in difficult times.266
HEDGEHOG CONCEPT: Nucor built itself on a simple concept: a passionate dedication to taking care of its customers by monomaniacally harnessing culture and technology to produce low-cost steel while steadily increasing profit per ton of finished steel.267 DiMicco and his team remained committed to this central idea while making appropriate strategic changes (see Preserve the Core/Stimulate Progress below). DiMicco remained relentlessly focused on only those selective arenas in which Nucor could attain best-in-the-world status and superior economic returns, and jettisoned businesses that failed these tests, such as its bearing products and iron-carbide operations.268
CULTURE OF DISCIPLINE: DiMicco reinvigorated the intense culture of productivity that defined Nucor. Instead of focusing on employee rank and status, Nucor emphasized performance; those teams that met or exceeded productivity goals without compromising safety or quality received compensation 100 to 200 percent in excess of their hourly wages. Bonuses were based on team and unit performance, which encouraged all employees to assume full responsibility for productivity, not just for their little piece of the puzzle. If a team produced a bad batch of steel, its members would lose their bonuses; if that batch reached the customer, they could lose three times that amount. The entire system was designed to reinforce the idea that no one at Nucor received a paycheck simply by virtue of having a “job”; rather, each employee was responsible for contributing to the dual goals of producing high-quality, low-cost steel and taking care of the customer.269
FLYWHEEL, NOT DOOM LOOP: DiMicco did the exact opposite of grasping for salvation and falling into a doom loop of chronic inconsistency. He understood the importance of consistency, building cumulative momentum in the flywheel. In the wake of the tumultuous events of 2001 and the disruptive challenges facing the steel industry, his letter to shareholders that year stated, “I wrote the same thing in my letter to you last year, and I expect you’ll be reading it 12 months from now. No matter what’s happening to the industry and in the world around us, we must never lose sight of our main goal.” And in 2003, after a particularly turbulent time in the steel industry, he wrote, “Whatever turn the economy takes, Nucor will remain true to the principles that have guided us through nearly four decades of uninterrupted profitability and growth.”270
CLOCK BUILDING, NOT TIME TELLING: The ultimate testament to the Nucor system is the fact that the company survived its tumultuous transition beyond the thirty-year tenure of its guiding genius, Ken Iverson. DiMicco committed to reinvigorating the Nucor culture and organization so that the company’s sustained recovery would not depend on his leadership alone.
PRESERVE THE CORE/STIMULATE PROGRESS: DiMicco explicitly embraced the idea of holding values and principles constant, while changing practices and strategies to endlessly adapt to a changing world: “Businesses must evolve while ensuring that core principles are not being compromised.”271 Key mechanisms for driving progress under DiMicco included paying greater attention to taking care of customers, using their demands as a constant catalyst for improvement, and creating an internal benchmarking mechanism.272 DiMicco changed the longtime practice of relying almost exclusively on internally developed minimill sites and added selective acquisitions based on three disciplined decision criteria: don’t overpay, stick to businesses you know, and ensure cultural compatibility.273 He invested in and experimented with new technologies, such as creating the world’s first production installation for the direct strip-casting of carbon sheet steel.274
Appendix 6.C:
Decline and Recovery Case Nordstrom
SYNOPSIS: Known for extraordinary customer service, Nordstrom made its reputation as one of the great retailing companies of the twentieth century. In the 1990s, the company began a long slide and took a dramatic downturn in 2000, with same-store sales actually declining. From 2000 to 2006, Nordstrom strongly recovered when fourth-generation family member Blake Nordstrom assumed leadership and refocused on the primary flywheel that had made the company great in the first place—the customer-service, professional-sales flywheel—while substantially improving background systems, such as inventory controls.275
I’ve outlined Nordstrom’s recovery through the lens of the good-to-great concepts below. (For an explanation of these concepts, see Appendix 7.)
LEVEL 5 LEADERSHIP: Blake Nordstrom answered his own phone, as had been Nordstrom family custom. He reestablished the inverted-pyramid structure that placed executives at the bottom, and customers and front-line salespeople at the top. He accepted responsibility for the company’s problems: “It was evident to my cousins and me that [our fall] was our fault—not the culture’s fault, but us personally.”276
FIRST WHO, THEN WHAT: Nordstrom’s transition began with significant changes in the leadership team—including the CEO, CIO, CFO, and president of full-line stores. The Nordstrom team re-embraced the idea of hiring based on values and character, not skills—“We can hire nice people and teach them to sell, but we can’t hire salespeople and teach them to be nice.” They returned to the rigor of having the right people in key seats. As one Nordstrom leader put it, “I would rather we lost lawsuits from time to time than keep employees that are not up to our standards. Because a weak employee will make the others around him weak, and drag them down.”277
CONFRONT THE BRUTAL FACTS: Blake Nordstrom confronted the fact that Nordstrom had strayed from its obsessive culture of customer service and that it badly needed to upgrade its basic systems, in particular through tying inventory systems to point-of-sale systems. He put $200 million into a new perpetual-inventory system so that Nordstrom could both reduce inventory costs and increase the chances that a salesperson could easily locate the exact item a customer desired.278
HEDGEHOG CONCEPT: The Nordstrom team rediscovered the company’s core concept, that it could be the best department store chain in the world in creating a relationship between the salesperson and the customer. The recovery was based on a simple, elegant idea: get back to building lasting relationships with customers by supporting individual sales professionals with vastly improved background systems (especially inventory systems) and thereby improve core economics measured by return on invested capital. They gained deeper understanding that economic returns were driven by margin dollars divided by average inventory.279
CULTURE OF DISCIPLINE: The Nordstrom team returned to the primary approach that had made Nordstrom great in the first place—getting passionate sales professionals, setting very high performance and customer-service expectations, and giving them the freedom to make decisions that would best serve the customer. They retained the Nordstrom rule book, which specified that the only rule is to use good judgment in all situations. “P
erhaps the biggest accomplishment,” wrote Blake Nordstrom in the 2003 annual report, “is that we are becoming more disciplined as a company.”280
FLYWHEEL, NOT DOOM LOOP: Blake Nordstrom focused on “small but meaningful steps,” not big, dramatic moves. He confronted the failure of the $40 million “Reinvent yourself” campaign: “[It] was an attempt to do something different, and we lost sight of what we are. The customers obviously didn’t want to reinvent themselves and didn’t want our company to reinvent ourselves.” In 2004, Blake Nordstrom wrote, “Success for our company is not going to take a new strategy or an entirely new business model. Instead it’s taking what we already do well and continuing to execute those strengths.”281
CLOCK BUILDING, NOT TIME TELLING: Blake Nordstrom focused on building the culture and supporting systems to enhance the culture so that Nordstrom’s recovery would not depend on the presence of any particular leader. He rebuilt his executive team so that the leadership of the company would not depend entirely upon him; if he were to step away, the success of the turnaround would likely continue. At the time of this writing, Blake Nordstrom remains president.282
PRESERVE THE CORE/STIMULATE PROGRESS: Blake Nordstrom emphasized reigniting enduring Nordstrom core values (service to the customer above all else, a passion for improvement, entrepreneurial work ethic, excellence in reputation) yet made dramatic changes in the systems and practices required to actualize those values—new systems, shared best practices, more disciplined buying practices.283
Appendix 7:
Good-To-Great Framework—Concept Summary
Note: At our website, www.jimcollins.com, we have posted a diagnostic tool for assessing an organization through the lens of these concepts. The diagnostic tool is free for use inside any organization.
