(Simplicity within the Three Circles) Good to Great-Chapter 5 The Hedgehog Concept (Simplicity within the Three Circles) Crystal Hill Stephen Lechtenberg Anand McGee Allison Purtell Jason Torres

Hedgehog Concept “The fox knows many things, but the hedgehog knows one big thing-rolling into a perfect ball becoming a sphere of sharp spikes, pointing out in all directions to ward of predators.”

2 Basic Groups- Fox: pursue many ends at the same time and see the world in all its complexity Hedgehogs: Simplify the complex world into a single organizing idea, a basic principle or concept that unifies and guides everything Understand that the essence of profound insight is SIMPLICITY

Hedgehog vs. Fox Those who build the good-to-great companies are, to one degree or another, hedgehogs. They used their hedgehog nature to drive toward what they call a Hedgehog Concept for their companies. Those who lead the comparison companies tend to be foxes, never gaining the clarifying advantage of a Hedgehog Concept, being instead scattered, diffused, and inconsistent

Example: Walgreens vs. Eckerds Walgreens: generated cumulative stock returns from 1975 to 2000 Hedgehog Concept: become the best, most convenient drugstore with a higher profit per customer visit. Eckerds: executives compulsively leapt at opportunities to acquire clumps of stores with no obvious unity

Example: Starbucks Hedgehog Concept: Premium quality coffee that sells at affordable prices Establish relationships with well known third parties that share their values Does not outsource operational control Vertically integrated: control coffee sourcing, roasting, and distribution

The Three Circles The essential strategic differences between the good-to-great companies lay in two fundamental distinctions: Founded the their strategies on deep understanding along 3 key dimensions- the 3 circles Translated that understanding into a simple, crystalline concept that guided all their efforts

The Three Circles (cont.) A Hedgehog concept is a simple concept that flows from deep understanding about the intersection of the following circles: What are you deeply passionate about? What drives your economic engine? What can you be the best in the world at?

Understand what you can (and cannot) be best at Don’t get distracted by things that would feed company’s ego if you can’t be the BEST at them. Core competency does not equal hedgehog concept. Straight A student analogy

Insight into your economic engine - what is your denominator? Good-to-Great companies frequently produce spectacular returns in very unspectacular industries They were able to do this because they attained profound insights into their economics and found the right economic denominator

Economic Denominator If you could pick one ratio- profit per x or in the social sector- cash flow per x to increase over time what x would have the greatest and most sustainable impact Don’t have a denominator just to have one, but for the sake of gaining insight which leads to more robust and sustainable economics

Understanding Your Passion Philip Morris vs. R.J. Reynolds Passion is a key part of the Hedgehog Concept Can’t manufacture passion or “motivate” people to feel passionate.

Understanding Your Passion (cont.) Gillette Don’t have to be passionate about the mechanics of the business. Fannie Mae Having passion is key to succeeding.

The Triumph of Understanding over Bravado Pre-hedgehog vs. Post-hedgehog 2 Reasons for Complexity Mindless Pursuit of Growth Great Western vs. Fannie Mae

The Triumph of Understanding over Bravado (cont.) Turning Point in the Journey Disciplined Action “Can’t just Jump” – Albert Einstein Inherently Iterative Process Useful Mechanism – The Council

Questions?