1. Good to Great Companies
Picking Great Companies to Build the Greatest Portfolio and Using Such Techniques to Make You a Great Executive
Eric Borzino, 4/11/2005

2. Today’s Objectives
Show how an avg person can use non-financial techniques to pick great long-term holds
Prove that “change” that leads to sustained stock gains cannot be pinpointed in a “great” company
Are you investing in hedgehogs or foxes?
Will YOU be a hedgehog or fox?
These tips to identify companies are also applicable to YOUR future management careers

3. Jim Collins Not as much of an idol as Peter Lynch
Author of fine and popular books as Built to Last and Good to Great
Taught at Stanford’s Graduate School of Business
Founded his management research laboratory back home in Boulder

4. Collins’ Laboratory Results
Started with 1,435 good companies
Found the companies that became great based on certain criteria over 40 year performance
Company had to show good stock performance, capped with a transition point
After transition, company had to generate stock returns that exceeded general market at least 3 times over 15 years independent of industry

5. Being Good, Ain’t Good Enough
Vast majority of good companies remain just that – good, not great
11 “great” companies were identified
$1 invested in the general market since 1970 would yield $56 by year 2000
$1 invested evenly upon the 11 great companies would have yielded $471 by year 2000
All 11 companies had decent performance, until a transition occurred

6. 11 “Great” Companies
A few of the companies over the past 15 years that have been identified as great:
Abbot
Circuit City
Fannie Mae
Gillette
Kimberly-Clark
Wells Fargo
Walgreens
Philip Morris
Kroger
Nucor
Pitney Bowes

7. What factors do not lead to greatness?
Larger-than-life celebrity leaders
Negative correlation
10 of the 11 good to great CEOs came from the firm
Good to great companies did not principally focus on what to do to become great
Equally focused on what NOT to do
And also what to STOP doing – diworsification
Technology can accelerate a transformation, but cannot cause a transformation

8. What factors do not lead to greatness – Part Duex?
M&A played no role in igniting a transformation from good to great
Two big ok companies joined together NEVER make one great company
Sorry Sat for bursting the bubble
Good to great companies had no specific action or program to signify their transformations
Only in retrospect did the magnitude appear
No outlandish, over published event or change
Good to great companies were not in great industries, some were in terrible industries

9. The Flywheel Cycle to Greatness
Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
People
Buildup
Thought
Break-
Through
Action

10. Be Humble Yet Cool There are five levels of leaders
Level 5 leaders, had one distinguishing characteristic: humility
Level 5 leaders channel their ego needs away from themselves
Larger goal is building a great company
Ambition is first and foremost for the institution, not themselves
Extreme blends of humility and intense will

11. Egos Can Kill
Absence of Level 5 leaders was the consistent factor that hindered greatness
Level 5 leaders set up successors for success
Other level leaders set up their successors for failure
Or chose weak successors
Good to great leaders never wanted to be larger-than life
Ordinary people producing extraordinary results due to unwavering resolve to produce sustained results
Large personal egos contributed to the demise or continued mediocrity of 2/3rd of comps

12. Are You Level 5 Worthy? Abraham Lincoln
Personal modest and shy nature
Weren’t signs of weakness
Darwin Smith – CEO of Kimberly Clark 1971
Generated stock returns 4.1 times the market
Demolished rivals Scott Paper and P&G
Resolve to do what’s best for company: sold the paper mills to concentrate on consumer products
Wall Street called the move stupid – downgraded
“I never stopped trying to become qualified for the job”

13. Great, How Do You Find 5spot?
If you listen to a CEO and he boosts of how his new ideas/programs will enhance returns
Or how his strategies have already enhanced returns
AVOID – got an ego and wants credit
Level 5 leaders look outside the window to accredit
Thanked others and luck
Also never blamed bad luck when things when poorly, took credit for mistakes (unlike other leaders)

14. The Flywheel Cycle to Greatness
Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
People
Buildup
Thought
Break-
Through
Action

15. First Who NOT What
Began achieving sustained success by first getting the right people on the bus
Get the wrong people off the bus
Then, figured out where to drive it

16. Isn’t Strategy and Product Mas Importante?
Why do it this way?
Begin with “who” instead of “what, can more easily adapt to a changing world
If you have the right people on the bus, problem of motivation and people managing are diminished
If you have the wrong people, doesn’t matter whether you have the right direction b/c company will still not be great

17. Teamwork Baby
Good to great companies build deep and strong executive teams
Decent companies followed a “genius” with a “thousand helpers”
What happens if genius is wrong or leaves? Idiots…
People are NOT your most important asset. The RIGHT people are.
Look for companies with distinguished managers who have been in the company and work together over time

18. Wells Fargo’s Success
Early 1970s, then CEO Dick Cooley foresaw changes in the banking world, but did not know what or how
Assembled an endless stream of talent – best team according to Warren Buffet
Hired outstanding people whenever and wherever without a specific job in mind

19. The Flywheel Cycle to Greatness
Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
People
Buildup
Thought
Break-
Through
Action

20. Who Says Honor Doesn’t Matter
All good to great managers first confronted the brutal facts of their current reality
Impossible to make good decisions without being honest in the process
Look for executives who admit to the reality of their industry – company to invest in
Comparison companies were afraid to confront adversity, not the good to great companies

21. Got to Stay Stiff and Hard
Stockdale Paradox:
Absolute faith that you can and will prevail in the end
Same time, confront the most brutal facts of your current reality
Leadership does not begin just with vision, begins with the right people confronting reality and sticking to a rigorous yet flexible plan

22. The Flywheel Cycle to Greatness
Level 5 leadership
First who…then what
Confront the brutal facts
Hedgehog concept
Culture of discipline
Technology accelerators
People
Buildup
Thought
Break-
Through
Action

23. The Hedgehog and the Fox
Ancient Greek parable:
The fox knows many things
The hedgehog knows one big thing
Foxes pursue many ends and see the world in all of its complexity
Hedgehogs simplify the world into a basic principle, see what’s essential, and ignore the rest

24. The Big Three
All good to great companies adhered to the Hedgehog Concept (three questions)
What you can be the best in the world at
What drives your economic engine
What are you deeply passionate about
Not the goal to be the best, but understanding of what you can be the best at

25. Sometimes Need to Rethink
If you cannot be the best in the world at your core business, then your core business cannot form the basis of your Hedgehog concept
Best to look for companies that keep it simple
Exotic companies in many different industries are like the fox and stretch themselves too thin
As a manager, want to focus solely on your core and how to make it the best in the world

26. What the Hell You Saying?
Takeaways for investing:
Look for companies with humble, yet passionate leaders
Research the background of management to determine if the team was assembled with a “who” instead of “what” mentality
Find out the culture of the firm, whether it is bureaucratic, dominated by a few executives, or open and willing to confront the brutal facts
Keep an eye out for simple companies, with great people, hard-working culture, and not constantly featured in CNBC or Wall Street Journal

27. Hedgehog Concept Most Important
To remain great over time requires to strictly adhere to the Hedgehog Concept
If the firm slides outside its hole, it will slide back down to mediocrity
Good to great transformations never happen at once, unlike the WSJ likes to make it appear
Happens slowly over time
And can easily be tracked by looking at qualitative clues outside of ratios and DCFs