Chapter 5 The Hedgehog Concept (Simplicity Within the Three Circles)

1. Breakthrough Buildup Flywheel Chapter 5 The Hedgehog Concept (Simplicity Within the Three Circles) Level 5 Leadership Confront theBrutal Facts HedgehogConcept TechnologyAccelerators Culture ofDiscipline First Who…Then What Disciplined People Disciplined Action Disciplined Thought Group 4 Raul Guerrero Melissa Dunlop Laura Randall Jose Medina Alma Pena Mona Shafer

2. Brief Overview Hedgehog Or A fox? The Three Circles --Understanding What You Can (And Cannot) Be Best At --Understanding What Drives Your Economic Engine- What Is Your Denominator --Understanding Your Passion The Triumph Of Understanding Over Bravado The Council

3. Are You A Hedgehog or A Fox? “Foxes pursue many ends at the same time and see the world in all its complexity. They are scattered and diffused, moving on many levels, never integrating their thinking into one overall concept or unifying vision” “Hedgehogs, on the other hand, simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything” “Hedgehogs see what is essential and ignore the rest”

4. Are You A Hedgehog or A Fox? Greek Parable “ The fox knows many things, but the hedgehog knows one big thing” ACCT 2300..A=L+OE….simple concept as Einstein's theory of relativity e=mc2 Under Armour- Performance Apparel

5. Walgreens Hedgehog Walgreens vs. Eckerd The simple concept was this:. The best, most convenient drugstores, with high profit per customer visit. That’s it. That’s the breakthrough strategy that Walgreens used to beat Intel, GE, Coca-Cola, and Merck. Simple economic idea: Profit per customer visit Video Kevin Plank- CEO Under Armour

6. The Three Circles • Walgreens vs. Eckerd • Both had strategies • Two Distinctions between good-to-great companies and comparison companies • Good-to-great companies founded their strategies on deep understanding along three dimensions- what came to be called the three circles. • Good-to-great companies translated that understanding into a simple, crystalline concept that guided all their efforts-Hence the term Hedgehog Concept. • Thus the reason Walgreens was able to beat their competitor.

7. The Three Circles • Hedgehog Concept- is a simple, crystalline concept that flows from deep understanding about the intersection of the following three circles: • Simplicity within the three circles • Hedgehog concept is not the same as core competence. • Under Armour

8. Understanding What You Can Be (An Cannot) Be The Best At The technology behind Under Armour clothing is complex, but it’s Hedgehog concept is simple, be the best at making a superior gear for athletes.

9. What we can potentially do better than any other company, and, equally important, what can we NOT do better than any other company?(and if we can’t be the best at it, then why are we doing it) “They stick with what they understand and let their abilities, not their egos determine what they attempt”. –Warren Buffett Running a bank like a business, with a focus on the western U.S

10. Hedgehog Concept- Understanding A Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial. What you can potential be the best at is just as important as what you cannot be the best at. Ex. Abbott saw it’s opportunity at becoming the best company in the world at creating products that make health care more cost effective.

11. You can have the competence at something but not necessarily have potential to be the best in the world at it. • The Hedgehog Concept requires a severe standard of excellence. • It’s not about building on the strength and competence, but about understanding what your organizational truly has the potential to be the very best at and sticking to it.

12. Shifted From Good To Great Abbott Laboratories: at creating a product portfolio that lowers the cost of health care. Circuit city: At implementing the “4-S” model applies to big ticket consumer sales. Fannie Mae: Capital market player in anything that pertains to mortgages. Lower-cost health care, principally hospital nutritionals, diagnostics, and hospital supplies. Consistent, superior execution of the model. It could be a full capital markets player as a good as any on Wall Street. Develop a unique capability to assess risk in mortgage-related securities.

13. What Drives Your Economic Engine?

14. What Is Your Economic Denominator? Of the good – great companies in this book 5 were in good industries, 5 in bad industries and only 1 in a great industry A company does not need to be in a great industry to succeed The 11 good-great companies were able to be great from a building a great economic engine Companies saw what their main drivers were and built a system around them Common among them was a economic denominator, can be thought of picking a ratio of profit per x and having increase over time Company needs to pick an x that has the greatest impact on the company’s economic engine

15. Economic Denominator Denominator can be simple and sometimes unobvious, but the main point of the economic denominator is to have a better understanding of a company’s economic engine A single denominator is not always necessary but having too many at one time will allow a company to lose focus on one main goal and therefore not having a good understanding of its economic engine Failing to find a single denominator is not a bad thing

16. Examples • Fannie Mae::switched from profit per mortgage to profit per mortgage risk level • They stuck to their main strong point of managing the risk on mortgages instead of the mortgages themselves; and reduced the dependence on the direction of interest rates • Walgreens::went from using profit per store to profit per customer visit • Best locations were expensive so by choosing profit per customer visit they were able to open more stores within a smaller distance and increase their profitability

17. Understanding Your Passion “We should only do things we can get passionate about” Passion does not just exist for a product in the business world “I always wanted to be somebody. I should have been more specific.” -Lily Tomlin

18. Plank’s Passion “Passion" "Vision" and "People” "My passion is to build the biggest, baddest brand on the planet," "My vision is that I want to stay focused.... We want to make sure there is nothing that prevents us from doing what we want to do with our brand. Finally, we want to have the best type of people -- team, team, team. I can't underscore that need [enough].“ –Kevin Plank "Under Armour begins with a vision that we are making athletes better," and every product,, can't just be fashionable: It also must enhance the athletic experience. The company's mouth guards, for instance, have back-bites that level the head and improve posture. "You do something so you can get a quick buck and that may look good on the revenue chart, but only for a little while. What you do must protect your brand or you will ultimately fail. – Kevin Plank

19. The Triumph of Understanding Over Bravado • It is necessary that, to succeed, companies have simple and clear ideas of their goals • Nowhere is this more evident than in the comparison companies mindless pursuit of growth • Over two thirds of the comparison companies displayed an obsession with growth without the benefit of Hedgehog Concept.

20. Bravado • Comparison companies have not reached what the good-to-great have for two reasons • They don’t ask the 3 circles questions • Their goals are set more from bravado than from understanding

21. 3 Stages • Pre-hedgehog State: • It’s like groping through the fog, making progress in a long march, while unable to see clear. At each juncture in a trail, only a small portion is visible and must make each move at a deliberate and slow crawl. • Hedgehog State: • Breaking into clearing the fog lifts, and being able to see form miles. From then on each juncture requires less deliberation and shift from crawl to walk, and from walk to run, can be made. • Post-hedgehog State: • Miles of trail move swiftly beneath your feet, forks in the road fly past as you quickly make decisions that could have not been seen so clearly in the fog. • Under Amour's method for marketing and retaining clients

22. The Council

23. Understanding The Hedgehog Concept Simplifies a complex world and makes decisions much easier Inherently iterative process, not an event The essence of the process is to get the right people engaged in vigorous dialogue and debate, infused with the brutal facts and guided by questions formed from the three circles.

24. Ask Questions, Guided By The Three Circles The Council Autopsies And Analysis, Guided By The Three Circles Dialogue And Debate, Guided By The Three Circles Executive Decisions, Guided By The Three Circles

25. The Council • Characteristics of The Council • 5 to 12 people • Each member has ability to argue and debate in search of understanding, not egoistic need to win • Each member retains respect of every other member • Each member come from a range of perspectives, but has deep knowledge of the organization

26. The Council • Characteristics of The Council • Key members of the management team • A standing body • Meets periodically • Does not seek consensus, final decision remains with the leading executive • Informal body

27. Understanding The Hedgehog Concept • How do we accelerate the process of getting a Hedgehog Concept? • Increase the number of times you go around that full cycle in a given period of time • Does every organization have a Hedgehog Concept to discover? • Most of the good-to-great companies were not the best in world at anything and showed no prospects of becoming so. Infused with the Stockdale Paradox, every good-to-great company, no matter how awful at the start, prevailed in its search for a Hedgehog Concept

28. Five Takeaways • The Hedgehog Concept is not a goal, strategy, or intention; it is an understanding of three things: • What you can be the best in the world at • What drives your economic engine • What are you deeply passionate about • 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. • To get insight into the drives of your economic engine, search for the one denominator that has the single greatest impact • Good-to-great companies set their goals and strategies based on understanding; comparison companies set their goals and strategies based on bravado. • Getting the Hedgehog Concept is an iterative process. The Council can be a useful device