Masterspeak 2015

"The only mistakes you can learn from are the ones you survive"

Management thinker Jim Collins defined the concept of 'Level 5 leadership'

Published 7 years ago on Jul 21, 2017 21 minutes Read

If there is one management thinker who has spent a large part of his waking hours trying to figure out what really drives superlative corporate performance, it is Jim Collins. Over his career spanning 25 years, Collins has researched this overarching theme from every possible angle and the result of that is a series of co-authored books starting from Built to Last, Good to Great, How the Mighty Fall and Great by Choice. One of his most insightful contributions was the concept of Level 5 leadership that busted the traditional belief that CEOs have to be charismatic to deliver outperformance.

Instead, it is leaders with humility and high professional will that make companies go from good to great. Why do some non-profits deliver and others don’t is his current area of interest and as our conversation gets underway, we soon learn that the avid rock-climber wants to start the interview with a few questions of his own. “What are you unquenchably curious about and passionate to understand in general?” After hearing us out, comes another question: “What do you think that we in the United States don’t understand about the way India works and the way Indian business works that we ought to understand.” With Jim’s questions dealt with, the interview, too, begins with a question that he is yet to write a book on but is probably best placed to answer.

It all starts with a question and the key to getting good inputs is to ask the right questions. But not all organisations or journalists get it right.

This is very interesting because I am guided by questions. I am very aware that I know very little relative to how much there is to understand and therefore it is far better to be a questioner and to constantly question than to prove that you know and understand. You need to have genuine and obsessive curiosity. A really significant moment in my life was when the great wise man John Gardner — who wrote books on self-awareness and self-improvement and was a fellow faculty member — said to me one day, “Jim, you truly spend a lot of time in trying to be interesting. Why don’t you spend more time trying to be interested?”

That was a marvelous turning point and it’s great because when you are interested, everything and everybody becomes interesting. Every situation is interesting because you are interested. When we research, we always allow data to be generated because it leads us to new insights. I would be very disappointed if we only found what I thought was going to be nothing new or unusual. I really like to be surprised. The Level 5 Leadership finding was a huge surprise, so much so that I was almost against it. But I would rather have my view changed than being in the dark. The other part about questions is to allow yourself to recognise that you can learn from everyone.

The last thing is the value of maintaining a wide range of interests in order to kind of connect the areas and learn. At any given time, I am interested in three or four subject areas outside my field — be it history or philosophy or art or music, literature, biographies, psychology, economics, field theory, string theory. If you maintain a wave of intellectual interests instead of just sort of developing deeper expertise in one or two areas, you learn better. I personally have a deep interest in learning from areas I don’t have expertise in because that stimulates a lot of questions. I personally hope that the last thing that I do before I die is ask a question. 

What constitutes a good question?

A good question has to begin with you genuinely asking something because you don’t know the answer. If I say to you, “Don’t you think that x…,” I am not asking you a very good question. I am basically making an argument. So, it has to be a question that is really seeking to understand rather than holding itself in a disguised version of pretending that you already understand. Second, if I am going to pursue a research question, it has to be a question that has some methodological approach to answering it. A really good question has to have in it the potential to leave you someplace that you never imagined.

The Good to Great study came up because Bill Meehan, who was then managing director at McKinsey, really challenged me, saying, “The Built to Last companies were always great and it didn’t answer the question of what if you never were great. It is one thing to be a Walt Disney or a GE — you have been great for so long that it is really a matter of perpetuating it. But what if you are mediocre? Can you turn something that is nearly good into something that is really good?”

Once I was challenged, I went back and thought about how to answer the question and came up with the solution that you have to identify an inflection point, you have to have a method of comparison, you have to be able to present the evidence or the data to be able to see what is the difference between the mediocre period and the great period versus others that couldn’t do it. Then, I remember drawing the curves — which are the great curves of comparisons — and thinking, wow, that is a valuable method. We were seeking to assemble evidence and then finally 80% of what we found was a surprise, and that is fantastic.

Of the original companies that you came up with, some have faced their own challenges — Circuit City, for instance. The latest one is Gillette, which is being challenged by online competitors. Did you look back at the Good to Great companies in terms of how they have coped since then?

There are two things here. Our research is not about the companies. The companies are just sort of study creatures and it is about the principle that we uncover by studying dynastic eras of performance. In many ways, the work was basically to go and find dynastic approaches. So, we said, let’s go back and examine the great dynastic eras and compare them to something that wasn’t that great at that time but could have been.

Then we try to find out what principle correlates the difference between the dynastic performance and the non-dynastic performance. It has nothing to do with what happened with the companies afterwards. That said, one thing that we did later out of sheer curiosity was How the Mighty Fall. Just because you had a great era does not guarantee that you will continue to be great. Just as you can go from good to great, you can also go from great to good to bad to mediocre to irrelevant to gone.

We studied the fall of a number of companies in history — Circuit City, Scott Paper, Zenith, A & P grocery stores and so on — that had clearly been great at one point and then lost it. The only way to be built to last is to always push from good to great. No matter how great you are, you have to say we are only good relative to what we could do next. If some of the greatest companies in history can fall, then anyone can fall.

So, were there lessons that came across in How the Mighty Fall? Do they apply across the board for companies that lose their greatness over time?

It actually turned out that developing a framework for How the Mighty Fall was in many ways harder than developing a framework for Built to Last and Good to Great. The reason is that there are more ways to fall than there are to become great. So, capturing it in a single framework turned out to be intellectually very stimulating. We felt that decline was a five-stage process. In stage one, you go from being successful to being arrogant about that success.

You begin neglecting what made you successful in the first place or you believe that your success was entitled. That hubris of stage one then leads to stage two, which is the undisciplined pursuit of more. There is something very interesting about stage two — we found that at this stage, complacency will certainly bring you down but the dominant pattern of decline of a great company is the opposite, it is overreaching. It is making big, undisciplined bets or growing too fast; growing beyond the ability to have enough of the right people to execute on that growth brilliantly.  

Stage three is denial of imminent threats. This is when undisciplined or complacent steps begin to create problems. You can see the risks that are accumulating but the response is to engage in denial of the peril that is coming. Finally, there is catastrophe in stage four, when you have actually begun to fall and it is visible to everyone that you have fallen.

The way you respond in stage four is by grasping for salvation. Instead of getting back to discipline and doing the critical things to get you back on the right track, you begin to engage in a big cultural revolution, radical new technologies, bringing in a new CEO. These are all signs of grasping for salvation and they all almost never work. If you stay in that grasping stage long enough, you finally get to stage five, which is when your balance sheet and your cash position catches up with you and you have lost all your cultural capital and enterprise.

Stage five is capitulation, where you are either irrelevant or dead. And that is the stage from which you never come back. Interestingly, companies can come back from stage four. You can go all the way to stage four and come back as a great company. A good example of that would be Apple, Xerox and IBM. 

Is there a life cycle in terms of the number of years it takes to go from stage one to stage four?

What we found is that it actually varies a little bit by the type of company and industry. Some kind of industries — such as technology or financial services, where the leverage affects the cycle — can turn very fast in the middle. It might take a really long time for stages one and two to really show up but then stage three can happen really fast.

There are other companies — let’s say, retailing companies — that might take longer because it takes you longer to die. You can stay in the game longer before you die. What we found was that with some companies, one stage lasts a really long time and another stage can take only months. It is actually quite fascinating; it can take a few years or even a decade. 

You talk about the leader being bigger than the personality — he puts in place a system where the thing gets on to autopilot and goes much beyond him. If you look at Apple, it was so closely identified with Steve Jobs that people raised question marks all the time as to what would happen after he goes away. 

There have been companies in history that have been able to go beyond really strong founders. I don’t pretend to understand India by any stretch. But in India, there is a lot of tremendous growth of a powerful entrepreneurial class who are building companies. That is great. But the challenge is, how do you build a company that is great beyond that leader? If you look back in time, there are companies that have been able to do this. You have Walt Disney, Boeing and Wal-Mart — all these companies have managed to go beyond their founders.

How did this happen? You have to build a culture where it is not based on leadership charisma, it is based on core values and a durable purpose that you always chase. If you think of Disney, then you have Walt’s charisma and genius. But you still have the underlying purpose of Disney, which is to make people happy. That is a charismatic purpose. 

You don’t need a charismatic leader if you have a charismatic purpose. In Sam’s case, it was, “We want to make stuff that is normally available to wealthy people more available to less wealthy people and we are going to do that by driving down prices on everything.” That purpose drove the company than Sam driving the company. Part of it is that the company has to be able to answer the question, “Would it matter if we disappeared? What would we be missed for?”

The other side of the coin, and equally important, is that you have to stimulate progress and have the yin-and-yang dynamic. The yin preserves the core but the yang stimulates progress. One key way to do that is by setting a big hairy audacious goal (BHAG). Those goals go beyond the founders. Sam put in place the goal that Wal-Mart would become a $125-billion company by the year 2000. He knew he was going to die before that, the goal was there to push them forward. Walt Disney said, “We are going to create the most amazing theme parks.”

It took more than Walt’s life to make that happen. When you set goals that are all about what the company can be beyond yourself, it is like you climb up K2 and then Everest and then Ama Dablam. You keep setting these monstrous big, audacious, scary mountains to climb. The day you stop setting those is the day you will begin to slide backwards. 

Now, setting up these audacious goals for the organisation to live beyond the founder requires one to be bold. But resources tend to be limited. You have to be bold but disciplined with resources.

Two things. First, a really good BHAG is set with very deep understanding and an empirical validation, whereas a bad BHAG is set with bravado. Let me explain the difference. We were writing about the hedgehog concept and the idea that you need to focus your energy on the intersection of three circles — what we can be passionate about and the best in the world at, based on empirical evidence that we can be the best at it. Finally, what drives our economic engine?

A really good BHAG has to fit right in the middle of those three circles. It has to reflect that you are truly passionate about it. If you are not passionate about it, you are never going to achieve it. Two, you have to a very clear realistic sense that we may not yet be the best in the world at it but we could be; we could be because we have some empirical evidence to show that we could. Then finally, there has to be an economic engine behind the whole thing, otherwise it is just falling.

 If you think about the early days at Apple, there was a great BHAG — what we are going to do is we are going to build a computer that everyone can easily use. You have to look at that goal as a historical version of the BHAG, which eventually led to the Macintosh, which led eventually to everything that changed the world. That again played out with the iPod. The people at Apple found that their MP3 players couldn’t catalogue their music.

There existed a market for MP3 players and their empirical validation showed that they could do it better than everyone else. So, they put it in an accessible package because that is what they knew. Number two, they created software that catalogued music and would facilitate downloads in a legitimate way. Then they packed in an economic engine with iTunes and all that stuff. What is interesting in that story is that it was the BHAG that led us to the passion and the empirical validation that we could do this and there is a real big thing out there to solve. Finally, they understood the economics of it. They made sure it was a good BHAG based on understanding rather than a bad BHAG based on bravado.  The problem with bad BHAGs is that they are less well known because they didn’t work. 

Which organisations inspire you now and what about them inspires you? 

Most of what actually inspires me these days is outside of business. After 25 years of studying great companies, I am finding my energy increasingly focused on how you create greatness in other sectors. I have got a study going on right now on grade-school and high-school education in the US, where school leaders are producing spectacular results on most underserved kids.

Building a school where we make sure that the kids who are the most underserved get a great education inspires me as that is how we build a great future. I am very inspired by what Wendy Kopp is doing with Teach for All in trying to inspire young men and women to go into teaching, in some of our most difficult schools all around the world. I can talk about the next social media company, that is cool but I think that making sure the kids in school gets a great education is super cool.

I am also inspired by people who are 55 to 85 because they are in the most productive and creative stage of their lives. I think creative impact accelerates after 50 and doesn’t slow down. The late Peter Drucker is a role model for me. It is very interesting if you look at Drucker’s life. When he was 86 years-old, I asked him. “Which of your 26 books are you most proud of?” and he said, “The next one,” and then he wrote ten more. Two-thirds of his books were written after the age of 65. What inspires me is reaching the age of 60 and basically saying, “Ok, I am at the starting line.”

Are there any lessons from non-business segments for business leadership or the other way round?

The ideas we have uncovered by studying business turned out to be of real interest to people who were building organisations where you also need performance outside of business. People were saying that we need to make the social sector more like business. That led me over to work on a research team and we began looking at Good to Great as self-reflection.

There are a couple of things that became clear to us — one, the really critical question is not the difference between business and the social sector but the difference between great and good. What we need is a common language of the principles of the great organisation that both business and social sector leaders aspire for.

For example, the principle of having the discipline to get the right people in key teams — that is not a business idea, that is a great organisational idea and it applies to both business and social sectors. The principle of having leaders who are ambitious for the enterprise, for its cause, for its purpose more than themselves — it is not a business idea or a social idea. It is a greatness idea. The idea that things don’t happen in one shot — you have to remain focused on where you can be best, what you are passionate about and where you can have an economic and resource engine to drive it. So, it’s not about business thinking but about embracing the language and concepts of what makes a great organisation in the business world and then asking how to apply that to the non-business world. 

There is a lot to learn for the business sector from the non-business sector. One is this notion of leading in the spirit of service. Level 5 at its highest level is the idea that you are so committed to a cause that you would sacrifice for it, that you will suffer for it and endure pain for it, that you would give yourself for it. The notion that I am leading in a spirit of service to a cause rather than leading in a spirit of self-aggrandisement is very strong in the social sector.

The second is the idea of success defined in terms of saying that we’ll succeed if we help each other succeed. The way you build a really vibrant culture is by ensuring that people don’t feel alone — if something is difficult, someone will help me and I will help them. We will watch out for each other. That notion of, “We will succeed if we help each other succeed” is very strong in the social sector. That is very powerful to build into a business organisation because then you have that real cohesion that helps people to work very hard together to achieve really big, audacious goals.

Any leaders you have seen in action over the past decade that you really admire? 

I think two leaders of the recent era — Steve Jobs and Bill Gates — I put them in the Level 5 category. What is really interesting is that Level 5 comes in many packages of personalities — you can have a lot of variations in the way it looks and feels on the outside. But the really critical thing is that a Level 5 leader is one who is ambitious for something bigger and more enduring than they are and they have the personal humility to learn and grow and endure their own failures along the way as challenges — they are able to humble themselves for the cause and they have the will to do whatever it takes to make good on it.

They service the cause with humility and will. If you take a look at Steve Jobs, the biggest thing about him was that his quest at the end of the day was to try to bring these incredibly powerful things to millions of people. It is about making things available and doing whatever it takes to make Apple the best possible company it could be. Steve had to go through the very humbling experience of leaving Apple the first time, going off into the wilderness, coming back from the wilderness as a different leader. Even though he was a well-known person, it was not about him and that is what the essence of Level 5 is. 

Then you look at Bill Gates. Here is a person who is going to retire the richest person in the world and what does he do? He throws himself into the world of philanthropy and says my first job is to learn about this. That is humility. What is he ambitious for? He is ambitious to eradicate curable diseases. That gives you a sense of a leader who grew into Level 5. Many of the great leaders that we have studied didn’t start as Level 5 or as great leaders. Steve Jobs 1.0 and Steve Jobs 2.0, Bill Gates 1.0, Bill Gates 2.0, now 3.0 — they grew and evolved. If they didn’t start at Level 5, they became Level 5. Not everybody does.

Those are two great examples of people who did. If you look at the personality side, look at Anne Mulcahy, who saved Xerox, and compare her with Katherine Graham, who took over the Washington Post and went through some very difficult decisions — both of them were Level 5 leaders but radically different personalities. Mulcahy was enigmatic and pragmatic. Graham was more shy and reserved and had the look of someone who was constantly terrified — completely different external personalities. Both women, when they had the responsibility of their enterprises thrust upon their shoulders, were able to grow into a Level 5. For the folks who are leaders, the message is that you can choose to grow into a great leader. It will require suffering, sacrifice, endurance and mistakes. You need to go through that. 

You say leaders need to know when to become followers and followers should know when to become leaders? Can you give us some examples?

First of all, you have to understand what leadership is. Leadership has nothing to do with devotion, title, rank or power. People will only follow when they will have the freedom to not follow. This happens to me all the time in rock-climbing. There is a leader and a follower. The leader is the one, who is leading from the sharp end of the rope, where the risks are much higher. We reach a pitch where I may technically be the leader but you are a lot more of an expert than I am, so I give up the pitch and leadership to you.

Actually, you are more competent at that than I am. You take the lead and I will become the follower. What you find in really great teams is that there is a constant trading off based on circumstance. So, for example, at Intel, when they debate what to do with semiconductors, you might have the CEO in the room but the person who will take over the lead of the conversation would be somebody who understands the technical opportunity or challenge of moving Moore’s Law forward. So, in that meeting, even with the CEO in it, the person who is going to lead is going to be the person who understands that business or technology aspect better. 

Since you mentioned rock-climbing, what are the parallels between it and business success?

I have always thought of rock-climbing as a great quest for curiosity and learning. There are two things that have been very helpful. The first is that you need to attack the really big goals, and for that, you need to be humble. You ought to have confidence to set the goal and pursue it. But you also have to have the humility to say that I am inadequate and that I have to get better to accomplish it.

In a sense, gravity doesn’t care. Gravity is a very humbling reality. And the mountain doesn’t care. If you are not humble about the mountains, the climb and gravity, you are going to pay a price for it at some point. Climbing teaches you that. Second is about having the right people. Far more important than how you are going to get to the top is who you choose as your climbing partners. You don’t know what the mountains and the climb are going to be like.

The most important question is: who do you have on the other end of the rope with you? If something goes wrong, you have to make sure that you have the right person at the other end of the rope. Over time, I have seen that people who stay in the game longer are the people who climb longer. If you are really motivated by whom you climb with rather than just what the climb is, and you choose people you really love to climb with, then you want to keep climbing. Similarly, what keeps you in the business and your company going is if you choose people you love to work with — every day you will come in and say. “Wow, I love being with these partners.”

Third is productive paranoia. Gravity, the markets, competitors — all these never take a day off. In fact, you will always be paranoid about how the world might change and need you to change to stay ahead. You will always have to be paranoid about gravity — it is never going to let you pretend that it is not there. Climbing also teaches you the importance of focus. In business, it is easy to get distracted because of multiple opportunities. You have to focus on a few things with great intensity. Another thing is to never confuse probability with competence. Climbing might be a low-probability event but is one that will kill or severely hurt you. So, you have to treat it as a high-probability event. Climbing brings the idea of the Black Swan very much alive. The only mistakes you can learn from are the ones you survive. 

Are there any companies that are great practitioners of productive paranoia in the current lot as well as historically?

One of the really interesting things is how pretty much every company that went through periods of great trouble and came out well have been fantastic at productive paranoia. Historically, some of the companies that are able to become great — companies such as Intel, Southwest Airlines, Progressive Corp and Amgen — were in industries where things could change very quickly, and part of the reason they did so well is that they were always paranoid about the future.

They understand that it is what you do before the storm comes that enable you to do well when the storm comes. The productive paranoia practices constitute maintaining a very strong balance sheet and a lot of cash reserves because you don’t know when the next recession or the next disruption or geopolitical event is coming. All you know is that it is coming, but you don’t know when or in what form. The second aspect in productive paranoia is the zoom out and in idea. You should always be asking the question: if you zoom out 15 years, what is likely to change? And, therefore, what do we need to be doing today with a tremendous sense of urgency to stay in front of that change?