How Great Companies Deal with Economic Asteroids

Over the last few weeks we have watched an asteroid explode near the surface of Russia and a few others miss us with close orbits. Here on earth many of our companies, including mine, are watching two economic asteroids approach – the Affordable Care Act and federal budget cuts and sequestration. We know both will have a significant impact on us.

What should we do?

I think it was good timing this week for me to finish reading Great by Choice by Jim Collins and Morten Hansen. The question that inspired them to write the book was “Why do some companies thrive in uncertainty, even chaos, and others not?”

Two Explorers, Two Different Outcomes

The book begins with a very compelling story that compares and contrasts the race to the South Pole by Roald Amundsen and Robert Scott in 1911. This was a great example of two teams with similar goals facing similarly harsh, uncertain forces. Both leaders had the same amount of time to prepare, chose their own starting location, and faced the same weather conditions. The winner, Amundsen, returned on time and in good health after pausing to photograph the crew and Norwegian flag at the Pole. Scott’s crew perished on their return from the Pole after arriving there over a month after Amundsen. Throughout the rest of the book the authors continually connect their findings on great companies to Amundsen and Scott.

Great by Choice Findings

After studying 20,400 companies and making 11 levels of cuts, Collins and Hansen ended up with seven companies that stood out and grew at consistently high rates – Amgen, Biomet, Intel, Microsoft, Progressive Insurance, Southwest Airlines, and Stryker. Here are the lessons I took away from the book about how these companies survived and thrived.

1. The companies were fanatically disciplined. These companies set reasonable revenue and profit targets and were disciplined about hitting them, consistently. For example, Southwest Airlines has been profitable every year for over 30 years – no other airline has come close. And they didn’t chase after huge, unknown growth opportunities.

A term the writers used was the “20 mile March”. They wrote about how Amundsen did 17-20 miles, every day. When there was good weather and his team wanted to do 35 miles, he said no. Likewise, when conditions were rough, they did 17-20 miles. On the other hand, Scott drove his team to exhaustion on good days, and then they couldn’t go far on subsequent days.

A disciplined 20 Mile March has several elements, but these four are key:

• The March has “performance markers” or goals that set minimum acceptable goals that are especially challenging during down cycles. The markers should create “productive discomfort.”
• The March has “self-imposed constraints” that create upper bounds for how far you would chase opportunities.
• The goals are “tailored to your enterprise”, not the same for every company.
• The goals lie “within your control to achieve” and you don’t have to rely on luck.
• The goals are consistently achieved; good intentions don’t count.

2. The companies fire bullets, then cannonballs. These companies were always “one fad behind” and were not early adopters. They tested assumptions carefully. They tried pilot projects and measured results, adjusted their plans, and tested again.

The authors used a clever metaphor for how these companies approached new business – “they fire bullets, then cannonballs.” If you are on a ship with limited gunpowder and an enemy ship aggressively approaches what should you fire, bullets or cannonballs? If you shoot a cannonball you will likely miss the ship because you haven’t been able to calibrate the distance yet. You will soon be out of gunpowder and you will lose the battle. However, if you use bullets, which require a fraction of the gunpowder, you can fire a number of bullets until you figure-out the distance – then you shoot the cannonball. Three tips on what makes a good bullet:

• The bullet is low cost for the business.
• The bullet is low risk so failure has a minimal impact on the business.
• The bullet is a low distraction for the overall business.

3. The leaders are productively paranoid. In the book there are several examples of how the leaders of these companies seemed to live in a constant state of fearful uncertainty, regularly asking “what if” questions. They wanted to make sure their companies were prepared for an “asteroid”. As an example, the authors used the 1996 Mt. Everest story made famous in the book Into Thin Air. One climbing team, there to film an IMAX movie, stopped short of the summit and went down to a lower camp to wait for both weather to improve and the large climbing group behind it to go up and finish. The leader of the IMAX team, David Breashears, could turn back because he had brought plenty of extra air canisters and food to allow for unexpected events. He also asked many “what if” questions at a critical point in the climb. The leaders of the other team, Rob Hall and Scott Fischer, pushed on because they had commercial clients who wanted to get to the summit. They ignored their own rules and limits. They along with six others died over the next day.

Collins and Hansen describe three types of productive paranoid they observed in the companies.

• The companies built cash reserves and balance sheets (their oxygen canisters) to survive surprise events or bad luck.
• The companies bound their risk (the death line) and didn’t let the organization go too far.
• When a threat appeared, the leaders Zoomed-out, then Zoomed-in. This means they went up to 30,000 feet and looked for and studied threats. They developed plans and strategies to deal with the threat. Then they moved in close and executed the strategy with precision.

I think our team has done many of these things, but could always be more disciplined. We have recently “zoomed-out” to study the ACA “asteroid” of 2014, but I wish it would explode long before it hits us.