In a world of constant change and unpredictability, some companies manage to not just survive but thrive. What sets these exceptional organizations apart? This is the question that Morten T. Hansen explores in his insightful book, "Great by Choice."
Introduction
Hansen's book takes us on a journey through the world of business, drawing parallels with historical events to illustrate his points. He introduces us to the concept of "10X companies" - organizations that outperform their industry averages by at least ten times. These companies aren't just lucky; they employ specific strategies and behaviors that allow them to excel in even the most turbulent environments.
The book's central premise is that success in an uncertain world isn't about predicting the future or being the most innovative. Instead, it's about being prepared for any eventuality and having the discipline to stick to proven methods, even when faced with tempting shortcuts or distractions.
The Power of Preparation
One of the most compelling stories Hansen uses to illustrate his points is the race to the South Pole in 1911 between Roald Amundsen and Robert Falcon Scott. This historical event serves as a powerful metaphor for business success in uncertain conditions.
Amundsen's team reached the South Pole first and returned safely, while Scott's team arrived 34 days later and tragically perished on the return journey. The key difference? Preparation.
Amundsen was obsessive in his preparation. He spent years gathering knowledge from various sources, including learning survival techniques from Eskimos. He tested every potential food source and equipment. His team carried extra supplies as insurance against delays and carefully marked their supply depots with black flags that stood out against the white landscape.
In contrast, Scott's team carried fewer provisions, leaving them vulnerable to unexpected delays. They relied on untested technologies like motor sledges, which failed in the extreme conditions. This lack of thorough preparation led to delays, failure, and ultimately, death.
This story sets the tone for the rest of the book. Just as Amundsen and Scott faced uncertain conditions in the Antarctic, companies face turbulent and ever-changing business environments. The lesson is clear: don't let external conditions determine your success. Instead, prepare to survive and thrive in any environment.
The Three Core Behaviors of 10X Companies
Hansen identifies three core behaviors that set 10X companies apart:
Fanatic Discipline: This doesn't mean strict obedience to authority, but rather consistency in action. Once 10X leaders identify their goals and preferred methods, they stick to them doggedly.
Empirical Creativity: 10X companies base their decisions on evidence, not opinions or established consensus. They focus on finding out what really works.
Productive Paranoia: 10X leaders remain hypervigilant, always fearful of what might go wrong. They channel these fears into policies that prepare their companies for difficult times.
These behaviors allow 10X companies to navigate uncertainty successfully. They're always prepared, always vigilant, and always basing their decisions on solid evidence rather than hunches or trends.
The Twenty-Mile March: Consistency in Action
One of the most powerful concepts Hansen introduces is the "Twenty-Mile March." This strategy is named after Amundsen's approach to reaching the South Pole. Every day, regardless of conditions, Amundsen's team marched about 15.5 miles. On good days, they didn't push further, and on bad days, they still hit their target.
In business, the Twenty-Mile March translates to setting consistent performance markers and hitting them year after year, regardless of conditions. This approach has several benefits:
- It builds confidence in the organization's ability to perform in difficult times.
- It reduces the likelihood of catastrophic events by forcing leaders to prepare and adapt.
- It helps the company exert self-control in good times, preventing overextension.
Hansen provides several examples of companies successfully implementing the Twenty-Mile March strategy. For instance, Southwest Airlines maintained a profit every year for 30 consecutive years, even during industry downturns. They achieved this by setting clear, consistent goals and sticking to them, regardless of whether times were good or bad.
In contrast, companies that chase rapid growth during good times often find themselves vulnerable when conditions change. Hansen cites the example of AMD (Advanced Micro Devices), which nearly destroyed itself in the 1980s by chasing a 60% growth rate. This over-ambitious goal led to over-borrowing, leaving the company with few resources when the market collapsed.
The lesson is clear: consistency and self-imposed constraints can be more valuable than chasing every opportunity that arises.
Fire Bullets, Then Cannonballs: The Art of Empirical Creativity
While 10X companies are known for their innovations, Hansen argues that their approach to innovation is more calculated than many realize. He introduces the concept of "firing bullets, then cannonballs."
In this analogy, "bullets" are low-cost, low-risk, and low-distraction tests or experiments. "Cannonballs" are major strategic commitments. The idea is to test the waters with small experiments (bullets) before committing significant resources (cannonballs).
Apple's development of the iPod and iTunes serves as a perfect example of this approach:
- Apple first launched a small-scale MP3 player compatible only with Mac computers (a bullet).
- Seeing promising initial sales, they launched iTunes, an online music store also restricted to Mac users (another bullet).
- Only after these "bullets" hit their targets did Apple launch the "cannonballs": iTunes and iPod for non-Mac computers.
This approach allows companies to innovate based on empirical evidence rather than hunches or trends. It reduces the risk of major strategic failures while still allowing for bold moves when the evidence supports them.
The Myth of Constant Innovation
Hansen challenges the common belief that the most innovative companies are always the most successful. While innovation is crucial, it's not everything. Every industry has an "innovation threshold" - a level of innovation firms must meet to remain competitive. However, innovation beyond this threshold doesn't necessarily lead to greater success.
In fact, Hansen argues that over-focusing on innovation can be detrimental. Companies that pour too many resources into chasing innovative breakthroughs may neglect other crucial areas of their business, such as manufacturing, marketing, or accounting.
The key is to balance innovation with discipline in all areas of business practice. Hansen cites the example of Intel beating their rival, Advanced Memory Systems (AMS), despite AMS initially being the better innovator. Intel succeeded because they remained focused on all areas of their business, from innovation to manufacture and distribution. They obsessed over costs and production processes, ensuring their products were delivered on time and on budget.
This balanced approach allowed Intel to win where it matters most: in the marketplace.
Productive Paranoia: Preparing for the Worst
One of the most intriguing characteristics of 10X companies is what Hansen calls "productive paranoia." Leaders of these companies are never fully comfortable; they're always worried about what might go wrong.
This paranoia isn't paralyzing, though. Instead, it drives these leaders to prepare obsessively for potential challenges. They ask themselves questions like:
- "What if things in my industry change?"
- "How will my company cope?"
- "Where will my next rival come from?"
This mindset leads to several behaviors that set 10X companies apart:
Building Cash Reserves: 10X companies tend to have much higher cash-to-asset ratios than their competitors, often three to ten times higher. This financial buffer allows them to weather unexpected storms and seize opportunities when they arise.
Hypervigilance: 10X leaders constantly scan their environment for potential threats or changes, including new competitors, legislative changes, or shifting financial conditions.
Deep Industry Understanding: This constant vigilance leads to a profound understanding of their industry, which, combined with their preparation, gives them a significant competitive advantage.
Hansen illustrates this concept with the example of Southwest Airlines. When the airline industry was rocked by the 9/11 attacks in 2001, many airlines struggled or went out of business. Southwest, however, not only survived but managed to post profits and even grow its business. While they hadn't predicted the specific event, their financial preparedness and deep market understanding allowed them to navigate the crisis successfully and even identify new opportunities.
SMaC: Specific, Methodical, and Consistent
Another key strategy of 10X companies is the development of what Hansen calls "SMaC" operating procedures. SMaC stands for Specific, Methodical, and Consistent.
These are durable and precise operating procedures that guide a company's actions over long periods. They're specific enough to be actionable, methodical in their application, and consistent enough to provide stability over time.
Hansen uses Southwest Airlines again as an example. In 1979, when the US airline industry was deregulated, Southwest's CEO issued a list of ten operating procedures. These included directives like "Use 737 aircraft" and "Stay out of food services." Remarkably, 80% of these procedures remained unchanged for the next quarter-century, despite the volatile nature of the airline industry.
The success of SMaC procedures lies in their specificity and durability. They're precise enough to cover a range of issues, yet flexible enough to work in different situations. 10X companies develop these procedures based on empirical evidence, and they have the discipline to stick to them even when faced with temptations to change course.
Importantly, while SMaC procedures provide consistency, they're not set in stone. 10X companies will adjust them when absolutely necessary, but they do so carefully and deliberately, based on strong evidence.
The Role of Luck in Success
Hansen addresses a common misconception in business and society: the idea that success is largely the result of luck or circumstance. While he acknowledges that luck plays a role, he argues that it's not the determining factor in the success of 10X companies.
Instead, Hansen introduces the concept of "return on luck." He argues that all companies experience both good and bad luck. What sets 10X companies apart is how they respond to and capitalize on the luck they receive.
To illustrate this point, Hansen uses the example of Bill Gates. While Gates undoubtedly had some advantages and lucky breaks - such as access to computers at a young age and reading a pivotal article in Popular Electronics - many others in his generation had similar opportunities. What set Gates apart was his response to these opportunities.
When Gates read the article that inspired his first product, he dramatically changed his life plans. He dropped out of college, moved to a new state, and worked tirelessly to develop his software. He turned his luck into success through hard work, ambition, and a willingness to take calculated risks.
This example underscores a crucial point: it's not about how much luck you have, but what you do with it. 10X companies don't succeed because they're luckier than others. They succeed because they're prepared to capitalize on good luck when it comes and to mitigate the effects of bad luck through preparation and resilience.
The Power of AND
Throughout the book, Hansen emphasizes what he calls "the genius of the AND." This concept refers to the ability of 10X companies to embrace seemingly contradictory ideas simultaneously. For example:
- They are both disciplined AND creative
- They are both paranoid AND courageous
- They are both conservative AND bold
This ability to balance opposing forces is a key factor in their success. It allows them to be prepared for any eventuality while still being able to seize opportunities when they arise.
The "genius of the AND" is particularly evident in how 10X companies approach innovation. They're not recklessly innovative, nor are they overly cautious. Instead, they innovate in a disciplined way, using empirical evidence to guide their decisions.
Leadership in 10X Companies
Hansen also delves into the characteristics of leaders in 10X companies. These leaders share several key traits:
Fanatic Discipline: They're incredibly consistent in their actions and decisions.
Empirical Creativity: They base their decisions on evidence rather than hunches or popular opinion.
Productive Paranoia: They're always preparing for worst-case scenarios.
Level 5 Ambition: They have an unwavering resolve to do whatever it takes to make the company great, combined with a compelling modesty.
These leaders don't see themselves as heroes or saviors. Instead, they view their role as stewarding their companies through uncertain times. They're not afraid to make bold moves, but they do so based on evidence and careful preparation rather than ego or intuition.
Applying the Lessons
While "Great by Choice" primarily focuses on large companies, the principles it outlines can be applied to businesses of all sizes and even to personal life. The key lessons - such as consistent performance, evidence-based decision making, and preparing for the worst - are valuable in any context where success in uncertain conditions is the goal.
For small business owners, the Twenty-Mile March concept could translate to setting consistent, achievable growth targets rather than chasing rapid expansion. The "fire bullets, then cannonballs" approach could guide product development, allowing for low-risk experimentation before major investments.
For individuals, these principles could apply to personal finance (building cash reserves), career development (consistent skill-building), or even health and fitness (steady, sustainable progress rather than crash diets or extreme exercise regimens).
Final Thoughts
"Great by Choice" offers a compelling perspective on what it takes to succeed in an uncertain world. It challenges many common assumptions about business success, particularly the roles of innovation and luck.
The book's central message is that greatness is not primarily a matter of circumstance, but of choice and discipline. The most successful companies don't leave their fate to chance. Instead, they:
- Prepare obsessively for any eventuality
- Make decisions based on empirical evidence
- Maintain consistency in their performance and methods
- Balance innovation with discipline in all areas of business
- Remain vigilant and ready to adapt to changes
These companies understand that while they can't control external events, they can control their responses. They don't succeed because they can predict the future or because they're always the most innovative. They succeed because they're prepared for anything and have the discipline to stick to their proven methods, even when faced with temptations to change course.
Hansen's work provides a roadmap for building resilient, successful organizations in any industry. By adopting the principles of 10X companies - fanatic discipline, empirical creativity, and productive paranoia - businesses can position themselves to thrive, not just survive, in an uncertain world.
The lessons from "Great by Choice" extend beyond the boardroom. They offer valuable insights for anyone looking to achieve sustained success in their personal or professional life. In a world that often seems chaotic and unpredictable, Hansen's research shows that with the right approach, we can indeed be "great by choice."