Happy Scribe Logo

Transcript

Proofread by 0 readers
Proofread
[00:00:00]

Here's the interesting thing about luck, Lakas, asymmetric as a cost, bad luck can kill you, but good luck cannot be too great.

[00:00:19]

Hello and welcome. I'm Shane Parrish and this is the Knowledge Project podcast, exploring the ideas, methods and mental models that help you master the best of what other people have already figured out. To learn more and stay up to date on new episodes, go to F-stop Logush podcast. Farnam Street also puts together a weekly newsletter that I think you'll love. It's called Brain Food, and it comes out every Sunday, much like this podcast. It's high signal, timeless and mind-expanding you can read what you're missing at First DOT Blogs newsletter.

[00:00:50]

Today I I'm speaking with Jim Collins. Jim is the author or co-author of books like Built to Last Good to Great How the Mighty Fall Great by Choice and Turning the Flywheel Together. I think they've sold over 10 million copies. And you've likely heard of one, if not all of them. This conversation is amazing and detailed. We start with an understanding of how Steve Jobs helped him teach at Stanford and go on to explore what makes companies and people successful using the lenses of Level five leadership, flywheels, bullets and cannonballs, the 20 mile march compounding and so much more.

[00:01:24]

We also talk about why companies fail. And Jim flips the script on me and asked me a few questions as well. And we also explore why leadership can be learned but not taught. Jim has spent his life studying businesses, and this conversation is far more productive than an MBA. It's time to listen and learn. The Knowledge Project is sponsored by Medlab for a decade, Medlab has helped some of the world's top companies and entrepreneurs build products that millions of people use every day.

[00:01:58]

You probably didn't realize that at the time, but odds are you've used an app that they've helped design or build apps like Slack, Coinbase, Facebook Messenger, Oculus, Lonely Planet and many more. Medlab wants to bring their unique design philosophy to your project. Let them take your brainstorm and turn it into the next billion dollar app from ideas sketched on the back of a napkin to a final ship product. Check them out at Medlab Dutko. That's Medlab Dutko.

[00:02:24]

And when you get in touch, tell them Shane sent you. Jim, I'm so happy to have you on the show. I'm really looking forward to our conversation. When I was doing research for this, I came across an anecdote where Steve Jobs helped you prepare for a class at Stanford University.

[00:02:47]

Can you expand on that? That would be a good place to kick this off. Well, sure.

[00:02:53]

And tell you what, actually, I'll begin there. And then as we kind of tilt back, I'd love to ask you a couple of questions, just things that have been provoked in my mind as I've enjoyed learning from the classroom that you've created with your marvelous guests of a couple of things that occurred to me. I'd love to ask you the story with with Steve Jobs. So I had the great really privilege when I was only 30 years old to begin teaching a course on entrepreneurship and small business at the Stanford Graduate School of Business.

[00:03:26]

And I had a great mentor. One of the things I believe in is you get not just luck in life, but who luck. And a little bit later, by the way, I hope we circle back to the question of luck because we actually systematically studied and quantified its role in our research and one of our studies. And I think that we ought to hit that. But people think about luck is kind of what luck. And I've had great who luck in my life and who luck as we come across somebody who changes your character trajectory or invests in you bets on you, gives you guidance at key points.

[00:03:58]

So I had a great mentor named Bilharzia who was a professor of mine when I was a graduate student at Stanford and who then went back for me with what the deans to get me to teach this entrepreneurship and small business course. And so when I first got the course, I'm 30 years old and I somehow, at the very beginning of the course, changed its frame. And that leads me to why I ended up calling Steve Jobs. So I changed the frame.

[00:04:25]

Originally, the original syllabus said something about this will be a course on the mechanics and challenges of the new venture entrepreneur and small business leader or something like that. And I ended up impulsively crossing out the first line of the syllabus and replacing it with this is going to be a course on how to turn a new venture or small business into an enduring great company. And I looked at that and I thought, wow, I really don't know much about that.

[00:04:58]

But that's the frame I wanted to challenge my students with. And it was really the beginning of what became 30 years of work up to today.

[00:05:06]

And so as I was beginning to teach the course and prepare it, that launched me on a research arc, which I'm sure we'll get to. But early on, I thought, you know, I need to lend some weight to the course because I don't necessarily really know how to. How do you take a startup and turn it into an enduring great company? And so I picked up the phone and I called Steve Jobs and I said, hey, you don't know who I am.

[00:05:31]

I'm down here at the Stanford Business School teaching this course on make him into great companies, gave him the frame.

[00:05:37]

I need somebody who knows a lot more than I do about this. You founded co-founded Apple. Why don't you come down? And Steve, who was always very gracious in my experience, this isn't the Steve that we know today.

[00:05:50]

This is like Steve Jobs at the time just to contextualize things.

[00:05:56]

Yeah. So I think actually it's a really interesting place to begin the conversation because I think it really gets to how people grow. And and I think there's a marvelous, marvelous set of lessons from his particular story.

[00:06:09]

So you got to take it in that this is nineteen eighty eight in nineteen eighty eight. It was only three years, if my memory is right, since he'd been fired from Apple, the company he founded or essentially forced out, but essentially lost his own company and he's gone off to start this next thing called next. And it wasn't yet becoming the next big thing. And he was in the wilderness. And one of the great strokes of good fortune in my life was to meet Steve Jobs, not when he's the Steve Jobs that we know today.

[00:06:45]

We all know that he came back to Apple then and then out of that came the iPod and the iPhone and the iPad and one of the greatest wealth creation machines in all of human history and so on and so forth.

[00:06:55]

But in nineteen eighty eight, he was flat on his back. And that's when you want to get to know someone. That's when you get a sense as to who and what somebody is, is when you see them. That and that's when I had the great privilege to meet him. So he he kind of made a quip or you realized I lost my company. And even in the session with my students at that time, he he just simply said, hey, I got booted out of my last company and just kind of it could have been really bitter and angry.

[00:07:25]

And I'm sure he felt hurt. I know that.

[00:07:28]

But he channeled all of. And so when it came to the class, he came in and he sat down cross-legged in front of the classroom and you said, so what do you want to talk about? And we had this nearly two hour seminar on life and creating companies and creativity and what's next in the future of computing and how you think about putting teams together, all kinds of stuff. But when he's in the wilderness and and what was really clear to me was this was a person who was never going to stop.

[00:07:58]

He was utterly driven for the actual quest of the work, not what the work would bring. He had no idea if he ever kind of end up back to the stature he'd been before when there was a gathering of, I think, the top five hundred Silicon Valley leaders for a for a meeting, I believe it was with the president or something.

[00:08:18]

But he didn't get an invitation. That's the wilderness. He is in the wilderness. And yet if you just listen to that conversation that day, you wouldn't get that sense. It was all pointed for. But he was also going through an evolution and a change.

[00:08:36]

And one of the things that I think is a great message of Steve Jobs life, if you watch the arc, is there was a Steve Jobs one point zero and Steve Jobs 2.0. And most people only know the 1.0 because all the sort of immature behavior from when he was a young entrepreneur is sort of Steve Jobs 1.0, but then getting fired and then having to sort of grow from that and then to learn from people like Ed Catmull of Pixar and then had to come back as the seasoned, much less in many ways.

[00:09:08]

Interesting, because it wasn't so strange. It was just really effective to come back as Steve Jobs to point out, to redo Apple later. And that's the really key thing, is that that journey from one point to two point zero 1.0 couldn't have done what 2.0 did. I got to meet him right as he was beginning that journey. And it was an amazing thing to watch because it was so pure. It's unfiltered by what's to come. That's an incredible story.

[00:09:37]

Are there any other lessons that you sort of draw from this arc of Steve Jobs?

[00:09:44]

One of the things that we have we've often been asked and I've been asked a lot is can somebody grow to become a level five leader?

[00:09:54]

And the level five leader is an idea that came out of the good to great research, which essentially asks the question, can a good company become a great company? And if so, how and how is it different than the comparison companies? And we have a research method behind everything that we do.

[00:10:09]

But one of the really surprising findings from that research was that at those times of inflection as a company navigated itself from kind of mediocrity to outstanding performance that lasted at least 15 years.

[00:10:21]

That good the great inflection we found that the the companies that make that leap had what we call level five leaders. And the companies that were there direct comparisons at the same time, same industry, same opportunities, same resources or controls that had what we ended up calling level for leaders. And one of the key insights from good to great was that the power of the level five over the level four and the essence of the level five was the strange blend of kind of personal humility and indomitable will with ambition channeled into a cause that's bigger than you are.

[00:10:58]

Right, that that's what it's about. And that that's what that was different about the good, great leaders and the comparisons. Well, people often come back and say, well, what about Steve Jobs or can somebody grow into a level five? Or what if what if you're kind of a towering personality? Because a lot of the level five, four or uncharismatic, they had charisma, bypasses and so forth, they were often self-effacing and shy and so forth.

[00:11:23]

Well, what's really interesting about the arc of Steve Jobs is that I believe that before he was done, he had migrated to that full level five. And he actually called me a couple of times in his very early years. And we're talking about the future of Apple. And what's so clear is that it the experience of getting it going through the wilderness actually did create a kind of humility that might have not been there before. The indomitable will never waver.

[00:11:55]

Right. So you add that piece, but then what in the end was it about for Steve Jobs? It wasn't about Steve Jobs. He wanted Apple to be a great and lasting company, that its ultimate proof would be that it didn't need him and that the effort would go into how do I make this an enduring great company that then over time will continue to produce really great bicycles for the mind that will really unleash thousands and millions and billions of people's creativity and that ambition, that that's what it was about.

[00:12:26]

And by the time you get to the end, he's still working on that, right? He's. Wants that to happen, and so I look at it, is that it's a clear example of an arc of a journey. Steve Jobs is not a success story. Steve Jobs is a growth story. And it also shows this idea that if you look at it, you have offered this view that there's that there's entrepreneur types and there's company builder types and that what you once you run out of, you're kind of entrepreneurial confidence, then you need to hand it over to the company builder type and then they take it from there as if they're like different species.

[00:13:04]

But what you really find in the research is that the greatest company builders often started as entrepreneurs. We could go through a whole list of them and they grew into the ability to do that so that they could really become great company builders. They they that myth that there's an entrepreneur and there's a company builder and they're different animals is simply wrong. It's it's simply a matter of choice. And do you decide to become that if there is a stark example of that?

[00:13:33]

It's Steve Jobs, one point to Steve Jobs to point out, I'm curious as to whether some of those others went through similar pitfalls or similar sort of failures. First, let's start with what is level five? Just put everybody on the same page and then I'm curious as to like how many of those CEOs, what does the research indicate have this sort of failure point that either causes them to go off the radar entirely or causes them to to perhaps if they adapt and change, become an example that you're using in your research.

[00:14:09]

So first of all, the level five, I mentioned it earlier, the essence of the five is an answer to the question, what is the truth of your ambition? And then you essentially humble yourself to that ambition.

[00:14:24]

You you are in service to that ambition and with an iron will to do whatever it takes to make good on that ambition. And so when you strip it away, obviously, there's no way to climb inside somebody and measure it. But if you look at people's decisions and behaviors, you can kind of see essentially an answer to the question in the end, is it really about what you're trying to get done and contribute and how you want to impact the world or to build something exquisite or to create a beautiful painting or a marvelous piece of music or whatever the thing is that you're working on?

[00:14:59]

Is it about that or is it in the end really, truly most about you, about what you get, about how you look, about what you garner, about how people think of you write a more your ambition is channeled into self and the essence of the five is there maybe even more ambitious than most people write.

[00:15:18]

But the ambition is not about them. That's the essence of it.

[00:15:21]

The ambition, the burning, driving, exhausting, relentless, just like we can never stop. Ambition is all channeled outward into the company or into a purpose larger than them, or to a great piece of writing or something that is creating an idea that's durable but not about them. And then they know that in order to do that, they have to serve. They have to be in service to that ambition rather than that ambition is in service to them.

[00:15:54]

And then with that is underneath is this notion of a personal humility. I have to learn from this. Maybe it can help me grow as a leader. Right. That's a humility and a will, which is I'm never going to stop. And no matter what on the fundamental principles, we will never compromise. And so that's the beauty of the humility and the will with the question of what are you really ambitious for? So if we kind of go back, you were asking, here's some great entrepreneurs in history.

[00:16:24]

You have Herb Kelleher, Southwest Airlines, if George Rathmann of Amgen, if Gordon Moore and Robert Noyce of Intel, if Sam Walton of Wal-Mart, Jay Willard Marriott, senior of Marriott, Phil Knight of Nike, Fred Smith of Federal Express, Bill Hewlett Packard, HP. We talked about Steve Jobs, Walt Disney, one of the people who I think is one of the greatest entrepreneurs, did it in the social sectors. Wendy Kopp, who founded Teach for America.

[00:16:52]

And what what all these folks share in common is they were entrepreneurs.

[00:16:56]

Every one of them were entrepreneurs. But look at what they built. Every one of them built a company. So they went from startup entrepreneur to great company builders. And if I go look at that list and I could go make the list longer than this, too, but most of them did not have the crushing wilderness experience.

[00:17:17]

Most of them did not. Herb Kelleher, George Raft, Gordon Moore. In the nineteen eighties semiconductor meltdown, Sam Walton took a long time to get to his first few stores, but I wouldn't say that that's a dominant pattern.

[00:17:30]

Maybe we just want to grab on to that narrative, right? That our own comfort, if we're going through something or struggling to know that there's sort of light on the other side of this and there's hope.

[00:17:41]

Well, yeah. And I think that, again, it kind of goes back to this notion of the indomitable will of channeled into what the company needs and the cause needs to. Let me talk about one one person who I think did go through something quite dramatic in her life. And one of the great level five leaders, and that's Katharine Graham of The Washington Post, I think is one of the great chief executives of the last 50 years. So Katharine Graham never thought she was going to run or build the post.

[00:18:10]

Right. That wasn't her objective is a wonderful book, by the way. Personal history. What if people are interested in kind of the interior development of a Level five leader? I think personal history is one of the great memoirs and it reads very honest. And Katharine Graham's husband, Phil Graham, ran the post and it was her family's company and and he committed suicide. And all of a sudden her entire life, I don't even want to try to describe what she describes in her own book, if you just read the text in her own book of what happened at that moment.

[00:18:42]

But there was also this, what she was doing with her own personal grief. There's the question of what happens to the post. And at that time, there are people who are saying, well, Katherine, who are you going to who are you going to bring in to run it? Meaning what manner are you going to bring into Robert? And in a wonderful almost Aretha Franklin like way, it's like I said, thanks, I think I'll do this myself.

[00:19:06]

She grabbed on to it and grew into becoming a great chief executive. But what's interesting is that she felt that the Post had a noble role in the world and she had to step up to guard and protect and lead around that. And then what happens to the Pentagon Papers? The labor strikes massively difficult decisions, her indomitable will for what she as saw as the cause of the post, even though she hadn't necessarily ever seen herself in this role. It just pulled the Level five ambition right out of her.

[00:19:42]

And she established herself as one of the great chief executives of the last 50 years. And she really did steer the post through those very turbulent years. Classic Level five. Do you think that focus on the mission like that, relentless diving into the mission moves your ego out of the way? I kind of think of this as, oh, come over, ego. It's much easier to go talk to somebody who's an expert who knows something that I don't know if I'm focused on the mission and not focused on me being right.

[00:20:12]

Yes. And I think there's actually two things that really play in there. One is a focus on the mission or the purpose of the enterprise. And by the way, I don't think that that always has to be as grand and noble. It could be as simple as people want to give people a sense of freedom to fly around the country inexpensively, reliably, and create a great culture that people really love to be part of. And at Southwest Airlines.

[00:20:39]

Right. But it's still in the end, it's about Southwest Airlines and what it's doing in the world. And then you can have some companies like Amgen or George Rathmann recruited out of Abbott to do one of the very first biotechnology company startups. There's a very interesting case, by the way, if people are thinking about their own trajectory. Here's a guy that in his 50s had had a corporate career. He'd been 3m in like, I think adhesives and worked in the R&D side, worked, then moved over to Abbott and ran part of some of the medical stuff at Abbott.

[00:21:12]

And then in his 50s, he's recruited into the birth of this new industry, which is biotechnology can be an explosion of new entrants. And remarkable investors saw him and brought him in. So here's a guy with his corporate career who steps into one of the great Wild West environments as an entrepreneur and ends up building probably to this point the earliest found. It's still out there. Great. Today, independent biotechnology company. There's some other great ones, too.

[00:21:43]

But it was very early. It was like seventy six when it was founded. And Rathmann, of course, had this incredible sense of what biotech could do. And there's a very interesting circle to the story. He was he would defend against patents. I mean, he was like General Grant out there just he will go forward. We will defend these patents no matter what is very US grant like.

[00:22:04]

But in the end, he knew that the what they were doing could affect lives. And in the very end of his own life, he ended up being a patient of the very key product, EPO that they had built.

[00:22:17]

And he would sit there and be getting his blood work and there'll be other patients in there. And you say, yeah, I had a little something to do with this.

[00:22:26]

You're so sure you can you could be doing something less save the world and lives as airlines, or you could be at Amgen or you could be doing iPods or you could be the nobility of the post, or it could be making people happy at Disney or there's a lot of different versions.

[00:22:43]

The key is you really are ambitious for that, and that's for the five really, really begins. And we live in an era where there are just as always, there's a split. Right. Those who want to do built the flip and there are those who want to do built to last. I've always been on the side of those who want to do built to last. How do.

[00:23:04]

Oh, sorry. Go ahead. It's always going well anyways. Well, I have these questions for you.

[00:23:08]

Yeah, please go ahead.

[00:23:09]

I mean I can go for hours I think let's have this a bit of a conversation because I am by the way, I really have enjoyed your conversations with people. And what I really love about them is the desire to create a conversational environment where real insight happens that people can benefit from. And it's interesting, there's been a couple of things. I mean, I just I loved your interview with Barbara Oakley, for example. I would actually change some of the ways I go about my own learning.

[00:23:40]

Of course, I can't I could never not want to learn from Howard Marks. I mean, it's just fascinating the way he thinks about different pieces and cycles and blocks and so forth.

[00:23:48]

But as you've kind of gone through this, one thing I've noticed in your interviews is you come back to the the puzzles around decision making, whether it be through the lens of behavioral economics or how to think through the lens. Models or how to think about complex systems, as she did with Scott Page and so forth, but you come back to this kind of frame on getting better and better at decision making. Right. And I've noticed that that's a theme that runs through like a thread that runs through.

[00:24:16]

And I I'm curious, what do you know now from having done all these conversations? It's like you're having Jefferson dinners with all these people who think about Decision-Making.

[00:24:28]

What do you know now that you didn't know before you started these conversations that you're pretty confident of, about decision making, about how to make a better decision?

[00:24:38]

Well, I appreciate your generosity in terms of benefiting from some of the work that we've done, I think with decision making. And we all make decisions. And I think I went into this not the knowledge project, but firm street writ large, thinking that there was an answer to decision making or there was a skill that I could learn. And this is like 10 years ago where if I just learned this one thing, I will all of a sudden I will know how to make better decisions.

[00:25:06]

And I think I've walked away going. There is no skill called decision making. There's no skill called problem solving. It's all contextual.

[00:25:13]

And that doesn't sound very useful, but it is in a way, if you think of life as well. What can I do with that information? Well, now I can intelligently prepare, right. So I can try to anticipate the types of decisions that I will make and try to anticipate what will be relevant. And so if you look at the body of work that Furnham STS created and we're trying to create timeless knowledge on that timeless knowledge compounds so that as we learn more or we go deeper into a subject, we're actually building upon something that we've already had or connecting it to something that we we already know about or talk about.

[00:25:46]

And then in that sense, we strengthen the foundation that we're on. And the other thing I think that I didn't appreciate as much with decision making is that if we don't draw attention to our process. We can't get better because the process is where we make the corrections and I went into this thinking and it was pretty naive of me, which is like, oh, I'm just going to create a big checklist of all these cognitive biases. And, you know, when I make decisions, I'm going to go through this checklist.

[00:26:17]

And what I found is cognitive biases are sort of great for explaining why we make mistakes in hindsight, but they're not necessarily really good for preventing or anticipating mistakes in the future, because what happens is any reasonably intelligent person sits down in front of this checklist and then creates all of these stories in their head about why overconfidence doesn't apply in this case or why there's limited data set is actually more relevant than I should give it credence to. And I think that I didn't appreciate that.

[00:26:48]

If we sort of highlight our decision process when we are wrong and we will be wrong, we can be wrong with good decisions or we can be wrong because of bad decisions and sort of separating. That is really important. But going back and saying, where am I consistently wrong and how do I get how do I make that part of my process, my structure, my environment, so that if I'm making a repeated type decision, I get better at it.

[00:27:12]

The other thing is really highlighting your thinking. We use the concept of decision journals with people, and often what happens is people will start writing out their decisions and they'll do it in advance and then they'll go back and evaluate them. And what they'll find, and it's really humbling for people is that they were right. But when they read the reasons, they were right on the outcome.

[00:27:35]

But when they read the reasons, they thought it would be right, they're not quite as right as they want to be. And then you have this mental sort of justification that goes on, right? Well, I knew that this was going to play out differently or this was going to happen. And we sort of convince ourselves that we're right, even though we're not right faced with this evidence. And I think part of the process of getting better at making decisions is, you know, sort of unearthing this reality about, you know, we're not as smart as we think we are and we can get better.

[00:28:06]

And how do we go about doing that in a way where we exist in a world where I think the baseline, if you want to stay the same, you have to get better at making decisions. And if you want to advance, you have to get better, faster than average. What are your thoughts or reactions to that answer? I'd love to hear your.

[00:28:24]

Yeah, so it's interesting with with decision making and it's something I think there might have been something that Howard Mark said, but it was one of the fundamental things I find trying to help people understand and to keep in mind myself is this idea of do not confuse decision process and outcome.

[00:28:46]

Like if I could if I could go to all high schools and just say, what is the one course that everyone should have before they graduate in in the math and sciences areas? It would be statistics, probability and statistics because we live in a probabilistic world when our brains are wired for even people have been trained in statistics and probability, make probabilistic errors all the time because for whatever evolutionary reason, we don't naturally think that way. And so you can make the right decision and still have a bad outcome.

[00:29:20]

So you think about, say, medical decisions, like if you go through a personal as all of us well, some kind of somewhere in our lives or ourselves or somebody we love or whatever, you're going to have to make decisions about treatment, about drugs and side effects or surgeries or whatever it happens to be. Those are probabilistic. If you get an adverse outcome, it doesn't mean you made the wrong decision. It just means that the probabilities that you were considering went against you at a critical nodes on the decision tree.

[00:29:56]

I had some had to do a decision tree around a cancer situation was with somebody really close to me in my life. And one of the things I learned, by the way, is I used to laugh when I was in graduate school. Who would ever draw a decision tree? Well, actually, I ended up drawing decision for real, actual decision for the pretty useful if they are really useful.

[00:30:17]

OK, so you've got to do something a little biopsy's. Do you what are the risks of lymphedema? What do I use. And you draw a decision tree. It's a perfect thing and to use but in the decision tree you have a choice note and the probability notes and when you roll that back you may have made the absolute right decision tree choice, but those probability notes are still probability notes. And so I think that that notion of accepting the reality of those probabilities and then separating good decision, adverse outcome is a better approach than bad decision process.

[00:31:00]

Good. Because bad decision process with good outcome reinforces bad process, which then when you were talking about compounding. Ends up producing, compounding in the wrong direction. Eventually you're going to go to zero or worse.

[00:31:17]

And and one of the things just on decisions that you were talking earlier about how people are, the leaders we talked about, keep themselves kind of focused on what's important versus versus just, say, being right.

[00:31:32]

And one of the key things we learned in good to Great was this notion of you don't start with a vision. You start with confronting the brutal facts and this ability, this very stoic ability to just simply say, let's begin with the very best accounting of the brutal facts that we can that enhances your ability to see more clearly if you start out with simply what you want to make happen or what you hope will happen any of that, those are maybe fine things to get to.

[00:32:03]

But the first step is what are the brutal facts where we spend so much of our time just warning the world to work differently than it does or wanting to create the outcome that we think should happen, even though it's just against the natural order of things?

[00:32:17]

Exactly. The capacity to deny brutal facts is immense. We always looking at comparison. We just take a moment on this, because what my research mentor, Jerry, pour us another stroke of luck on my life. Right when I first started looking at this question of how would you figure out how you go from a startup to an enduring great company? And my approach was to historical because I believe that retrospective give you bias. So what you want to do is what historians do.

[00:32:45]

Historians, if you really want to understand how the civil war unfolded in the United States, you don't do retrospective accounts. You try to look at like what did it look like from Grant's point of view in 1863 three and Lincoln's point of view in 1863, not not nineteen eighty three, looking back to eighteen sixty three. And so I said we need to do historical analysis that way and move through time. So if you're if you're Grove and Moore at Intel and Bob Noyce at Intel in the in the early 1970s and you're making decisions, what did the world look like to them to that.

[00:33:21]

That's the way you have to do it. Right. And that's that's why we do the historical analysis. But then Jüri added a second part. He said, But you have to ask, how did they look at it and what decisions did they make and how did they think about those decisions different than another company, like the comparison, which was Advanced Micro Devices.

[00:33:38]

And so when you do this, you always have to have a control comparison. It's a brutal amount of work to do this because you have to do historical slices and you have to make a good comparison and do comparative analysis all the way through. And that's why our work keeps me in a cave, which I love the cave, but it keeps me in a cave for so long because it's just a brutal, crushing amount of work to do. But it's the only way I know to gain some confidence in the insights in that comes a very interesting question you're going through, walking through time.

[00:34:09]

Is there any evidence that the people at critical junctures of industries or critical junctures of kind of strategic decision or inflection had better information than their comparisons? Did they have better knowledge of the industry, better insight, better data, better any of that? The answer is we can find no evidence that they had that or that they even necessarily had better analysis. So then you have to step back and say, well, it's not necessarily that they have better information.

[00:34:41]

It's not necessarily that they had better data. It's not necessarily that they saw things in the industry that other people didn't see. There's the comparison. Companies saw often the same things. But what what was interesting to see was at that very moment in history, the capacity of one group of people to essentially look at the facts that everybody can see on the table and choose to pay attention to the really ugly ones versus to discount the ugly ones. They take the grocery chain industry.

[00:35:15]

Let's just use one example of this. So in the early late 60s, early 70s, and I know go back into history a lot, but I'm a historian by nature. You have two grocery chains. You have Kroger and ANP. They have a significant footprint and by all rights should be Kroger. Today, the grocery store industry starts to change, moving towards larger footprint stores, uses of certain kinds of technologies like scanning devices and so on and so forth.

[00:35:44]

It's a familiar story of how things unfold. Now, if you look at what happened at that moment in time, what was different? If you go over to the AP folks, you see a lot of defense. Of why their model should continue to work the way it is, despite the fact that they can see the right in front of themselves. Will explain away ugly facts.

[00:36:07]

So they're getting disconfirming evidence and they're certainly ignoring it. Exactly. The discount, the negative. You go over to the folks at Kroger and they were looking at and saying, man, this is really scary.

[00:36:19]

We're really afraid where let's look over the rocks and see all the ugly things underneath. And they their natural instinct is to go right into the teeth of the ugly facts and then wrestle with what they might mean. Same environment, same time, same moment in history, same kinds of business. Everything's exactly the same and the facts are the same. One tilts to revel in the brutal, ugly facts and the other chooses to discount them. That's the main now why is that I don't have an answer for I don't understand the psychology of discounting the ugly facts versus those that simply are very comfortable reveling in the ugly fact, even if those ugly facts are about yourself and our stores are no longer the right size stores.

[00:37:09]

That's a fact. Why are some able to do that better than others that I don't have an answer for? Can I ask you one other question that I came into this with?

[00:37:18]

Because we're talking about decision making, which you and I have puzzled on a lot over the years.

[00:37:23]

But you you're in the great, joyful position of being able to ask a lot of really remarkable people questions.

[00:37:33]

You have themes in your questions and then a lot of variation around those themes based on the person.

[00:37:40]

But I'm curious what questions you keep asking. And no matter how much you ask them, you are still incredibly unsatisfied with the answers in your understanding.

[00:37:55]

I think, you know, it's hard in an interview format where I would like to see people go is be more vulnerable about their darkest moments or their darkest times. We're surrounded by this weird sort of culture of social media, right where everybody is doing everything. And it's amazing all of the time. And we don't have a lot of we have hiccups in our personal life.

[00:38:17]

But I mean, we're not seeing them in other people's. That used to be like you lived on a street, you know, and you saw your neighbors and your neighbor got a new car. And it would happen once every once in a while and you would see that you kind of know them and be happy for them. And it was this rare event. But now you open up your Instagram and all your neighbors are on vacations. They're all all your friends, friends and loosely defined sense.

[00:38:41]

They're flying private jets. They're doing all of these things. And then you feel sort of like less good about yourself and you feel alone. And I think one of the other ways that we feel alone is. We stumble like we lose track of what's important, we go through divorce, we have major life issues and I would like to find a way for very remarkable people like you're saying, to have a platform to not only be open about what they've learned about life, but open to exploring what they've learned about themselves.

[00:39:16]

And I've found that really hard to get people to. I mean, you sort of get that thirty thousand foot view. But I want to go in the weeds and I want to talk about, you know, what that was really like and what does it feel like when you are sitting on your couch crying because you you got divorced, which is something I've done. And how I avoided that, which is like I started traveling a lot. And how do you recover from that and how do you get back?

[00:39:42]

And it's not necessarily skills in that type of conversation. It's sort of meaning in life. And it's you're not alone. Right. And it's not that you fall down. It's that you get back up and we all stumble. We all make mistakes to errors, sort of human.

[00:40:03]

But what we do when confronted with that are similar to what you're talking about with these companies. What we do when confronted with those facts, with this situation, how do we handle that and what's within our control to handle that? And I'm not sort of purely stoic about this stuff where life happens and you just sort of put on this armor and you go through it. I'm a a person and I have emotions. And I think this we also tend to over exert ourselves towards rational behavior.

[00:40:35]

And I think that there's there's a spectrum between emotional and rational and at points on that spectrum where we're making a decision or we have a choice, we're faced with a situation in life. We need to know when rational is going to serve us and when it's going to harm us.

[00:40:54]

And I don't think that the notion that we should be purely rational and everything we do is healthy.

[00:41:01]

It's OK to just sit on your couch and cry after you get divorced and you can't see your kids.

[00:41:08]

You know, I go back to my mentor, my research mentor. I've had so many mentors in my life, but I go back to Jerry Porous. You come across some people in your life that have a kind of not just intellectual wisdom, but a life wisdom that for me was was profound and and kind of the grace and humility that come of things. For example, I still look back on Jerry, who was a dean at Stanford Business School, massively tenured senior, soon to be emeritus.

[00:41:42]

And we start to build the last research. And he agrees to partner with me as a as a pure colleague. And we did the book we put our names on in alphabetical order. My name came first in alphabetical order, even though we were almost thirty years, twenty five years apart in age and experience.

[00:42:01]

I mean, just marvel on them. And one of the things that Jerry is just is just this range of quality of person. But he taught this course at Stanford that everybody ended up feeling they needed to take or that they really don't know if any other graduate school at this point. It was called business three seventy four, but called interpersonal dynamics. But we all called it touchy feely. But the idea behind this course was you basically were in these groups.

[00:42:29]

This is groups where the only thing you're allowed to discuss picture this Stanford MBAs and graduate students. The only thing you're allowed to talk about for ten weeks when you're in your group is feelings could only talk at the level of feelings with another eleven graduate students and a couple of facilitators and sort of thing like, well, I think it's not really part of the deal. It's you have to be going to your feelings and to things that that were really impactful for me on that one is just your basic point.

[00:43:08]

I try to teach us to young people as much as I can.

[00:43:12]

People do not operate first and foremost at the level of FOX. They operate at the level of feelings. And you go into a discussion or a negotiation or a classroom or and you go intellectual level, but that the real level people are at is feelings.

[00:43:31]

That was the whole point of that course, which is like if you wear that lens right, you wear that lens into any conversation, there's there can be good feelings about things. We operate at the level things we're feeling beings is Jerry's view. And and I took this course and I had this I my my father. And I don't want to go into a lot of detail about my father over time, come to really he died when I was twenty three.

[00:44:00]

He was very much MIA as I was growing up. And and I kind of the last real interaction I had with my father was he was he was living in an adobe hut and outside of Santa Fe. And I took him a turkey for Thanksgiving. And anyways, that didn't go very well.

[00:44:23]

It was had a dirt floor and the whole deal. And and and I realized my father was just very self-absorbed and just didn't have any bandwidth to be a dad her. And it was actually very hard.

[00:44:35]

And I remember driving down on the bus was a Greyhound bus I took from from Boulder down to Santa Fe. And I was the thing that was going to get out with my brain. And so I was studying and I'm sitting there on the Greyhound bus highlighting Plato come all the way down to Santa Fe.

[00:44:52]

I still remember it very vividly, but I still have the book. But anyways, I came back from that and I just made this very what I thought was very stoic decision. I'm just writing. I'm just going to move on with my life and I'm not going to try to do a lot with this. And and I think that was very self protective because there was my dad was up, didn't have the capacity really to focus on being a dad.

[00:45:15]

So I don't need to go in any more detail about my dad. But I had thought that I fully taking care of them. And then in this course is in three seventy four, which during my research mentor years later, I was I was just a graduate student when I first met him because the whole course was around feelings. I still remember the moment when just overwhelmed me like a tsunami wave just crashing over me. That much of my drive had really come from channeled feelings from that which I had truly thought was just, oh, I've already dealt with that, but I hadn't.

[00:45:57]

And for me, the jury gave me this great gift for the first time in life when he created the course where that could happen. And then later, of course, we became very close friends to the research and so forth. But I think this notion that we tend to think decision making, we tend to think that approaches to life. We tend to think that we are rational because we're smart. But deep down, feelings wind, that was Jerry's view, I appreciate you sharing that story with us, Jim.

[00:46:29]

It's part of the story. I don't need to go into huge amounts of detail, but I'm sure everybody has something in their life that's like that. Right. And you think it's dealt with?

[00:46:39]

I think that's kind of the point of what I was saying, though, right? Like, we all have stories like that. It's just rare to hear exceptional people who've reached great heights. Be open and honest about their struggles at that point, because they for whatever reason, it becomes almost harder to put that out there in the world.

[00:47:03]

Yeah, or maybe I'm just completely off base.

[00:47:08]

Yeah, yeah. No, I think that there's I mean, what I find for me is that now that I'm sixty one.

[00:47:19]

Is that what drives me changes, though, because when I was younger, so much of what drove me I think was from experiences like that and so forth. Right. And do you create sort of just a drive? As I've gotten older? You know, what I've really found is that I don't need the fuel of that because the work itself, the love of the work, is its own self-perpetuating fuel. And the part of the journey has been to go from, you know, sort of kind of youthful drives, as I would think of it, to more of the sense of the sustained sense of, you know.

[00:48:05]

Really, the work itself motivates me. I'm just motivated by what I do and what it can do.

[00:48:13]

And when you have that, then you kind of it's a different kind of emotion. It's kind of this generative emotion. Right. That's very joyful in the end. And then when you once you cross over to that, then it's like a perpetual flywheel.

[00:48:27]

Oh, let's talk about five miles. Those a good Segway. I was going to move to Lucke, but let's let's go fly will then look, let's do five miles and then I can explain the concept of a flywheel. Yeah.

[00:48:38]

So let me just zoom out here for a moment and just kind of I mentioned earlier in the conversation, there's this method that goes the credit for the the foundation of the contrast in the method goes back to very poor us and then our our historical methodology and having control and contrasted it. Why did some teams, some companies attain a superior result and others in the same circumstances? The best of our ability to control that did not. And then kind of in an epidemiological type style, essentially trying to figure that out.

[00:49:15]

And what we found after six thousand years of combined corporate history of doing that across four major studies, talking through different lenses, that this question kind of overall big question of what makes a great company tick through this rigorous research methodology. You zoom way out and you get a framework of principles. So this is and I just want to I want to quickly highlight a couple of aspects of this framework, because it took nearly 30 years to get down to something that fits on a page.

[00:49:41]

Right. And I think that the more you get small from a lot of work, the better off you are. And I'll put the flywheel in that context. So let's stand back for a moment. Hang on and let's just take a look. Imagine if you're asking the question what makes a great company tick? First of all, I got to ask what's a great company? And that's the. So think of it is that are inputs and outputs.

[00:50:05]

The outputs are how would you know if you'd become a great company? And I would say there are three outputs you have to have. One is superior results. If you don't win at the game you play, you're not great at it. Right. And that would be superior return on invested capital for a business, for superior sports results as a team, superior educational results, superior health results, whatever results are. Second is distinctive impact, which means you can actually ask the question.

[00:50:33]

Answer the question if our company, big or small. If what we do disappeared, would it leave an unfillable hole? That could not be or a hole that could not be easily filled by anything else on the planet, either because of the excellence of what we do or the distinctiveness or both, like it would matter. Somebody would miss us. And then the third is lasting. And to be able to do this over a long period of time and if you have those three superior results, distinctive impact, lasting endurance, that is sort of the output, then the question becomes what are the inputs that produce that?

[00:51:11]

And what we what we have is think of it as sort of four stages that lead to those outputs. Stage one is about discipline people. Stage two is about disciplined thought. By the way, I think it's a lot of where you spend great time in your interviews is a rather disciplined thought question. Stage three is about disciplined action. Stage four is about building it to last. And then there's this multiplier at the end, which all has to do with luck and return on luck, which is this massive kind of amplification variable, which is why we need to get to that in our conversation.

[00:51:48]

And we go back to that framework in the framework and disciplined people. You have the level five leader we already talked about that you have the discipline to get the right people before you decide what to do. The principle of first two and back on decision making. Very quickly on that, we talk all the time about decisions. One of my big takeaways from our research about decision making is try to change every what decision into a huge decision, not what should we do about this cybersecurity threat, but who should we have involved in it?

[00:52:24]

What should we do about this investment decision? But who should we have involved in it? Right. Change every what to who as much as possible. So disciplined people. There's one thought there's this thing called the genius of the end versus the tyranny of the OR we don't need to spend a lot of time without the brutal facts, the discipline to confront the brutal facts which we've already talked about, and then the discipline to really find your hedgehog concept, which is what you're passionate about, what you can be the best in the world.

[00:52:50]

That and what drives your economic engine and understanding that in a very deep and simple way. So you can make a series of disciplined decisions consistent with that that begin to accumulate momentum, then that leads us to disciplined action. Disciplined action then is where the flywheel kicks in. And so if you think about it as that, you begin to make a series of disciplined decisions. Not all of them have perfect outcomes, right? Discipline decisions don't necessarily cause absolutely perfect outcomes, but their discipline.

[00:53:20]

And then you begin to execute on them and you begin to build momentum and it's a compounding effect. So that brings us to the flywheel. So indisciplined action. We have a flywheel, the 20 mile march and fireboats and cannibals. Let's focus on the fly. We're zooming way out here.

[00:53:35]

One of the things you learn is that the way something really great, a great result happens, a great company happens, a transformation into a great result often looks like an instantaneous action because you all of a sudden become aware of it from the outside. But on the inside, it might have taken years to get there. Let's take the great UCLA basketball team under John Wooden Gate break through to.

[00:54:04]

Tenancy started a run of tenancy to a championship's of 12 years from, I believe it was nineteen sixty two to nineteen seventy four, something like that. That was sort of the era. Right. And you would have thought that in nineteen sixty two there was this instantaneous breakthrough. It bang woodenness teams jump jump into everybody's consciousness and it's wow.

[00:54:23]

Right. But if you really look at it, that story had been in progress for well over a decade. Of all the things that wouldn't have been doing to put in place around his approach to running a team and the pyramid of success and the kinds of players that bring in developing the fast break and all these and getting better and better year upon year every single game, and it begins to accumulate momentum in the first starts. It's like pushing a giant heavy flywheel and no one pays any attention because it's just one giant slow cricketer.

[00:54:55]

But you keep pushing and you refine the fast break and you and you begin to get different kinds of players and you begin to refine the system and you make the rules better and you learn from each and every game and boom, you got four turns on the flywheel and then you begin to improve your record. You get eight turns on the fly on sixteen and thirty two and one hundred and a thousand. And a flywheel is just building momentum, compounding one upon another upon another.

[00:55:16]

And then at some point boom, it breaks through. They win in to a championship. It's a million turns on the fly flywheel and it looks like it came out of nowhere. But actually it's been this long cumulative process of building flywheel momentum. And then you keep building it and you go to a billion turns on the five or ten billion turns on the flywheel.

[00:55:35]

Here's the thing.

[00:55:37]

People think you can jump to the great result by skipping the fly? Well, what we found is that the most durable results happen as a series of good decisions that accumulate one upon another over a very long period of time to create a massive compounding effect.

[00:55:54]

And just like investing where it's a high quality asset, you would presume to hold forever that largely due to let them compound. This is the idea that you get a really good thing and you build strategic compounding over a very long period of time and then you end up with this spectacular result. So that's the flywheel principle. Now, let me let me pause there, because the thing that then we've done since writing good to great that came at a good degree was we've done a lot of work on.

[00:56:24]

OK, well then how do you really harness your own specific flywheel? And that has been the the thing that recently we did with the flywheel monograph and something I've wanted to bring to the world. But let me just pause and see if you have any sort of thoughts or questions on the whole flywheel principle. I have a couple.

[00:56:42]

Yeah, for sure. The first one I wanted to start with is what causes flywheels to break. What are the most common reasons you're talking about this? When I was reading and doing preparation for this and I had read one of your books sort of back in business school, I was thinking like, is it environmental shifts that just render the flywheel that existed sort of more inefficient? And over time it just becomes irrelevant and you ignore it, sort of like the AP story you mentioned earlier, or is it sort of ego where you get in and you get involved and you start thinking that you know better or you can do something differently and then that lead to destroy or people start infighting, sort of like for credit and you become tribal internally and political maybe, perhaps.

[00:57:29]

And then it starts destroying the culture despite the fact that you have this sort of perpetual flywheel that's operating in in a similar environment to which it was created. Like those are just two examples, and I'm sure there's more. But I'm interested and curious to hear your thoughts.

[00:57:45]

There's kind of a an inverse to the flywheel called the doom loop. And one of the things that is interesting, when we were we wrote the the chapter in Good to Great. And I've just I want to grab something here. Hang up one sec. I grab this.

[00:58:02]

I've got it. So in good to great. The chapter is actually not called the flywheel, it's called the flywheel and the Duvel. And the reason is because when we look at the comparison companies, because again, we're always doing contrast, right? You're always looking at companies that were in the same situation. Both of them could have gone to great. One of them didn't. Why? What happened? And so if you think of the flywheel as kind of a it's a cycle where great results begin to compound because you understand how those great results are created.

[00:58:34]

The loop is exactly the opposite. And what happens is this and let me just sort of describe the inverse of the flywheel, which is the do something happens that produces disappointing results. And it could be that it was a random event or something just happened that was out of your control or something that you just made a mistake or you bungled something, whatever. You get disappointing results.

[00:58:59]

But unlike really understanding why that happened so that you can correct what happens is a company reacts without understanding, oh, my gosh, we had disappointing results. And often what happens is they panic. They look for a new direction or a new program or a new leader or a new acquisition or a new technology or something.

[00:59:21]

And because that never really produces a great result, produces sort of a burst of false hope. But but it's like kind of drinking a sugar drink as opposed to getting back to your core training. It doesn't give you any accumulated momentum, which then creates another negative inflection, more disappointing results, which then your reaction to that understanding, then another new direction, new fad, new program, new whatever, and then another failure to build momentum or disappointing results.

[00:59:53]

And then you're in the new hope. And so what's really interesting is when you look at, again, this is the power, the comparative method. You have the companies that built flywheels and they really understood what drove their flywheel around, understood it. Right. It's about intellectual insight and understanding so that then even if they get a disappointing result, they can look at it with a clinical eye and they know the flywheel still works.

[01:00:17]

We're going to continue to improve our execution on it versus if you don't understand it, you start reacting and you end up with a doom loop and you end up grasping for salvation and just going down the other side.

[01:00:29]

That's what we see in comparison companies in contrast to those that were on the other side of the coin of a flywheel that kept building.

[01:00:35]

I like that. The next question I'm sorry, I have three different questions, and they don't necessarily have cigarets together. The second one is can you identify flywheels from the outside in companies that have this amazing flywheel? And if you can do that, why don't you have a hedge fund set up to, like, invest money based on that?

[01:00:56]

Well, so so first, it seems like a perpetual money printing machine.

[01:01:00]

If you can identify these positive flywheels and level five liters and in advance instead of like in real time. So here's how I thought about that.

[01:01:07]

So first of all, I have a real deep understanding of what my own hedgehog is. I think individuals have hedgehogs as well as companies. So I go back to the hedgehog and the idea of of understanding what you're really passionate about. And in the case of the personal hedgehog, what you're truly genetically encoded for and then third, where you can contribute, that's the world the society will value, that you could make a living for it or have some sort of resources to be able to pursue the goals you want to pursue.

[01:01:43]

For me, I think if I hadn't gone the path I'm on, I would have taken a financial path. I have I have a mathematics undergraduate.

[01:01:52]

I studied mathematical sciences as an undergraduate computer science. You just used computers as well as your computer science, mathematics, statistics, operations, research.

[01:02:02]

I love if I can quantify things or simplify things with numbers. I love doing that. And and I love thinking about markets and things like that. That would have been kind of my probably my other path, but I was lucky enough to find what I'm really hedgcock about, which is what I've done so far. And so I'm more interested in how you understand what makes a great company tick from 60 to 90. Moving on to new questions, but for 30 years, that question occupied my mind.

[01:02:34]

And all along there was this question of should I do a fund? Right. Should I do a good to great fund? Or maybe I should learn how to play. The reality is, it's just not my hedgehog idea. I'm not passionate about that at all. I'm not sure I would be as encoded for it the way, say, Howard Marx or Warren Buffett or somebody who's just they're just like they're so stoic when it comes there. They're able to ride through things with a certain equanimity.

[01:03:01]

That's quite extraordinary. Sure. That's in my encoding. Now, that said, here's the one thing.

[01:03:07]

This is not investing advice how to be really clear, because I would be incompetent at that. But I don't think you want to find a flywheel at only 10 turns if it's a great flywheel.

[01:03:20]

So maybe we'll talk in a minute about the Amazon flywheel, because that's what stimulated me further.

[01:03:24]

Thinking about Amazon, would it be so bad to pick up a flywheel when it's already at a million turns? But you can understand it if it's on its way to ten billion hertz, you don't necessarily have to have found it before the flywheel is really turning or even early. You might just be able to find it when it's far enough along that you can really understand it and say that's a flywheel. I understand how that one works. And most importantly, those who are building the fly will understand how it works.

[01:03:54]

And then so what if you miss the one to a million turns? If you pick up the million to ten billion terms, that that seems to me to be a better game than trying to predict free.

[01:04:04]

Let's talk about Amazon for a second, because they they invited you out, right? Like Jeff invited you to Amazon. I think it was a twenty thousand one. Tell me about that conversation. And sort of like because you were talking flywheels with them.

[01:04:18]

Yeah. So what what happened is and I want to be really clear as I started, as I can take virtually zero credit for anything that Amazon has done spectacularly well. And I don't want to imply that I can. I'm a teacher at heart and who likes to understand things and to share them so that people come away with their minds changed in a way that's permanent and durable with ideas. And the broad sort of scope of those ideas have been around this question of what makes companies tick.

[01:04:46]

So it done built to last with Jerry and where we looked at companies that had sort of gone from startup to these sort of visionary, iconic, enduring status in contrast to others that could have and did. And then we did the good the great study, which is text companies that are average performers and then what breaks through and makes a good to great leap in the comparison company does it. And we ask what was different from those? We derive the ideas, some of the ones I've already let up partway through the framework earlier in our conversation up to the flywheel part.

[01:05:15]

So after good to Great came out, I was invited up to Amazon. I don't even remember who was specifically that asked me to go up there. But I went up and I met with the executive team and I believe the board and stuff like that. But all I did was teach, didn't tell them what to do, didn't give them direction, didn't consult with these people are really smart. They're a lot smarter than I am. And they could just take.

[01:05:36]

Ideas. If I just thought the oil, but one of the things I emphasize, because two thousand one was a dark time, it was fall of two thousand or so, the world felt dark, number one. Number two is post dot bust. And people had questions and what was going to happen with all kinds of companies, but Amazon as well. And I thought the flywheel principle, as well as level five and first two brutal facts, hedgehog fly.

[01:06:02]

Will the whole deal and challenge with the idea that you respond to this difficult time by understanding and doubling down on building a fly will panic. And to their great credit, and really it's their full credit, they took the idea, the principle of the fly will, the way I described it to you here, the cumulative compounding idea. And then they said, let's do the fly will for ourselves and ask, what is our fly? Well, this was the crucial thing that they did that I learned from.

[01:06:36]

So I came across the flywheel principle. The research taught it. They then took it a step further and changed the way I look at it. So here's what they did. I want to share with you.

[01:06:45]

What they did was they said, if you really want to harness the flywheel, you need to crystallize how your specific fly will turn out. And let's spend a moment on this, because it really illustrates the power of a flywheel, what a flywheel is. So here's a sketch of what it was, a picture going around in a circle. Right. It starts at the top with lower prices on more offerings. OK, so that's the start at the top of the fly.

[01:07:11]

Well, now, if we do that, that's going to increase customer visits. And if we increase customer visits, that that's going to attract third party sellers that can then as the next, expand the store and extend our distribution. And if we do that, we're going to grow revenues for fixed cost. And if we grow revenues for fixed cost boom, that's going to bring us right back to the top of the flywheel.

[01:07:33]

We can lower prices of more offerings, which then increases customer visits, which is that attracts third party sellers, which then expand the store and extend distribution, which then grow revenues for fixed costs, then back to the top, lower prices again of more offerings. Right. And notice something about that flywheel. So first of all, it's specific, but here's the key. A flywheel is not a set of aspirations or action steps simply drawn as a circle so that you could say you have a flywheel, a flywheel is an understanding of the inexorable underlying logic that drives that momentum machine.

[01:08:13]

You have to be able to say for each part of the flywheel, why will it drive the next part? Almost inevitably, if you lower prices or offerings you, it's almost inevitable that you're going to get or customer visits.

[01:08:30]

And if you get more customer visits, it's almost inevitable that you are going to get more third party sellers.

[01:08:37]

And if you get right, so you can see that it's got an inexorable underlying logic to it that drives it around. So it's not a static thing. It's a dynamic thing that captures what actually drives momentum in your specific situation. So what Amazon did was they took the flywheel principle and then made it their own. And that was their genius, right, that they did that.

[01:09:03]

That caught my eye. And I started challenging other organizations to do exactly that. So I teach you the flywheel principle, but you should do for yourself what Amazon did for itself, and then that's how people can really begin to harness it. But here's the really key thing. The thing that will stop a flywheel is if you fail on any component, because on the one hand, while it is a compounding machine, each piece driving the next piece round and round and round.

[01:09:32]

The other side of the coin, though, is that if you fail at any one piece, the entire flywheel slows or stops. So if you give yourself scores on a point of the fly, will you say one to 10 execution scores on each component? And those scores on the, say, five or six companies were like nine, eight, nine, ten, three, nine, 10. What happens because of the linkages and interdependence of the entire flywheel?

[01:10:00]

The entire flywheel stops five six execution is zero momentum and multiplying by zero.

[01:10:08]

Exactly right. Exactly right.

[01:10:10]

And so the challenge is to understand it and then make sure that you execute on each part as you go round it around their key questions in the flywheel. But that's the essence of it. Now, let's go back again. Suppose you were sitting there and you were thinking how far could have fly will go well in two thousand three. How far could that fly? Will go a really long way. People underestimate how far a really great fly will go.

[01:10:38]

That's a really good point.

[01:10:39]

I think like identifying that even when it's going might be good inside for investors. Again, not investing advice for anybody listening. Do you have flywheels applied to people as well?

[01:10:51]

Do you have a personal flywheel and what does that look like?

[01:10:54]

I do have a personal flywheel and it's interesting because we we put out this recent monograph on the fly. Well, to kind of extend good to great. So people didn't have to buy a whole other book. If I made it just a chapter in the back, I'd put it out as this monograph and on the flywheel principle. And then as I started thinking about it, sort of showing a lot of examples of different types of flywheels in it, I began to think, you know, what's my own flywheel?

[01:11:19]

And here's the essence of it. It starts with curiosity. I'm just interested in a really interesting a big questions veraciously curious.

[01:11:29]

And if if I have a really great big question, then I can't help but then want to translate that into rigorous research.

[01:11:38]

Because I don't feel I could just go straight to wisdom, I need I need a method and if I if I do good rigorous research with my research team, then I can't help but at some point have some real chaos to have insight, because the method will lead to that inevitably if you do the method. Right. And then if you actually get some really good insights like Level five or the flywheel or the hedgehog concept or whatever, or the whole framework or whatever the insights are, and they're put together in a way that is deeply satisfying and true to the data, well, then you can't help but want to write and teach, which is what we're doing right now.

[01:12:15]

I love sharing the ideas. This is this is what I love to do. I want you to understand this. Let me write it. Let me hear it. Let me teach it. Let me put it together way that people can digest it. And then if you do that, you're going to be able to have that have impact on the world, whether it be through book sales or whether it be through some interactions. And over time, I've reached a point now where I don't need to generate an income.

[01:12:40]

It just so I can kind of have a self endowed chair. But that generates the resources, which then allows you to put it right back into the next big question. Is it really curious about. So to put that in a very concrete form after built to last where had bet my entire career built to last with Jerry and I left Stanford to see if I could do this path as a kind of self-employed professor. It's kind of a down grant myself.

[01:13:06]

Tenure built to last. I have really good fortune that it was successful. I turn to Joanne, we've been married for thirty nine years now, and I said, OK, I'm going to take all the money that we're making from this. And I'm throwing it into another big question. And it was what became good to great. I took all the resources. So it was it was the investment. The reinvestment at the end of the flywheel was to take the resources that came from the success was built to last double down and put it into the research project that became good to great.

[01:13:40]

And I remember writing these checks for like researchers and data. And all this money is going out like we may have only had one successful product, but all of this money is going out of writing these these checks. Right. They're just going out of our account. But remember, Joanne just looking at me one day and saying, I sure hope you find something yourself.

[01:13:59]

And then and now, please, please, please. Exactly. And but that was the process, right?

[01:14:04]

That if you if you had a successful one, then you would channel the resources into more curiosity and questions and research.

[01:14:12]

Cool. I like that you brought up Joanne, so I'd be remiss if I didn't bring this up at some point in the conversation. Now is probably one of the best points to bring it up, which is you made one of the biggest decisions of your life four days after meeting her. Can you tell me that story?

[01:14:28]

Well, so it is four days. So I don't know whether this is how you put this in our decision making framework, because there was no way, I suppose there was an implicit decision tree you went all in, all in.

[01:14:42]

So Joanne and I were in in in college, separated by one year from each other. She was a year behind me. And we both graduated high school in Boulder, Colorado, and we had a friend who was my climbing partner.

[01:14:57]

Felony Roger breaks another great stroke of good luck in my life. And he was also her high school cross-country coach, a physics teacher, and he kept encouraging us.

[01:15:09]

He had us meet once just before she went off to college. We were both undergraduates at Stanford where she was running, and and I was studying math and doing a little bit of rock climbing and stuff.

[01:15:19]

And it was he kept encouraging us. He said, you guys need to get together the range for us to meet. But nothing really happened for like years. And then finally, my senior year, Joanne calls me. And in that conversation where she kind of kept me on the phone for a little while, I said, are you still running? And she said, yes.

[01:15:40]

And I said, well, I'm thinking of upping my village.

[01:15:44]

And of course, that was true because zero percent were greater than zero would be an increase. And she said, would you like to go for a run? And I said, sure. And so she said, Why don't you come by my dorm room on Sunday morning, about eight o'clock. So I'm not really a runner. Like, I'm not a runner at all. But I figured, OK, I'll go do this. So I put up can it be and why it turned out to be.

[01:16:10]

Yeah. So I go over and I believe she looks at me and I'm kind of in my Dorcy I have like this rugby shirt thing on and kind of climbers like shorts and I do not look like a runner.

[01:16:22]

And she says, do you need to change? I'm like, no, I'm good to go.

[01:16:24]

She goes, OK, so she takes me out on an eight mile run and the first three miles were uphill, right?

[01:16:33]

We were running up Trail Road and over to the industrial park and we ended up walking five of the eight miles and that was Sunday and Thursday we were engaged.

[01:16:46]

That was May was basically almost exactly thirty nine years ago. I was in May of nineteen eighty and we just went all in. We just both looked at each other and said, we are in this together and this is going to be life together. We both k I mentioned earlier that I'd had challenges growing up. Joanne had some challenges growing up and we both had this incredible instinct. I don't know where it came from. We both had this incredible instinct that.

[01:17:21]

The other person. Could go all in. With this, I don't know how you process it, but it was just this leap of faith that the other person is going to be able to commit to this the way I'm committed to it. And will never blink. Will never blink, I imagine that's an amazing feeling. Also scary at that age, too, maybe.

[01:17:47]

Well, I think it fell to each of us like. There's an anchor point. And somehow, just instinctively, I think we could each know. That we could commit to each other and to marriage in a way that you could always count on the other person in a world where it's really hard to count on things. Thirty nine years, I think we're still the same. That's amazing. Yeah, there might be some amount of luck in there.

[01:18:20]

So maybe that's a good Segway to sort of talk about. A little bit of luck. I mean, you had some who luck. They're part of your research is basically sort of like, how do we analyze look, how do you how do you think about that? And then also you have a concept of return on luck and who luck and like, let's explore luck a little.

[01:18:39]

I would love to because most people don't ever really want to talk about it. But I've noticed in your in your interviews that the concept of luck has come up multiple times. And I'm also struck by the number of people that I've heard reference it or you've referenced it in your podcast. So I thought this would be a great topic for us to spend a little time on because we've actually done some systematic analysis of the question. So first of all, let's just complete the framework because it leads up to the return of the question.

[01:19:06]

So you have the inputs and outputs and you had this one people, the five leaders first who write people on the bus disappear, thought genius at the and confront the brutal facts hedgehog concept disciplined action fly will. We spent a lot of good time on the fly with real discipline, understanding into disciplined action toward the flywheel and the discipline to stay with the flywheel for long enough to get a compounding effect. And what the world thinks. You're crazy. You still understand your fly.

[01:19:30]

Well, then there's these other two parts. We we may or may not have it circle back from the 20 mile march, which I think is how you defeat disruption and the bulls and cannibals, which is how you extend flywheels that disciplined way over time. Then you go to the building as the last. And there's three components at that. There is productive paranoia and how to stay out of the five stages of decline. And I personally think that understanding how companies fall, it's just as important as understanding how they become great.

[01:19:57]

I find it fascinating that becoming second point is that becoming a clock builder, not just the time teller. So to build a last minute at some point, you have to stop being the time telling entrepreneur and become the one who could build the clock. That doesn't depend on you anymore. That's what Steve Jobs did. And then finally, the principal Deepti principle, preserve the core and stimulate progress, which is kind of the secret to long term renewal of an institution.

[01:20:22]

So those are the main principles in the whole framework that lead to the outputs of a great company. But then there's this multiplier. At the end, I came to see it as a multiplier, this big amplification variable that amplifies everything else and it's called return luck.

[01:20:39]

Now, before we get into that, let me let's just talk about this back and forth a little bit. You may have read the chapter, but if you hadn't, let me just ask you one of the research team. And I were to say to you, look, we've got these companies for the Great by Choice Research with another great friend of mine, bought brilliant methodologies and we realized great by choice that we were studying.

[01:21:02]

Companies ended up going from startup to IPO to ten times better than their industries in the most turbulent industries we could find semiconductors, biotechnology, airlines, medical devices. We could go through the list, software, computers, et cetera. And in contrast to other companies that sort of started in the same Cambrian explosion, it didn't become successful in those areas. And we were comparing them and asking why? What was different? What do we learn, the very nature of that?

[01:21:30]

Because of what the outsized level of success and to the fact that they were highly turbulent industries full of big, fast moving forces and activities and changes that were outside of their control, provided a perfect vehicle to study the question of luck, which I felt always needed any for, because it could be that all those other variables I described, the disparate people that just thought the different of the building, the last all the principles, maybe that's like a giant equation where at the end is a giant variable called plus l luck and maybe plus is 80 of one points.

[01:22:04]

Right. And if you didn't address that question, you were going to leave a massive intellectual the framework in my view. So and I've been aware of luck in my life. So I said we need to study it. Let's figure out how to study it. So first, just let me pause and ask you if you are on the research team before we knew the answer and you had to put down a bit hypothesis. Were those 10 winners more than Tenex was the minimum Kennex winners relative to their comparisons, when you slice it over time, luckier than their comparisons?

[01:22:41]

Do they get more good luck, less bad luck, bigger spikes of luck, better timing of luck?

[01:22:47]

If you had to hypothesize, hypothesis is I'm going to bet they were luckier. Or B, I'm going to bet I'm going to put my hypothesis on that they weren't luckier. What would you hypothesize? I'm just going to step back before I answer that question in just one second just for framing, because when I think about look, I mean, all the people in that data set the comparison group and the performers are all incredibly fortunate.

[01:23:16]

Right, in the sense that they were likely born into countries with roads and health care and schools and education systems. And I think that we're super fortunate to have that sorority really lucky. And then when you start looking at luck beyond sort of like this birth, like you have sort of like you don't pick your parents, right. You have the certain socioeconomic status or trajectory, but eventually you sort of take over your own trajectory at some point through your habits, your actions.

[01:23:47]

If you're fortunate enough to sort of not be struggling for your next meal, you can start doing things that are like we talked about earlier with intelligent preparation. So my hypothesis would be, generally speaking, we all have the same amount of luck, like the same opportunities for luck to have happened in. My hypothesis would be that people capitalize on that luck differently, whereas if you are fortunate enough to have time to intelligently prepare, you have more situations where you can capture that luck.

[01:24:22]

Yeah, that would be my my sort of inclination. You can tell me why I'm wrong.

[01:24:26]

No, no. I think that's a pretty good inclination of first of all, I think you're right.

[01:24:31]

There's a limitation in our analysis, which is that we're already starting with a group of folks that the comparative analysis is on a relatively high plane when you're comparing to Andy Grove, been born in sub-Saharan Africa.

[01:24:45]

But if the girl was born behind the Iron Curtain.

[01:24:48]

Yeah, no, but I mean, like, had he been in a tribe somewhere, we would never know who he is.

[01:24:53]

Exactly. So there's a. Absolutely.

[01:24:57]

You're Canadian, is that right? Yeah. Yeah.

[01:25:00]

OK, so I can't tell by the amazing Canadian accent or my wife.

[01:25:06]

My wife was born in Canada, but I mean to be, to be, to be born in an advanced industrialized economy in the 20th century clearly is one of the great starting points that any of us could have. That's true. So the little knowledge also that there are other ways in which you're kind of starting line could be affected based on neighborhood. You were born in a variety of other things. OK, so let's set those to decide for then the only thing I could really look at in our research was a very simple question, which is to say, OK, but now we got this kind of starting point for the same fairly high level of starting points, but starting point to the same and then really vastly divergent outcomes.

[01:25:45]

How much of that is luck? So the first thing you got to do is you got to ask a question of how would you define luck yet so you could study this.

[01:25:56]

This is where Morten and I spent two years trying to figure out how to do it and more and how to have the following insight. Luck is in effect. So the moment you could look at things as events, you could then begin to do that analysis, which allows you to do certain kinds of quantitative analysis. OK, so then my job was to go back and look at us. OK, that's a great insight.

[01:26:20]

What is a lack of it? And so we defined a lot of it and I think it's a good definition of luck. A luck event is any event that meets three tests. One, you didn't cause it to it has a potentially significant consequence, good or bad. So bad luck is the one that's potentially a bad consequence. Good is good luck. It's the good cumquats because you have to look at both. And three, it came as a surprise in some form, either the timing of it, the form of it that had happened at all.

[01:26:55]

There could be any number of different permutations of the surprise. You could have know for certain that it would happen or when it would happen or what form it would take.

[01:27:04]

So any event that meets those three test cause it has a potentially significant consequence, good or bad. And it came in some sense as a surprise is a luck event.

[01:27:15]

And once you understand that, then you can go back through the history of the companies and you and you and you can take all the information and you can begin to identify what are luck events that meet those three tests. Very clinical. Does it mean all three tests? And if it does, it goes to the luck of it. And then what you have the luck of that buckets the buckets looking at. You can take the companies and you could say, OK, now let's look.

[01:27:40]

Did the 10X winners end up with a better bucket of luck events that they get more good luck events, less bad luck events, bigger spikes of luck events or better timing because it could be path. And then look at all that data and what you find. What we found is that. If anything, the comparisons were lucky, but it wasn't strong enough to make that case.

[01:28:05]

So we'll call it a wash, essentially, if you wanted to argue that the ones who beat their comparisons were luckier, that they had more luck on their side. You can't not make that claim with the data. You can't. So then, though, we stood back and we said, so then what does that mean? And what we really came to see is there's two critical aspects of luck where the multiplier comes in, you get comparable luck events, but the return on luck.

[01:28:40]

Is a huge variable, take a classic historical story, early days of the personal computer industry. Two small companies get the exact same massive lock event IBM is looking for an operating system. One of them in Pacific Grove, California, digital research. The other is a small company in Seattle called Microsoft, the Big Computer Languages. IBM is looking for an operating system for the IBM PC. They go to both companies and their initial instinct, if anything, was they wanted to work with digital research because they had actually an operating system for personal computers.

[01:29:25]

I think it was called jambe or something. I forget exactly.

[01:29:27]

But they actually had a product. Microsoft at that point didn't have an operating system. They get the same lock of it. In response to that lock of it, Gates recognizes its value goes all over it once they come back from Pacific Grove and looks at it and says, well, we don't have an operating system, but maybe we can get when it gets his kudos thing and a variety of other things. And then it's the return on luck in that building upon that.

[01:29:54]

Right, the flywheel effect of windows. It wasn't just a single moment. Once they got that flywheel going, then it was like a step after step after step building upon that Lucke event. Right. So there's a lot in there. So you wouldn't say that wasn't a huge Lucke event? It was. But the point is, two companies had the same look of it at. One squandered it and one made the most of it. That exact kind of pattern we can see over and over and over and over again.

[01:30:21]

The other side of the coin is our bad luck. Here's the interesting thing about luck. For me, luck is asymmetric as a cost. We cannot make the case of luck as the cause of a great company and any of our research, more of the fly will affect over time and return to capitalizing on things that are cumulative. Right. So good luck. Cannot cause a great company, but bad luck can be the cause of the death of a company.

[01:30:50]

So luck is asymmetric to the negative. Bad luck can kill you, but good luck cannot be too great. Howard Marks talks about this in his interview. Right. One of the things he does all the time is he's throughout his entire career is the way I heard it in your podcast.

[01:31:08]

It was a wonderful interview because he's talking about you have to always be prepared for when the bad luck goes against you. You're in the game and then you're able to capitalize on that. Everybody's suffering, but you stay alive and you make sure that the asymmetric negative, bad luck never knocks you out of the game, ever kills you. That's really important for a block.

[01:31:33]

And people think that luck management has a lot to do with the upside, but it is even more imperative on protecting on the downside.

[01:31:42]

It's really interesting. I hadn't really thought about it in that sense, I like that a lot. How do we harness luck then? I guess what can we do to to better capitalize on a return on luck? The first thing is we'll go back to the flywheel principle again. Let's take the building of Microsoft is a really good example of this. There was a lock of it, no question. And then they got a really high return. The other company could have had that luck event to grab it.

[01:32:11]

But then what was the capitalism? What you grabbed that lock that you kept building it. It wasn't like, oh, great, touchdown. We want we're successful.

[01:32:18]

What happens over the next 20 years is recognizing that there is a flywheel effect that has to do with standards and so forth, that really building that out and really doubling down on it, sticking with it consistently. And early on the early versions of Windows Early turns on that flywheel. We're not some people even laughed at them, but they stayed on it and they kept building and they kept building it. They kept building the windows. Ninety five. You just keep building and keep building and eventually harness the Internet to keep building and keep building a massive flywheel effect.

[01:32:52]

So the way that you you get the return on the luck is you have to translate the lock of it into a flywheel at some point as opposed to viewing it as a windfall.

[01:33:03]

It's really good advice. One of the things that you brought up in actually two things I want to talk about the 20 mile march and bullets versus cannonballs.

[01:33:13]

Yeah, let's do the 20 mile march first and then we'll go into bullets versus cannonballs. What is the 20 mile march?

[01:33:19]

OK, I'd like to lead into this one if we could, with a just a simple little investing quiz. All right. Let's just take two companies from our research. We'll call them a company, a company. B, for the moment is a real company. Let's let's imagine that you could you have to make a big bet investment. What are these two companies? And of course, keep in mind that the most effective investing strategy is a highly diversified portfolio where you are.

[01:33:49]

Right. So obviously, that's a bit facetious because that's almost impossible to do. Let's just suppose for a moment you're going to place a huge constraint about a company, a company B now I'm going to tell you, over a two decade period, something about the performance of those two companies are small, the technology driven. They have massive growth in front of a company. A is going to achieve an average annual that income growth of twenty five percent a year.

[01:34:17]

For two decades, so rapid growth average annual that income growth of twenty five percent a year for two decades.

[01:34:25]

Company be coming off at the same pace with the same kinds of products, same kinds of technology, same kinds of customers, same potential.

[01:34:31]

And its future is going to grow its average annual income growth at forty five percent year over the same two decades. If you pause here for a moment and you just simply say, if I just were to say given just give it no further information, if you had to place a bet, where would you put it? A twenty five percent or B forty five percent.

[01:34:51]

Oh man. I don't know. Most people with. Yeah most people. I would take the forty five. Give it right.

[01:34:59]

Just go with you. Right. But let me just add a little bit of extra information. I want to give you the standard deviation of that growth rate. So company is going to have a plus or minus 50 points on the standard deviation. So it's twenty five plus or minus 15. Company B is going to be one hundred fifteen point so forty five plus or minus 15. Now company is over.

[01:35:24]

That two year period is almost never going to be above 30 percent. They will never once this 20 percent right? Company B get the same industry, same kinds of company, same technologies is going to be above 30 percent. Two thirds of those years. But it's going to have a range of plus three hundred to minus two hundred now, if you had to place your bet, would you go to twenty five percent for the forty five percent? You go with the twenty five because you are the numbers that everybody who would listen to your podcast knows their numbers and so forth.

[01:35:56]

So they do that really well.

[01:35:58]

But the amazing thing is that it is not even close like two hundred ninety to one which is in chapter three of Great by choice.

[01:36:06]

Here's the point, that's a company that had a 20 mile march and its 20 mile march was 20 percent that had growth consecutive every year. And I want to be really clear. The 20 mile march is not about necessarily growth rate that just happened to be that what this company called Strike or John Brown, when it went public at the 1970s, set this march, the idea being to be a consecutive every single year. Now, if you think about it, think of it as like walking across the United States and you got two approaches.

[01:36:38]

What is every day I'm going to get up and do 20 miles, no matter what good conditions, bad conditions, wind my face hot, cold, whatever. I'm kind of on my 20 mile march. And the other is, well, depending upon the conditions, I'll either do big days or hide in my tent and wait for conditions to improve.

[01:36:55]

I'm not on the 20 mile march. I'm erratic based upon the conditions around Company B was the 20 mile marker company was the 20 mile march. And what we found is that the more turbulent the environment, the greater the results accrue to those that have a 20 mile march and stay consecutively with consistency on their 20 mile march. Now could be exactly the more turbulent the environment, the greater the value of being the 20 mile march.

[01:37:27]

Now, let's puzzle on this for a bit about why that would be, because here's one that's interesting that happens for me when I first see an idea or this case was Borton and I together create by choice where we saw this idea, the 20 mile march, either we write it in the final book.

[01:37:45]

I may not fully understand it yet, even though it's right. Right, I may still be processing my understanding. I don't think I understood when we published Great by Choice why the 20 mile march works.

[01:37:56]

So let's just let's puzzle on that. Forget and anybody that's listening to this, why do 20 mile marker SWIP and it doesn't have to be growth rate, so don't get trapped up on the idea. It's just compounding growth. It could be. I'll be profitable every year no matter what a Southwest Airlines, it could be Moore's Law and technology earnings were all over the map at Intel, but double components at affordable costs. Eighteen to twenty four months like clockwork, no matter what, no matter what, no matter what, no matter what.

[01:38:24]

That's our march. We will not deviate from that march till we have quantum mechanics, the limits of quantum, so the marches can take different forms. I have a 20 mile march. There's different kinds of marches. Here's the puzzle. Why do the 20 mile marchers will we know that they do. Why? And so let me just positive for your listeners might be thinking about it all the popping to mind for you. This isn't like a test like you, right or wrong, but it's all I'm going to get it wrong.

[01:38:55]

My initial hypothesis would be effectively that a relentless focus on what they do well, instead of like looking at the grass is greener and sort of getting led astray in these other sort of business lines or units or, you know, to use your terminology, maybe a focus on their flywheel.

[01:39:13]

Yeah, that's that's definitely part of it. But wait a minute. If you really focused on your march, doesn't that become really dangerous? Because then if the world changes year over here, focus on the market, you get killed. Right. So I started thinking about how does the march so highly disruptive, highly turbulent, highly technology driven industries often somehow those marchers win. But on the surface, you would say, well, wait a minute, though, the 20 mile marchers are the ones that get clobbered by changes.

[01:39:41]

How does that work? Don't they just get disrupted into oblivion? So let's step back for a moment. The key to the 20 percent mark is the word consecutive. Let's think about this for a while. Let's suppose. Your Southwest Airlines, if you say we have a march or we want to be profitable every single year.

[01:40:08]

For 40 consecutive years without a miss. All right, now, how would that change your decision making? So this is the key to the body we're talking about decision making, I suppose your decision is that you have to hit something for 20 or 30 or 40 consecutive years without a bath. Well, that means that if you start making don't make your investments or think about new things you have to be doing in the future. Today. You might maximise your short term results today.

[01:40:44]

But you're going to miss it seven or 12 cycles down the road and the very commitment to say that we're not going to miss ever. Forces you to be doing all sorts of things today that change your time frame and put you ahead of those disruptions.

[01:41:02]

So the great irony is that the short term focus of we can't miss today, but we can't miss it for the next 20 cycles, 20 years, 30 years, 40 years means that you have to be constantly investing for down the road or else you're going to miss somewhere down the road. And that is what the power. So for me, the power, the march isn't about just this year. It's the commitment to the executive performance that will force you to innovate ahead of disruptions like that.

[01:41:34]

That's really interesting. Let's talk about bullets versus cannonballs, right? So this is so against sort of now back in the notion of the framework, right, to split people, this one thought this one action at that building a class is the last part of the discipline to actually got the flywheel, got the 20 mile march and the bullets and cannibals.

[01:41:55]

So we had thought that there would be a very strong correlation between being more innovative than others and being the really big winners. And I think this fits in to what we were just talking about, right, in terms of constantly investing and. Exactly and what we what we found is that as well as did tell us, Goldar, their marvelous work with vision, there's very little evidence that the pioneering innovators with. And what we found instead is that it's not being innovative that matters.

[01:42:32]

It's the ability to scale the right innovations. So let's just stand back for a moment. Think about this. So imagine you have a ship and you have a certain amount of gunpowder and you take all your gunpowder and you put it in a big cannonball. You fired that ship that sails out there and it misses. And here comes the ship and you're in trouble. You're out of gunpowder. But suppose instead what you did was you took a little bit of gunpowder, you put it in a bullet, you fire that bullet at the ship.

[01:43:03]

It misses, but you've got enough time to recalibrate because you're 30 degrees off fire. Another shot, you're 10 degrees off. Recalibrate to give King. You hit the side of the ship and now you take your gunpowder. Now you put it in a cannonball and you fire it on a calibrated line of sight. What we found in this, this is one of Morten's real insights when we work together and great by choice. I want to give a lot of credit to this.

[01:43:29]

What Morton said is, look, it's the ability to scale the right innovation that separates, not innovation, say. And the more we studied, the more we found that to be true. But then what are the right innovations? The right innovations are the ones that are the bullets that are calibrated, that are then followed by the big investments in the cannibals. Get in your podcast. A number of times people talked about big bets or big bets or either dangerous or really effective accelerants on the fly.

[01:44:01]

And what we found is that if you calibrate with empirical validation by firing bullets first and then you get calibration, then you convert to the cannibal. That's what correlates with the best performance over time. The comparison companies, in contrast with either A, not fire enough bullets. B would fail to convert a bullet to a cannibal when it came time for the big that they would do it or C and this is their biggest kind of constant mistake, is the firing of big calibrator cannibals uncalibrated.

[01:44:35]

Big bets at that correlated with ending up heading down the path and the duel when you stand back over history that the bullets and catapults becomes the way that you extend the fly.

[01:44:48]

Is there a correlation between firing those big uncalibrated bets and the incentives of the leader? Like, did you start to unearth some of the reasons why that took place? It strikes me as interesting that that would be a bigger problem. My initial inclination is that people would be less risk averse. They wouldn't want to fire any of them, not that they would sort of like fire uncalibrated. And I'm super curious as to what's behind that. That's really interesting because it would seem like I'm just sort of like mapping that it would be better to fail conventional.

[01:45:21]

And, you know, you can sort of like fail by not understanding that something's changed and you don't have enough information. So you don't want to make these changes and you can sort of rationalize that to yourself. Whereas, you know, I can see in sports this big uncalibrated sort of cannonball might be the way to go, because if there's massive incentive to win and win now and if you don't, you know, you're going to be a mediocre performance is not an option if you're the professional coach.

[01:45:48]

I mean, it might be in some cases, but generally speaking, it's not. So you sort of have to employ a strategy that's quickly that's going to get you to a position where you're winning. So the reason I'm pausing here is because. The pattern of. Decline is actually firing the big uncalibrated cannibals. Mm hmm. And I'm puzzling in my mind as to why would the psychology of be that. But I'm not a psychologist, so I can't necessarily I'm just observing the empirical patterns.

[01:46:25]

This actually what I what I'd love to do, because I think this really ties to the to the next stage of the framework, which is how great companies fall, because it's really interesting how this ties right into the stages by which companies actually bring about their own demise. Let me jump ahead and then come back. Let's jump ahead to the fourth stage of the framework to the building at the last stage. And the opening part of that is productive paranoia.

[01:46:54]

But that really means staying out of the five stages of decline. Productive paranoia doesn't mean not doing bold things. It's productive paranoia if worried, worrying about the things that the world can really do to you and protecting yourself against those so that you stay alive, you're managing those downside risks. As we were talking about earlier, the only mistakes you could learn from are the ones you survive. We really tried to understand how does a great company fall? Does the first step in being built to last is don't die in good to great?

[01:47:29]

We had some of the good to great companies later really stumble. One of them, for example, being Circuit City.

[01:47:36]

And my response to that wasn't, oh, by our research is wrong, our research was right because our research is never oh, these are great companies forever. Our research is about studying errors and episodes in history from which we can derive principles that correlate with the best results. And if companies cease to live up to those principles, they're going to fall. Right.

[01:47:58]

So there's no guarantee that people will maintain their discipline just as an athlete or a sports team. If they lost their discipline, even if they were a great champion, they could lose it later. I took that didn't bother me at all that a company that was once great fell. That was it. Our research fell. But what it really became was a source of great curiosity because it wasn't that the companies that stumbled worked great. What was really scary is that they were great and then they lost.

[01:48:31]

In the end, you're trying to understand things. If you mentioned earlier, what do you love about what you're trying to do with these conversations is to over time, have insights that are going to be durable, right. That there's some timeless quality to them, that you can rely on them right now? That's the quest. That's the design you share with me, a desire for that quest for that this need to get there if we can.

[01:48:58]

And so for me, the fall of like Circuit City became a great opportunity to understand something. What is it that we need to understand about this? So we did a study that ended up in a small book called How the Mighty Fall. So we built to last and good to great limited how the mighty fall, because I started thinking I need to understand how it unravels if it unravels.

[01:49:25]

First of all, just as an aside, here's an interesting thing from an intellectual standpoint, which is harder to understand the ascent or the fall. Ascent is much easier because it's like it's like entropy. Think about a pool table with the pool balls. How many ways are there to rack them in the middle? There's only a small number of ways that they could be wrapped in a perfect triangle in a specific place on the table. That's like the path to building something great.

[01:49:53]

There's a narrow path. There are things you have to do and you have to do them really well over a long period of time. That's racking the pool balls in the middle of the table. It's maybe difficult, but it's fairly clear what those are after we've done all the research.

[01:50:07]

Now, looking at how many ways are there for all the pool balls to be disordered on the table, it's infinite. All right. There's just so many possible variations. Well, that's like disintegration. That's like entropy. The natural state of things is towards disorder. So if there's a fairly narrow path to the end, there are lots of paths to decline to coming up with a framework for the turned out to be much harder than the framework for a set.

[01:50:37]

So we puzzle Darcus and a number of members of my research team and I, we took the same methodology except with the companies that kept rising in contrast to others, that if a given point had the negative inflection, they lost. We started asking why, what happens when you lose? And we found this sort of five stages by which a company falls. First of all, here's what's really scary. You go through the first three or five stages we're looking in from the outside.

[01:51:04]

You still look healthy, but you're already sick like cancer or something, and you're not visibly sick where nobody can deny it anymore. Until stage four out of five stages and the fifth stages of the stage you never come back from, which is capitulation to irrelevance or death.

[01:51:20]

So you can actually be in stages one, two or three. And be thinking you're just fine and everybody thinks you're still great, and that's terrifying because if it was really obvious when you're in stage one, you could catch it early. So those stages, stage one is not success, but it's hubris born of success. When that success gets converted into arrogance, that then leads to stage two. And this links back to your previous question. You would think the company's fall because hubris leads them to be complacent.

[01:51:53]

And that's kind of a type to pathology here. Here's what's really interesting. Almost none of our the companies we studied that were great companies that fell, fell because of complacency, they fell because of overreaching stage two with a disciplined pursuit of more.

[01:52:15]

They become too aggressive, too much growth, firing, uncalibrated, catabolic, expanding into areas of which they have no business, operating big bets that have massive risks built into that right. It's the undisciplined pursuit of more that is actually stage two. You would think it's. Well, they just become complacent. Sure. And if you do, you'll fall. But that's not the dominant pattern of history of the great ones. Go the other way.

[01:52:40]

So they're overconfident. They're taking risks. Then they're not fully aware of the risks that they're taking because of their overconfidence, which is borne of the success.

[01:52:48]

Correct. You know, there's a certain animus that happens if we've been really successful now. We just need to have more and we need to be bigger and let's do a bigger acquisition. If we put two of us together, we'll just be that much more powerful, whatever it happens to be. Or we can now start growing at 40 percent to year or we're going to gobble things up without any earnings or whatever it happens to be. We can move.

[01:53:08]

I've got to I'm a new CEO and I need to show my mettle by doing something really bold. That's the sort of thing that tends to happen again.

[01:53:17]

If we go back to, say, the financial crisis, was it complacency or was it undisciplined pursuit of more? Then we go to stage three, which is, though, the undisciplined pursuit of more leads to problems, risks that are evidence that's growing. Things are not all. Well, the kingdom maybe underlying signs of things we ought to be worried about in stage three is as the risks and the facts. Begin to mount, stage three is denial, denial of risk and peril.

[01:53:52]

And when you're in denial of risk and peril to hubris for success leads to stage two undisciplined pursuit of more leads to stage three, denial of risk and peril.

[01:54:02]

If you stay in that long enough, eventually catches up with you would go to stage four.

[01:54:07]

Stage four is when you fall and it's visible to everyone at that stage for it's not that you fell that stage four, it's how you react. And if you react with grasping for salvation. Right. And this is where you get into the do loop that we talked about earlier, you start making lurching moves, panicky moves, disappointing results, reaction without understanding. And you're in that do loop. And often people will fire more uncalibrated cannibals as they're grasping for salvation because they never get back to rebuilding the fly.

[01:54:38]

Will you get these little reflections up, followed by another Dashti or the other up and then dash down?

[01:54:44]

Kind of like the gambler trying to make back their money? Exactly right.

[01:54:48]

And then you end up eventually off your balance sheet runs out, which is the crossover point. You go from stage four to stage five, which is capitulation to irrelevance and death.

[01:55:00]

So you'd ask a question earlier about the caliber of cannibals, people going to play it safe and I jumped ahead. The reason I did is because the great interesting thing is the more dominant pattern of how great companies fall is the undisciplined pursuit of more, not the hunkering down and just being too conservative.

[01:55:20]

Do you think it's harder to fire the bullets and calibrate, or is it harder to fire a cannonball? Like if you were looking at those as processes internally in an organisation, which would you focus on in proportion to energy committed? Would it be fifty fifty? Would it be seventy five percent firing bullets versus twenty five percent. Sort of like getting better at firing the cannonball after you've calibrate it.

[01:55:42]

How would you think about that is I like to sort of describe things through the lens of a specific case. Let's take the iPod that went into the iPhone and so forth. This was a classic bullets to cannibals move and I could go through lots of them through our research.

[01:56:01]

The microprocessor was about caterwaul at Intel. We could take the move to many bills of manufacturing. Steel at Nucor was aboard the Cannonball Process, where we could go through a variety of these cases just to illustrate how this works. Yet Apple's got its kind of original activities, which is in the Macintosh computer. Steve Jobs goes back to 1997. First thing he does is to basically try to reintroduce a discipline, get costs under control, stop the bleeding, get the Macintosh rolling back into really good shape, and then try to pull out of the woodwork the people who still believe that the real dream that originally founded the company at Apple and those some of those people were still there became the people on whom he could begin building the next phase of Apple.

[01:56:43]

So ninety seven to 12 to twenty three is make sure that we pay attention to what we have, make sure that the flywheel, as we understand it, is actually turning. Don't deviate from that. We got to really make the most of the Macintosh computer.

[01:56:58]

So they did them well, they did that.

[01:57:01]

They were firing some bullets and one of the bullets was around the MP three player. They saw the rise of the MP three. They weren't really sure what to do with it. They were kind of late to the game. They fired a bullet on this thing that was kind of called the iPod. And it was great.

[01:57:15]

Today we look at the iPod and we say, wow, that became the iPhone and the iPad and everything else. Right. It's really the whole kind of ecosystem of Apple now. They must have known. They must have they were going to fire this big uncalibrated carnival or this big carnival to do it. But at the time, they didn't know that that's what it would be. This is the important thing about historical research.

[01:57:37]

If you just look in retrospect, it would look like they knew that was the path to take, but they didn't know that was the path to take. What they were doing was they were firing bullets on a variety of things. But one of them was this this thing that was the little iPod.

[01:57:54]

And if you go back to I think it was the twenty or twenty three Apple 10k report and you read it at the time, they describe the iPod like three sentences, a natural extension of our digital hub strategy or something. And they still thought at that moment it's like that Macintosh is the center of the world. We've got this extension thing of this iPod and that's all they said about it.

[01:58:18]

It's really fascinating. So first thing I want to say, really important to grasp, is that when you're firing bullets, you can't presume to know which bullets are going to really become your big cannonballs for the future. If you go back into the history of Intel, you're firing some bullets and later you won't even hear about some of the things like the digital watches.

[01:58:40]

They tried the whole bunch of other things because the bullets never merited big cannonballs. So it's very important when you're firing bullets to realize that some of the bullets will never amount to anything. It's not like every bullet we fired is going to become a cannibal. The whole point is the uncertainty. You don't know which bullet will mirror the cannibal. So you're going to be firing enough of them to have some discovery. But the iPod starts to show some promise.

[01:59:05]

It's got kind of got its own little mini flywheel. It starts to build momentum and people within Apple are really excited about it. And there was this critical point where they said, well, but it's only the Macintosh computer. Well, what would happen if we took the next logical step of. Putting our little iTunes software, which we had to do to really make use of the iPod and put it over on a Windows machine.

[01:59:29]

OK, so there was this next organic step, right? And they took that put the windows between boom. All of a sudden they found all these people in the world who weren't original Macintosh people wanted to use iTunes and have brought them to this thing called the iPod. And all of a sudden you have this calibration. Wow. It's not a theory. It's been a series of steps leading to an empirical validation. And there's one critical thing. If you're going to fire a bullet, you have to go at it the way the folks Steve Jobs did or the microprocessor was done at Intel.

[02:00:02]

You you have to fire it. Well, meaning if you're going to do a test, you can't find yourself afterwards saying if the bullet didn't hit or that because the bullet will never hit or is it because we did a bad job of it? If you're going to fire a bullet, do it. Excellent. Yeah.

[02:00:19]

That way, you know that if it doesn't hit, it's just not going to work as opposed to maybe it would have worked if you would have done it well. So if it's a bullet, you still have to bring the kind of excellence to it to get a clean test. That's what they did. It was a really the iPod was a really nice thing. Even if it was a small thing, then you get the calibration. Then there came this point like, wow, this is validated.

[02:00:41]

Then came the huge cannonball. And then, of course, that became what what Apple is more for today. Here's a really key point. Is it a different flywheel? No, it's the same underlying flywheel of kind of the architecture of these great products for the mind where the bullet, the cannonball becomes the extension of the flywheel so that you can still build the overall momentum. But with this bullet, the cannonball extension and what history shows is usually the second cannonball from the bullet, the cannonball process on top of an existing flywheel becomes the biggest part of the company.

[02:01:20]

Bériot started in restaurants, bullett the cannibal hotels. Apple started a personal computers, bought the cannibal smart handheld intel, started out in memory chips, bought the cannibals, microprocessors and beyond. And so that's that notion of you've got the flywheel, your 20 mile marching, but then you're both the cannibal and usually not always, but usually theme parks to Disney.

[02:01:46]

Right. Versus films. That second extension of the flywheel that came in The Bullet the Cannibal becomes the really big momentum in the company, usually for decades like that.

[02:01:59]

A lot. I know we're coming up on time here. So I have two questions I want to get to before we end. So it's going to appear like a non sequitur here. But I want to know what's the best counterargument you've heard too good to create, so.

[02:02:15]

I'm going to answer that at two sides of a coin, one, as I mentioned earlier, that say a company like Circuit City fell is not in line behind the counter argument. I can go back and always look and see. You're looking at dynastic eras of performance.

[02:02:34]

You were trying to make predictions, right? Making predictions. Exactly. And also, you basically, if you can go back and look at what companies fall, if there's a divergence from the principles, then it actually, if anything, reinforces the principles rather than calls into question. So that's always been for me, more of a source of curiosity, of somebody to learn from. I can actually go through each of our books and say, what would I criticize if I would be the critic based on what other people have said, what just would go with my own mind in good to great.

[02:03:06]

I think the the fact that our only pattern that we selected on was stock returns, a pattern of stock return relative to the market. I think that was the right way to do the research from a political standpoint. At the same time, I also believe that if I were to stand back and I would to look at the built to last companies, which came from for the last person I did back in the early 90s, and I would to look at the good to great companies and sort of did this great this marvelous inflexions for mediocrity to way past the market that lasted at least 15 years.

[02:03:42]

But if you do way out, you ask which set of companies had greater endurance built to last was about the last, but the built the last companies did. And and I have to ask myself why? Because we're looking through different lenses.

[02:03:55]

So you're still just trying to build one overall framework? I think the principles are totally sound on all of them. But here's the thing that the built to last study had.

[02:04:06]

It put a premium on the importance of a purpose far beyond just making, but that notion, like what Bill Hewlett David Packard found at HP later, it grew too fast for this acquisition and touch, but part of what allowed them to have a nearly 50 year run was they understood HP existed to make a contribution, not just to make money. And if you look at George Merck, medicine is for the patient. It is not for the profits. The profits will follow R.W. Johnson, the Johnson Johnson that the original credo, which was way back in the early 20th, visionary for its time.

[02:04:46]

You have to understand in the context of its time the idea that Disney, Walt Disney was never about just trying to maximize profit. He was really trying to do something that would have a very special feel to it. And again and then I would go to we've talked about Apple. I don't think Apple ever just about anybody. And and so I think that if I kind of step back and I say, what did the built last visionary companies have that not all of the good to great companies?

[02:05:14]

That is, I think, this sense of incredibly deep sense of responsibility to the world and what they were doing in their eyes that helped guide them over very long periods of time. I don't believe anything is ultimately permanent. I've been looking for two 1/2 billion years, the earth, the center or a giant. None of this matters, right?

[02:05:35]

So you have to if we give them time for it to live forever.

[02:05:39]

No, but I mean, but it in a really big context. But but I think in the in the business for corporate world, if you can get a five decade record of excellence, that's really, really good.

[02:05:50]

Do you think that shortening the sort of run of excellence I don't know the numbers.

[02:05:56]

I don't know the numbers. I'd have to before I could weigh in on that, I'd have to actually look at statistics to be able to say what I can say is that. The great CEOs that we ever studied managed for the quarter century. And if you are not making decisions to hit a 20 mile march for a quarter of a century, if you are not building a company, if you are just trying to build the flip or just make money during your tenure, if you're if you're not thinking in terms of laying foundation so the company can still be ahead a decade, two decades, three decades down the road, you don't deserve to lead.

[02:06:37]

If there is a shortening of the potential. I think it has to do with the shortening of the timeframe of decisions. And so if you ask the question, why do some companies get disrupted? Ask yourself a simple question. How did so many smart people get disrupted? Was Ken Olson at DEC stupid? The question is, what's the time frame in which you're making decisions? And if you if you said we had it 20 more consecutive years of being the head of the game, you're going to make different decisions than if it's the next two years.

[02:07:09]

If, in fact, it's shortening, then a potential contributor to that is the time frame within which people are making their decisions.

[02:07:20]

If circles back a little bit, as you were saying, that was sort of like trying to listen to you. And I was simultaneously catching myself, drifting towards our earlier conversation where people were prone to fire cannonballs versus sort of like sitting and waiting and just keep firing bullets and then not take that bet. And I was wondering if the time frame for the performance measurement, the time frame that the person's under, has an impact on that.

[02:07:47]

It does. Your bullet today is going to still be relatively small relative to what it could be in the future. And we have multiple cases in history where what the cannonball came. Oh, it's a big bet at that time, but it may not pay off for a while. It's probably going to pay off because it was calibrated. But if all you were trying to do was to maximize the returns of the next two years, then you would never fire a huge cannonball.

[02:08:20]

That's truly the flywheel extension cannibal.

[02:08:24]

You have to you have to think 20 years long term thinking definitely plays into. I mean, there's an arbitrage on the decision making where if you're thinking longer term, you can do things that other people can't do, things that are first-order, negative, second order positive, especially if you have competitors who are under pressure to do things that are first or positive, that might be second and subsequent order negative. The last question I wanted to end with today, and I really appreciate all the time you spent with us and our listeners, is given what you've studied about leadership and people.

[02:08:57]

And this is going to be a big sort of like very open ended question, but you spent more time thinking about this and you've spent more time with leaders than probably anybody I know in diving into the research. How do we develop not only young leaders, but how do we develop leaders? First of all, I I've learned a great deal about how it is entirely possible to build leaders. And let me just go to the experience and experience I had that had a profound impact on my thinking about this.

[02:09:29]

For twenty, twelve and twenty thirteen, I had the real honor to serve as the class of nineteen fifty one chair for the study of Leadership at the United States Military Academy at West Point. And I did not come from a military background originally, but I always believed that I owe something to my country and I didn't serve when I was younger when the opportunity came. They have this chair rotate every two years. Sometimes they have like a former general officer in the chair.

[02:10:00]

Sometimes they have somebody from the non-military world, such as myself, who hold it for two years. And you can do anything you really want with this chair, including interacting a lot with cadets and faculty at this story at a place called West Point. And I learned a huge amount in the West Point journey.

[02:10:19]

For example, I came to the conclusion that my West Point cadets were in a general happier than my Stanford MBA students that I taught. And I think it was really interesting. I think it has to do with the fact that there is an ethic of service that's immense, that is communal success. You never succeed alone and they know that, and you succeed by helping each other. And the whole idea that failure, the opposite side of the coin of success is not failure, it's actually growth.

[02:10:47]

And you will fail at West Point. It is designed you will fail. And so you learn how to get through by helping each other and you learn how to get through, by growing from your failures. And you learn that early and you get tremendous responsibility by the time you're twenty two, twenty three, twenty four years old when you're out.

[02:11:04]

And the thing that, that there's so many things I learned going to the West Point experience. But one of the biggest things I learned is this institution has been in existence for over two hundred years. Where it sees as its role in the world is to build leaders of character.

[02:11:18]

As you get you get young men and women who come in to West Point and it's like a factory. And what comes out the other side, our leaders, it's what they do. And sure, maybe you've got a range of just like in any field of life, there's a distribution of capabilities as leaders when they come out at twenty two years old. But that distribution is they've shifted far to the right of what you might get out of a random sample of a whole bunch of other twenty two year olds, which is the way you have to think about.

[02:11:49]

So first, just as an empirical point with conscious attention, it is entirely possible to build leaders and to do it systematically and to do it at a young age. Part of what happens for building leaders and I saw this at West Point and then later I thought when I did a study on education where I was looking at schools that went through an inflection to produce better results for kids in the most adverse environments that you could find. And you would find often a teacher who became a school principal and had to go from teaching to leading, and they would grow into this leadership role.

[02:12:28]

So you could see that they would they would go and they would become a leader of the school. And then as a leader of the school, they create the environment in which the performance for the kids would go up and you would have these spectacular results was up in the Turning the Flywheel monograph, which we talked about earlier. I give an example of a flywheel, which is an individual elementary school on a military base in Kansas, public school led by a woman named Debka Gustafson, who created a flywheel that took kids from thirty three percent reading rates to nearly one hundred percent and stayed there.

[02:13:03]

And she went from it, stepped into the leadership role in. Into that responsibility. So stand back and look at these ah, look at those great school principals that we studied and superintendents, I look at the what West Point does. I look at what happened when I see some of my students from Stanford grow into real leadership. I don't know if someone else can make someone a leader. I don't know if you can teach leadership, but I'm pretty sure you can learn it.

[02:13:31]

And I think that distinction is key. I think it's very arrogant to say that you or I or anyone else could take someone and I'm going to teach you leadership. But I watched people learn it. And I think a big part of what it takes to learn it. There's kind of two things that would let me highlight one for the moment, embracing the idea of seeing what has to be done and then exercising the art of getting people to want to join you in getting it done.

[02:14:00]

But it starts with clarity of something's got to be done and I am not going to be a bystander. So when I look at, for example, the the school principals that I that I studied, I know this one superintendent will just tell you the story sort of grew into a leader, takes over a school district. Sees that that school district had kids from previous years before this person was in charge. What you're not really in charge of it was, Superintendent, where there had been low graduation rates, a whole bunch of kids had not graduated from high school.

[02:14:35]

And he takes one look at and says, this is just wrong. Somebody's got to do something. So you would think, well, then great, that person is going to lead people to do what's necessary to increase graduation rates. But here was the extra leadership step. When you recognize something is just wrong, something's just got to be done. Somebody's got to step forward. I can't be a bystander, right. He looks at it and he says we have to take responsibility for the kids.

[02:15:00]

Before I was superintendent who didn't graduate and we're going to go find them and we're going to create a program to bring them back into the schools and we're going to make sure that they get out with their high school degree. I'm going to take responsibility to make sure that happens for the kids who are here before I was even superintendent. And I'm going to walk down to a building in this town and I'm going to say we need space for this. You have an extra floor in your building.

[02:15:28]

You need to help these kids because somebody has got to do something. Will you join me and give us space so we can bring them back and get them their degrees?

[02:15:36]

So what is leadership Eisenhower put in? His leadership is the art of getting people to want to do what must be done. It's an art form and everybody is a different kind of an artist. Some are painters, some are sculptors, some are orders. Some are good at like just getting the right people together around the table. Some are good at definition. Some are really good at asking the right question. Right. There's different kinds of art, but it's an art and you learn from others.

[02:16:02]

You don't copy them. You get your own artistry of getting people to want to join you and not being a bystander. But what's got to be done, those people are coming over the hill. Someone's got to do something. Those kids didn't get their education. Someone's got to do something. This product has incredible potential. Someone's got to do something. And you infuse that in folks to be able to to do that. That is, I think, where the real start of the leadership begins.

[02:16:28]

Hey, we got this computer. We made it for ourselves. So has got to do something to bring this to a whole bunch of other people because it's so cool. We can sit here and think it's cool or we can do something. And I think that's the seedbed of where the leading really begins. Second, one of the people and I think I've actually asked him if I could write this, so I think I can share this story. One of the great four star general officers, a fellow named General Austin, who really had a profound impact on me when I ventured off to West Point and he held the chair two times after me.

[02:17:04]

It was after the most recent shareholder for the class of fifty one chair. He was one of the only four star generals to come out of his era in his class at West Point. You might be the only one, but certainly one of the only ones ended up with a very storied career spectacular leader. And he told me the story about partway through his career. He he was worried a little bit about promotions, is he getting promoted fast enough, his career right now?

[02:17:33]

One day you just woke up and changed and he said, I'm not going to take care of my career anymore. I'm going to take care of my people. And the moment I did that, everything changed because they wouldn't let me fail. When young people come to me asking, I'd like some career advice, my first response is let's stop asking that question. What have you done for someone else? How can I be useful? How can I be useful?

[02:18:04]

How can I take care of my people? Take care of your people, not your career? And in general, Hossam ended up as a spectacular leader. And I think those two sorts of things, if you were sort of thinking about seedbeds of how we would help young people grow into the leaders that our world desperately needs in all walks of life, it's one. Don't be a bystander, see what has to be done and someone's got to do something, and if you feel someone's got to do something, then you can exercise the art of getting people to want to do what you see must be done with you.

[02:18:36]

The second is stop taking care of your career, start taking care of your people. And if you do that, then they won't let you fail. So I don't know if an outside entity. I certainly couldn't, like, make somebody a leader, but I think people can learn it. And I think that's kind of some of the catalyst in the leavening of the bread based on what I've seen. And I'm really optimistic, I mean, I think that if I stand back and look at the young leaders that are coming up, the ones I met at West Point, a lot of the ones that I've that are on my research team, young people that I meet in life, we live in an era when it's easy for people to feel pessimistic.

[02:19:18]

I, I absolutely reject I'm incredibly optimistic.

[02:19:23]

And my reason I'm optimistic is because what I see in the leadership capabilities of the generations that are coming and I think will be in very good hands.

[02:19:32]

One more question about leadership, because I just can't help myself. But like, how much of leadership do you think is contextual or as somebody we think of as an exemplary leader in one situation, would be mediocre or below in another situation?

[02:19:49]

So obviously, there's a contextual element to everything. And I think that's something you talked to earlier about about even decision making as this idea that there is a kind of an isolated, perfect universe where we don't live on a Euclidian grid and and there's context and there's certainly social context. We know from social psychology that almost everything is is affected by social context. And you never know how you're going to behave. How are you going to react in any given situation until you're there?

[02:20:21]

And that's why we should always be very humble about our own sense of ourselves, knowing that we'll always act in a certain way because we actually don't know under certain pressure. So you should be very humble about that. So context matters a lot. That said, I think what the evidence very clearly shows me is that I can see leaders who learn how to be effective across very different kinds of contexts. And so, for example, let's take Eisenhauer phenomenal example, your supreme commander of allied forces.

[02:20:52]

Before that, you were relatively undistinguished, Major. You were brought up by General Marshall and so forth. But your being a five star, which would have only been five five star generals, I believe, in the history of the US military. But being a five star general is a very different leadership context than being president in a political system. And now but what's also interesting is along the way, he also went to be a president of the university and really struggled there.

[02:21:17]

So what you have with Eisenhower is you've got a two wins and one which was not as much of a win, which is the presidency of the university. What does Eisenhower's case show? It shows, number one, that two very different context. He could be enormously successful. He was successful in both military and presidential. But in a university setting, he was less successful. And I could go through multiple cases across scales of companies. I could look at people that had moved across sectors.

[02:21:43]

I think the shift that Bill Gates has taken from running Microsoft to leading in about world health in the foundation with his wife, Melinda, those are really different contexts. I mean, really different contexts, both enormously successful. So, A, you can be successful across different kinds of contexts and you have to learn how to do it. But it may not be infinite. You might be a good president, but you might not be a good president of a university.

[02:22:11]

And so as an individual is sort of figuring out where as you sort of surf along, you fit really well with your ability to get people to want to do what must be done. Thank you, Jim. That's a great place to end this conversation. I had a great time chatting with you today and really appreciate you taking the time to give us in-depth, detailed insights.

[02:22:33]

You're very welcome. It's a great, great privilege. I look forward to learning more from all of the conversations you hold. Thank you. The knowledge project is produced in collaboration with Jason Oberholtzer and the team at Charts and Leisure. You can find notes on this episode as well as every other episode at F-stop Blog Slash podcast. If you find this episode valuable, shared on social media and leave a review to support the podcast, go to F-stop logged membership and join our learning community.

[02:23:08]

You'll get hand edited transcripts of all the podcasts and so much more. Thank you for listening.