here's the interesting thing about luck luck is asymmetric as a cause bad luck can kill you but good luck cannot make you great [Music] hello and welcome i'm shane parish 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 FS blog slash 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 F s dot blog slash newsletter today I'm speaking with Jim Collins Jim is the author or co-author of books like built to last good great how the mighty fall great by
choice and turning the flight wheel 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 detail 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 5 leadership flywheels bullets and cannonballs the 20-mile March compounding is so much more we also talked about why companies fail and Jim flips the script on me and
ask 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 [Music] the knowledge project is sponsored by
meta lab for a decade meta lab has helped some of the world's top companies and entrepreneurs build products that millions of people use every day 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
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a final ship product check them out at meta lab co that's meta lab CO 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 class at Stanford University can you expand on that like no good place to like kick this off well sure 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 things that occurred to me I'd love to ask you that the story with with Steve Jobs so I had the great
really privilege when I was only thirty years old to begin teaching a course on entrepreneurship and small business at the Stanford Graduate School of Business 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 hoping you still go back to the question of luck because we actually systematically studied and quantified its role in our research in 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 is when you come across somebody who changes your director trajectory or invests in you bets on you gives you guidance at key points so at a great mentor named Bill Azir 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 originally the original syllabus said something about this will be a course on you know 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 period and I I looked at that and I thought wow you know I really don't know much about
that but that's the frame I wanted to challenge my students with and it was really the beginning of what became thirty years of work up to today and so as I was beginning to teach the course and prepare it that launched me on a research arc which one 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 howdy 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 I'm down here at the Stanford Business School teaching this course on make him into great companies gave him the frame I need somebody who knows a lot more than I do about this you found it co-founded Apple why don't you come
down and and Steve who was always very gracious in my experience this isn't the Steve that we know today that this is like Steve Jobs at the time just to contextualise things yeah so I think actually you know it's a really interesting place to begin the
conversation because I think it really gets to how people grow Anna and I think there's a marvelous marvelous set of lessons from his particular story so ya got to take it in that this is 1988 in 1988 it was only three years if my memory is right since he'd been fired
from Apple the company he founded or essentially you know 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 succeeds that we know today right yeah we all know that he came back to Apple and then you know 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 but in 1988 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 then and that's when I had the great
privilege to meet him so he kind of made equip it well you realize I lost my company and even in the session with my students he at that time he he just simply said hey I got booted out of my last company and just kind of he could have been really bitter and angry and
I'm sure he felt hurt I know that but he channeled all of it and so when he 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 like nearly two-hour seminar on life and creating
companies and creativity and what's next and 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 but this was a person who was never gonna stop he was utterly driven
for the actual quest of the work not what the work would bring he had no idea if he'd ever kind of end up back to the stature he'd been before when there was a gathering of I think the top 500 Silicon Valley leaders for up for a meeting I believe it was with the
president or something but he didn't get an invitation hmm okay so that's the wilderness he is in the wilderness and yet if you just listened 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 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 1.0 and a Steve Jobs 2.0 and most people only know the 1.0 because all the sort of image for 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 at Pixar and then how to come back as the seasoned much less in many ways interesting because it wasn't so strange it was just really
effective to come back as Steve Jobs 2.0 to redo Apple later and that's the really key thing is that that journey from 1.0 to 2.0 1.0 couldn't have done what 2.0 did Ryan 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 it's none filtered by what's to come that's an incredible story are there any other lessons that you sort of draw from this arc of Steve Jobs 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 5 leader and the level 5 leader is a 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 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 that good to great inflection we found that the the companies that made that leap had what we call level 5 leaders and the companies that were their direct comparisons right at the same time same industry same opportunities seem same resources or
control set had what we ended up calling level 4 leaders and one of the key insights from good to great was that the power of the level 5 over the level 4 and the essence of the level 5 was this strange blend of kind of personal humility and indomitable will
with ambition channeled into a cause that's bigger than you are right that that's what it's about and that that's what that was different about the good great leaders in the comparisons well people would often come back and say well what about Steve Jobs or can
somebody grow into a level 5 or what if what if you're kind of a towering personality because a lot of the level flies were were uncharismatic they had charisma bypasses and so forth they were often self-effacing and shy and so forth 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-5 and he actually called me a couple of times in his very lately years and we're talking about the future of Apple and what's so clear is that it won the experience of getting your going
through the wilderness actually did create a kind of humility that might have not been there before the indomitable will never wavered right so you add that peace 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 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 and by the time you get to the end he's still working on that right he still 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 often this view that there's you know that there's entrepreneur types and there's company builder types and that and what you want
to run out if you're kind of entrepreneurial confidence then you need to hand it over to the company built or type and then they take it from there as if they're like different species 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 that miss that there's an entrepreneur and there's a company builder and they're different animals is
simply wrong it's the cause is simply a matter of choice and do you decide to become Neph if there's a stark example of that it's Steve Jobs 1.0 - Steve Jobs 2.0 I'm curious as to whether some of those others went through similar pitfalls or
similar sort of failures first let's start with like what is level 5 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 like go off the
radar entirely or causes them to perhaps if they adapt and change become an example that we're you're using in your research so first of all the the level 5 I mentioned it earlier the essence of the 5 is an answer to the question what is the truth of your ambition and then
you essentially humble yourself to that ambition 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 and 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 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 right the more your
ambition is channeled into self and the essence of the 5 is there maybe even more ambitious than most people right but the ambition is not about that mmm that's the essence of it the ambition the burning driving exhausting relentless just like we can never stop
ambition is all channel outward into the company or into a purposes larger than them into a great piece of writing or something that is creating an idea that's durable but not about them and then and they know that in order to do that they have to serve they have to be
in service that ambition rather than that ambition is in service to them and then with that is underneath is this notion of a personal humility I have to learn from this maybe ed catmull can help me grow as a leader right that's a humility and
a will which is I'm never gonna 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 now if we kind of go back you were asking here's
some great entrepreneurs in history you have heard Kelleher Southwest Airlines if George Rathlin of Amgen if Gordon Moore right and Robert Noyce of Intel if Sam Walton of Walmart J Willard Marriott senior of Marriott Phil Knight of Nike Fred Smith of Federal Express Bill
Hewlett Dave Packard HP we talked about Steve Jobs Walt Disney right 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 and what what all these folks here are in common is they
were entrepreneurs every one of them is a 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 I could go make the list longer than this to but
most of them did not have the crushing wilderness experience hmm most of them did not hurt Kelleher George Rath Gordon Moore in the 1980s 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 maybe we
just want to grab on to that narrative right that ever our own comfort if we're going through something and we're struggling to know that there's sort of light on the other side of this and there's hope well yeah and I think that again it kind
of goes back to this notion of the indomitable will channeled into what the company needs and the cause needs let me either talk about one one person who I think did go through something quite dramatic in her life from one of the great level 5 leaders and that's
Katherine Graham of the Washington Post who I think is one of the great chief executives or the life fifty years so Katherine Graham never thought she was going to run or build the post right that wasn't her objective there's a wonderful book by the way personal history which 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 Catherine 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 you just read the text in her own book of what happened at that moment but there was also this what she was dealing 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 gonna who are you gonna bring in to run it meaning what man are you gonna bring in to run it and in a wonderful almost Aretha Franklin like ways like I said
thanks I think I'll do this myself she grabbed on to it and grew into becoming 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 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-5 ambition right out of her 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 fun do you think that focus on the mission like that relentless diving into the mission moves
your ego out of the way so it's like I kind of think of this as outcome 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 yes and I think there's actually two things that really
play in there one is a focus on the you know the mission of 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 we really get 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 it's Southwest Airlines right is 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 where George Rathmann recruited out of Abbott to do one of the very first biotechnology companies start up see if there's a very interesting case by the way if people are thinking about their own trajectory here's a guy that in his fifties had had
a corporate career he'd been 3m in like I think adhesives and worked in the R&D side work then moved over to Abbott and ran part of a kind of some of the medical stuff ed Abbott 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 this corporate career who steps into one of the great wild West's environments as an entrepreneur and ends up building probably to this point you know the
earliest founded still out there great today independent biotechnology company there's some other great ones too but it was very early and was like 76 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 Amgen's patents I mean he was like General Grant out there just he will go forward we will defend these patents no matter what he's very did you ask Grant white but in the end he knew that 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 mmm EPO that they had built and he would sit there and be work getting as his blood work and there be other patients in there and he'd say yeah I had a little something to do with this hmm
you know so sure you can you could be doing something else you know last you know save the world and lives as airlines or he could be at Amgen or he could be doing iPods or he could be the nobility of the post or it could be making people happy
at Disney or if there's a lot of different versions the key is you really are ambitious for that and that's where the five really really begins and we live in an era where there is it 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 huh oh sorry go ahead so he's good well anyways well I have these questions for you oh yeah please go ahead I mean I can just deal for hours I know let's have
this a bit of a conversation because um I am by the way I really have enjoyed your conversations with people what and what I really love about them is the desire to create a a conversational environment or 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 your interview with Barbara Oakley for example I mean actually changed some of the ways I go about my own learning of course I can 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 because you've kind of gone through these 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 of models or how to think about complex systems as you did with Scott page and so forth but you come back to this kind of frame on getting better and better at decision making we and right and I've noticed
that that's a theme that runs through like a thread that runs through and I'm I'm curious what do you know now from having done all these conversations it's like you're having Jefferson dinners like with all these people who think about decision making 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 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 Furnham 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 ten years ago right
where if I just learned this one thing I will all of a sudden I will know how to make better decisions 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 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 streets created and we're trying to create timeless knowledge and 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 our connecting it to
something that we we already know about or talk about 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 right and I went into this thinking and it was pretty naive of me which is like oh I'm just gonna create a big checklist of all these cognitive biases and you know when I make decisions I'm gonna go through
this checklist and what I found just 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 you know why there's limited data set is actually more relevant than it I should give it credence to and I
think that I didn't appreciate that 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 book is about 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 of my environment so that if I'm making a repeated type decision I get better at it 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 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 gonna play out
differently or this was gonna happen and we sort of convinced ourselves that were 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 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 where your thoughts or reactions to that answer I'd love to hear your yeah your take well you know so it's interesting with with decision making it's something I might have been so many Howard Marks said but it it was
one of the fundamental things I find trying to help people understand and to keep in mind myself is this idea of you do not confuse decision process and and outcome like if I could if I could go to all high schools and just say what is the low one course that everyone should
have before they graduate in the in the math and sciences areas it would be statistics right B probability and statistics because we live in a probabilistic world when our brains aren't wired for even people have been trained in statistics and probability
make probabilistic errors all the time because for whatever evolution any reason we don't naturally think that way and so you can make the right decision and still have a bad outcome 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 critical nodes on the decision tree uh yeah I had some had to do a decision tree around a cancer situation was with somebody really close
to me in my life and more 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 trees real actual decision trees are pretty useful if they are really useful okay so you've
got you know do you do something on those biopsies do you know what are the risks of lymphedema what am I you're sorry and you draw a decision tree it's a perfect thing and to use but in a decision tree you have just you know choice notes and you have probability
notes and when you roll that back you may have made the absolute right decision for each choice but those probability notes are still probability notes and so III 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 good outcome 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 right eventually you're
gonna go to zero yeah or worse and and one other thing just on decision so 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 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 may be fine things to get to but the first step is what are the brutal facts 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 is just against the natural order of things exactly the the capacity to deny brutal facts is immense we're always looking at comparison we
just take a moment on this because what my research mentor Jerry Porras another stroke of who luck in my life right when I first started looking at this question of how would you figure out how you go from a start-up to an enduring great company and my approach was to
historical because I believe that retrospective gives you bias so what you want to do is what historians do historians if you really want to understand how the Civil War and unfolded in the United States you don't do retrospective accounts you try to
look at like what did it look like from Graham's point of view in 1863 and Lincoln's point of view in 1863 not you know not 1983 looking back to 1863 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 you know in the early 1970s and you're making decisions what did the world like to them to that that's the way you have to do it right nuts that's why we do the historical analysis but then Giri 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 then another company like the comparison which was Advanced Micro Devices and so when you do this in say 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 pick 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 now in that comes a very interesting question you're going through walking through time 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 right 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 have 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 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 so they take the grocery chain industry 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 I'm a historian by Nature
you have two grocery chains you have Kroger and A&P they have a significant footprint a and P by all rights should be Kroger today the grocery store industry starts to change moving towards larger footprint stores uses of certain kind of technologies like scanning
devices and so on and so forth 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 A&P folks you see a lot of defense of why their model should
continue to work the way it is despite the facts that they can see in front of it right in front of themselves they it will explain away ugly facts so they're getting disconfirming evidence and they're certainly ignoring it exactly they'll discount the negative you go
over to the folks of Kroger and they were looking at it saying man this is really scary you're really afraid where they will let's look over the rocks and see all the ugly things underneath and you know they they their natural instinct is to go 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 is 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 debt now why that I don't have any answer for I don't understand the psychology of discounting the ugly facts versus those that simply are very comfortable reveling and the ugly facts even if those ugly facts are about yourself right man our stores are
no longer the right size stores that's just 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 because we're talking about decision making which you and I have puzzled on a
lot over the years but you you you're in the great joyful position of being able to ask a lot of really remarkable people questions you have themes in your questions and then a lot of variation around those themes based on the person 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 I think you know it's hardened interview format where I would like to see people go is you know 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 but I mean
we're or we're not seeing them in other people's it used to be like you lived on the 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 and you'd 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 you know all your friends friends and loosely defined sense 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 right 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 your
seat 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 and I found that really hard to get people to I mean you sort of get that 30,000 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 you know 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 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 mm-hmm right and it's not that you fall down it that you get back up and we all stumble
we all make mistakes - error is sort of human but what we do when confronted with that error similar to what you're talking about with these these companies what we do when confronted with those Fox with this situation how do we handle that what's within our control to handle
that and I'm not sort of purely stoic about this stuff we're you know life happens and you just sort of put on this armor and you go through it I'm a person and I have emotions and I think this we also tend to over exert ourselves towards rational behavior 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 gonna serve us and when it's gonna harm us and I don't think
that the notion that we should be purely rational and everything we do is healthy it's okay to sit on your couch and cry after you get divorced and you can't see your kids 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 Porras you come across some people in your life that have a kind of not just an intellectual wisdom but a life wisdom that for me was was profound and and kind of the grace and humility they come at things for example I still look
back on if Jerry who was a Dean at Stanford Business School massively tenured senior soon to be emeritus and we start to build to last research and he agrees to partner with me as a as a pure colleague and when 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 I mean just a marvel bask on that and one of the things that Jerry is just is just this range of quality of person but he taught this core
at Stanford that everybody ended up feeling they needed to take or that they really I don't know if there's any other graduate school at this point it was called business 374 but called interpersonal dynamics but we all called it touchy-feely but the idea behind
behind this course was you basically were in these groups these groups where the only thing you're allowed to discuss now picture this so you know 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 it could only talk at the level of feelings okay with another you know eleven graduate students and a couple of facilitators and you know sort of saying like well I think it's not really part of the deal it's you have to be going to your
feelings and and to things you know that that were really impactful for me on that one is just your theories basic point I try to teach this to young people as much as I can 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 in you go an intellectual level but that the real level people are at is feelings that was the whole point of that course which is like if you wear that lens hmm right you wear that lens into any
conversation there's they give me good feelings the capacities we operated lawful things were feeling beings is Jerry's view and and I took this course and I had this I might my father and I don't want to go into a lot of detail about my father I've over time you know
come to really he died when I was 23 he was very much a my a 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 who has 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 like be a dad I must have been her aunt it was actually very hard and I remember driving down on the bus I was a
Greyhound bus I took from from older down to Santa Fe and I was you know I I see how that's gonna get out with my brain and so I was studying and I'm seeing there on this Green Hill bus highlighting plate oh yeah my way down to Santa Fe and so remember very vividly
I still have the book but anyways and 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 right I'm not gonna try to do a lot with this and and I think there was very self protective
because there was my dad was not didn't have the capacity really to focus meeting a dad so I don't want need to go in any more detail about my dad but I had thought that I fully taken care of that and then in this course business 374 which Jerry
my 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 I still remember the moment when just a 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 and and for me you know that the Jerry 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 whim that was Jerry's
view I appreciate you sharing that story with us Jim it's part of the story yeah I I don't need to go under huge amounts of detail but I'm sure everybody has something in their life that's like that and you think it's dealt with 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 yeah or maybe I'm just completely you know off-base yeah yeah no I I think that there's I mean what would I find for for me is I know that I'm 61 is that what drives me changes though because when I was younger so much of what drove me I
think was you know 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 that sort of kind of youthful drives as I would think of it to more the sense of this sustained sense of you know I really the work itself motivates me I'm just motivated by what I do and what it can
do 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 mmm oh let's talk about five wheels so as a good segue I
was gonna move to luck but let's let's go flywheel then luck you know let's do five wheels and then I can explain the concept of a flywheel yeah so 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 with the credit for the foundation of the contrast in the method goes back to Jerry Porras and then our historical methodology and having control in contrast in it why did some team 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 and what we found after 6,000 years of combined corporate history of doing that across four major studies to look in two
different lenses at 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 now so this and I would 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 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 let's 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 you gotta ask what's a great company and that's the outputs so think of it as that there are inputs and they're outputs 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 education results superior out health results whatever results are second is distinctive impact which means you can actually ask the question 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 endurance
you're 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 outputs then the question becomes what are the inputs that produce that and what we what we
have is think of it as sort of four stages that lead to those outputs stage one is about disciplined people stage two is about disciplined thought which by the way I think is a lot of where you spend great time in your interviews is around the discipline thought question
stage 3 is about disciplined action stage 4 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
now we go back to that framework in the framework and discipline people you have the level 5 leader we already talked about that you have the discipline to get the right people before you decide what to do the principle is first to and chand back on decision making very
quickly on that we talk all the time about you know decisions one of my big takeaways from our research about decision making is try to change every what decision into a who decision not what should we do about this cybersecurity threat but who should we
have involved in it not what should we do about this investment decision but who should we have involved in it right change every what to a whom as much as possible so discipline people there's one thought there's this thing called the genius at the end versus the tyranny
of the or we don't need to spend a lot of time on that the brutal facts the discipline confront the brutal facts which we already talked about and then they just want to really find your hedgehog concept which is what you're passionate about what you can be the
best in the world at 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 there's
one 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 perfect outcomes but they're disciplined
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 in disciplined action we have the flywheel the 20-mile March and and fire bullets and cannonballs let's focus on the sly one zooming way
out here 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 okay breakthrough - tendency started a run of 10 NC to a championships in 12 years from I believe it was 1962 to 1970 for something like that that was sort of the
era right and you would have thought that in 1962 there was this instantaneous breakthrough it banging Wooden's teams jumps on you know jump on into everybody's consciousness and it's wow 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 and the first starts it's like pushing a giant heavy flywheel and no one pays any attention because it's just one giant slow creaky turn but you keep pushing and you refine the fast-break in you and
you begin to get different kinds of players and you begin to refine the system and you'd make the trails 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 and you get eight turns on
the fly 116 and 32 and a hundred and a thousand and that flywheel is just building momentum compounding one upon another upon another and then at some point boom it breaks through they win an NCAA championship it's in a million turns on the 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 firewall and 10 billion turns on the fly well here's the thing 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 and just like investing where it's by quality assets
you would presume to hold forever then largely do and 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 things that then we've done since writing good to great that came out of good to great was we've done a lot of work on ok well then how do you really harness your own specific flywheel and that has been 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 yes yes sure the first one I wanted to start
with is what causes fly wheels to break what are the most common reasons you're talking about this and when I was reading and during preparation for this and I had read a lot 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 ANP 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 leads it astray like or people start infighting sort of like for credit and you know you become tribal internally and political maybe perhaps 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 and I'm sure there's more but I'm interested and curious to hear your thoughts there's kind of a an inverse to the
flywheel called the Doom loop and one of the things that it's interesting when we wrote the the chapter in good to great and I'm just I want to grab something here hang up one sec I grabbed this I've got it so in good to great the chapter is actually not called the flywheel it's
called the flywheel and the do look and the reason is because when we looked 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 good to great one of them did why what happened and so if you think of the flywheel is kind of a it's a cycle where great results begin to compound because you understand how those great results are created the do loop is exactly the opposite and what happens is
this and I'm just sort of described the inverse of the flywheel which is the do loop something happens it produces disappointing results and it could be that it was a random event or you know something just happened that was out of your control or something that you just
made a mistake or you you bungled something whatever we get disappointing results but unlike really understanding why that happened so that you can correct what happens as a company reacts without understanding oh my gosh we had just winning 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 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 more reaction well and understanding then another new direction new fad new
program new whatever and then another failure to build momentum or disappointing results and then you're in the Doom loop and so what's really interesting is when you look at again this is the power of the compare method you have the companies that bill
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 did this funny result they can look at it with a clinical I say no the fly will still
works we're going to continue to improve our execution on it versus if you don't understand it you start reacting mm and you end up in the Doom loop and you end up grasping for salvation and just going down the other side that's what we see in comparison companies in contrast to
those that were on the other side of the coin of a fly wall that kept building I like that um the the next question I'm sorry I have three sort of different questions and they don't necessarily have segways together the second one is can you identify fly wheels 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 it seems like a perpetual money printing machine if you can identify these positive fly wheels and level 5 leaders
and in advance instead of like in real time so here's how I've thought about that so first of all I have a real deep understanding of what my own hedge hog is I think individuals have hedgehogs as well as companies so go back to the Hedgehog and the idea of life of
understanding what you're really passionate about in the case that 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 right then you can make a living for it or have
some sort of resources to be able to pursue the goals you want to pursue 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 I studied man medical scientist as an undergraduate which is computer science
up you studied computers as well I saw computer science mathematics statistics operations research 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
by probably my other path but I was lucky enough to find what I'm really Hedgehog about which is what I done so far and so I'm more interested in how you understand what makes a great company tick from 61 to 90 I'm moving on to new questions but for 30 years that
question occupied my mind and all along there's this question should I do a fund right should I do a good great fund or maybe I shouldn't learn how to but you know the reality is it's just not my hedgehog ID I'm not passionate about that at all
I'm not sure I would be as encoded for it the way say Howard Marks or a Warren Buffett or somebody who's just they're just like they're so stoic when it comes they're they're they're able to ride through things for the certain equanimity that's quite extraordinary
I'm not sure that's in my encoding now that said here's the one thing this is not investing advice so 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 hmm so maybe we'll talk
in a minute about the Amazon flywheel because that's what stimulated me further 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 10 billion turns 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 important those who are
building the fly will understand how it works 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 let's talk about Amazon for a second because they
they invited you out right like Jeff invited you over to Amazon I think it was a 2000 2001 tell me about that conversation and sort of like because you were talking flywheels with them yeah so what happened is and I and I want to be really clear as I started as
I I can take virtually no 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 great companies tick so done built to last with Jerry and where we looked at companies that had sort of gone from start up to these because a
visionary iconic and during status in contrast to others they could have it didn't and then we did the good great study which has takes companies that are average performers and then one breaks through and makes a good - great leap and the comparison company doesn't and
we asked what was different and from those we derived the ideas some of the ones I've already led up partway through the framework earlier in our conversation up to the flywheel part 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 them right you know
these people are really smart they're a lot smarter than I am and they could just take ideas if I just taught them all but one of the things I emphasized because 2001 was a dark time it was a fall of 2001 so the world felt dark number one number two is post.com bust
and people had questions and what was going to happen with all kinds of companies but Amazon as well and I taught the flywheel principle as well as you know well five and first two brutal facts Hedgehog flywheel the whole deal and challenge with the idea that you respond to this difficult time by
understanding and doubling down on building a flywheel you know panic and to their great credit and really it's their full credit they took the idea the principle of the flywheel the way I described it to you here the cumulative compounding idea and then they said
let's do the flywheel for ourselves and ask what is our flywheel this was the crucial thing that they did that I learned from so I came across the final principle of absurd Tophet they then took it a step further and changed the way I look at it so
here's what they did now I want to share with you what they do was they said if you really want to harness the flywheel you need to crystallize how your specific fly will turn and let's spend a moment on this one because it really illustrates the power of a fly well what
a fly will is so here's a sketch of what it was a picture going around in a circle right it starts at the top we're going to lower prices on more offerings okay so that's the start at the top of the fly well now if we do that that's going to increase customer visits and if
we increase customer visits now that's going to attract third-party sellers that can then as the next expand the store and extend their distribution and if we do that we're going to grow revenues for fixed costs and if we grow revenues for fixed costs boom that's
gonna bring us right back to the top of the flywheel we can lower prices or more offerings which that increases customer visits which is that attracts third-party sellers which then expand the store and extender distribution which then grow revenues for fixed costs
then back to the top lower prices again up 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 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 are more offerings you it's almost
inevitable that you're going to get more customer visits and if you get more customer visits it's almost inevitable that you are going to get more third-party sellers 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 the static thing it's a dynamic thing that captures what Lee 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 that caught my eye and I started challenging other organizations to do exactly that so I'm a teacher the final 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 fly will 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 it round the other side of the coin though is that if you fail in any
one piece the entire flywheel slows or stops so if you give yourself scores on on a point of the flywheel right you say one to ten execution scores on each component and those scores on the safe five or six components were like nine eight nine ten
three nine ten what happens because of the linkages and interdependence of the entire flywheel the entire flywheel stops five six execution is zero momentum it's like multiplying by zero exactly right exactly right and so the challenge is to understand it and then
make sure that you execute on each part as you go round and around now there are 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're thinking how far could a fly will go well in 2003 how far could that fly
will go a really long way people underestimate how far a really great flywheel could go that's a really good point I think like identifying that even when it's going might be good insight for investors again not investing advice for anybody listening do you have the
flywheels applied to people as well do you have a personal flywheel and what does that look like I do have a personal flywheel and you know it's interesting because we we put out this recent monograph on the flywheel to kind of extend good to great so people didn't have to buy
another bona fide mate is just a chapter in the back I put it out as this monograph and on the flywheel principle and then as I started thinking about it and 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 and here's the essence of it it starts with curiosity I'm just interested in really interesting and big questions I'm for racially curious and if I if I have a really great big question then I can't help but then want to translate that into rigorous research
because I I don't feel I can 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 concept 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 5 or the flywheel or you know the Hedgehog concept but whatever or the whole framework 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 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 share 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 you know some interactions and over time I've reached a point now where I don't need
to generate an income it's just so I can kind of have the self endowed chair but that generates the resources which then allows you to put it right back in to the next big questions it really curious about so to put that in a very concrete form after built to last where I had
Beth my entire career built to last with Jerry left Stanford to see if I could do this path is a kind of self-employed professor it's kind of a down my own chair and grant myself tenure built to last I have really good fortune that it was successful
I turned to Joanne we've been married for 39 years now and I said okay I'm gonna take all the money that were 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 was it was the investment
the reinvestment at the end of the flywheel was to take the resources that came from the successive belt last double down and put it into the research project that became good to great and I remember writing these checks for like researchers and data and you know all
this money is going out like the wumei have only had one successful project but all this money is going out I'm writing these these checks right there just going out of our account they remember Joanne just looking at me one day of saying I sure hope you find something no
please please please exactly and but that was the process right that if you if you had a successful one then you would channel the resources into more curiosity and questions and research cool I like that you brought up Joanne so I 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 well so it is four days right like I don't know whether this is how you put
this in our decision-making frameworks because there was no why I suppose there was an implicit decision tree you weren't all in all him 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 at Boulder Colorado and we had a friend who was my climbing partner felony Roger breaks another great stroke of good wholock in my life and he was also her high school cross-country coach and physics teacher he kept encouraging us 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 you know studying math and doing a little bit of rock climbing and stuff and it was he kept encouraging us he said you know you guys need to get together and
arrange for us to meet but nothing really happened for like years and then finally my senior year Joann 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 and I said well I'm I'm
thinking of upping my mileage and of course that was true because zero plus a greater than zero would be an increase and she said would you like to go for a run and I said sure and so they 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've got a runner at all but I figure okay yeah I'll go do this so I put up how hard can it be right it turned out to be so I go over and I beat her she looks at me and I'm kind of in my dorky I have like this
rugby shirt thing on and kind of climbers like shorts and these you know I I do not look like a runner and she says do you need to change I'm like no I'm good to go she goes ok so she takes me out on an 8 mile run and the first three miles were uphill right we was
running a page railroad 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 that was May it was basically it's almost exactly 39 years ago I was a May of 1980 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 can I mention earlier that you know 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 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 committing to
it and will never blink will never blink I imagine that's an amazing feeling also scary at that age too maybe well I think it felt to each of us like there's an anchor point hmm and somehow just instinctively I think we could each know that we could commit to each other into
a 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 39 years I think we're still the same that's amazing gratulations yeah there might be some amount of luck in there so maybe that's a good segue to
sort of talk about a little bit of luck I mean you had some who look there yeah part of your research is basically it's sort of like how do we analyze luck 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 I would love to and because most people don't ever really want to talk about it but I 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 our
question so you have oh you know the inputs and the outputs if you had though this one people well the five leaders first two right people on the bus discipline thought genius at the end confronted brutal facts Hedgehog concept disciplined
action flywheel which spent a lot of good time on the fly one real discipline understanding into disciplined action toward the flywheel and the discipline to stay with the flywheel for long enough to get its compounding effect and when the world thinks you're crazy you
still understand you're fine well then there's these other two parts we we may have I'd be happy to circle back to the 20-mile March which I think is how you defeat disruption and the Bulls and cannibals which is how you extend flywheels in a disciplined way over time
then you go to the building great as to 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 I find it fascinating the becoming second point in that becoming a clock builder not just a time teller so to build a last means at some point you have to stop being the time telling entrepreneur and become the one who could built a clock that doesn't
depend on you anymore that's what Steve Jobs said and then finally the principle deep deep roots will preserve the core and stimulate progress which is kind of the secret to long-term renewal of an institution 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 and I came to see it as a multiplier this big amplification variable that amplifies everything else and it's called return on luck 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 have special on the research team and I were to say to you look we've got these companies where this came for the great by choice to research with
another great friend of my board he had a brilliant methodologist and we realized in great by choice that we were studying companies that ended up going from startup to IPO to 10 times better than their industries in the most turbulent industries we could find
semiconductors biotechnology Airlines medical devices we could go through the esophagus enra and in contrast to other companies that sort of started it in the same Cambrian explosion and didn't become a successful of those areas and we were comparing them and asking why
what was different what do we learn the very nature of that because of one the outsized level of success and to the fact that they were highly turbulent industries for big fast moving at 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 answer because it could be that all those other variables are described right the discipline people that just one thought the disciplined action the building
greatness to last all the sub principles maybe that's like a giant equation where at the end is a giant variable called plus L block and maybe plus L is a T of a hundred points right if you didn't address that question you were gonna leave a massive intellectual hole in the
framework in my view so uh 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 is let me pause and ask you if you were on the research team before we knew the answer and you had to put down a bid hypothesis were those 10x
winners more than 10 X 10 X was the minimum 10x winners relative to their comparisons when you slice it overtime luckier than their comparisons did they get more good luck less bad luck bigger spikes have luck better timing of luck if you had to hypothesize hypothesis a
is I'm gonna bet they were luckier or B I'm gonna bet but I put my hypothesis on that they weren't luckier what would you hypothesize I'm just gonna step back before I answer that question in just one second I'm just for framing cuz when I think
about luck I mean all the people in that data set the comparison group and the the out performers are all incredibly fortunate right in the sense that they were likely born into countries with roads and healthcare and schools and education systems and I think that we're
super fortunate to have that so we're already really lucky and then when you start looking at luck beyond sort of like this birth luck you have sort of like you don't pick your parents right you have a certain socioeconomic status or trajectory but eventually you sort of
like take over your own trajectory at some point through your habits your actions 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 hypotheses
would be generally speaking we all have the same of luck like the same opportunities for luck to have happened and 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 yeah that would be my sort of inclination now you can tell me why I'm wrong no no I think that's a pretty good inclination of first of all I think you're right so 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 all right had Andy Grove been born in sub-saharan Africa but it was worn behind the Iron Curtain yeah no but I mean like had you been in
a tribe somewhere I think we would never know who exactly so there's a absolutely you're Canadian is that right yeah yeah okay so I can tell by the amazing Canadian accent right 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 full 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 parents or a variety of other
things okay so let's set those to the side for a moment then the only thing I could really look at in our research was a very simple question which is to say okay but now we got this kind of starting points are the same fairly high level of starting points but starting
points are the same and then really vastly divergent outcomes 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 yeah so you could study it and this this is where Morton and I spent two years trying to
figure out how to do it and Morton had a had the following insight luck is an event so the moment you can look at things as events you can then begin to do event analysis which allows you to do certain kinds of quantitative analysis okay so then my
job let's just go back and look at it's okay that's a great insight what is a luck event and so we defined a luck event and I think it's a good definition of luck a luck event is any event that meets three tests what you didn't cause it to it has a potentially significant
consequence good or bad so bad luck is the one that's potentially you know bad a consequence good is good luck is the good consequence could you have to look at both and three you came as a surprise in some form either the timing of it the form of it that had happened at all
there could be any number of different permutations of the surprise right you could have known for certain that it would happen or when it would happen or what form it would take so any event that meets those three tests you didn't cause it there's potentially significant
consequence good or bad and it came in some sense as a surprise is a luck event and once you understand that then you then go back through the history of the companies and you in you and you can take all the information and you can begin to identify what our luck events
that meet those three tests is very clinical does it mean all three tests and if it does it goes in the lock event bucket and then once you have the two luck event buckets you have the buckets looking at companies you can take the companies and you can say okay now let's
look did the 10x winners end up with a better bucket of luck events did they get more good luck events less bad luck events bigger spikes of luck events or better timing because it could be past contingency and then look at all that data and what you find what we found is
that if anything the comparisons were luckier but it wasn't strong enough to make that case so we'll call it a wash essentially there if you wanted to argue that the ones who beat their comparisons were luckier that they had more luck on their side you cannot 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 is a huge variable take a classic historical story early days of the personal computer industry to small companies get the exact same massive luck event iBM is looking for an operating system one of them in Pacific Grove California it's digital research
the other is a small company in Seattle called Microsoft that makes 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 I think was called jam or something I forget exactly but they actually had a product Microsoft at that point didn't have an operating system they get the same luck event in response to that luck event 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 he gets his cue das thing and a variety of other things and then it's the return on luck and then
building upon that right the flywheel effect of Windows right it wasn't just a single moment once they got that flywheel going then it was like you know step after step after step building upon that luck event right so there's a lot of there so you wouldn't say that wasn't
a huge lock event it was but the point is two companies had the same luck of it and one squadron it and one made the most of it that exact kind of pattern we can see over and over and over and over again the other side of the coin is on
bad luck and here's the interesting thing about luck for me luck is asymmetric as a cause we cannot make the case of luck as the cause of a great company and any of our research or on the fly will affect overtime and return a lot capitalizing on things that
cumulative right so good luck cannot cause a great company but bad luck can be the cause of the death of a company so luck is asymmetric to the negative bad luck can kill you but good luck cannot make you great Howard Marx talks about this in his interview right one of the things he
does all the time is he throughout his entire careers the way I heard it in your podcast 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 never kills you that's really important for return our block and people think that luck management is a lot to do with the
upside but it is even more imperative on protecting on the downside now that's really interesting I hadn't really thought about it in in that sense I like that a lot um 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 it's a really good example of this there was a lack of it no question right and then they got a really high return the other company could have had that luck event too did
grab it but then what was the capitalizing once you grab that luck event you get building it it wasn't like oh great touchdown we won were successful what happens over the next 20 years is recognizing that there's a flywheel effect that has to do with standards and so forth and really
building that out and and really doubling down on it sticking with it consistently and early on the early versions of Windows early turns on that flywheel were not some people even laughed at them but they stayed on it all right and they kept building and they kept
building and they kept building and then Windows 95 and just keep building and keep building and eventually harness the Internet to it and keep building and keep building a massive flywheel effect so the way that you you get the return on the on the lock is
you have to translate the lock event into a flywheel at some point as opposed to viewing it as a width oh oh that'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
yeah let's do the 20-mile March first and then we'll go into bullets versus cannonballs what is the 20-mile March okay 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 will
call them company a and Company B for the moment it's a real company let's imagine that you could you have to make a big bad investment on one of these two companies and of course keep in mind though the most effective investing strategy is a highly under versified
portfolio where you are right so and obviously that's a bit facetious because that's almost impossible to do only just suppose for a moment you're gonna place a huge concentrated better company a Company B now I'm gonna tell you over a two-decade period something
about the performance of those two companies are small they're technology-driven they have massive growth in front of them a company a is going to achieve an average annual that didn't come growth of 25% a year for two decades so rapid growth average annual
that income growth twenty-five percent a year for two decades company being coming off the same base for the same kinds of products same kinds of technology same kinds of customers same potential and as future is gonna grow as average annual that income growth at 45
percent a year over the same two decades now if you pause here for a moment and you just simply say if I just were to say hey you know given change just given no further information if you had to place a bet where would you put it a 25 percent or B at 45 percent oh man I
don't know most people with yeah most people do I would take the 45 give it go right just go up with the OPP's right but let me just add a little bit of extra information I'm gonna give you the standard deviation of that growth rate
so company a is gonna have plus or minus 15 points on the standard deviation so it's 25 plus or minus 15 Company B is going to be 115 points so 45 plus or minus 115 downs Company a is over that two-year period is almost never gonna be above 30% but will never once this 20%
right company B say again these are same industry same kinds of company same technologies is going to be above 30% two thirds of those years but it's gonna have a range of plus three hundred to minus 200 now if you had to place your bet would you go the 25% a or the 45 units
right you go with the 25 right because you are the numbers and everybody who was since your podcast knows their numbers and so forth so they do that really well but the amazing thing is that it is not even close like two hundred ninety two one it's in Chapter
three of great by choice here's the point that's a company that had a 20-mile March and his 20-mile March was 20% net income growth consecutive every year now I want to be really clear the 20-mile March is not about necessarily a growth rate that just happened to be
that one there's company called Stryker under John Brown who wonder what public in the 1970s said this March the idea being to be a consecutive every single year now if you think about it think of it just like walking across the United States and you got two approaches what
is every day I'm gonna get up and do 20 miles no matter what good conditions bad conditions when to my face hot coals whatever I'm kind of on my 20-mile March and the other is while depending upon the conditions I'll either do big days or hide in my tent and wait for
conditions to improve I'm not on the 20-mile March I'm erratic based upon the conditions around me Company B was the non 20-mile March our company a 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 this exactly the more turbulent the environment the greater the value of being the twenty-mile Archer now let's puzzle on this for a bit
chained about why that would be because somebody here's what one thinks interesting it happens for me when I first see an idea or in this case was Borton and I together okay by choice where we saw this idea the 20-mile March even we write it in the final book 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 publish made by choice why the 20-mile March works so let's just let's puzzle on that for a bit anybody that's listening to this
why do 20-mile March or swim and it doesn't have to be growth rate so don't get wrapped up on the idea bullet just compounding growth it could be I'll be profitable every year no matter what a Southwest Airlines it could be Moore's law in technology earnings were all over the map and Intel
but double components at affordable cost 18 to 24 months like clockwork no matter what no matter what no matter what no matter what that's our March we will not deviate from that March to have quantum mechanics the limits iguana 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 win we know that they do but why and so let me just pause there for a moment your listeners might be thinking about it oh look pop into mind for your this
isn't like a test like yo right or wrong but just what would pop in your way I'm gonna get it wrong um what my initial hypotheses 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 yeah that's that's definitely part of it but wait a minute if you're really focused on your March doesn't that become really dangerous because
then if the world changes you're over here focused on the March can't 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 marks with but on the surface you would say
well wait a minute though the twenty mile markers are the ones that could be get clobbered by changes how does that work don't they just get disrupted into oblivion so now let's step back for a moment the key to the 20-mile March is the word
consecutive hmm now let's think about this for a moment let's suppose your Southwest Airlines and you say we have a March for we want to be profitable every single year for 40 consecutive years without a miss all right now how would that change your decision-making see
this is the key to the money we're talking only about decision making suppose your decision is that you have to hit something for 20 or 30 or 40 consecutive years without a Miss 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 maximize your short-term results today but you're gonna miss at 7 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 to
change your timeframe and put you ahead of those disruptions so the great irony is that the short-term focus of we can't miss today but we can't miss any for the next 20 cycles 20 years 30 years 40 years means that you have to be constantly investing for down the road
else you're going to miss somewhere down the road and that is what the pounds so for me the power of the March isn't about just this year it's the commitment to the consecutive performance that will force you to innovate ahead of disruptions I like that that's really
interesting let's talk about bullets versus cannonballs right so this is so again sort of now back in the notion of the framework right just split people this one thought discipline to action at that building a class is the last part of the discipline to action we got
the flywheel got the 20-mile March and the bullets and cannibals 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 that I think this fits in to what we were just talking
about right in terms of like constantly investing and exactly and and what we what we found is that as well as did tell us gold or their marvelous work well envision there's very little evidence that the pioneering innovators whip and what we found instead is that
it's not being innovative that matters is 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 bearing down on you and you have a certain amount of gunpowder and you take all your gunpowder and you put
it a big cannonball and you fire at that ship it 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 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 again ping 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 Morton's real insights when we work together and great by choice I want to give a lot of credit to more about this what what Morton said is look it's the ability to scale the right innovations that separates not
innovation per se 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 well big bets are either dangerous or really effective accelerants on the sly way and what we found is that if you calibrate with a Pyrrhic of validation by firing bullets first and then you get
calibration then you convert to the cannonball that's what correlates with the best performers over time the comparison companies in contrast would either a not fire enough bullets B would fail to convert a bullet to a cannonball when it came time for the big bet they wouldn't
do it or C and this is their biggest kind of constant mistake is the firing of big uncalibrated cannibals uncalibrated big bets and that correlated with ending up heading down the path and do the doom look when you stand back over history that the bullets
and cannonballs becomes the way that you extend the flywheel is there a correlation between firing those big uncalibrated bats 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 like what's behind that that's really interesting cuz it would
seem like I mean I'm just sort of like mapping that it would be better to fail conventionally and you know you can sort of like fail by not understanding that something's changed and you know 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 cannon ball 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 gonna be out so mediocre performance is
not an option if you're the professional coach I mean it might be in some cases but generally speaking it's not so you you 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 pattern so
delicious actually you know 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 jump ahead to the fourth stage of the framework to the building at - last stage and the opening part of that is productive paranoia but that really means staying out of the five stages of decline productive
paranoia doesn't mean not doing old things it's productive paranoid it's worried agreeing about the things that the world could really do to you and protecting yourself against those so that you stay alive you're managing those downside risks is we're talking
about earlier the only mistakes you can learn from or the ones who survives we really tried to understand how does a great company's fall does the first step in being built to last is don't dock in good the great we had some of the good to great companies later really stumble
one of them for example being Circuit City a my response to that was at Ohio research is wrong our research was right we because our research is never oh these are great companies forever right our research is about studying errors and episodes in history from which we
can derive principles that correlate with the best results and if company cease to live to those principles they're going to fall right 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 weren't were a great champion they could lose it later so that didn't bother me at all that a company that was once great fell that was in our research film but what it really became was a source of great curiosity because it wasn't that the companies
that stumbles weren't great what was really scary is that they were great hmm and then they've lost in the end you're trying to understand things as 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 there's some timeless quality to them that you can rely on that right that's the quest that's the desire you share with me a desire for that quest for that this need to get there if we can and so for me that's 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 we ended up in small book called how the mighty fall so we did built to last then good to great and then I did how
the mighty fall cuz I started thinking I need to understand how it unravels if it unravels first of all just as an aside here's an interesting thing from intellectual standpoint which is harder to understand the ascent or the fall ascent is much easier because it's like
it's like entropy right I think about a pool table with 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 racked in a perfect triangle in a specific place on the table that's like the path to
building something great 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 wracking 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 now one good thing about the other side how many ways are there for all the pool balls to be disordered on the table well it's infinite almost right there's just so many possible relations 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 ascent there are lots of paths to decline so coming up with a framework for the coin turned out to be much harder then the framework for assent so we told
on this and a number of members of my research team and I we took the same methodology except with the companies they kept rising in contrast to others that at a given point had the negative inflection they lost him we started asking why what happens when you lose it
and we found this sort of five stages by which a company Falls and he first of all here's what's really scary you go through the first three of five stages we're looking in from the outside 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 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 I think if you was really obvious when you're in stage one you could catch it early so those stages our Stage one is not success but it's hubris bored of success it's 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 and that's kind of a type-2 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 is undisciplined pursuit of more they become too aggressive too much growth firing uncalibrated cannonballs expanding into
areas in which they have no business operating big bets that have massive risks built into them right it's the undisciplined pursuit of more that is actually stage two you would think it's oh 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 so they're overconfident they're taking risks that are not fully aware of the risks that they're taking because their overconfidence which is born of this says correct you know there's a certain
animus that happens have we been really successful now we just need to have more and we need to be bigger and let's do a bigger acquisition you know 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%
to here or we're gonna gobble things up without any earnings or whatever it happens to be we can move I've got a 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 if we go back to say the financial
crisis was a complacency or was an undisciplined pursuit of core then we go to stage three which is though the undisciplined pursuit of more leads to problems risks that are labeled evidence that's growing that things are not all well in the kingdom maybe underlying
signs of things we ought to be worried about and stage three is as the risks and the facts begin to mount Stage three is denial denial of risk at peril and when you're in denial of risk and perils again hubris for success leads to stage two a disciplined pursuit of more leads
to stage three denial of risk and peril if you stay in that long enough eventually it catches up with you and go to stage 4 stage 4 is when you fall and it's visible to everyone and then stage 4 it's not that you fell that stage 4 is how you react and if you react with
grasping first salvation right and this is where you get into the Doom loop that we talked about earlier you start making lurching moves panicky moves disappointing results reaction without understanding and you're in that Doom loop and often people will fire more
uncalibrated cannonballs as they're grasping for salvation because they never get back to rebuilding the flywheel you get these little reflections up followed by another - down board another up and then - down work kind of like the gambler trying to
make back their money exactly right and then you end up eventually if your balance sheet runs out which is the crossover point you go from stage 4 to stage 5 which is capitulation to irrelevance and death so you'd ask a question earlier about
the uncalibrated cannonballs and people wanted to play it safe and I jumped ahead the reason I did is because the great the interesting thing is the more dominant pattern of how great companies fall is the undisciplined pursuit of more not the hunkering down and just be
too conservative 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 organization which would you focus on in proportion to energy commit it would it be 50/50
would it be 75% firing bullets versus 25% sort of like getting better at firing the Cannonball after you've calibrated how would you think about that so suppose I like to sort of describe things through the lens of a specific case let's take the iPod that
would that went into the iPhone and so forth this was a classic bullets to cannonballs move and I could go through lots of them through our research the microprocessor was about to cannonball at Intel we could take the move to MIDI Bills of manufacturing steel at new core
was a bullet to cannonball process right we could go through a variety of these cases just to illustrate how this works yet apples got its kind of original activities which is in the back of dosh computer Steve Jobs goes back to 1997 first thing he does is to basically try
to reintroduce so disciplined get cost under control stop the bleeding get the Macintosh falling back into really good shape sort and then to read to pull out of the woodwork to people who still believed in 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 so 97 to 2000 to 2003 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 right so they did that well they did that they were firing some bullets and one of the bullets was around the mp3 player they saw the rise of the mp3 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 called the iPod the illustrate today we look at the iPod and we say wow you know they became the iPhone their eye 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 cub uncalibrated Canabalt or this big cannibals 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 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 I did a variety of things but one of them was this this thing that
was the little iPod and if you go back to I think was the 2002 or 2003 Apple 10k report and you read it at the time they described give the iPod like three sentences a natural extension of our digital hub strategy or something and they still saw it at that moment
it's like dad Macintosh is the center of the world we got this extension thing of this iPod that's all I said about its 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 and 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 they tried a whole bunch of other things because the
bullets never merited big cannon balls 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 fire is going to become a cannibal the whole point is the uncertainty you don't
know which bullets will merit the Cannonball so you got to be firing enough of them to have some discovery but the iPod starts to show some promise 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 then there was this critical point where they said well but it only runs on Macintosh computers 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 put it over on a Windows machine hmm
okay so there was this next organic step right and they did that put it in the Windows machine boom all of a sudden they found all these people in the world who weren't original Macintosh people wanted to use iTunes and it 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 votes it's Steve Jobs did
or the microprocessor was done it until you you can't 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 well is 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 that way you know that if it doesn't hit it's just not gonna 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 wasn't 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 death cain't a huge cannibal and of course that
became what what Apple is more known 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 to cannonball extension and what history shows is usually the second cannonball from abort the cannonball process on top of an existing flywheel becomes the biggest part of the company marriott
started in restaurants bullit the Cannonball hotels right Apple started in personal computers followed the Cannonball smart handhelds Intel started out and memory chips followed the cannonballs microprocessors and beyond and so that's that notion of you've got the flywheel your toy
while marching but then your bullet to cannonball and usually not always but usually theme parks to Disney right versus films that second extension of the flywheel that came in the bullet cannonball becomes the really big momentum in the company usually for
decades I like that a lot I know we're coming up on time here so I have two questions I want to get you before we end so it's gonna appear like a non sequitur here but I want to know what's the best counter-argument you've heard - good - great so 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 my mind a counter-argument I can go back and always look and see you're looking at dynastic eras of performance yeah you aren't trying to make predictions right
you're making predictions exactly and and also basically if you can go back and look at what companies fall is if there's a divergence for the principles then it actually if anything reinforces the principles rather than calls them into question so that that's always been
for me more of a source of curiosity if something you learned from I can actually go through each of our books and say what would I criticize if I would be the critic basically of what other people have said what just would go in my own mind and good - great I
think the the fact that our only pattern that we selected on was stock returns a pattern of stock returns relative to the market I still think that was the right way to do the research from a clinical standpoint at the same time I also believe that if I were to stand back and
I were to look at the built to last companies which came from four built alas - Jerry Porras as I did back in the early 90s and I were to look at the good to great companies and sort of did this great these marvelous inflections for mediocrity - way past the market that
lasted at least fifteen years but if he zoom way out you asked which set of companies had greater endurance no bill - last was about Bill - last but the built last companies did and and I have to ask myself why because we're looking through different lenses
so you're still just trying to build one overall framework that I think the principles are totally sound not all of them but here's the things that the built to last study had it put a premium on the importance of a purpose far beyond just making money that notion
like what Bill Hewlett and David Packard found it HP later it grew too fast with its acquisitions and such 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 from arc
you know medicine is for the patient it is not for the prophets the prophets will follow RW Johnson at Johnson & Johnson and the original JJ credo which was way back with it early 1920s it was a visionary for its time you have to understand it in the context of its time
the idea you know the Disney Walt Disney was never imagined so I'm just trying to maximize profits he was really trying to do something that would have a very special feel to it and again I and then I would go to we've talked about you
know Apple I don't think Apple was all ever just about making money and and so I think that if I kind of stand back and I say what did that built to last visionary companies have that not all of the good to great companies had is I think this sense of incredibly deep
sense of responsibility to the world and what they were doing in their eyes that help guide them over very long periods of time I don't believe anything is ultimately permanent I've been looking for two half billion years the earth you know this uncharted or red giant none of
this matters right so you have to if we give them time frame you know mean forever no you know but I mean but do you mean in a really big context but but I think in the in the business for corporate world if you can get a five decade rod of excellence that's really
really good do you think that shortening yeah the the sort of like a run of excellence I don't know the numbers 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 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 deck stupid no question is what's the timeframe in which you're making decisions hmm and if you if you
said that we had it 20 more consecutive years of being in the head of the game you're gonna make different decisions than if it's the next two years if in fact it's shortening then a potential contributor to that is the timeframe within which her people are making their
decisions I wonder if that circles back a little bit as you were saying that it 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 the the performance measurement the time frame that the persons under has an impact on that 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 and in history where what the Cannonball came it's a big bet at that time and 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 in the next two years then you would never fire a huge cannibal that's truly the fly will extension cannibal hmm you have to you have to think 20 years right long term thinking definitely
plays into I mean there's an arbitrage drama as to decision making where if you're thinking longer-term you can do things that other people can't like do things that are first-order negatives second-order positive especially if you have competitors who are under pressure
they do things that are first-order positive it 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 a bit leadership and
people and this is gonna be a big sort of like hairy open-ended question but you spent more time thinking about this and you spent more time with leaders than probably anybody I know and diving into the research how do we develop not only young leaders but how do we develop
leaders first of all I have 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 for 2012 and 2013 I had the it was a real honor to serve as
the class of 1951 chair for the study of leadership at the United States Military Academy at West Point and I do 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 rotates every two years sometimes they have like a former general officer in the chair sometimes they have somebody from the non military world such as myself will hold up for two years and you can do anything you really want with
this chair including interacting a lot with cadets and faculty and this story to place called West Point and I learned a huge amount in the West Point journey 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 hey guys reading it was really interesting I think it has to do was the fact that there there in a epoch of service that's immense that it's 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 and you will fail at Westpoint 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 22 23 24 years old when you're out and the thing 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 200 years where it sees as its role in the world is to build leaders of character right si you get you get young men and women who come in to West Point and that's like a factory and what comes out the
other side are leaders it's what they do and sure maybe you've got this range of just like in any field of life there's a distribution of capabilities as leaders when they come out at 22 years old but that distribution is phase-shifted far to the right of what you might get out
of a random sample of a whole bunch of other 22 year olds which is the way you have to think about so first this is 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 saw when I did a study on education when 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 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'd create the environment in which the performance for the kids would go up and you would have these spectacular results there's a 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 Deb Gustafson and created a flywheel that took kids from 33% reading rates to nearly a hundred percent and stayed there and she went from it stepped into the leadership role
and grew into that responsibility so if I stand back and I look at these look at those great school principals that we studied in superintendent's 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 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 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 gonna
teach you leadership but I want people learn it and I think a big part of what it takes to learn it there's kind of two things that would 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 but it starts with clarity of something's got to be done and that 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 this 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 but was superintendent where there's been low
graduation rates a whole bunch of kids had not graduated from high school 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 gonna lead people to do what's necessary to increase graduation
rates but here is 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 before
I was superintendent who didn't graduate and we're gonna go find them and we're gonna create a program to bring them back into the schools and we're gonna make sure that they get out with our high school degree I'm gonna take responsibility to make sure that happens
for the kids who were here before I was even superintendent and I'm gonna walk down to a building in this town and I'm gonna say we need space for this you have an extra floor in your building you need to help these kids because somebody's got to do something will you
join me and give us space so we can bring them back and get them their degrees so what is leadership Eisenhower put it as leadership as 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 summer
sculptors some are orders some are good at like just getting the right people together around the table some are good at admonitions 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 you don't copy
them you you get your own artistry of getting people to want to join you and not being a bystander about 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 do that that is I think where the real start of the leadership begins hey we got this computer we made it for ourselves somebody's 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 fellow named general Austin who really had a profound impact on me when I bent it off the West Point and he held the chair two times after me it was after the most recent chair holder for
the class of 51 chair he was one of the only four-star generals to come out of his era his class at West Point he 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 you know promotions is he getting promoted fast enough his career right and one day he just woke up and changed and he said I'm not gonna take care of my career anymore I'm gonna 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 just stop asking that question what have you done for someone else how can I be useful how can I be
useful how can I take care of my people take care of your people not your career and and in general Asin ended up as a spectacular leader and I think those two sorts of things if you're 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 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 you know you know I certainly couldn't like make somebody a leader but
I think people can learn it I think that's kind of some of the catalyst and 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 I look at the young leaders that are coming up the ones I met at West Point a
lot of the ones that I've there on my research team young people that I meet in life we live in an era when it's easy to for people to feel pessimistic I absolutely reject I'm incredibly optimist 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 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 so obviously there's a contextual element to everything and I think that's something you talked earlier about about even decision-making is this idea that there isn't kind of an
isolated perfect universe window we don't live on a Euclidean 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 you how
you're going to react in any given situation until you're there 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 you 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 Eisenhower phenomenal example your Supreme
Commander of Allied forces before that you were relatively undistinguished major you were brought up by General Marshall and so forth but you know being a five star which 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 a university and really struggled there so what you have with Eisenhower's you've
got a two wins and one which was not as much of a win which is the presidency at the University what does Eisenhower's case show it shows number one that two very different contexts he could be enormous ly successful he was successful in both military and presidential but in a
university setting he was was successful and I could go through multiple cases across scales of companies I could look at people that have moved across sectors I think this 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 in context I mean really different context both enormous ly successful so point a you can be successful across different kinds of contexts and have to learn how to do it but it may not be
infinite right you might be a good president but you might not be a good president of the university and so as an individual it's 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 insight 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 [Music] the knowledge project is produced in collaboration with Jason Oberholtzer and the team at charts and leisure you can find show notes on this episode as well as every other episode at F s dot blog slash podcast if you find this episode
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