#67 Jim Collins: Keeping the Flywheel in Motion

An earnest student and powerful teacher, mega best-selling author Jim Collins goes under the hood and shows what all enduring companies have in common. We talk luck, leadership, and business longevity. Go Premium: Members get early access, ad-free episodes, hand-edited transcripts, searchable transcripts, member-only episodes, and more. Sign up at: https://fs.blog/membership/ Every Sunday our newsletter shares timeless insights and ideas that you can use at work and home. Add it to your inbox: https://fs.blog/newsletter/ Follow Shane on Twitter at: https://twitter.com/ShaneAParrish Learn more about your ad choices. Visit megaphone.fm/adchoices

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Speaker 00

  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.

• 0:19Shane Parrish?

  Hello and welcome. I'm Shane Parrish and this is The Knowledge Project, a 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/podcast. Farnham 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 fs.blog/newsletter. Today, I'm speaking with Jim Collins. Jim is the author or co-author of books like Built to Last, Good to Great, How the Mighty Fall, Great by Choice, and Turning the Flywheel. Together, I think they've sold over 10 million copies and you've likely heard of one, if

• 1:04Shane Parrish?

  not all of them. This conversation is amazing and detailed. We start with an understanding of how Steve Jobs helped him teach at Stanford and go on to explore what makes companies and people successful using the lenses of level-five leadership, flywheels, bullets and cannonballs, the 20-mile march, compounding, and so much more. We also talk about why companies fail. And Jim flips the script on me and asks 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.

• 1:39Shane Parrish?

  It's time to listen and learn. Jim, I'm so happy to have you on the show.

• 1:52Speaker 00

  I'm really looking forward to our conversation.

• 1:55Shane Parrish?

  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, I thought that would be a good place to like, kick this off.

• 2:11Speaker 00

  Well, sure. And I'll 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. So a couple of things that occurred to me, I'd love to ask you. The story with Steve Jobs. So I had the great, really, privilege, when I was only 30 years old, to begin teaching a course on entrepreneurship and small business at the Stanford Graduate School of Business. And I had a great mentor. One of the things I believe in is you get not just luck in life, but who luck. And a little bit later, by the way, I hope we circle back to the question of luck,

• 2:55Speaker 00

  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 as 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 trajectory or invests in you, bets on you, gives you guidance, a key point. So I had a great mentor named Bill Azier, who was a professor of mine when I was a graduate student at Stanford, and who then went back for me with 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.

• 3:40Speaker 00

  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 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

• 4:22Speaker 00

  of what became 30 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 I'm sure we'll get to. But early on, I thought, you know, I need to lend some weight to the course because I don't necessarily really know how 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 them into great companies, gave him the frame. I need somebody who knows a lot more than I do about this. You founded, co-founded Apple. Why don't you come down? And Steve,

• 5:04Speaker 00

  who was always very gracious in my experience.

• 5:08Shane Parrish?

  This isn't the Steve that we know today, though. This is like Steve Jobs at the time, just to contextualize things.

• 5:16Speaker 00

  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. And I think there's a marvelous, marvelous set of lessons from his particular story. So you 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'd 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 it was one of the great strokes of good fortune in my life was to meet Steve Jobs,

• 6:01Speaker 00

  not when he's the Steve Jobs that we know today, right? You know, 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, he kind of made a quip, well, you realize I lost my company. And even in the session with my students 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.

• 6:46Speaker 00

  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 he 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 was this was a person who was never going to 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.

• 7:30Speaker 00

  When there was a gathering of, I think, the top 500 Silicon Valley leaders for a, for a meeting, I believe it was with the president or something. But he didn't get an invitation. Okay, so that's the wilderness. He is in the wilderness. And yet, if you just listen to, to that conversation that day, you wouldn't get that sense. It was all pointed forward, 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 immature behavior

• 8:13Speaker 00

  from when he was a young entrepreneur is sort of Steve Jobs 1.0. 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.

• 8:45Shane Parrish?

  Right.

• 8:46Speaker 00

  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 not filtered by what's to come.

• 8:56Shane Parrish?

  That's an incredible story. Are there any other lessons that you sort of draw from this arc of Steve Jobs?

• 9:03Speaker 00

  One of the things that we have, we've often been asked, and I've been asked a lot, is can somebody grow to become a level five leader? And the level five leader is an idea that came out of the Good to Great research, which essentially asks the question, can a good company become a great company? And if so, how? And how is it different than the comparison companies? And we have a research method behind everything that we do. 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 companies

• 9:45Speaker 00

  that made that leap had what we call level five leaders and the companies that were their direct comparisons, right? At the same time, same industry, same opportunities, same resources or control set, had what we ended up calling level four leaders. And one of the key insights from Good to Great was that the power of the level five over the level four. And the essence of the level five was 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 was different about the good, great leaders than the comparisons. Well, people would often come back and say, well, what about Steve Jobs? Or can somebody grow into a level five?

• 10:29Speaker 00

  Or what if, what if you're kind of a towering personality because a lot of the level fives were, you know, 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 five. And he actually called me a couple of times in his very late, late years. And we're talking about the future of Apple. And what's so clear is that, one, the experience of getting, going through the wilderness actually did create a kind of humility that might have not been there before.

• 11:12Speaker 00

  The indomitable will never wavered, right? So you add that piece. But then, what in the end was it about for Steve Jobs? It wasn't about Steve Jobs. He wanted Apple to be a great and lasting company, that its ultimate proof would be that it didn't need him. And that the effort would go into, how do I make this an enduring great company that then, over time, will continue to produce really great bicycles for the mind that will really unleash thousands and millions and billions of people's creativity? And that ambition, that that's what it was about, and by the time you get to the end, he's still working on that, right? He still wants that to happen.

• 11:51Speaker 00

  And so I look at it as 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, once you run out of your kind of entrepreneurial competence, then you need to hand it over to the company builder type. And then they take it from there, as if they're like different species. 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.

• 12:33Speaker 00

  And they grew into the ability to do that, so that they could really become great company builders. They, that myth that there's an entrepreneur and there's a company builder and they're different animals is simply wrong. It's simply a matter of choice and do you decide to become that? If there's a stark example of that... It's Steve Jobs 1.0 to Steve Jobs 2.0.

• 12:56Shane Parrish?

  I'm curious as to whether some of those others went through similar pitfalls or similar sort of failures. First, like, let's start with like, what is level five? Just to 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?

• 13:29Speaker 00

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

• 14:11Speaker 00

  Or to build something exquisite, or to create a beautiful painting, or a marvelous piece of music, or whatever the 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 five is they're maybe even more ambitious than most people, right? But the ambition is not about them. That's the essence of it. The ambition, the burning, driving, exhausting, relentless, just like we can never stop ambition.

• 14:51Speaker 00

  Is all channeled outward into the company or into a purpose that's larger than them or into a great piece of writing or something that is creating an idea that's durable, but not about them. And then they know that in order to do that, they have to be in service to 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 going to stop and no matter what, on the fundamental principles, we will never compromise.

• 15:32Speaker 00

  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 Herb Kelleher, Southwest Airlines. You have George Rathman of Amgen. You have Gordon Moore, right? And Robert Neuss of Intel. You have Sam Walton of Walmart. Jay 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 sector is Wendy Kopp, who founded Teach for America. And what all these folks share in common is they were entrepreneurs.

• 16:16Speaker 00

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

• 16:50Shane Parrish?

  Maybe we just want to grab on to that narrative, right? For 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.

• 17:01Speaker 00

  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, so let me talk about one, one person who I think did go through something quite dramatic in her life and one of the great level five leaders, and that's Catherine Graham of the Washington Post, who I think is one of the great chief executives of the last 50 years. So Catherine Graham never thought she was going to run or build the Post, right? That wasn't her objective. It'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.

• 17:44Speaker 00

  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 should just read the text in her own book of what happened at that moment. But there was also this, while 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, Catherine, 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 way, it's like, I said, thanks, I think I'll do this myself.

• 18:25Speaker 00

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

• 19:10Speaker 00

  Classic level five.

• 19:12Shane Parrish?

  Do you think that focus on the mission, like that relentless diving into the mission, moves your ego out of the way? So 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.

• 19:32Speaker 00

  Yes, and I think there's actually two things that really play in there. One is a focus on the mission or the purpose of the enterprise. And by the way, I don't think that that always has to be as grand and noble. It could be as simple as, well, 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? But it's still, in the end, it's about Southwest Airlines and what it's doing in the world. And then you could have some companies like Amgen, where George Rathman recruited out of Abbott to do one of the very first biotechnology company startups. There's a very interesting case, by the way, if people are thinking about their own trajectory.

• 20:17Speaker 00

  Here's a guy that in his 50s had had a corporate career. He'd been 3M in, like, I think, adhesives and worked on the R and D side, then moved over to Abbott and ran part of kind of some of the medical stuff at Abbott. And then in his 50s, he's recruited into the birth of this new industry, which is biotechnology. Came to 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 environments as an entrepreneur and ends up building probably to this point, you know, the earliest founded, still out there, great today, independent

• 21:00Speaker 00

  biotechnology company. There's some other great ones, too, but it was very early and it was like 76 when it was founded. And Rathman. 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, we will go forward. We will defend these patents no matter what. He's very US Grant like. 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, EPO that they had built. And he would sit there and be working, getting his, his blood work. And there'd be other patients in there. And he'd say, yeah, I had a little something to do with this.

• 21:45Speaker 00

  You know, so sure, you can, you could be doing something that's, you know, less, 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 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 are, just as always, there's a split, right? Those who want to do Built to Flip, and there are those who want to do Built to Last. I've always been on the side of those who want to do Built to Last. How do, oh, sorry, go ahead. So I was going, well, anyways, well, I, I, I have these questions for you. Oh, yeah, please go ahead.

• 22:29Speaker 00

  I mean, I can just go for hours. Yeah, so, well, let's have this a bit of a, of a conversation because I, um, by the way, I really have enjoyed your conversations with people. What I, and what I really love about them is the desire to create a, a conversational environment where real insight happens that people can benefit from. And it's interesting, there's been a couple of things. Uh, I mean, I just, I loved your, your interview with Barbara Oakley, for example. I mean, it actually changed some of the ways I go about my own learning. Uh, of course I can't, I could never not want to learn from Howard Marks. I mean, it's just fascinating the way he thinks about different pieces and cycles and luck and so forth. But as you've kind of gone through these, one thing I've noticed in your interviews

• 23:11Speaker 00

  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. 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?

• 23:52Speaker 00

  That you're pretty confident of about decision making, about how to make better decisions?

• 23:58Shane Parrish?

  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 Farnham Street writ large, thinking that there was an answer to decision making, or there was a skill that I could learn. And this is like 10 years ago, right? Where if I just learn 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?

• 24:42Shane Parrish?

  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 Farnham Street's created, I mean, 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 or 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.

• 25:20Shane Parrish?

  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 going to create a big checklist of all these cognitive biases. And, you know, when I make decisions, I'm, I'm going to go through this checklist. And what I found is cognitive biases are sort of great for explaining why we make mistakes in hindsight, but they're not necessarily really good for preventing or anticipating mistakes in the future. Because what happens is any reasonably intelligent person sits down in front of this checklist and then creates all of these stories in their head about why overconfidence doesn't apply in this case, or, you know, why this limited data set is actually more relevant than I should give it

• 26:05Shane Parrish?

  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 because of bad decisions. And sort of separating that is really important. But going back and saying, where am I consistently wrong? And how do I get, how do I make that part of my process, my structure, my environment? So that if I'm making a repeated type decision, I can get better at it. And 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

• 26:50Shane Parrish?

  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 going to play out differently, or this was going to happen. And we sort of convince ourselves that we're right, even though we're not right faced with this evidence. And I think part of the process of getting better at making decisions is, you know, sort of unearthing this reality about, you know, we're not as smart as we think we are, and we can get better. And how do we go about doing that in a way where we exist in a world where I think the baseline

• 27:33Shane Parrish?

  If you want to stay the same, you have to get better at making decisions. And if you want to advance, you have to get better faster than average. What are your thoughts or reactions to that answer? I'd love to hear your take.

• 27:45Speaker 00

  Yeah, so it's interesting with decision making. And it's something, I think it might have been something that Howard Marks said, but it was one of the fundamental things I find trying to help people understand and to keep in mind myself is this idea of do not confuse decision process and outcome. Like if I could go to all high schools and just say, what is the one course that everyone should have before they graduate in the math and sciences areas? It would be statistics.

• 28:17Shane Parrish?

  Right.

• 28:18Speaker 00

  It would be 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 evolutionary 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 will, some kind of someone in our lives, 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.

• 29:01Speaker 00

  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 that decision tree.

• 29:15Speaker 00

  I had to do a decision tree around a cancer situation with somebody really close to me in my life. And one of the things I've 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.

• 29:34Shane Parrish?

  They've been pretty useful.

• 29:36Speaker 00

  They are really useful. Okay, so you've got, you know, do you do something on those biopsies? Do you, you know, what are the risks of lymphedema? What am I, you know, starting? 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 tree choice, but those probability notes are still probability notes. And so I, I think that that notion of accepting the reality of those probabilities and then separating good decision, adverse outcome is a better approach than bad decision process, good outcome.

• 30:21Speaker 00

  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.

• 30:32Shane Parrish?

  Right. Eventually, you're going to go to zero.

• 30:34Speaker 00

  Yeah, or worse. And one other thing, just on decisions, though, you were talking earlier about how people, 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

• 31:15Speaker 00

  to make happen, or what you hope will happen, any of that, those are maybe fine things to get to. But the first step is, what are the brutal facts?

• 31:26Shane Parrish?

  We spend so much of our time just wanting the world to work differently than it does, or wanting to create the outcome that we think should happen even though it's just against the natural order of things.

• 31:37Speaker 00

  Exactly. The capacity to deny brutal facts is immense. We're always looking at comparison. Let me just take a moment on this because my research mentor, Jerry Porras, another stroke of hoolock in my life, right? When I first started looking at this question of how would you figure out how you go from a startup to an enduring great company? And my approach was to do 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 unfolded in the United States, you don't do retrospective accounts. You try to look at like, what did it look like from Grant's point of view in

• 32:15Speaker 00

  1863 and Lincoln's point of view in 1863, 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 Grove and Moore at Intel and Bob Noes at Intel in the early 1970s and you're making decisions, what did the world look like to them then? That's the way you have to do it, right? And that's why we do the historical analysis. But then Jerry added a second part. He said, but you have to ask, how did they look at it? And what decisions did they make? And how did they think about those decisions different than another company like the

• 32:55Speaker 00

  comparison, which was Advanced Micro Devices? And so when you do this, 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 there 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,

• 33:39Speaker 00

  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 had that, or that they even necessarily had better analysis. So then you have to step back and say, well, it's not necessarily that they have better information. 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 comparison companies saw often the same things. But what was interesting to see was, at that very moment in history,

• 34:18Speaker 00

  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 you take the grocery chain industry, let's just use one example of this. So in the early, late 60s, early 70s, and I know I go back into history a lot, but I'm a historian by nature. You have two grocery chains, you have Kroger and A and 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,

• 35:00Speaker 00

  uses of certain kinds 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 and 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, right in front of themselves. It will explain away ugly facts.

• 35:27Shane Parrish?

  So they're getting disconfirming evidence and they're sort of ignoring it?

• 35:30Speaker 00

  Exactly, they'll discount the negative. You go over to the folks at Kroger and they were looking at it and saying, "Man, this is really scary. You know, we're really afraid. Well, let's look over the rocks and see all the ugly things underneath." And you know, their natural instinct is to go right into the teeth of the ugly facts and then wrestle with what they might mean. Same environment, same time, same moment in history, same kinds of business. Everything's exactly the same and the facts are the same. One tilts to revel in the brutal ugly facts and the other chooses to discount them. That's the main... Now, why?

• 36:12Speaker 00

  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 in the ugly facts, even if those ugly facts are about yourself, right? "Man, our stores are no longer the right-sized stores. That's just a fact." Why are some able to do that better than others? That I don't have any 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're in the great joyful position of being able to ask a lot of really remarkable people questions.

• 36:53Speaker 00

  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.

• 37:14Shane Parrish?

  I think, you know, it's hard in 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's 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 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

• 37:57Shane Parrish?

  your friends, friends in 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 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've found that really hard to get people to, I mean, you sort of

• 38:40Shane Parrish?

  get the 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, right? And it's not that you fall down, it's that you get back up. And we all stumble, we all make mistakes to errors, sort

• 39:22Shane Parrish?

  of human. But what we do when confronted with that error, similar to what you're talking about with these companies, what we do when confronted with those facts, with this situation. How do we handle that? What's within our control to handle that? And I'm not sort of purely stoic about this stuff where, 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 overexert ourself 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,

• 40:04Shane Parrish?

  we're faced with a situation in life. We need to know when rational is going to serve us and when it's going to harm us. And I don't think that the notion that we should be purely rational in everything we do is healthy. It's okay to, to sit on your couch and cry after you get divorced and you can't see your kids.

• 40:28Speaker 00

  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, well, for me was, was profound and, and the kind of the grace and humility that come with things. For example, I still look back on Jerry, who was a dean at Stanford Business School, massively tenured, senior, soon to be emeritus. And we start the Bill to Last research and he agrees to partner with me as a, as a peer colleague.

• 41:08Speaker 00

  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 30 years, 25 years apart in age and experience. I mean, just, I'd put Marvel back on that. And one of the things that Jerry is just, is just this range of quality of person. But he taught this course at Stanford that everybody ended up feeling they needed to take or that they really, I don't know if it's at any other graduate school at this point. It was called Business 374, called Interpersonal Dynamics, but we all called it touchy-feely. But the idea behind this course was you basically were in these groups, these groups where the only thing you're allowed to discuss,

• 41:52Speaker 00

  now picture this, you have Stanford MBAs and graduate students, the only thing you're allowed to talk about for 10 weeks when you're in your group is feelings. You can only talk at the level of feelings, okay? With another, you know, 11 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 two things, you know, that were really impactful for me on that. One is just Jerry's basic point, and I try to teach this to young people as much as I can.

• 42:31Speaker 00

  People do not operate first and foremost at the level of thoughts. They operate at the level of feelings. And you go into a discussion, or a negotiation, or a classroom, and you go at intellectual level, but the real level people are at is feelings. That was the whole point of that course, which is like if you wear that lens, right, you wear that lens into any conversation, there's, there can be good feelings, there can be bad feelings. We operate at the level of feelings, we're feeling beings, is Jerry's view. And I took this course, and I had this, my father, and I don't want to go into a lot of detail about my father.

• 43:13Speaker 00

  I've, over time, you know, come to really, um, he died when I was 23. Uh, he was very much MIA as I was growing up. And, uh, and I, kind of the last real interaction I had with my father was, uh, he was, he was living in an adobe hut and outside of Santa Fe and... And I took him a turkey for Thanksgiving and anyways, that didn't go very well. It had a dirt floor and the whole deal and, um, and, and I realized my father was just very self-absorbed and sort of just didn't have any bandwidth to like be a dad.

• 43:52Shane Parrish?

  That must have been hard.

• 43:53Speaker 00

  And it was actually very hard and I, I remember driving down on the bus. Uh, it was a Greyhound bus I took from, from Boulder down to Santa Fe and I was, you know, I, I had to say, I was gonna get out with my brain and so I was studying it and I'm sitting there on this Greyhound bus, highlighting Plato on the way down to Santa Fe. I still remember it very vividly. I probably still have the book. But anyways, um, 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, uh, do a lot with this. And, and I think that was very self-protective because there was, my dad was not, didn't have the capacity really to focus on being a dad.

• 44:35Speaker 00

  So I don't need to go into any more detail about my dad, but I had thought that I'd fully taken care of that. And then in this course, is in three seventy-four, 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 it overwhelmed me like a, 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.

• 45:15Speaker 00

  But I hadn't. And, and for me, you know, 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 through 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 win. That was Jerry's view.

• 45:44Shane Parrish?

  I appreciate you, uh, sharing that story with us, Jim.

• 45:49Speaker 00

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

• 45:59Shane Parrish?

  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,

• 46:13Shane Parrish?

  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.

• 46:23Speaker 00

  Um, yeah.

• 46:24Shane Parrish?

  Or maybe I'm just completely, you know, off base.

• 46:28Speaker 00

  Yeah, yeah, no, I think that there's, I mean,

• 46:33Speaker 00

  what I find for, for me is that now 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 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,

• 47:16Speaker 00

  you know, the 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.

• 47:47Shane Parrish?

  Oh, let's talk about flywheels. That was a good segue. I was gonna move to luck, but let's dive into.

• 47:52Speaker 00

  Let's go flywheel, then luck.

• 47:54Shane Parrish?

  Yeah, let's do flywheels and then luck. Can you explain the concept of a flywheel?

• 47:57Speaker 00

  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, well, the credit for the foundation of the contrast and the method goes back to Jerry Porras. And then our historical methodology and having control and contrast in it. Why did some teams, some companies attain a superior result and others in the same circumstances? The best of our ability to control that did not. And then kind of in an epidemiological type style, essentially trying to figure that out. And what we found after 6,000 years of combined corporate history of doing that across four major

• 48:39Speaker 00

  studies, looking through 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 is, and I would just wanna, I wanna 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, 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.

• 49:21Speaker 00

  So think of it as that there are inputs and there are 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 mean superior return on invested capital for a business, or superior sports results as a team, superior education results, superior 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

• 50:06Speaker 00

  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 disciplined thought question.

• 50:50Speaker 00

  Stage three is about disciplined action. Stage four is about building it to last. And then there's this multiplier at the end, which all has to do with luck and return on luck, which is this massive kind of amplification variable, which is why we need to get to that in our conversation. Now, if we go back to that framework, in the framework in disciplined people, you have the level five leader, we already talked about that. You have the discipline to get the right people before you decide what to do, the principle of first who. And 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

• 51:35Speaker 00

  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 who as much as possible. So disciplined people, disciplined thought, there's this thing called the genius of the and versus the tyranny of the or, we don't need to spend a lot of time on that. The brutal facts, the discipline to run the brutal facts, which we already talked about. And then the discipline to really find your hedgehog concept, which is what you're passionate about, what you can be the best in the world 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.

• 52:20Speaker 00

  Then that leads us to disciplined action. Disciplined action then is where the flywheel kicks in. And so if you think about it as that you begin to make a series of disciplined decisions, not all of them have perfect outcomes, right? Disciplined decisions don't necessarily cause absolutely 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 indisciplined action, we have flywheel, the 20 mile march and fire bullets and cannonballs. Let's focus on the flywheel. Zooming way out here, one of the things you learn is that the way something really great, a great result happens, say a great company happens, a transformation

• 53:05Speaker 00

  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 to Tennessee, started a run of Tennessee 2A championships in 12 years from I believe it was 1962 to 1974, something like that. That was sort of the era, right? And you would have thought that in 1962, there was this instantaneous breakthrough and bang, 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

• 53:50Speaker 00

  a decade. Of all the things that Wooden had been doing to put in place around his approach to running a team and the pyramid of success and the kinds of players to bring and developing the fast break and all of 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 and you, and you begin to get different kinds of players and you begin to refine the system and you make the drills 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 flywheel and 16 and 32 and 100 and 1,000 and that flywheel is just building momentum,

• 54:33Speaker 00

  compounding one upon another upon another. And then at some point, boom, it breaks through. They win an NCAA championship. It's at 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 flywheel and 10 billion turns on the flywheel. Here's the thing. People think you can jump to the great result by skipping the flywheel. 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 that create a massive compounding effect.

• 55:14Speaker 00

  And just like investing, where it's buy 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 thing 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, okay, well then how do you really harness your own specific flywheel? And that has been the, the thing that recently we did with the Flywheel Monograph and it's something I've wanted to bring to the world. But let me just pause and, and see if you have any sort of thoughts or questions on

• 55:59Speaker 00

  the whole flywheel principle.

• 56:01Shane Parrish?

  I have a couple, yeah, for sure. The first one I wanted to start with is what causes flywheels to break? What are the most common reasons? You were talking about this when I was reading and doing 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 AMP 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

• 56:45Shane Parrish?

  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 I'm sure there's more, but I'm interested and curious to hear your thoughts.

• 57:04Speaker 00

  There's kind of a, an inverse to the flywheel called the doom loop. And one of the things that is interesting, when we, when we wrote the, the chapter in Good to Great, and I'm just, I want to grab something here. Hang on one sec. Let me grab this. Got it. So in Good to Great, the chapter is actually not called The Flywheel. It's called The Flywheel and the Doomloop. 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 didn't. Why? What happened? And so if you think of The Flywheel as kind of a,

• 57:47Speaker 00

  it's a cycle where great results begin to compound because you understand how those great results are created. The Doomloop is exactly the opposite. And what happens is this, and let me just sort of describe the inverse of The Flywheel, which is the Doomloop. Something happens that produces disappointing results. And it could be that it was a random event or something just happened that was out of your control or something that you just made a mistake or you bungled something, whatever. But you get disappointing results. But unlike really understanding why that happened so that you can correct, what happens is a company reacts without understanding. "Oh, my gosh, we had disappointing results."

• 58:30Speaker 00

  And often what happens is they panic. They look for a new direction, 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, it produces sort of a burst of false hope. But it's like 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 without understanding. Then another new direction, new fad, new program, new whatever. And then another failure to build momentum, more disappointing results, and then you're in the Doomloop.

• 59:14Speaker 00

  And so what's really interesting is when you look at, again, this is the power of the comparative method. You have the companies that build flywheels and they really understood what drove their flywheel around, understood it, right? It's about intellectual insight and understanding. So that then even if they get a disappointing result, they can look at it with a clinical eye and say, no, the flywheel still works. We're going to continue to improve our execution on it. Versus if you don't understand it, you start reacting and you end up 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 flywheel that kept building.

• 59:55Shane Parrish?

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

• 1:00:15Speaker 00

  Well, so first of all-

• 1:00:17Shane Parrish?

  It seems like a perpetual money printing machine if you can identify these positive flywheels and level five leaders in advance instead of like in real time.

• 1:00:26Speaker 00

  So here's how I've thought about that. So first of all, I have a real deep understanding of what my own hedgehog is, right? I think individuals have hedgehogs as well as companies. So go back to the hedgehog and the idea of like of understanding what you're really passionate about. And in the case of the personal hedgehog, what you're truly genetically encoded for. And then third, where you can contribute that the world, the society will value, right? Then you could 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

• 1:01:06Speaker 00

  I'm on, I would have taken a financial path. I have, I have a mathematics undergraduate. I studied mathematical sciences as an undergraduate, which is computer science. 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 kind of my, probably my other path. But I was lucky enough to find what I'm really hedgehog about, which

• 1:01:41Speaker 00

  What I've 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 was this question of should I do a fund, right? Should I do a good to great fund? Or maybe I should learn how to play. And you know, the reality is, it's just not my hedgehog. 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 Warren Buffett, or somebody who's just, they're just, like, they're so stoic. When it comes, they're able to ride through things with a certain equanimity that's quite extraordinary. I'm not sure that's in my encoding.

• 1:02:24Speaker 00

  Now, that said, here's the one thing. This is not investing advice. I want 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. 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

• 1:03:09Speaker 00

  how that one works. And most important, those who are building the flywheel, understand how it works. And then, so what if you miss the one to a million turns, if you pick up the million to 10 billion turns? That seems to me to be a better game than trying to predict free.

• 1:03:24Shane Parrish?

  Well, let's talk about Amazon for a second, because they invited you out, right? Like Jeff invited you out to Amazon, I think it was 2000, 2001. Tell me about that conversation and sort of like, because you were talking flywheels with them.

• 1:03:37Speaker 00

  Yeah. So what happened is, and I want to be really clear, as I started, I can take

• 1:03:44Speaker 00

  Zero credit for anything that Amazon has done spectacularly well, and I don't want to imply that I can. I'm a teacher at heart and who likes to understand things and to share them so that people come away with their minds changed in a way that's permanent and durable with ideas. And the broad sort of scope of those ideas have been around this question of what makes great companies tick. So Done Built to Last with Jerry, and where we looked at companies that had sort of gone from startup to these sort of visionary iconic enduring status, in contrast to others that could have and didn't. And then we did the Good to Great Study, which is takes companies that are average performers and then one breaks through and makes a good to great leap and the comparison company doesn't.

• 1:04:26Speaker 00

  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 it 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 well. But one of the things I emphasized, because 2001 was a dark time. It was fall of 2001, so the world felt dark, number one.

• 1:05:07Speaker 00

  Number two was post dot 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, level five and first two, brutal facts, hedgehog, flywheel, the whole deal. And challenged with the idea that you respond to this difficult time by understanding and doubling down on building a flywheel. You don't 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?"

• 1:05:52Speaker 00

  This was the crucial thing that they did that I learned from. So I came across the flywheel principle of the research, taught it. They then took it a step further and changed the way I look at it. So here's what they did. Now, I want to share with you. What they did was they said, "If you really want to harness the flywheel, you need to crystallize how your specific flywheel turns." And let's spend a moment on this one because it really illustrates the power of a flywheel, what a flywheel is. So here's a sketch of what it was. So picture it going around in a circle, right? It starts at the top with, "We're going to lower prices on more offerings." Okay? So that's the start, the top of the flywheel. Now, if we do that, that's going to increase customer visits.

• 1:06:36Speaker 00

  And if we increase customer visits, then that's going to attract third-party sellers that can then, as the next, expand the store and extend our distribution. And if we do that, we're going to grow revenues per fixed costs. And if we grow revenues per fixed costs, boom, that's going to bring us right back to the top of the flywheel. We can lower prices on more offerings, which then increases customer visits, which then attracts third-party sellers, which then expand the store and extend distribution, which then grow revenues per fixed costs, then back to the top, lower prices again on more offerings, right? And notice something about that flywheel. So first of all, it's specific, but here's the key.

• 1:07:13Speaker 00

  A flywheel is not a set of aspirations or action steps simply drawn as a circle so that you can say you have a flywheel. A flywheel is an understanding of the inexorable underlying logic.

• 1:07:31Speaker 00

  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 on more offerings, 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, see, you can see that it's got an inexorable underlying logic to it that drives it around. So it's not this static thing. It's a dynamic thing that captures what actually drives momentum in your specific situation.

• 1:08:14Speaker 00

  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've been teaching the flywheel principle, but you should do for yourself what Amazon did for itself. And then that's how people can really begin to harness it. But here's the really key thing. The thing that will stop a flywheel is if you fail on any component. Because on the one hand, while it is a compounding machine, each piece driving the next piece round and round and round. The other side of the coin, though, is that if you fail on any one piece,

• 1:08:57Speaker 00

  the entire flywheel slows or stops. So if you give yourself scores on a point of the flywheel, right? You'd say one to 10 execution scores on each component. And those scores on the, say, five or six components were like nine, eight, nine, 10, three, nine, 10. What happens? Because of the linkages and interdependence of the entire flywheel, the entire flywheel stops. Five, six execution is zero momentum.

• 1:09:26Shane Parrish?

  It's like multiplying by zero.

• 1:09:28Speaker 00

  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 were thinking. How far could a flywheel go? Well, in 2003, how far could that flywheel go? A really long way. People underestimate how far a really great flywheel could go.

• 1:09:58Shane Parrish?

  That's a really good point. I think identifying that even when it's going might be good insight for investors. Again, not investing advice for anybody listening. Do you have, do flywheels apply to people as well? Do you have a personal flywheel? And what does that look like?

• 1:10:13Speaker 00

  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 a whole nother book. If I'd made it just a chapter in the back, I'd put it out as this monograph and on the flywheel principle. And then as I started thinking about it 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 voraciously curious. And if I have a really great big question, then I can't help but then want to translate

• 1:10:56Speaker 00

  that into rigorous research. Because 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 five, or the flywheel, or you know, the hedgehog concept, or 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.

• 1:11:41Speaker 00

  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 a self endowed chair, but that generates the resources, which then allows you to put it right back into the next big questions you're really curious about. So to put that in a very concrete form, after Built to Last, where I had bet my entire career on Built to Last with Jerry, and I left Stanford to see if I could do this path as a kind of self-employed professor, kind of endowed my

• 1:12:25Speaker 00

  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 going to take all the money that we're making from this, and I'm throwing it into another big question. And it was what became Good to Great. I took all the resources. So it was the investment, the reinvestment at the end of the flywheel was to take the resources that came from the success of Built to 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 we may have only had one successful product, but all this money is going out, I'm writing

• 1:13:09Speaker 00

  these checks, right? They're just going out of our accounts. But I remember Joanne just looking at me one day and saying, I sure hope you find something. So

• 1:13:19Shane Parrish?

  Please?

• 1:13:20Speaker 00

  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.

• 1:13:31Shane Parrish?

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

• 1:13:48Speaker 00

  Well, so.

• 1:13:50Shane Parrish?

  It is four days, right?

• 1:13:51Speaker 00

  Yeah, so I don't know how, I don't know whether this is how you put this in our decision making frameworks because there was no, well, I suppose there was an implicit decision tree.

• 1:14:00Shane Parrish?

  You went all in.

• 1:14:01Speaker 00

  All in. So Joanne and I were in, in, in college separated by one year from each other. She was a year behind me and we both graduated high school in Boulder, Colorado. And we had a friend who was my climbing partner, fellow named Roger Brakes, another great stroke of good who luck in my life. And he was also her high school cross country coach and physics teacher. And he kept encouraging us, he, he'd, he'd 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 anyways, he kept encouraging us, he, he said, you know, you guys need to get together and he arranged for us to meet, but nothing really happened for like years.

• 1:14:47Speaker 00

  And then finally, my senior year, Joanne calls me. And in that conversation where she kind of kept me on the phone for a little while, I said, are you still running? And she said, yes. And I said, well, I'm, I'm thinking of upping my mileage. And of course that was true because zero plus any number, any number greater than zero would be an increase. And she said, would you like to go for a run? And I said, sure. And so she said, why don't you come by my dorm room on Sunday morning about eight o'clock? So I'm not really a runner, like I'm not a runner at all, but I figure, okay, how, yeah, I'll go do this. So I, I put on my.

• 1:15:27Shane Parrish?

  How hard can it be, right?

• 1:15:29Speaker 00

  It turned out to be, so I go over and I, I meet 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 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, okay. So she takes me out on an eight mile run.

• 1:15:50Speaker 00

  And the first three miles were uphill. We were running up Pageville Road and over to the industrial park. And we ended up walking five of the eight miles. And that was Sunday. And Thursday, we were engaged. That was May. It was basically almost exactly 39 years ago. It was in 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, Kay, I mentioned earlier that, you know, I'd had challenges growing up. Joanne had some challenges growing up. And we both had this incredible instinct.

• 1:16:35Speaker 00

  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 we'll never blink. We'll never blink.

• 1:17:02Shane Parrish?

  I imagine that's an amazing feeling. Also scary at that age, too, maybe.

• 1:17:07Speaker 00

  Well, I think it felt to each of us like there's an anchor point.

• 1:17:13Shane Parrish?

  Hmm.

• 1:17:14Speaker 00

  And somehow, just instinctively, I think we could each know that we could commit to each other and to 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.

• 1:17:35Shane Parrish?

  That's amazing. Congratulations.

• 1:17:37Speaker 00

  Yeah.

• 1:17:38Shane Parrish?

  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 luck there.

• 1:17:45Speaker 00

  Yep.

• 1:17:46Shane Parrish?

  Part of your research is basically 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.

• 1:17:59Speaker 00

  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 on luck question. So you have, you know, the inputs and the outputs, and you have the disciplined people, level five leaders, first two right people on the bus, disciplined thought, genius at the end, confront the brutal facts, hedgehog concept, disciplined action, flywheel. We spent a lot of good time on the flywheel, real disciplined understanding into disciplined action, turn the flywheel, and the discipline

• 1:18:44Speaker 00

  to stay with the flywheel for long enough to get its compounding effect. And when the world thinks you're crazy, you still understand your flywheel. Then there's these other two parts, we may or may not 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 greatness to last, and there's three components in 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 is 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 the last means at some point you have to stop being

• 1:19:26Speaker 00

  the time telling entrepreneur, and become the one who can build a clock that doesn't depend on you anymore. That's what Steve Jobs did. And then finally, the principle, deep, deep principle, 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 's just talk about this back and forth a little bit. You may have read the chapter, but if you hadn't, let me just ask, suppose you were on the research team?

• 1:20:09Speaker 00

  And I were to say to you, look, we've got these companies, this came from the great by choice research with another great friend of mine, Morton Hanson, 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 software, computers, et cetera. And in contrast to other companies that sort of started in the same Cambrian explosion and didn't become as successful in those eras, and we were comparing them and asking why? What was different? What did we learn?

• 1:20:49Speaker 00

  The very nature of that, because of, one, the outsized level of success, and, two, the fact that they were highly turbulent industries full of big, fast-moving forces and activities and changes that were outside of their control, provided a perfect vehicle to study the question of luck, which I felt always needed an answer, because it could be that all those other variables I described, right, the disciplined people, the disciplined thought, the disciplined action, the building greatness to last, and all the sub-principles, maybe that's like a giant equation where at the end is a giant variable called plus L, luck. And maybe plus L is 80 of 100 points, right? And if you didn't address that question, you were going to leave a massive intellectual hole in the framework, in my view. So, and I've been aware of luck in my life.

• 1:21:33Speaker 00

  So I said, we need to study it. Let's figure out how to study it. So, first, just let me pause and ask you, if you 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 10x, 10x was the minimum, 10x winners, relative to their comparisons, when you slice it over time, luckier than their comparisons? Did they get more good luck, less bad luck, bigger spikes of luck, better timing of luck? If you had to hypothesize, hypothesis A is, I'm going to bet they were luckier, or B, I'm going to bet, I'm going to put my hypothesis on, that they weren't luckier.

• 1:22:19Speaker 00

  What would you hypothesize?

• 1:22:21Shane Parrish?

  I'm just gonna step back before I answer that question, just one second, just for framing, because when I think about luck, I mean, all the people in that data set, the comparison group and the outperformers are all incredibly fortunate, right?

• 1:22:37Speaker 00

  Correct.

• 1:22:37Shane Parrish?

  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 the 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.

• 1:23:16Shane Parrish?

  So my hypotheses would be, generally speaking, we all have the same amount of luck, like the same opportunities for luck to have happened. And my hypotheses 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.

• 1:23:42Speaker 00

  Yeah.

• 1:23:42Shane Parrish?

  That would be my sort of inclination. Now, you can tell me why I'm wrong.

• 1:23:46Speaker 00

  No, no, I think that's a pretty good inclination. 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.

• 1:24:00Shane Parrish?

  Like, had Andy Grove been born in Sub-Saharan Africa?

• 1:24:04Speaker 00

  Well, but Andy Grove was born behind the Iron Curtain.

• 1:24:08Shane Parrish?

  Yeah, no, but I mean, like, had he been in a tribe somewhere?

• 1:24:11Speaker 00

  Right, I agree.

• 1:24:12Shane Parrish?

  We would never know who he is.

• 1:24:13Speaker 00

  Exactly. So there's a absolutely... You're Canadian, is that right?

• 1:24:19Shane Parrish?

  Yeah.

• 1:24:19Speaker 00

  Yeah, okay. So I can't just say...

• 1:24:21Shane Parrish?

  You can tell by the amazing Canadian accent, right?

• 1:24:24Speaker 00

  Well, my wife, yeah, 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 we'll acknowledge also that there are other ways in which your kind of starting line could be affected based on the neighborhood you were born in, parents, 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?

• 1:25:07Speaker 00

  So the first thing you gotta do is you gotta 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 analyses, which allows you to do certain kinds of quantitative analyses. Okay. So then my job was just go back and look at it and say, 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. One, you didn't cause it.

• 1:25:52Speaker 00

  Two, 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. Cause you have to look at both. And three, it came as a surprise in some form, either the timing of it, the form of it, that it happened at all. There could be any number of different permutations of the surprise, right? You couldn't 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. It has a potentially significant consequence, good or bad, and it came in some sense as a surprise, is a luck event.

• 1:26:35Speaker 00

  And once you understand that, then you can go back through the history of the companies. And you can take all the information and you can begin to identify what are luck events that meet those three tests, very clinical. Does it meet all three tests? And if it does, it goes in the luck event bucket. And then, once you have the two luck event buckets, you have the buckets looking at the 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 path contingency. And then, look at all that data.

• 1:27:15Speaker 00

  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, 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,

• 1:27:56Speaker 00

  but the return on luck is a huge variable. Take a classic historical story. Early days of the personal computer industry. Two small companies get the exact same massive luck event. IBM is looking for an operating system.

• 1:28:20Speaker 00

  One of them in Pacific Grove, California is 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 it 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,

• 1:29:05Speaker 00

  and looks at it and says, "Well, we don't have an operating system, but maybe we can get one." He gets this QDOS 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 in there. So you wouldn't say that wasn't a huge luck event. It was, but the point is, two companies had the same luck event. And one squandered it and one made the most of it. That exact kind of pattern, we can see over and over and over and over again. 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.

• 1:29:49Speaker 00

  We cannot make the case of luck as the cause of a great company in any of our research. It's more of the flywheel effect over time and return on luck, capitalizing on things and 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 Marks talks about this in his interview, right? One of the things he does all the time is he's, he, throughout his entire career, is the way I heard it in your podcast. It was a wonderful interview because he's talking about,

• 1:30:31Speaker 00

  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.

• 1:30:43Speaker 00

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

• 1:31:01Shane Parrish?

  Oh, that's really interesting. I hadn't really thought about it in that sense. I like that a lot. How do we harness luck then, I guess? What can we do to better capitalize on our return on luck?

• 1:31:16Speaker 00

  The first thing is we'll go back to the flywheel principle. Again, let's take the building of Microsoft as a really good example of this. There was a luck event, no question, right? And then they got a really high return. The other company could have had that luck event too, didn't grab it. But then what was the capitalizing? Once you grabbed that luck event, you kept building it. It wasn't like, oh, great touchdown, we won, we're 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 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.

• 1:32:01Shane Parrish?

  Right.

• 1:32:01Speaker 00

  And they kept building, and they kept building, and they kept building, and then Windows 95, you just keep building and keep building, and eventually harness the internet to it, and keep building and keep building, and massive flywheel effect. So the way that you you get the return on the on the on the luck is you have to translate the luck event into a flywheel at some point, as opposed to viewing it as a windfall.

• 1:32:22Shane Parrish?

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

• 1:32:32Speaker 00

  Yeah.

• 1:32:33Shane Parrish?

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

• 1:32:38Speaker 00

  Okay. I'd like to lead into this one, if we could, with a, just a simple little investing quiz, right? Let's just take two companies from our research. We'll call them Company A and Company B for the moment. These are real companies. Let's just imagine that you could, you have to make a big bet investment on one of these two companies. And of course, keep in mind, the most effective investing strategy is a highly undiversified portfolio where you are right. So, and obviously, that's a bit facetious because that's almost impossible to do. Let's just suppose for a moment, you're going to place a huge concentrated bet on company A or company B. Now, I'm going to tell you

• 1:33:22Speaker 00

  over a two-decade period, something about the performance of those two companies. They're small, they're technology-driven, they have massive growth in front of them. A company A is going to achieve an average annual net income growth of 25% a year for two decades. So, rapid growth. Average annual net income growth, 25% a year for two decades. Company B coming off of the same base, with the same kinds of products, same kinds of technology, same kinds of customers, same potential in its future, is going to grow its average annual net income growth at 45% 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, Shane,

• 1:34:04Speaker 00

  just given no further information, if you had to place a bet, where would you put it? A at 25% or B at 45%? Oh, man, I don't know. Most people would, yeah, most people would, I would take the 45, given no further information, right? Just go with the odds, right? But let me just add a little bit of extra information. I'm going to give you the standard deviation of that growth rate. So, company A is going to 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, it's 45 plus or minus 115. Now, company A is, over that two-year period, is almost never going to be above 30%.

• 1:34:48Speaker 00

  But will never once miss 20%. Right. Company B, same, again, these are same industries, same kinds of company, same technologies, is going to be above 30% two thirds of those years. But it's going to have a range of plus 300 to minus 200. Now, if you had to place your bet, would you go the 25% or the 45%? Yes. Right. You go with the 25, right? Because you run the numbers and everybody who listens to 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. It's like 290 to one. Right. It's in chapter three of Great by Choice. Here's the point. That's a company that had a 20 mile march.

• 1:35:29Speaker 00

  And its 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 a company called Stryker under John Brown, who when it went public in the 1970s, had this march. And the idea being to be consecutive every single year. Now, if you think about it, think of it as like walking across the United States. And you got two approaches. One is every day I'm going to get up and do 20 miles, no matter what. Good conditions, bad conditions, wind in my face, hot, cold, whatever. I'm kind of on my 20 mile march. And the other is, well, depending upon the conditions, I'll either do big days or hide in my tent and wait for conditions to improve.

• 1:36:15Speaker 00

  I'm not on a 20 mile march. I'm erratic based upon the conditions around me. Company B was the non 20 mile marcher. Company A was the 20 mile marcher. And what we found is that the more turbulent the environment, the greater the results accrue to those that have a 20 mile march and stay consecutively with consistency on their 20 mile march. Now, could be, exactly, the more turbulent the environment, the greater the value of being the 20 mile marcher. Now, let's puzzle on this for a bit, Shane, about why that would be. Because sometimes, here's what, one thing that's interesting that happens for me.

• 1:36:55Speaker 00

  When I first see an idea, or in this case, it was Morton and I together at Great By Choice, when we saw this idea, the 20 Mile March, even when 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 published Great By Choice, why the 20 Mile March works. So let's just, let's puzzle on that for a minute. And anybody that's listening to this, why do 20 mile marchers win? And it doesn't have to be growth rates. So don't get trapped up on the idea of, well, it's just compounding growth. It could be, I'll be profitable every year, no matter what, at Southwest Airlines. It could be Moore's Law in technology. Earnings were all over the map at Intel, but double components at affordable costs,

• 1:37:37Speaker 00

  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 till we hit quantum mechanics, the limits of quantum. So the marches can take different forms. I have a 20 mile march. There's different kinds of marches. Here's a 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. What would pop into mind for you? This isn't like a test, like you're right or wrong, but just what would pop in your mind?

• 1:38:12Shane Parrish?

  I'm gonna get it wrong. My initial hypothesis would be effectively that a relentless focus on what they do well, instead of like looking at the grass as 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.

• 1:38:32Speaker 00

  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 and 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 marchers win? But on the surface, you would say, well, wait a minute, though. The 20 mile marchers are the ones that are gonna 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. Now let's think about this for a moment.

• 1:39:15Speaker 00

  Let's suppose you're Southwest Airlines and you say, "We have a march where 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 were talking earlier 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

• 1:39:56Speaker 00

  new things you have to be doing in the future today, you might maximize your short-term results today, but you're going to miss at seven or 12 cycles down the road. And the very commitment to say that we're not going to miss ever forces you to be doing all sorts of things today 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.

• 1:40:39Speaker 00

  And that is what the power, 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.

• 1:40:52Shane Parrish?

  I like that. That's really interesting. Let's talk about bullets versus cannonballs.

• 1:40:58Speaker 00

  Right, so this is so, again, sort of now back in the notion of the framework, right? Discipline, people, discipline, thought, discipline, action, and then building it to last. This is the last part of the discipline action. We've got the flywheel, we've got the 20-mile march, and the bullets and cannonballs. So, we had thought that there would be a very strong correlation between being more innovative than others and being the really big winners.

• 1:41:26Speaker 00

  And

• 1:41:26Shane Parrish?

  I think this fits in to what we were just talking about, right? In terms of like constantly investing and

• 1:41:32Speaker 00

  Exactly. And, and what we, what we found is that as well as did Tels and Goldr, their marvelous work well envisioned. There's very little evidence that the pioneering innovators win.

• 1:41:48Speaker 00

  And what we found instead is that it's not being innovative that matters. It's the ability to scale the right innovations. So let's just stand back for a moment, think about this. So imagine you have a ship bearing down on you and you have a certain amount of gunpowder. And you take all your gunpowder and you put it in 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.

• 1:42:30Speaker 00

  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, and this, this is one of Morton's real insights when we worked together on Great by Choice. And I want to give a lot of credit to Morton on 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 cannonballs. Again, in your podcast, a number of times people have talked about big bets.

• 1:43:15Speaker 00

  Well, big bets are either dangerous or really effective accelerants on the flywheel. And what we found is that if you calibrate with empirical validation by firing bullets first, and then you get calibration, then you convert to the 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 cannonballs, uncalibrated big bets.

• 1:43:55Speaker 00

  And that correlated with ending up heading down the path into the doom loop. When you stand back over history, then the bullets and cannonballs becomes the way that you extend the flywheel.

• 1:44:08Shane Parrish?

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

• 1:44:35Speaker 00

  That's really interesting.

• 1:44:36Shane Parrish?

  Because 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 cannonball might be the way to go because you have this massive incentive to win and win now. And if you don't, you know, you're going to 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.

• 1:45:18Speaker 00

  So the reason I'm pausing here is because the pattern of decline is actually firing the big, uncalibrated cannonballs.

• 1:45:34Shane Parrish?

  Hmm.

• 1:45:36Speaker 00

  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 let's just, 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. Let's jump ahead to the fourth stage of the framework, to the building it to last stage. And the opening part of that is productive paranoia, but that really means staying out of the five stages of decline.

• 1:46:17Speaker 00

  Productive paranoia doesn't mean not doing bold things. It's productive paranoia. It's worrying about the things that the world can really do to you and protecting yourself against those so that you stay alive. You're managing those downside risks as we were talking about earlier. The only mistakes you can learn from are the ones you survive. We really tried to understand how does a great company fall? Because the first step in being built to last is don't die. In Good to Great, we had some of the Good to Great companies later really stumble. One of them, for example, being Circuit City. And my response to that wasn't, oh my, our research is wrong. Our research was right.

• 1:47:01Speaker 00

  Because our research is never, oh, these are great companies forever. Right? Our research is about studying eras and episodes in history from which we can derive principles that correlate with the best results. And if companies cease to live to those principles, they're going to fall. 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 once were a great champion, they can lose it later. So that didn't bother me at all, that a company that was once great fell, that was in our research, fell. But what it really became was a source of great curiosity. Because it wasn't that the companies that stumbled weren't great.

• 1:47:45Speaker 00

  What was really scary is that they were great. Hmm. And then they've lost it. 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? That there's some timeless quality to them, that you can rely on them. That's the quest, that's the desire. You share with me a desire for that, a quest for that, this need to get there if we can. And so for me, the fall of like Circuit City... Became a great opportunity to understand something.

• 1:48:27Speaker 00

  What is it that we need to understand about this? So we did a study that ended up in a small book called How the Mighty Fall. So we did Built to Last, then Good to Great, and then I did How the Mighty Fall. Because 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 an intellectual standpoint, which is harder to understand, the ascent or the fall. Ascend is much easier because it's like entropy, right? Think about a pool table with the pool balls. How many ways are there to rack them in the middle? There's only a small number of ways that they can be racked in a perfect triangle in a specific place on the table. That's like the path to building something great.

• 1:49:12Speaker 00

  It's a narrow path. There are things you have to do, and you have to do them really well over a long period of time. That's racking the pool balls in the middle of the table. It's maybe difficult, but it's fairly clear what those are after we've done all the research. Now, let's think 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 variations. Well, that's like disintegration. That's like entropy. The natural state of things is towards disorder. So if there's a fairly narrow path to the ascent, there are lots of paths to decline. So coming up with a framework for decline turned out to be much harder than the framework for ascent.

• 1:49:57Speaker 00

  So we puzzled on this, and a number of members of my research team and I, we took the same methodology, except we took companies that kept rising in contrast to others that at a given point had the negative inflection, they lost it. And we started asking why, what happens when you lose it? And we found this sort of five stages by which a company falls. First of all, here's what's really scary. You go through the first three of five stages where, 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 stage is the stage you never come back from, which is capitulation to irrelevance or death.

• 1:50:40Speaker 00

  So you can actually be in stages one, two, or three. And be thinking you're just fine and everybody thinks you're still great. And that's terrifying because if it was really obvious when you're in stage one, you could catch it early. So those stages, uh, stage one is not success, but it's hubris born 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 that companies fall because hubris leads them to be complacent. And that's kind of a type two pathology here. Here's what's really interesting. Almost none of our, the companies we studied that were great companies that fell,

• 1:51:25Speaker 00

  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 they 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.

• 1:52:00Shane Parrish?

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

• 1:52:08Speaker 00

  Correct. You know, there's a certain animus that happens of we've been really successful. Now we just need to have more and we need to be bigger and let's do a bigger acquisition. 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% a year, or we're going to gobble things up without any earnings, or whatever it happens to be, or we can move, I've got a, I'm a new CEO and I need to show my metal 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.

• 1:52:41Speaker 00

  Was it complacency or was it undisciplined pursuit of more? Then we go to stage three, which is the undisciplined pursuit of more leads to problems, risks that are latent, 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 and peril. And when you're in denial of risk and peril, Hubris more to success leads to stage two, undisciplined 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 four.

• 1:53:26Speaker 00

  Stage four is when you fall and it's visible to everyone. And in stage four, it's not that you fell, that stage four is how you react. And if you react with grasping for 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 inflections up, followed by another dash downward, another up, and then dash downward.

• 1:54:03Shane Parrish?

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

• 1:54:06Speaker 00

  Exactly right. And then you end up, eventually if your balance sheet runs out, which is the crossover point, you go from stage four to stage five, which is capitulation to irrelevance and death. So you'd ask a question earlier about the uncalibrated cannonballs and people wanting to play it safe, and I jumped ahead. And 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 being too conservative.

• 1:54:39Shane Parrish?

  Do you think it's harder to fire the bullets and calibrate? Or is it harder to fire the cannonball? Like, if you were looking at those as processes internally in an organization, which would you focus on in proportion to energy committed? 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?

• 1:55:03Speaker 00

  So sometimes I like to sort of describe things through the lens of a specific case. Let's take the iPod that went into the iPhone and so forth. This was a classic bullets-to-cannonballs move, and I could go through lots of them through our research. The microprocessor was a bullet-to-cannonball at Intel. We could take the move to mini-mills of manufacturing steel at Nucor was a bullet-to-cannonball process, right? We could go through a variety of these cases, just to illustrate how this works. Yet, Apple's got its kind of original activities, which is in the Macintosh computer. Steve Jobs comes back in 1997. First thing he does is to basically try to re-induce some discipline, get costs under

• 1:55:44Speaker 00

  control, stop the bleeding, get the Macintosh line back into really good shape, and then to re, to pull out of the woodwork the people who still believed in the real dream that originally founded the company at Apple. And those, some of those people were still there and became the people on whom he could begin building the next phase of Apple. So 97 to 2002, 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. While 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.

• 1:56:28Speaker 00

  They were kind of late to the game. They fired a bullet on this thing that was kind of called the iPod. And it illustrates today, we look at the iPod and we say, wow, you know, that became the iPhone and the iPad and everything else, right? It's really the whole kind of ecosystem of Apple now. They must have known, they must have, they were going to fire this big uncalibrated cannonball or this big cannonball 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 on a variety of things, but one of them was this, this thing that was the little iPod.

• 1:57:13Speaker 00

  And if you go back to, I think it was the 2002 or 2003 Apple 10K report and you read it at the time, they describe, they 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've got this extension thing of this iPod. And that's all they said about it. I mean, it's really fascinating. So first thing I want to say, really important to grasp, is that when you're firing bullets, you can't presume to know which bullets are going to really become your big cannonballs for the future. If you go back into the history of Intel, you're firing some bullets and later you

• 1:57:57Speaker 00

  won't even hear about some of the things like the digital watches they tried and a whole bunch of other things, because the bullets never merited big cannonballs. So it's very important when you're firing bullets to realize that some of the bullets will never amount to anything. It's not like every bullet we fire is going to become a cannonball. The whole point is the uncertainty. You don't know which bullets will merit the cannonball. So you're going 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. And 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...

• 1:58:41Speaker 00

  Putting our little iTunes software, which we had to do to really make use of the iPod, and put it over on a Windows machine.

• 1:58:48Shane Parrish?

  Hmm.

• 1:58:48Speaker 00

  Okay, so there was this next organic step, right? And they took that, put it on 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 folks, Steve Jobs did, or the microprocessor was done at Intel. 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

• 1:59:33Speaker 00

  hit, or is it because we did a bad job of it? If you're going to fire a bullet, do it excellent.

• 1:59:39Shane Parrish?

  Yeah.

• 1:59:39Speaker 00

  That way you know that if it doesn't hit, it's just not going to work, as opposed to, maybe it would have worked if you would have done it well. So if it's a bullet, you still have to bring the kind of excellence to it to get a clean test. That's what they did. It was a really, the iPod was a really nice thing, even if it was a small thing. Then you get the calibration, then there came this point of like, wow, this is validated, then came the huge cannonball, and of course, that became what Apple was more known for today. But 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 to cannonball becomes the extension of the flywheel, so

• 2:00:24Speaker 00

  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 a bullet to cannonball process on top of an existing flywheel becomes the biggest part of the company. Marriott started in restaurants, bullet to cannonball, hotels, right? Apple started in personal computers, bullet to cannonball, smart handhelds. Intel started out in memory chips, bullet to cannonballs, microprocessors and beyond. And so that's that notion of you've got the flywheel, you're 20 mile marching, but then you're bullet to cannonball and usually, not always, but usually, theme parks to Disney, right, versus films.

• 2:01:08Speaker 00

  That second extension of the flywheel that came in the bullet to cannonball becomes the really big momentum in the company, usually for decades.

• 2:01:17Shane Parrish?

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

• 2:01:33Speaker 00

  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 counterargument. I can go back and always look and see, you're looking at dynastic eras of performance.

• 2:01:53Shane Parrish?

  Yeah, you weren't trying to make predictions, right?

• 2:01:56Speaker 00

  Not making predictions, exactly. And also, basically, if you can go back and look at when companies fall, if there's a divergence from the principles, then it actually, if anything, reinforces the principles rather than calls it into question. So that's always been for me more of a source of curiosity, of something to learn from. I can actually go through each of our books and say, what would I criticize? If I were to be the critic, basically, what other people have said and what just would go in my own mind. In good to great, I think 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

• 2:02:37Speaker 00

  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, from built to last to Jerry Porus that I did back in the early 90s, and I were to look at the good to great companies and sort of did this great, this marvelous inflection from mediocrity to way past the market that lasted at least 15 years. But if you zoom way out and you ask which set of companies had greater endurance, now built to last was about built to last, but the built to last companies did. And, and I have to ask myself why? Because we're looking through different lenses, so you're, you're still just trying to build one overall framework. Now, I think the principles are totally sound

• 2:03:20Speaker 00

  on all of them. But here's the thing 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 founded 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. As you look at George Merck, you know, medicine is for the patient and is not for the profits. The profits will follow. RW Johnson and Johnson and Johnson and the original JJ Credo, which was way

• 2:04:02Speaker 00

  back in the early 1920s, was visionary for its time. You have to understand it in the context of its time. The idea, Disney, Walt Disney was never about just, oh, 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, and then I would go to, we've talked about, you know, Apple. I don't think Apple was ever just about making money. And, and so I think that if I kind of stand back and I say, what did the 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 helped guide them over very long periods

• 2:04:46Speaker 00

  of time. I don't believe anything is ultimately permanent. I've been looking four and a half billion years, the earth, you know, the sun turns into a red giant. None of this matters, right? So you have to have a big enough timeframe.

• 2:04:57Shane Parrish?

  You're saying you're not gonna live forever?

• 2:04:59Speaker 00

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

• 2:05:09Shane Parrish?

  Do you think that's shortening now? The, the sort of like run of excellence?

• 2:05:13Speaker 00

  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're 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 foundations so the company can still be ahead a decade, two decades, three decades down the road,

• 2:05:55Speaker 00

  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 Dak stupid? No. Question is, what's the timeframe in which you're making decisions? And if you, if you said that we had to hit 20 more consecutive years of being in the head of the game, you're going to make different decisions than if it's the next two years. If in fact it's shortening, then a

• 2:06:33Speaker 00

  Potential contributor to that is the timeframe within which your people are making their decisions.

• 2:06:40Shane Parrish?

  I wonder if that circles back a little bit. As you were saying that, I 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 timeframe for the the the performance measurement, the timeframe that the person's under has an impact on that.

• 2:07:07Speaker 00

  It does. Your bullet today is going to still be relatively small relative to what it could be in the future. And we have multiple cases in in history where when the cannonball came, it's a big bet at that time, but it may not pay off for a while. It's probably going to pay off because it was calibrated. But if all you were trying to do was to maximize the returns in the next two years, then you would never fire a huge cannonball. That's truly the flywheel extension cannonball. You have to, you have to think 20 years.

• 2:07:45Shane Parrish?

  Right. Long-term thinking definitely plays into, I mean, there's an arbitrage almost 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 negative, second order positive, especially if you have competitors who are under pressure to do things that are first order positive, but might be second and subsequent order negative. The last question I wanted to end with today, and I really appreciate all the time you spent with us and our listeners, is given what you've studied about leadership and people, and this is going to be a big sort of like hairy, open-ended question, but you've spent more time thinking about this and you've spent more time with leaders than probably anybody I know in diving into the research.

• 2:08:28Shane Parrish?

  How do we develop not only young leaders, but how do we develop leaders?

• 2:08:34Speaker 00

  First of all, I've learned a great deal about how it is entirely possible to build leaders. And let me just go to the experience, an 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, it rotates every two years.

• 2:09:17Speaker 00

  Sometimes they have like a former general officer in the chair. Sometimes they have somebody from the non-military world, such as myself, who hold it for two years. And you can do anything you really want with this chair, including interacting a lot with cadets and faculty at this storied 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. Oh, that's interesting. And I think it was really interesting. I think it has to do with the fact that they're there in an ethic of service that's immense, that is communal success. You never succeed alone, and they know that. And you succeed by helping each other.

• 2:10:01Speaker 00

  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 West Point. It is designed, you will fail. And so you learn how to get through by helping each other, and you learn how to get through by growing from your failures, and you learn that early. And you get tremendous responsibility by the time you're 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? It's like you get, you get young men and women who come in to West Point, and it's like a factory. And what comes out the other side...

• 2:10:46Speaker 00

  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 has 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 it. So first, just as an empirical point, with conscious attention, it is entirely possible to build leaders and to do it systematically and to do it at a young age. Part of what happens for building leaders, and I saw this at West Point, and then later I saw it when I did a study on education, where I was looking at schools that went

• 2:11:31Speaker 00

  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 in the Turning the Flywheel monograph, which we talked about earlier, I give an example of a flywheel, which is an individual elementary school on a military base in Kansas,

• 2:12:14Speaker 00

  public school, led by a woman, Deb Gustafson, who created a flywheel that took kids from 33% reading rates to nearly 100% and stayed there. And she went from, stepped into the leadership role and grew into that responsibility. So if I stand back and I look at these, I look at those great school principals that we studied and superintendents, I look at what West Point does, I look at what's happened when I see some of my students from Stanford grow into real leadership. I don't know if someone else can make someone a leader. I don't know if you can teach leadership, but I'm pretty sure you can learn it. And I think that distinction is key. I think it's very arrogant to say that you or I or anyone else could take someone and I'm going to teach you leadership.

• 2:12:59Speaker 00

  But I've watched people learn it. And I think a big part of what it takes to learn it, there's kind of two things that would, well, 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 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, I know this one superintendent, let me just tell you this story, who sort of grew into a leader, takes over a school district, sees that that school district had kids

• 2:13:43Speaker 00

  from previous years before this person was in charge, what you're not really in charge, but was superintendent, where there'd been low graduation rates. A whole bunch of kids had not graduated from high school. And he takes one look at it and says, this is just wrong. Somebody's got to do something. So you would think, well, then, great. That person's going to lead people to do what's necessary to increase graduation rates. But here was the extra leadership step. When you recognize something is just wrong, something's just got to be done. Somebody's got to step forward. I can't be a bystander, right? He looks at it and he says, we have to take responsibility for the kids before I was superintendent who didn't graduate. And we're going to go find them.

• 2:14:26Speaker 00

  And we're going to create a program to bring them back into the schools. And we're going to make sure that they get out with their high school degree. I'm going to take responsibility to make sure that happens for the kids who were here before I was even superintendent. And I'm going to walk down to a building in this town. And I'm going to say, we need space for this. You have an extra floor in your building. 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 is the art of getting people to want to do what must be done. It's an art form and everybody is a different kind of an artist. Some are painters, some are sculptors, some are orators, some are good at like just getting

• 2:15:11Speaker 00

  the right people together around the table. Some are good at admonition, 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 gotta be done. Those people are coming over the hill, someone's gotta do something. Those kids didn't get their education, someone's gotta do something. This product has incredible potential, someone's gotta do something. And you infuse that in folks to be able to to do that. That is, I think, where the real start of the leadership begins. Hey, we got this computer, we made it for ourselves. Somebody's gotta do something to bring this to a whole bunch of other people because

• 2:15:56Speaker 00

  it's so cool. We can sit here and think it's cool, or we can do something. And I think that's the seabed 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 ventured off to West Point. And he held the chair two times after me. He was actually 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.

• 2:16:37Speaker 00

  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 going to take care of my career anymore. I'm going to take care of my people.

• 2:17:03Speaker 00

  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?

• 2:17:20Shane Parrish?

  How can I be useful?

• 2:17:21Speaker 00

  Yeah, how can I be useful? How can I take care of my people? Take care of your people, not your career. And then General Austin ended up as a spectacular leader. And I think those two sorts of things, if you're sort of thinking about seat beds 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.

• 2:18:06Speaker 00

  So I don't know if an outside entity, you know, I certainly couldn't like make somebody a leader, but I think people can learn it. And I think that's kind of some of the catalyst 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, that are 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, I absolutely reject, I'm incredibly optimistic. And my reason I'm optimistic is because what I see in the leadership capabilities of the

• 2:18:47Speaker 00

  generations that are coming, and I think will be in very good hands.

• 2:18:52Shane Parrish?

  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?

• 2:19:09Speaker 00

  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. We don't live on a Euclidean grid, and there's context, and there's certainly social context. We know from social psychology that, you know, almost everything is affected by social context, and you never know how you're going to behave, or 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 pressures.

• 2:19:50Speaker 00

  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. You're 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, what was also interesting

• 2:20:32Speaker 00

  is along the way, he also went to be a president of a university and really struggled there. So what you have with Eisenhower is you've got two wins and one, which was not as much of a win, which is the presidency of the university. What does Eisenhower's case show? It shows, number one, that two very different contexts, he could be enormously successful. He was successful in both military and presidential. But in the university setting, he was less successful. And I could go through multiple cases across scales of companies. I could look at people that have moved across sectors. I think the shift that Bill Gates has taken from running Microsoft to leading about world health in the foundation with his wife, Melinda, those are really different contexts. I mean, really different contexts, both enormously

• 2:21:15Speaker 00

  successful. So, point A, you can be successful across

• 2:21:20Speaker 00

  Different kinds of contexts and you 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 a 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.

• 2:21:43Shane Parrish?

  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.

• 2:21:52Speaker 00

  You're very welcome. It's a great, great privilege. I look forward to learning more from all of the conversations you hold.

• 2:21:59Shane Parrish?

  Thank you.

• 2:22:05Shane Parrish?

  The Knowledge Project is produced in collaboration with Jason Oberholzer and the team at Charts and Leisure. You can find show notes on this episode as well as every other episode at fs.blog/podcast. If you find this episode valuable, share it on social media and leave a review. To support the podcast, go to fs.blog/membership and join our learning community. You'll get hand-edited transcripts of all the podcasts and so much more. Thank you for listening.