Great by Choice (pt. 3)
You can find the last two posts in the Great by Choice series here:
One of the first books our employees are given on their first day at SLS is “Great by Choice” by Jim Collins and Morten T. Hansen, which looks at why some companies thrive in uncertainty and chaos, and why others don’t. What draws us to this particular book is its focus on quantifiable data to lead you to the conclusions of what made these companies excel in their industries. There are three main points that we will cover in three blog posts, so that we can hopefully give you some insights that will help you become GREAT BY CHOICE. And to that end … let us know when we can assist. We’re more than a commercial lender. We’re your partner in business. Call us at 816.423.8021
For some backstory, the research for this book began in 2002, and continued for nine years. The subjects of the study were seven companies that are referred to as “10xers”, or companies that beat their industry index by at least 10 times, but that is just the baseline. Some companies went above and beyond that benchmark, like Southwest Airlines who performed 63.4 times better than the market as a whole, and 550.4 times better than its own industry! These companies include:
- Amgen (1980-2002)
- Biomet (1977-2002)
- Intel (1968-2002)
- Microsoft (1975-2002)
- Progressive Insurance (1965-2002)
- Southwest Airlines (1967-2002)
- Stryker (1977-2002)
As mentioned previously, there are three main points that cover the three main characteristics these 10xers have including Fanatic Discipline, Empirical Creativity, and Productive Paranoia. Today we will be taking a look at Productive Paranoia.
The true key to becoming a great, lasting company, is survival. It’s almost in the definition of being a “lasting” company. This idea is pretty inherent in any business… we haven’t met any in our 31 years that were actively trying to go under… so why are there still companies that close their doors for the final time each year? What are they missing? Well, they might just be lacking some Productive Paranoia.
We’ll be looking today at the three points that are covered in this section of “Great by Choice”:
- Productive Paranoia 1: Build cash reserves and buffers to prepare for unexpected events and bad luck before they happen.
- Productive Paranoia 2: Bound risk, and manage time-based risk
- Productive Paranoia 3: Zoom out, then zoom in, remaining hypervigilant to sense changing conditions, and respond effectively.
Productive Paranoia #1: Build Cash Reserves
“By the late 1990s, Intel’s cash position had soared to more than $10 billion, reaching 40 percent of annual revenues (whereas [in comparison to Intel,] AMD’s cash-to-revenue ratio hovered at less than 25 percent).”
We know what you’re thinking – this sounds irrational! Intel knew that 95% of the time, it would be irrational to have such a high level of cash. But they weren’t looking at 95% of the time. They were looking at the 5% of the time where not having enough cash would be devastating during an industry or economic crisis. They were preparing to survive. They weren’t alone. “80% of the time, the 10X cases carried a higher cash-to-assets ratio and a higher cash-to-liabilities ratio than their comparisons.”
If you’re looking for 10X success, you need to prepare for the worst outcomes, or what this book dubs “Black Swan” events. These are low-probability, highly disruptive events that are impossible to predict… to a degree. As the text states “the probability of any particular Black Swan event might be less than 1 percent, but the probability that some Black Swan event will happen is close to 100 percent.” It never hurts to prepare… especially in the best of times.
Productive Paranoia #2: Bound Risk
One might think that companies that have reached 10X success are more likely to take bigger risks to reach their position, but according to the research in “Great by Choice” this was not the case. In looking at ~57 decisions made by 10X Companies, and their Comparison Companies, 56% were low risk and 44% were medium to high risk for 10Xers, as opposed to 22% falling in the low risk category and 78% for medium to high risk decisions. That tells quite a story.
Of course, not all risk is unavoidable, and some higher risk decisions come to the table. In cases where higher risk decisions are unavoidable, such as time-based risk decisions, 10Xers took control and made sure they analyzed the time table available and took a mindset of “go slow when you can, fast when you must.” They avoided reactionary decisions, and came to deliberate, fact-driven conclusions, and made sure they executed with the intensity needed for each respectively situation.
Overall, they were always looking to reduce risk so they could avoid these higher pressure, time-sensitive decisions. When times were good they continued to shoot bullets, not cannonballs to analyze their current business conditions, and where to move to next (remember part 2 of this series?) Sometimes a little productive paranoia can go a long way.
Productive Paranoia #3: Zoom Out, then Zoom In
We’re going to keep this one pretty simple. To be a 10X leader, you have to have a dual lens capability. You have to be hyper-focused on the task at hand, without losing track of the macro. This ability, in practice, looks like this:
Sense a change in conditions
Assess the time frame: How much time before the risk profile changes?
Assess with rigor: Do the new conditions call for disrupting plans? If so, how?
Focus on supreme execution of plans and objectives
Don’t zoom in so much that you can’t see your surroundings. Don’t zoom out so much that you can’t your own two feet. With a healthy balance, you may be able to be the next 10X success!
With the three topics we’ve covered over the last couple of months, hopefully we’ve helped you make the next step to become Great by Choice. Thanks for reading along each step of the way! Feel free to take a look at the rest of the posts on our blog for more helpful posts like these.
You can find our last two posts in the Great by Choice series here:
These ideas have been major philosophies of our business, and we hope it has given you productive ideas for yours. We’ve worked with a lot of companies over the years who are on the journey to become Great by Choice. We’ve helped businesses finance equipment to free up their monthly cash flow to pursue their business bullets, and continue to be a part of companies’ 20 Mile Marches. Maybe the ideas in this series were valuable enough, and if that’s true, thanks for stopping by, but if we can help assist you, feel free to give us a call! We’re more than your commercial lender, we’re your partner in business.