Usefulness of "Hedgehogs", New Business Model and Old Business Ideology

Jim Collins' book "Good to great" has marked a new stage in the research into successful company management, due to the following factors:

• the research was directed precisely towards discovering why some companies were able to grow from good to great, while others were not, not towards successful management in general,
• very strict criteria were formulated and applied when selecting companies (the average profitability of a company over the last 15 years had to be three times as high as the average profitability of the stock market),
• the research has yielded really interesting and even unexpected results which change to some extent the traditional notions of successful management.

How is Collins' book to be seen by Russian managers? Is it to be taken for a fiction book about management, a teach-yourself manual or a set of instructions to follow? Neither is it easy to decide whether you are immediately concerned or can think you are not because Collins deals with specifically American companies, managed on a different level and on a vaster scale, and so on. Yet it is difficult to remain impassive; you do feel attracted.

And yet for Russian managers the book represents essentially a challenge.

I hope that what I am going to say will help to clarify certain questions which have an essential importance for your choice of the way you react to Collins' challenge:

1. what allowed the companies studied to achieve such high results over such a long period of time?
2. what values brings Collins' model to company management?
3. how far can Collins' model be applied to Russian companies?

What allowed these companies to achieve such high results over such a long period of time?

Strategy rehabilitated

I do not know how other readers of Collins' book reacted; as for me, I was perplexed by the conclusion that the companies selected for research did not essentially differ? Insofar as their strategies are concerned, from companies used for comparison. As a matter of principle there is nothing strange in such a conclusion; on the contrary, it would probably seem strange if the companies studied were said to use some completely different strategies as compared to other companies, or to follow, like maniacs, a single strategy, the same for all.

The problem appears to be elsewhere: namely, in the involuntary jump made from the statement that the typical strategies followed by the companies studied do not differ from strategies followed by other companies, to the statement that the companies studied are not any different either in so far as strategic planning is concerned. But unless we view strategies from a highly specialized angle, it is evident that the main difference between the companies studied and others lies mainly in the way they carry out strategic planning. In any case the connection between "normal" strategic plans and the "hedgehog" concept has not been clearly defined by Collins.

And if we view strategy as a sequence of strategic decisions based on a clear understanding of a unique position and unique market prospects of a given company, it becomes possible not only to define various levels of strategic planning and realization of a strategy, but also try to examine the "hedgehog" concept within this framework.

Fifth level strategy

Let us define the following levels:

1. There are no strategic choices made, no strategic decisions taken. This is the strategy of having no strategy, sometimes still boasted of by certain Russian directors. This means just reacting to events and gradually withdrawing from the market.
2. Strategic choices are made in an incoherent manner. However strange this may seem, the strategy of going from one extreme to another is described by Collins as typical of a whole range of large and well-known American companies from the comparison group. This strategy is nothing new to Russian companies also.
3. Strategic choices are made coherently, but are not based on a clear understanding of a unique position and unique prospects of a company. This situation is typical for a superficially selected strategy: everything seems correct, well-grounded and elegant, but when it comes to putting the strategy into practice, it turns out quite the reverse. The company stubbornly refuses to fit into its strategic plans.
4. Strategic choices are made in a coherent manner and are based on a clear rational understanding understanding of a unique position and unique prospects of a company. This is a correct strategy for a given company, based on clearly defined and well-grounded strategic calculations and forecasts. The only thing it lacks is the sincere conviction of the leader and the managers that this is precisely the strategy their company needs.
5. Strategic choices are made in a coherent manner and are based not just on a clear rational understanding of a unique position and unique prospects of a company, but also on a sincere conviction of the managers that it is true. This is the fifth level strategy which can be regarded as analogous to the "hedgehog" concept. The creation of such a strategy can be described as "the picture is clear". After that all that remains to be done is to go on to put into practice the "hedgehog" concept, painfully acquired yet simple, elegant and true. In this respect the doubting question "Is it worth while (let me remind you that on the average companies spent four years to create their "hedgehog" concepts) to try to achieve a strategy of the fifth level?" must be answered "Yes, it is".

Let us underline the following:

• the main guarantee of the ultimate creation of a "hedgehog" concept is the company's leader and his/her steadfast determination to achieve a result which is unconditionally true,
• the acquisition of a sincere conviction that the "hedgehog" concept is true, is the key precondition of the success of its subsequent gradual realization (since we are speaking about that which will energize the company over 15 - 20 years),
• the "hedgehog" concept is a concept of concentration (of throwing away anything unnecessary) rather than a concept of expansion or growth; let me remind you that Collins declares it to be the result of the intersection of "three circles":

To conclude I would like to stress one more important aspect of the special nature of companies which grew from good to great: essentially they all were realizing an enterprise strategy comprising the development and realization of an enterprise goal of their own (a goal of company development), although it would be difficult to classify Gillette or Philipp Morris, e.g., as typical enterprise patterns. This does not seem serious enough, though quite successful. In this respect the picture Collins draws of the example of Amgen enterprise (perhaps the most relevant one for growing Russian companies) which managed successfully to avoid the bureaucratization stage, usually seen as an "inevitable" pitfall of rapidly growing companies, does not seem a random choice.

In what respect does a business model resemble a "hedgehog"?

Let us go back to the question of what allowed the companies researched to achieve steadily excellent results over at least 15 years since they had begun putting into practice the "hedgehog" concept. At first sight the answer is obvious: it is the "hedgehog" concept that allowed it. Yet let us try and be more specific.

What do Kroger supermarket network and Nucor mini-steel mill network have in common? Presumably the fact that both have realized a certain business model, both replicating a pattern already tested in practice. To what extent can the same approach be applied to other companies selected for research which did not use networking solutions? It seems that it can be applied. For instance, Fannie Mae seriously reconsidered the existing approach to mortgage loans. As a result the company realized a new business model for the mass market and secured for itself a new wide segment of potential mortgage borrowers. In Russia the way the bank "Russkiy Standart" is working on the market offers an analogy.

Thus the companies researched by Collins did not simply realize an efficient business model: they created and successfully put into practice business models new for their industries.

You may well ask: "Is not the business model just an abstract concept which only complicates a clear understanding of the "hedgehog" concept?" And how does the business model relate to the strategy?"

Seen from the angle of strategy, the business model can be considered a result of retaining the most stable parameters of the strategy being realized; it is their combination that ensures the efficiency of the company's activity. Here we take business model to mean a basic scheme of the company's activity, described as a combination of a range of parameters. Two important things are to be stressed here:

• the efficiency is ensured not by one or two key parameters, but by a well-balanced interconnection of all the main parameters of the business model,
• we are speaking about a dynamic model of the company's functioning as a "machinery" rather than about a static model.

The distinctive feature of the 11 companies selected by Collins (the creation of a specific economic indicator of their own to assess business efficiency) can be seen as specific efficiency indicators of the business model developed by the company. The use of the specific efficiency indicator allowed not only to possess a well-defined criterion for taking management decisions, but also to increase steadily the competitive advantages reflected by the indicator.

As we see, the new business model is seen as the core and the result of building a company according to the "hedgehog" concept. To a great extent it is its repeated use (replication) that allows in practice to achieve high results over a long period of time.

It is interesting that for many successful Russian companies the development of their business models is becoming a priority. It is true that up to now they are seeking to position their companies among typical business models used in their industry rather than to create a business model new for their industry. As a result the directors come to realize the limitations and the potential of each one of the typical business models, they see the business development logic behind a selected business model: if we choose this business model, we have to create certain things and give up others; the alternative business model has very good prospects but we do not have enough resources and competence to realize it, and so on. Such self-identification is very useful, because the situation in which heroical efforts are being devoted to simultaneous development of quite different business models is still characteristic of Russian companies, even successful; and this means wasting resources, not abundant by any means. Besides, Russian "hedgehogs", unlike the compact "hedgehogs" described by Collins, tend to be shapeless and voracious.

What values brings Collins' model to company management?

Business ideology is a strange thing. Two respectable managers voice opposite opinions on what a company's goal should be. And nobody seems surprised or worried. For instance, Roman Rodionov (AIG Brunswick Fund, Moscow) has very clearly defined his position at the conference "Management in Russia: management of growth", organized by the company ALT in 2001: "You do not have to do any planning here, you just have to understand what you really want. And to understand that you actually want only one thing: to become rich. You do not need anything else because a company cannot have any other goal, and growth does not mean production growth, it means capital growth."

Bill Hewlett (Hewlett-Packard) expressed once a quite different view: " Looking back I am most proud of having helped to create a company whose values, principles and success have exercised an immense influence on the way companies are being managed all around the world." And one of the key values according to "HP ideology" is a firm belief that profit is not the company's ultimate goal.

The company's philosophy formulated by George Merck Ju. In 1950 helps to understand this approach: "We are trying not to forget that drugs are being produced for the patients' sake. Not for the sake of profits. Profits will come. And if we do not forget the patients, we will not have to wait long for the profits. The oftener we remember that, the higher they will be."

You think that Russian companies are as yet far from putting this approach into practice? Then one more quotation from the conference "Management in Russia: management of growth". Roman Kotunov (RICHEL production group, Chelyabinsk): "It has been said today that high profits are the major goal a company strives to achieve. I shall take the liberty not to agree with that. Because the major goal is the client's satisfaction with the service he gets. If the client is satisfied, there will be high profits and everything else besides."

Why so much attention is being paid here to this one problem of business ideology, however important in itself? Because it is the most vivid and significant example of the way a business ideology considered far from unquestionable and rather obsolete in the West, is being presented to Russian managers as an absolute truth. Things which need the most serious clarification ("What have we come together into one company for?") are being presented as something quite obvious and unworthy of consideration ("To increase the amount the company costs, of course!")

It is here that Collins' approach ("it does not matter what makes up the company's system of values, it is your belief in it that matters") comes in handy: It seems to resolve the contradictions described. Let us note, however, that directors of many Russian companies use an opposite approach: "It does not matter whether I share the company's values declared; it is their elegance and correctness that matter." I almost cannot help telling them: "Be honest! It is better to declare values which are perhaps not very elegant, but in which you believe, than to put up slogans nobody believes in."

The discussion of values could be closed at this point. Let us however try to find something less vague and to formulate what the values of the companies researched by Collins have in common.

What value brought to a company by a fifth level director?

To get closer to an answer, let us formulate a viable alternative to a fifth level director. In Collins' book it is, as a rule, an ambitious director, a "star", realizing the model of "one genius and 1000 assistants". In Russia there are enough directors of this type, but ideologically speaking the opposite of a fifth level director would be a director of the "pure function" type, rather than "stars". It is the most perfect product of managerial technologies, a professional achieving high results in any company. As a rule it does not matter for him what company he works for: the important thing is to be paid better than before and not to be interfered with. His decisions are based on universal solutions already tested elsewhere, not on the unique "hedgehog" concept. His main goal is efficiency and does not consider it worthwhile to try and make others understand and share his views. Probably he is more efficient than a fifth level director in the short and not-so-long run, but naturally less so in the long run.

A director of the "pure function" type brings technological perfection into a company, while a fifth level director brings sense. One could perhaps say that he brings back to his company the meaning of its existence, lost at some point in the past, and so ensures the company's potential to actually pass in the future from the average level into the elite group of great companies. Unlike the classical founders of great companies who made their own "big and cheeky" ideas the basis of their company and realized them.

It can be supposed that, given these two ways of creating great companies, the difference between directors-"founders" and directors-"restorers" is to be found not only in the goal they set but also in the type of director needed at the moment. A "founder" must probably be more ambitious and active, and a "restorer" more perceptive (since the company has already developed up to a certain stage) and persevering (since he does not have the charismatic advantage of being the company's founder).

A Mutual Choice?

Once after talking with the director of a successful Russian company a definition came to my mind - very arbitrary, perhaps, but which stuck: "a successful director is a harmonious combination of, let us say, being limited and, let us say, irrationality". It is easier to speak about irrationality: this means the essential situation any company leader finds himself in: it is necessary to make definite decisions where a single rational solution does not exist and where a certain ethical position is required. A successful director probably differs from others because, being unable to change the nature of such problems, he finds the correct approach to them without giving in to temptation and trying to make such problems easier by rationalizing them.

It is not so easy to speak about being limited: for some reason the heavy burden of having to solve irrational problems does not make successful directors less involved (in a sincere and highly professional way) with the day-to-day progress of their business. What to think of this voluntary limitation to the reality of a company? It can probably be seen as an important precondition of this company's being successfully managed by this person. The company must actually be to his standard and interest him. It must be neither too "simple" (this leads to being bored) nor too "good" (this leads to his not being good enough for it), it must be just the thing that fits.

In its turn the company seeks and finds (though more often than not it does not find) "its own" director who is able to restore to it and to its staff the meaning and the goal of its existence in the future.

Thus we make somewhat more precise the problem of "a lost company seeks a fifth level director (fourth level possible, third unacceptable)": we see here a kind of mutuality in the way the company and its director like and choose one another.

Maybe such an approach allows us to get somewhat closer to answering the question why a modest director, appointed most of all because of an absence of better aspirants, gets the ambition to make his company a great company and why preparing somebody to become his successor becomes a priority for him.

Company as a capital and company as a value

Collins' study leads to a somewhat unexpected conclusion: the highest growth in capitalization of their companies has been achieved by directors for whom the main priority was the development of their business and not the increase of capital as such. Apparently this conclusion (even if seen as a correct priority sequence and not as an "incorrect" opposition of goals of "business development" and "capital growth") contradicts the widespread views of the Russian business community. In this respect I would like to say the following:

It is probable that orientation towards the usual goal (capital growth) leads, generally speaking, to the use of the usual means to achieve it and to the usual results, whereas the companies researched by Collins found individual goals for themselves, individual means of achieving them and so got individual results (significantly higher than the average on the market). Collins' research can be viewed as a detailed description of ways to find and achieve an individual goal for one's company.

At the current stage of their development Russian companies have first of all to learn to use the usual means of achieving the usual goals, which will provide the usual but reliable and stable results. There is no harm in that. What is harmful is the illusion that there can and must exist no other goals, means and results.

And if, for quite understandable reasons, the owners of our companies want in the future to achieve results comparable to those of these 11 American companies, they will not be able to avoid solving problems like accepting and respecting the values of one's company, finding for it a fifth level director with a corresponding staff of the best professionals and being ready to work patiently to set into motion the heavy fly-wheel of their business.

The "trick" of the companies researched by Collins is that their managerial staff considered their companies a value and a potential which can be fully realized in a great company - and that from the very beginning and having no special reasons for such an attitude. Says Robert Adams (Kroger): "We wanted very much to be alive, we were aware that we are Kroger, that Kroger existed long before we joined it and will last long after we leave it, so we were ready to strive for that. This could take one hundred years, but then we will strive for one hundred years if necessary." So it is not pure coincidence that the directors of ten out of eleven companies which achieved outstanding results, came from among the company staff and were not "invited stars".

Team as a value

Why can it be said that the team is one of the key values created in a company? The experience described by Collins allows to stress three factors:

1. A fifth level director positions himself as a leader yet at the same time a member of the team, which ensures a high degree of openness, independence and responsibility of the other team members
2. The best professionals in their field are selected for the company, but the necessary values and personality are seen as more important than professional skills,
3. Within the company there exists a council, an informal managers' board, which meets regularly and clarifies the key problems of the development of the company.

At first sight these means of creating a "valuable" team may seem very far from the Russian realities where the situation is much simpler: if you have money, you can buy any professionals you want, if you do not, you have to make do with what's available. Recently the Russian practice, however, begins to oppose such a simplistic approach to teams and their values. I for one know of three cases where good teams of managers (I know well one of them) left enterprises of large holding companies. This is already a trend, although not yet prominent. They were not lured away in the ordinary way by larger salaries: in this respect they were losing. But they hoped to find owners sharing their views on business and their role in it. One of my acquaintances explained his reasons in these terms: "I cannot work for an owner whom I do not respect (because of the way he manages his company)". This could be seen as a simple misunderstanding if losing a team of professionals did not mean for a company a loss of hundreds thousand or even billions dollars worth of "additional profits" which will not be soon mended by a new team. In such a case the value of a team is estimated pretty accurately at its worth, though under the heading "loss of profits".

Can Collins' model be applied to Russian companies?

To begin with, let us note that we Russians like to apply anything that's turned up. Sometimes an active use of a paradoxically combined range of management technologies and methods (for instance, coaching and reengineering) becomes a prominent feature of the individual style of certain very advanced directors.

It is known that to achieve the status of a "new management guru" one has to show how the new theory would work for Wal-Mart. Every such interpretation of the success history of Wal-Mart is in itself more or less convincing and harmless. Imagine however what would happen if Wal-Mart decided to use such interpretations as a guideline for their actual management. I suppose that its management would lose its bearings and the success history stop at that. It would be interesting to know what Sam Walter himself thinks about this.

My point is that a manager has to do with two realities: management and company, which both have a value of their own and which cannot be exchanged for, or simplified by, any theoretical approaches and management technologies (including, by the way, Collins' approach).

To tell the truth Collins brings us back to the simplicity and to the values of these realities rather than leading us away into theoretical complexities. As for managers, they have to defend their "managerial territory" from being trampled flat and rendered impersonal: otherwise they run the risk of "losing ground under their feet".

Are great companies being created in Russia?

If this question is to be answered "directly" in complete keeping with the terms used by Collins, a reliable answer cannot be given sooner than in about 20 years. This is less than inspiring. What, then, can we say today about the existence of great companies beginning to be created in Russia? The following can be seen as favourable factors:

• the Russian market is still in an evolving state, it has not yet been finally divided and presents more opportunities for an ambitious jump into the group of leaders,
• company management is also evolving actively; able and young persons have become owners and top-managers of many companies.

The following can be seen as adverse factors:

• the actual difficulty of creating a great company in the situation where Russian companies are lagging behind western companies, and are mainly local,
• the limited ambitions and the limited potential of the business ideology being realized by the majority of Russian business leaders: according to the most recent interviews with directors of several Russian leading companies one gets the impression that, having achieved the goals set previously, they are not yet ready to go further to achieve bigger goals. A typical way out of such a crisis of development goal becomes the idea to sell out.

Without trying to modify the notion of a great company, I would like nonetheless to put the same question in other terms: "Are outstanding companies being created in Russia?" First, it is not easy not to think of great companies as large companies. For his research Collins understandably selected from F-500 companies, though he says himself emphatically that size does not matter. Second, in my opinion it is an outstanding, not a great company that is the internal reality of those who ensure the transition from an average to an outstanding company. An outstanding company can be described as a company with a fifth level director, a fifth level team and a fifth level strategy (here I am tempted to add - and a fifth level business ideology). For instance, Procter&Gamble has retained in the recent years its position and its status of a great company, but since the aptly coined word "proctoid" (meaning a typical manager of the company) is widely used within the business community, the company clearly experiences problems as regards the position and the status of an outstanding company. That is why, if no great company "created to last forever" is created in Russia, this will be an essential characteristic feature of the scope of all of Russian business; but if no outstanding companies are created in Russia, this will make questionable the meaning of Russian business as such.

The inner feeling "we are an outstanding company" is a good basis for further progress despite an aggressive environment and insufficient understanding within the company. All the same recently some outstanding Russian companies, despite success in the past and good prospects in the future, are beginning to feel certain doubts because of their different and "non-standard" nature - to feel ashamed, one could say.

Outstanding or normal?

It is far from obvious that it is necessary to create an outstanding company. The idea "create first a normally functioning company, and later you can try to make an outstanding company of it" requires special consideration, particularly where Russian companies are concerned.

On the one hand one has to be realistic: yes, the majority of Russian companies still need to be brought to a normal and responsible state. And to "jump from feudalism into communism" is, for such companies, to seek risky adventures. On the other hand, going along the path leading to the creation of a normally functioning company, one can never switch to creating an outstanding company; although the real things being done in the company will be 80 % the same, whatever the route chosen, the logic of the progress will get more and more different in the two cases.

What is the main difference between these two paths? Certain norms reflecting one's notions of a normal company form the basis of creating a normally functioning company. Individual features of a particular company are seen in this light as "aggravating circumstances" which need, however, be integrated into the general picture in such a way that they do not distort or disturb it. Individually developed notions of what this particular company has to become (the "hedgehog" concept), form the basis of creating an outstanding company. The approach to normal models and management technologies may here be described within the framework of the universal approach to technologies adopted by outstanding companies: they do not follow the fashion or be progressive; they become the first to apply carefully selected technologies in harmony with their "hedgehog" concept.

To conclude let us note that both normally functioning and outstanding companies in Russia are, first of all, a constructive alternative to the predominant majority of abnormally functioning and average companies.

Model and patterns of Russian economics

In the first place it would be interesting to examine in this light the problem of the evolving economic model of Russia. One can note that currently the Russian market is being actively shaped and structured as one national market. The main participants are represented by three types of companies: industrial "self-made" enterprises (for instance, Wimm-Bill-Dann), Russian production and financial groups, usually aggregations (for instance, "System" corporation) and large foreign companies (for instance, Henkel). The market is being structured mainly through a reduction of the number of participants, plants and small companies being absorbed by leading companies. The future economic model of Russia will be essentially determined by the type of participants which will become dominant. We can see that none of the two models most often discussed (Korean and East-European) corresponds to Collins' model: the conglomerate Korean model is averse to the "hedgehog" concept, although it supposes the consolidation of national companies; the East-European model is geared towards their rapid integration into large foreign companies and their rapid development into good companies (but nothing more), rather than towards an independent full-scale development of national companies. Is it realistic to discuss a third model which supposes that enterprises are dominant and agrees best with Collins' model?

It is hardly possible to predict seriously that the enterprise model will become the Russian "pattern", although the growth rate of such companies as Wimm-Bill-Dann, Gloria Jeans, Kalina, Pyatyorochka and many others allow to hope that the positions of such companies in the economics of Russia will get considerably stronger.

A broader view allows to understand, however, that the enterprise model can be put, harmoniously and efficiently enough, into the framework of the two other models. For instance, some of the most successful Russian projects of large foreign companies are independent enterprises managed by Russians: Baltika (BBH) and Klebnyi Dom (Fazer) are two examples. In a recent interview published by the newspaper "Vedomosty" the director of Xerox, Ann Malchaki, not only described the Russian office of Xerox as a business on its own, but voiced plans to transfer the promising Russian business model (cooperation in projects with system integrators) to the company's offices in some other regions.

Similarly the relations between the owners of the company "Omskiy Bekon" and its managers team seem a system with good prospects, favourable to the realization of the full potential of the enterprise model in the company's management and development. Yet it has to be confessed that there are relatively few examples of successful cooperation between enterprises and production and financial groups - aggressive absorptions are much more frequent.

In their turn companies of the enterprise type facing the problem of finding investors for further development, tend more and more often to look not just for money, but for strategic investors who would ensure a considerable strengthening of the company's position on the market, including opportunities to integrate into international supply chains. For instance, recently the American Frequency Electronics (producing high-technology equipment and closely linked to the American defense industry), being one of the consumers of the production of the Saint-Petersburg firm "Morion", became its fifth co-owner. Thus what precedes does not mean that we have to gear towards the predominance of the enterprise type over the two other types. Rather we have to gear towards the predominance of an integration model within which each of the three models occupies its own "niche" and interacts closely with other models. And a "sane" enterprise ideology can form the basis of such a model. Probably it is time for directors of Russian companies to consider, in a broader and more balanced way, the place their company must hold within the business environment. They have to give up the simplistic logic of aggressive absorption and monopolizing the market and to adopt the logic of cooperation and searching their unique position among other companies. However, the competition, between companies as well as between models, does not disappear in the process: it just becomes more complicated and more productive.

Summary

1. "Hedgehogs" are useful, for keeping up the diversity in the business system if for nothing else.

   Yet if you have suddenly become inspired with the idea of taking the long "hedgehog" route, I would insist on your first looking attentively into a mirror: it is possible that you are not a "hedgehog".

2. The creation of a business model new for your industry is an elegant and efficient way of ensuring a long-term competitive potential for your company.

   Yet you must be prepared for the eventuality that your creation may disagree with the adopted working pattern (business model) of your industry and fail to achieve outstanding results.

3. 3. Do not accept without questioning the statement of the "old" business ideology that a company's major goal is high profits (or worth).

   But do not go too far in the progressive opposite direction either. It would be appropriate to remember how to apply here Collins' rule of the "genius of the conjunction And": principles AND profits.

There is a very interesting dialogue going on now between Russian managers. It is not direct, yet informal and intensive. It discusses goals, values, technologies - and Collins' ideas also. It is true it can be barely distinguished in the general information flow. I too wanted to participate in this dialogue.