Chapter 5 – The Hedgehog Concept (Simplicity within the Three Circles)
In this chapter the book uses an analogy of “foxes and hedgehogs” to characterize certain personality traits:
“Foxes pursue many ends at the same time and see the world in all its complexity. They are ‘scattered or diffused, moving on many levels.'”
“Hedgehogs simplify a complex world into a single organizing idea, a basic principle or concept that unifies and guides everything. It doesn’t matter how complex the world, a hedgehog reduces all challenges and dilemmas to simple – indeed almost simplistic – hedgehog ideas.”
“[H]edgehogs aren’t simpletons; they have a piercing insight that allows them to see through complexity and discern underlying patterns. Hedgehogs see what is essential, and ignore the rest.”
The book compares Walgreens and Eckerd convenience stores. Walgreens was the hedgehog, Eckerd was the fox. Walgreens took a cue from McDonalds, examining its stores and seeing how it could improve efficiency and convenience. They relocated stores to better locations, even if it cost money in the short term.
Eckerd went on a growing spree, buying out competitors wherever it saw a good deal. They picked up acquisitions outside their core competency, bought a company called American Home Video Corporation, and entered the home video market. They would’ve been better off doubling down on their current investments and finding ways to make the stores they owned more profitable. It would’ve meant harder work up front, but failing to do so left them lagging behind their competitors. When their home video investment took a nose dive the convenience stores couldn’t save them.
The Three Circles and Your Hedgehog Concept
The Three Circles are three overlapping circles, like a Venn diagram. Each circle is defined by the answers to these questions (a good picture of it can be found here):
- What can you be the best in the world at? Just because you possess a core competence doesn’t mean you can be the best in the world at it. What you can be the best at might not even be something in which you are currently engaged.
- What drives your economic engine? What is the single denominator – profit per x – that has the greatest impact on your company’s profit?
- What are you deeply passionate about? The question here is not “What can we stimulate passion for?” but, “What are we already passionate for?”
Your Hedgehog Concept is what lies at the intersection of The Three Circles. Many companies find success focusing on the intersection of two of the circles, but a great company has an idea that is covered by all three.
Understanding What You Can (and Cannot) Be the Best in the World At
From the book: “A Hedgehog Concept is not a goal to be the best, a strategy to be the best, an intention to be the best, a plan to be the best. It is an understanding of what you can be the best at. The distinction is absolutely crucial.”
By the turn of the century the banking industry had become extraordinarily extravagant, even for corporate standards. Wells Fargo saw it couldn’t compete with other banks by operating like a bank, and worse, with the deregulation that had just passed soon banking was going to become a commodity. They stopped trying to act like a bank, realizing they could be the best in the industry just by running it like a business. By cutting expenses and focusing on the actual business end of things they got the jump on everyone else and grew like crazy.
In the 1960s Abbot Laboratories realized they hadn’t invested nearly enough in R&D to keep up with the larger pharmaceutical companies. Instead of trying to play catch up they “recognized they had an opportunity to excel at creating products that contribute to cost-effective healthcare.” They found success focusing in this niche.
There’s one paragraph from this section that I want to copy verbatim, because it really hit home for me. This is exactly what happened to me when I tried college the first time:
[C]onsider someone who gets straight A’s in high school calculus and the math portion of the SAT, then goes to college and meets people who are genetically encoded for math. It takes them 30 minutes to finish the same test it takes him three hours to finish. He could still be a competent mathematician, but not the best. That young person might still get pressure from parents and friends to continue, saying, “But you’re so good at it.” Just like our young person, many people have been pulled or have fallen into careers where they can never attain complete mastery and fulfillment. Suffering from the curse of competence but lacking a clear Hedgehog Concept, they rarely become great at what they do. The good-to-great companies understood that doing what you are good at will only make you good; focusing solely on what you can potentially do better than any other organization is the only path to greatness.
Insight Into Your Economic Engine – What Is Your Denominator?
When considering profit per x, what x would have the greatest (and most sustainable) impact on your business? I think it’s pretty self explanatory. If you’re not looking at the right metric you’re going to miss important details. I’ll post two examples from this section to highlight:
Walgreens switched its focus from profit per store to profit per customer visit. The quickest way to increase profit per store is to decrease the number of stores and put them in less expensive locations. (But this is less convenient, and Walgreens is a convenience store.)
Circuit City – Shift from profit per single store to profit per region reflected economies of scale. While per-store performance remained vital, regional grouping was a key insight that drove Circuit City past Silo.
Understanding Your Passion
This section just reinforces what was said earlier about not being able to make people passionate about doing something. You have to be passionate about it of your own volition. They make the case that Fannie Mae executives weren’t passionate about the mechanics of packaging mortgages and selling market securities, but they were passionate about the role Sallie Mae played in helping everyday Americans realize the dream of home ownership, and they wanted to save and resurrect the company rather than see it die.
The Triumph of Understanding Over Bravado
Again I’ll post an excerpt that summarizes this better than I can:
On the research team we frequently found ourselves talking about the difference between “pre hedgehog” and “post hedgehog” states. In the pre-hedgehog state it’s like groping through the fog. You’re making progress on a long march but you can’t see all that well. Then, with the Hedgehog Concept, you break into a clearing, the fog lifts, and you can see for miles. From then on each juncture requires less deliberation, and you can shift from crawl to walk, and from walk to run. In the post-hedgehog state miles of trail move swiftly beneath your feet, forks in the road fly past you as you quickly make decisions that you could not have seen so clearly in the fog.
The author contrasts this with other companies that lurch back and forth and struggle to find their way, even ones that have charismatic leaders. It’s especially true of companies that eat up other companies, growing just for the sake of growing. If there’s no rhyme or reason to your acquisitions other than “It was too good a deal to pass up” you’re in for a very bad surprise. The book says this explained two thirds of all the comparison companies that seemed to be doing well and then failed.
I really liked this passage: “Growth is not a Hedgehog Concept. Rather, if you have the right Hedgehog Concept and make decisions relentlessly consistent with it, you will create such momentum that your main problem will not be how to grow but how not to grow too fast.”
Another thing I liked was that they clarified getting a Hedgehog Concept is not something that happens in a single moment; it’s an iterative process. Each time you go through the materials and the questions you get a little more clarity. Earlier in the book one CEO said they spent the better part of the first two years doing nothing more than asking questions. It’s not a good sign if your company brings in a CEO and overnight they know exactly what direction the company needs to go in. In the short term they may be right, and the company may do great – even for the next 10 years – but the study behind this book showed this type of behavior will usually not be sustained.
The title of this section (The Triumph of Understanding Over Bravado) comes from the idea that once you’ve uncovered your Hedgehog Concept it won’t be something loud and brash. After all the time spent uncovering it and discussing things, it’ll probably be a simple truth, clear to all. That’s the idea, anyway – as a Hedgehog Concept the idea ought to be simple, and clear to all. As the book put it, “When you get your Hedgehog Concept right it has the quiet ping of truth, like a single, clear, perfectly struck note hanging in the air in the hushed silence of a full auditorium at the end of a quiet movement of a Mozart piano concerto. There is no need to say much of anything; the quiet truth speaks for itself.”
The book didn’t separate this into its own subsection, but I thought it worthy of one. The Council is like an unofficial Board of Advisers. It’s similar to Churchill’s Statistical Office in that it’s outside the normal organizational structure, but unlike it, The Council is an informal group that doesn’t appear on any organizational chart.
The Council meets to discuss items important to the leadership of the organization, and is made up of people whose opinions the leaders value, regardless of their position in the company. If you value the janitor’s opinion, then by all means include him or her.
The book listed a table with characteristics of The Council, here are some of the ones I thought most important:
- The council exists as a device to gain understanding about important issues facing the organization.
- Each council member has the ability to argue and debate in search of understanding, not from the egoistic need to win a point or protect a parochial interest.
- Each council member retains the respect of every other council member, without exception.
- Council members come from a range of perspectives but each member has deep knowledge about some aspect of the organization and/or the environment in which it operates.
- The council includes key members of the management team but is not limited to management, nor is every executive automatically a member.
- The council is a standing body, not an ad hoc committee assembled for a specific project.
- The council meets periodically, as often as once a week or as infrequently as once a quarter.
- The council does not seek consensus, recognizing that consensus decisions are often at odds with intelligent decisions. The responsibility for the final decision remains with the leading executive.
The next chapter is titled “A Culture of Discipline”. If all goes well I’ll post my notes for it next week. Until then, have a good weekend 🙂