Jim Collins: Keeping the Flywheel in Motion –The Knowledge Project

Check out The Knowledge Project Episode Page & Show Notes

Key Takeaways

  • The absolute best company leaders are able to dissolve their ego into the company and develop a sense of humility far above the rest
  • Focus on your decision-making process, not the outcome
    • Remember: You can make the right decision and still have a bad outcome
  • We live in a probabilistic world and our brains aren’t wired for it
  • “We tend to think that we are rational because we’re smart, but deep down, feelings win” – Jim Collins
    • As logical as people are, humans are emotional beings at their core
  • Try to change every ‘what’ decision into a ‘who’ decision
    • Not – “‘What should we do about this cybersecurity threat?”
      • But – “Who should we have involved in it?”
    • Not – “What should we do about this investment decision?”
      • But – “Who should we have involved in it?”
  • “What we’ve 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. This creates a massive compounding effect.” – Jim Collins
    • This is also known as a flywheel principle – small actions over time compound to create massive results
  • Look for situations in life where you can fire bullets (try things), aim and calibrate (make sure you’re getting good results), and then fire a cannonball (go all-in)

Intro

Jim Collins & Steve Jobs

  • When Jim was 30, he was a professor at Stanford
    • He taught a course on how to turn a new venture or small business into an enduring great company – “It was really the beginning of what became 30 years of work up to today”
      • One day, Jim had Steve Jobs come in to share his experiences with the class
        • “We had this nearly two-hour seminar on life, creating companies, creativity, what’s next, the future of computing, and how you think about putting teams together” – Jim Collins
  • Jim describes the two versions of Steve Jobs:
    • Jobs 1.0: A young entrepreneur who built a good company but got fired because of his immature behavior
    • Jobs 2.0: An experienced entrepreneur who helped build Pixar and fix up Apple into the giant it is today

Level 5 Leaders

  • Level 5 leaders are humble people who are extremely ambitious about building something bigger and longer-lasting than themselves
    • The absolute best company leaders are able to dissolve their ego into the company and develop a sense of humility far above the rest
    • Entrepreneurs that Jim considers to fit this bill: Herb Kelleher, Robert Noyce, Phil Knight, Wendy Kopp, Walt Disney, and Steve Jobs
    • Another example – Katharine Graham of the Washington Post
      • After her husband committed suicide, Katharine took over his role of running the paper
        • “She established herself as one of the great chief executives of the last 50 years. She really steered the Post through some very turbulent years. Classic Level 5.” – Jim Collins
  • There are two types of company-building entrepreneurs: Those that build to flip and those that build to last

Jim Interviews Shane | Thoughts on Decision-Making

  • What has Shane learned about decision-making running Farnam Street and hosting his podcast?
    • The original purpose of Farnam Street was to share tips on how to become better at making decisions
      • “And I think I’ve walked away realizing there is no skill called decision-making. There’s no skill called problem-solving. It’s all contextual.” – Shane Parrish
    • You need to focus on your decision-making process, not just the outcome
      • “What I’ve found is that cognitive biases are great for explaining why we make mistakes in hindsight, but they’re not necessarily really good for preventing or anticipating mistakes in the future” – Shane Parrish
  • If Jim could have all high schools students take just one course, it would be statistics
    • Why? – “We live in a probabilistic world and our brains aren’t wired for it”  – Jim Collins
      • “Even people who’ve been trained in statistics and probability make probabilistic errors all the time because, for whatever evolutionary reason, we don’t naturally think that way” 
    • An important point: “You can make the right decision and still have a bad outcome– Jim Collins
      • For example: If a person has cancer and one treatment option has a 90% success rate while the other has a10% success rate, it would make sense to go with the first option
        • But, there’s still a 10% chance it fails and results in a bad outcome

Emotions > Thoughts

  • As logical as people are, humans are emotional beings at their core
  •  “People do not operate first and foremost at the level of thoughts. They operate at the level of feelings.” – Jim Collins
    • Whether in a discussion, negotiation, or a classroom, it may seem like people are operating at an intellectual level, but look again – it’s all feelings
  • “We tend to think that we are rational because we’re smart, but deep down, feelings win.” – Jim Collins

Advice on Building a Great Company | Turn What Decisions Into Who Decisions

  • To become a great company, you need 3 outputs:
    • 1) Superior results: Does your company provide superior returns or results?
    • 2) Distinctive impact: If your company disappeared tomorrow, would it leave an unfillable hole?
    • 3) Lasting endurance: Will your company be able to do this for a long period of time?
  • What inputs help produce a great company?
    • Disciplined people
    • Disciplined thought
    • Disciplined action
    • Building something that will last
  • “One of my big takeaways from our research about decision-making is to try and change every ‘what’ decision into a ‘who’ decision” – Jim Collins
    • “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?’ Change every what to who as much as possible.”

The Flywheel Principle

  • The Flywheel Principle is an analogy for a series of good decisions, supremely well-executed, taken with discipline thought, that added up over time produce a great result
    • Another way to think of this – A drives B drives C drives D and so on until you get back to A
  • “What we’ve 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. This creates a massive compounding effect.” – Jim Collins
    • This is also known as a flywheel – small actions over time compound to create massive results
  • Amazon’s flywheel:
    • Lower prices lead to more customer visits
    • More customers attract more third-party sellers
    • More sellers lead to a larger business with more distribution
    • The larger the business, the more you can lower prices and make money from volume
  • The opposite of the flywheel is the doom loop
    • It’s when a random event, or something out of your control, produces a bad result that causes a company to react without understanding the situation
      • As a result of this, the company shifts its strategy and begins heading in the wrong direction
      • “It doesn’t give you any accumulated momentum. You get disappointing results which then lead to reaction without understanding. Then the company takes another new direction, follows a new fad, or creates a new program… but this is just another failure to build momentum, followed by more disappointing results. You’re in the doom loop.” – Jim Collins

The Commonalities of Great Companies

  • To build a great company, you need:
    • A sense of productive paranoia
    • To build something that doesn’t depend solely on you
    • To preserve the core mission and stimulate progress
  • 20-mile marchers are companies that don’t think one year ahead, but 20 years ahead
    • If your goal is to make your company profitable every year for the next 20 years, you’re going to invest your capital very differently from a company that wants to make a profit for this year alone

Fire Bullets (then Cannonballs)

  • Look for situations in life where you can fire bullets (try things), aim and calibrate (make sure you’re getting good results), and then fire a cannonball (go all-in)
    • Ex. – Before Apple built the iPhone, it started with the iPod and iTunes

How Great Companies Fail

  • The 5 stages by which a company fails:
    • 1) Hubris is born out of success
    • 2) Undisciplined pursuit of more
    • 3) Denial of risks and peril
    • 4) Reacting without understanding
    • 5) Capitulation to irrelevance and death

The Role of Luck

  • There are two types of luck: 
    • “What” luck: When something good happens to you
    • “Who” luck: When you meet someone who invests, bets, or guides you
  • Jim describes luck as an event – a luck event is any event that meets 3 tests:
    • 1) You didn’t cause it
    • 2) It has potentially significant consequences
    • 3) The event came as a surprise
  • Luck is asymmetric as a cause
    • “Good luck cannot cause a great company, but bad luck can be the cause of death of a company. Luck is asymmetric to the negative. Bad luck can kill you, but good luck cannot make you great.”Jim Collins

Additional Notes

  • To truly understand any decision-making process of the past, you need to put yourself in the person’s shoes at that time
    • “Historians, if you really want to understand how the Civil War unfolded in the United States, don’t do retrospective accounts. Try to look at what things looked like from Grant’s point of view in 1863 or Lincoln’s point of view in 1863. Not 1983 looking back to 1863.”
  • If you’re getting disconfirming evidence, don’t ignore it
    • Examine it and determine whether or not it it’s factual
  • “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.” – Jim Collins
  • Jim got engaged to his now-wife after just 4 days of dating
    • “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 our life.”
      • The two of them have been together for 39 years 
  • “Leadership is the art of getting people to want to do what must be done”
  • Instead of focusing on promotions and taking care of your career, focus on taking care of your people
  •  “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 recently done for someone else?‘” – Jim Collins
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