The hedgehog concept

In 1996, American researcher, author, speaker and management consultant James C. Collins lead a team of 21 research associates to understand what made an American business great.  They had some pretty stringent criteria for what constituted a “great” company. They examined thousands of businesses and assessed each as follows: the company had to have been able to generate a stock return three times better than the average stock market return over a 15 year period; the business had to have demonstrated a consistent pattern of growth (i.e. not a one-off wonder); and it had to be a well-recognised entity. As a result, only eleven businesses made the cut. The team’s conclusions are documented in Jim Collins’ book “Good to Great” which is a valuable read for any business owner since it identifies what these eleven companies all had in common in order for them to be successful.

One of their key conclusions was that each business adhered to what Collins termed ‘The Hedgehog Concept’. The theory goes like this: The hedgehog (much like its Australian equivalent the echidna) does not have a wide array of techniques to protect it from potential predators – it does just one thing really well: when it is attacked, it rolls itself into a ball and becomes pretty well impenetrable by virtue of its sharp spines. In a similar way, each of the American ‘great’ companies all shared the three core attributes at their core which collectively made them very hard to beat. These core attributes were:

1.     Understanding what they were deeply passionate about;

2.     Being exceptionally competent in that space and

3.     Great insight into their ‘economic engine’.

Let’s look at each of these in turn.

Very few worthwhile things in life are achieved without passion. This is the oil that keeps things moving even when times get tough.  The great companies had people that were genuinely passionate about the business they were in and it permeated their company culture. The passion was focused on what the company was there to do, not necessarily on how they went about it. Interestingly, not one of the ‘great’ companies had as their core focus to make a lot of money. Financial success naturally followed as a result of their collective passion.

‘Being exceptionally competent in that space’ (or as Jim Collins stated “Understanding what you can be the best at”) might sound obvious at first sight, but the point here is that these great companies understood what it took to be exceptional in their field and focused on this rather than get drawn into spaces where they were less capable. This meant that business decisions tended to be based upon rational logic and objectivity as opposed to emotional reaction. Focus is the key word here.

Finally, having ‘great insight into their economic engine’ meant that each of these successful businesses knew what underpinned their success financially. Perhaps somewhat surprisingly only one of the eleven businesses was in a ‘top 10% industry’ which meant that the majority of these great businesses were able to stand out in industries where it was not seen as easy to succeed. The ‘great’ companies each understood what drove their financial success, i.e. which products and services provided a great return or cash-flow and which did not. In essence, they really knew their numbers.

So, a great Hedgehog Concept is where a business has deep understanding and knowledge in all three of these areas and applies this consistently to achieve and maintain success.

Ian Ash ACC, AinstiB

Managing Director OrgMent Talent Solutions www.omtalent.com.au