At Walgreens, food went back to the chief executive’s grandfather. Jim Collins, who studied the company, wrote that it had invented the malted milk shake, and that food service was a long-standing family tradition. One of its restaurant chains was called Corky’s, after the chief executive himself, Charles R. “Cork” Walgreen III.
Then, at a planning committee meeting, Walgreen spoke up. Dan Jorndt, who later succeeded him, told Collins what he said: “Okay, now I am going to draw the line in the sand. We are going to be out of the restaurant business completely in five years.” At the time, Jorndt said, Walgreens had more than 500 restaurants. “You could have heard a pin drop.”
Six months later, someone at the next meeting mentioned, in passing, the five years. Walgreen tapped on the table. “Listen, you now have four and a half years. I said you had five years six months ago. Now you’ve got four and a half years.”
The restaurants were not failing. By Collins’s account, they added substantial profits to the bottom line. Walgreen was shutting down a business that worked.
Four still under construction
On September 1, 1988, the Deseret News reported that Marriott had completed its purchase of the Wag’s family restaurant chain from Walgreen Co.: 91 free-standing, 24-hour restaurants in Florida and Illinois. Four of them were still being built. The sale, the paper reported, would allow Walgreens “to concentrate on drug store expansion.”
Find what you can be best at, what pays, and what you care about. Then stop the rest.
Collins called this the Hedgehog Concept in Good to Great, his 2001 study of 11 companies that went from good results to great ones. The name comes from Isaiah Berlin’s essay “The Hedgehog and the Fox,” built on an ancient Greek parable: “The fox knows many things, but the hedgehog knows one big thing.” Collins drew three circles. What can you be the best in the world at, and just as important, what can’t you? What single ratio, “profit or cash flow per ‘x’” in his words, best drives your economic engine? What are your core people deeply passionate about? The concept sits where the three overlap.
For Walgreens, Collins summed it up as the most convenient drugstores, with high “profit per customer visit.” Restaurants sat outside the first circle. They made money, and Walgreens was good at them. Collins called that trap “the curse of competence”: “doing what you are good at will only make you good.”
A food stall with a twelve-page menu can cook everything well enough. A stall that sells only dumplings can try to make the best dumplings in town, and it can count what each customer brings in.
Collins insisted the concept is not a goal or a plan. “It is an understanding of what you can be the best at.” By his count it took the good-to-great companies four years, on average, to reach one, through rounds of debate and what he called “autopsies without blame.”
The bookkeeper’s websites
Imagine you run a five-person bookkeeping firm. Over the years you’ve added tax returns, payroll and, because a few clients asked, websites. The websites pay, and the team is decent at them. Nobody wants to say no to good money.
Collins’s second circle gives you a way in. Pick one denominator and compute it for every line of work, say profit per client hour, from last year’s invoices. Then ask the first-circle question honestly: in which of these could your firm be the best in your town? Maybe the answer turns out to be payroll for restaurants, where you already know every rule and every owner’s worry.
If the websites fall outside both circles, you can do what Walgreen did. Give the current clients a date, write it down, and say it again at every meeting, a little closer each time.
Profit per mortgage risk level
The same book offered another company’s hedgehog as a model. Fannie Mae, Collins wrote, “grasped the subtle denominator of profit per mortgage risk level, not per mortgage.” The whole ratio was about judging mortgage risk.
A circle diagram can’t show its own blind spot. Collins chose his 11 companies by their stock returns and then looked back for what they shared, so the three circles describe companies that had already won. They can’t say how many companies drew confident circles and lost, or how long a winning one stays true.
On September 7, 2008, the head of Fannie Mae’s regulator, James Lockhart, announced that his agency had placed Fannie Mae and Freddie Mac into conservatorship. Their boards and managers, he said, “did not create the inherent conflict and flawed business model embedded in the Enterprises’ structure.” But the capacity of their capital “to absorb further losses while supporting new business activity is in doubt.”