Hedgehog Concept by Jim Collins
The Hedgehog and the Fox is an essay by philosopher Isaiah Berlin published as a book in 1953. The title is a reference to a fragment attributed to the famous Greek Poet, Archilochus: “A fox knows many things, but a hedgehog knows one big thing.” Jim Collins expands on this idea in his 2001 book, Good to Great. According to Jim, “the good-to-great companies founded their strategies on deep understanding along three key dimensions and then translated their understanding into a singular approach that guided all their actions.”
Jim poses these three dimensions as questions:
- What You Are Deeply Passionate About?
- What You Can Be the Best In the World At,
- What Best Drives Your Economic or Resource Engine?
What You Are Deeply Passionate About?
Companies should focus on areas where they have an intrinsic interest and enthusiasm, rather than chasing trends or external pressures. The discipline to say No, even to potentially lucrative ventures, separates great companies from good ones. Also, while personal passion is important for leadership, Collins emphasizes that the passion must extend to the organization as a whole.
What You Can Be the Best in the World At
It’s about recognizing areas where your organization has the inherent capability or could develop the capability to achieve unmatched excellence. This question requires brutal honesty about the company’s strengths and weaknesses. It’s also not about aspiration or ego; rather, it’s about realistic self-awareness.
Here’s an excerpt from Jim’s book:
“Prior to clarifying its Hedgehog Concept, Wells Fargo had tried to be a global bank, operating like a mini-Citicorp, and a mediocre one at that. Then, at first under Dick Cooley and then under Carl Reichardt, Wells Fargo executives began to ask themselves a piercing set of questions: What can we potentially do better than any other company, and, equally important, what can we not do better than any other company? And if we can’t be the best at it, then why are we doing it at all?”
Practical Steps to Identify What You Can Be Best At
Analyze Your Core Competencies:
What does your organization do better than competitors? Where do you consistently outperform others? Look at historical successes and what has driven them. Accuracy in this process of benchmarking is crucial to avoid drawing incorrect conclusions. Make sure to compare similar businesses within the same industry, as this allows for a more meaningful analysis. Additionally, take into account other factors such as the relative age of the benchmark company and their access to resources (financial, geographical, educational, and customer-related), as these elements can influence their results.
Evaluate Internal Resources:
A clear understanding of your current resource constraints is important. Do you have the talent, tools, and structure to dominate a specific niche? What areas of improvement could propel you to excellence in a focused domain?
Market and Industry:
What unmet needs exist in the market that aligns with your strengths? Where do competitors fall short, and how can you capitalize on those gaps?
What Best Drives Your Economic or Resource Engine?
Collins argues that every organization should find its unique “economic denominator,” a single measurable factor that has the greatest impact on its financial success. This denominator simplifies decision-making and ensures all efforts align with what truly drives financial health. According to Jim, “If you could pick one ratio (profit per X) – to systematically increase over time, what X would have the greatest and most sustainable impact on your economic engine?” Nowadays, it’s more common to find businesses using the term, “North Star Metric” which is similar to this denominator that Collins writes about.
What Is the North Star Metric?
The North Star metric reflects the core value that your product delivers to customers and can be a good predictor of a company’s long-term success.
To qualify as a “North Star”, it must deliver three things:
- Lead to revenue,
- Reflect customer value,
- And measure progress.
Examples of North-Star Metrics
- The number of weekly customers completing their first order
- Customer lifetime value
- Monthly-recurring revenue
- Daily Active Users
- Total Watch Time Per Month
- Number of patients on refills
- Average Order Value
- % of paid subscribers
- Daily Screen time
Nucor Hedgehog Concept
First, it’s essential to understand that innovation does not always mean starting from scratch. Businesses can foster innovation in new areas by leveraging their existing strengths and skills. Identifying ways to creatively adapt your core competencies can lead to new opportunities. A great example of this is Nucor, an American steel manufacturer that excels at utilizing its core capabilities in steel production. Nucor effectively embodies the Hedgehog Concept, which for them focuses on the idea: “We make steel, and we do it better and cheaper than anyone else.”
Passion:
Nucor is dedicated to producing low-cost, high-quality steel. They are dedicated to giving the finest value in the market to their clients.
Best in the World
Nucor has risen to the top of their chosen business model. They have developed a novel method of producing steel that is both efficient and cost-effective.
Economic Engine
Nucor’s economic engine is propelled by the company’s emphasis on efficiency and low costs. They have kept their prices low by utilizing technology and fostering a culture of constant improvement.
Humanocracy: A Book by Gary Hamel and Michele Zanini
Nucor is also mentioned as a model company in another more recent management book called Humanocracy by Gary Hamel and Michele Zanini.
Both books highlight the fact that Nucor empowers their employees to make decisions, accept responsibility for their jobs, and contribute to the company’s success. Nucor is well-known for its decentralized decision-making process, in which staff are encouraged to solve problems and take initiative. Employees at Nucor are rewarded and promoted based on their performance, with an emphasis on outcomes rather than any other factor.
Decentralized Management
Both books mention the fact that Nucor has decentralized management, providing employees with more authority, and eliminating bureaucracy. This approach is shown by Nucor’s flat organizational structure and emphasis on local decision-making.
