To best-selling “Good to Great” author Jim Collins, the most challenging times for businesses are the good ones.

Question - How do you bounce back after a downturn?   

Jim Collins: My colleague Morton Hansen and I have been doing a research project for the last seven, eight, nine years.  It’s not yet published.  It will be our next book.  But it really looks at the question of why do some become great when the world really spins out of control, when it’s an uncertain and unforgiving environment, characterized by immense amount of tumult.  This is one of those times of tumult.  And by the way tumult will remain.  Prosperity will return.  Uncertainty will remain.  Prosperity will return.  Unforgiving environments will remain.  Prosperity will return. 

One of the most unforgiving forms of an environment of business are good times because in difficult times it’s the economy that gets you.  In good times it’s your competitors that get you.  So either way, it’s a tough time.  Now here’s what’s interesting, when we do that analysis what’s very clear is that those who win are as fanatically disciplined in prosperity as they are in times of set back.  And the losers, the comparisons, the mediocres, the ones who never become great, they’re the ones who, “Oh, you know, times are good again and we’re going to be, we can afford to be less disciplined and we can begin to bleed around the edges.” 

No, no, no.  The ones who actually do great over time, they impose even more ferocious discipline during the good times because the bad times will always come again.  And they’re going to come again, and again, and again, and again, and again.  And if you’re the one that was disciplined when that time comes you can take advantage of it.  You can then be the one that spurts ahead of others who were less disciplined in the good times.

Question - Why do companies over-hire during boom times?

Jim Collins: The critical question is not how many people you have or what your head count is.  The critical question is do you have all of your key seats filled with the right people?  And do you have the discipline to make sure that no key seat you have compromised and put somebody who is not a right person in that seat. 

Now what happens in downturns like this is that they become a time when people begin to distinguish between the right people on their bus and maybe some of the people who weren’t the right people on the bus.  And so it’s not a matter of the number of people on the bus, it’s do you have the right people?  You have 10 of the right people, they can do what 50 of the not right people or more can do.  And so the critical question is never what’s the head count, do we have enough people, do we have too few people.  It’s do you have the right people and do you have the right people in key seats.  And that’s a discipline in good times and bad times.  Again, going back to the discipline in good times, it means that in good times when you’re growing really fast you do not break Packard’s law.

We wrote about Packard’s law in both Good to Great and in How the Mighty Fall.  Packard’s law goes like this.  It’s named after David Packard, the founder of Hewlett Packard.  "If you allow growth in revenues, growth in scale, growth in new adventures to exceed your ability to have enough of the right people in the key seats to execute on that growth brilliantly, you will fall."

And so when good times come, when there’s a robust growth period again, and there will be the critical question, the critical throttle on growth is having enough of the right people to execute that growth brilliantly.  If you then start adding wrong people just to absorb growth you’re becoming undisciplined again.

Recorded on: August 12, 2009