What’s Luck Got to Do With It?

By JIM COLLINS and MORTEN T. HANSEN

BETTER to be lucky than good, the adage goes.

And maybe that’s true — if you just want to be merely good, not much better than average. But what if you want to build or do something great? And what if you want to do so in today’s unstable and unpredictable world?

Recently, we completed a nine-year research study of some of the most extreme business successes of modern times. We examined entrepreneurs who built small enterprises into companies that outperformed their industries by a factor of 10 in highly turbulent environments. We call them 10Xers, for “10 times success.”

The very nature of this study — how some people thrive in uncertainty, lead in chaos, deal with a world full of big, disruptive forces that we cannot predict or control — led us to smack into the question, “Just what is the role of luck?”

Could it be that leaders’ skills account for the difference between just meeting their industry’s average performance (1X success) and doubling it (2X)? But that luck accounts for all the difference between 2X and 10X?

Maybe, or maybe not.

But how on Earth could we go about quantifying something as elusive as “luck”? The breakthrough came in seeing luck as an event, not as some indefinable aura. We defined a “luck event” as one that meets three tests. First, some significant aspect of the event occurs largely or entirely independent of the actions of the enterprise’s main actors. Second, the event has a potentially significant consequence — good or bad. And, third, it has some element of unpredictability.

We systematically found 230 significant luck events across the history of our study’s subjects. We considered good luck, bad luck, the timing of luck and the size of “luck spikes.” Adding up the evidence, we found that the 10X cases weren’t generally “luckier” than the comparison cases. (We compared the 10X companies with a control group of companies that failed to become great in the same extreme environments.)

The 10X cases and the control group both had luck, good and bad, in comparable amounts, so the evidence leads us to conclude that luck doesn’t cause 10X success. The crucial question is not, “Are you lucky?” but “Do you get a high return on luck?”

Return on luck: We call it ROL.

SO why did Bill Gates become a 10Xer, building a great software company in the personal computer revolution? Through one lens, you might see Mr. Gates as incredibly lucky. He just happened to have been born into an upper-middle-class American family that had the resources to send him to a private school. His family happened to enroll him at Lakeside School in Seattle, which had a Teletype connection to a computer upon which he could learn to program — something that was unusual for schools in the late 1960s and early ’70s.

He also just happened to have been born at the right time, coming of age as the advancement of microelectronics made the PC inevitable. Had he been born 10 years later, or even just five years later, he would have missed the moment.

Mr. Gates’s friend Paul Allen just happened to see a cover article in the January 1975 issue of Popular Electronics, titled “World’s First Microcomputer Kit to Rival Commercial Models.” It was about the Altair, designed by a small company in Albuquerque. Mr. Gates and Mr. Allen had the idea to convert the programming language Basic into a product that could be used on the Altair, which would put them in position to be the first to sell such a product for a personal computer. Mr. Gates went to college at Harvard, which just happened to have a PDP-10 computer upon which he could develop and test his ideas.

Wow, Bill Gates was really lucky, right?

Yes, he was. But luck is not why Bill Gates became a 10Xer. Consider these questions:

• Was Bill Gates the only person of his era who grew up in an upper middle-class American family?

• Was he the only person born in the mid-1950s who attended a secondary school with access to computing?

• Was he the only person who went to a college with computer resources in the mid-’70s? The only one who read the Popular Electronics article? The only one who knew how to program in Basic?

No, no, no, no and no.

Lakeside may have been one of the first schools to have a computer that students could use during those years, but it wasn’t the only such school.

Mr. Gates may have been a math and computer whiz kid at a top college that had computers in 1975, but he wasn’t the only math and computer whiz kid at Harvard, Stanford, Princeton, Yale, M.I.T., Caltech, Carnegie Mellon, Berkeley, U.C.L.A., the University of Chicago, Georgia Tech, Cornell, Dartmouth, Southern Cal, Columbia, Northwestern, Penn, Michigan or any number of other top colleges with comparable or even better computer resources.

Mr. Gates wasn’t the only person who knew how to program in Basic; the language was developed a decade earlier by Dartmouth professors, and it was widely known by 1975, used in academics and industry. And what about all the master’s and Ph.D. students in electrical engineering and computer science who had even more computer expertise than Mr. Gates on the day the Popular Electronics article appeared? Any could have decided to abandon their studies and start a personal computer software company. And computer experts already working in industry and academia could have done the same.

But how many of them changed their life plans — and cut their sleep to near zero, essentially inhaling food so as not to let eating interfere with work — to throw themselves into writing Basic for the Altair? How many defied their parents, dropped out of college and moved to Albuquerque to work with the Altair? How many had Basic for the Altair written, debugged and ready to ship before anyone else?

Thousands of people could have done the same thing that Mr. Gates did, at the same time. But they didn’t.

The difference between Mr. Gates and similarly advantaged people is not luck. Mr. Gates went further, taking a confluence of lucky circumstances and creating a huge return on his luck. And this is the important difference.

Luck, good and bad, happens to everyone, whether we like it or not. But when we look at the 10Xers, we see people like Mr. Gates who recognize luck and seize it, leaders who grab luck events and make much more of them.

This ability to achieve a high ROL at pivotal moments has a huge multiplicative effect for 10Xers. They zoom out to recognize when a luck event has happened and to consider whether they should let it disrupt their plans. Imagine if Mr. Gates had said to Paul Allen after seeing the Popular Electronics article: “Well, Paul, I’m kind of focused on my studies here at Harvard right now. Let’s wait a few years, and then I’ll be ready to start.”

When we examined less successful companies, we saw a generally poor overall return on luck. Some of the comparison cases had extraordinary sequences of good luck yet showed a spectacular ability to fritter that luck away. When the time came to execute on their good fortune, they stumbled. They didn’t fail for lack of good luck. They failed for lack of superb execution.

WHILE getting a high return on good luck is an essential skill for 10Xers, getting a high return on bad luck can be a truly defining moment. Consider the 10X case of Progressive Insurance.

On Nov. 8, 1988, Peter Lewis, the chief executive, received news that shocked the insurance industry. California voters had passed Proposition 103, a punitive attack on car insurance companies. Prop 103 required 20 percent price reductions and refunds to customers, plunging a huge auto insurance market into chaos. Progressive had significant exposure, with nearly a quarter of its entire business from that one state — bang! — severely damaged by a 51 percent vote on a single day.

Mr. Lewis zoomed out to ask, “What the heck is going on?” He placed a call to a former Princeton classmate, Ralph Nader. Mr. Nader had long been a consumer rights activist, at one point leading a sort of special forces unit nicknamed Nader’s Raiders, and he had championed Proposition 103. The message that Mr. Lewis heard: People hate you. Or, in other words, people simply hated dealing with insurance companies, so they revolted, screaming with their votes.

“People were saying, ‘We hate your guts. We’re going to kill you. And we don’t give a damn,’ ” Mr. Lewis said.

Chastened by what he had heard, he called his staff together and told everyone, “Our customers actually hate us.” He challenged his team to create a better company.

Mr. Lewis came to see Proposition 103 as a gift, and he used it to deepen the company’s core purpose and to reduce the economic cost and trauma caused by auto accidents. The company would create its “immediate response” claims service: No matter when you had an accident, Progressive would be available — 24 hours a day, 365 days a year. Claims adjusters would work from a fleet of vans and S.U.V.’s dispatched to policy holders’ homes or even directly to an accident scene.

By 1995, Progressive could note this achievement: in 80 percent of cases, its adjusters would have visited the customer, ready to issue a check within 24 hours of an accident.

In 1987, the year before Proposition 103, Progressive ranked No. 13 in the American private-passenger auto insurance market. By 2002, it had reached No. 4. Years later, Mr. Lewis called Proposition 103 “the best thing that ever happened to this company.”

Progressive and Mr. Lewis illustrate how 10Xers shine when clobbered by setbacks and misfortune, turning bad luck into good results. They use difficulty as a catalyst to deepen purpose, recommit to values, increase discipline, respond with creativity and heighten productive paranoia — translating fear into extensive preparation and calm, clearheaded action. Resilience, not luck, is the signature of greatness.

Nietzsche wrote, “What does not kill me, makes me stronger.” We all get bad luck. The question is how to use it to turn it into “one of the best things that ever happened,” to not let it become a psychological prison.

WE came across a remarkable moment at the very start of the history of Southwest Airlines, described by its first chief executive, Lamar Muse, in his book, “Southwest Passage.”

“The very first Sunday morning of Southwest’s life, we narrowly escaped a disaster,” Mr. Muse wrote. “During the takeoff run, the right thrust-reverser deployed. Only the captain’s instantaneous reaction allowed him to recover control and make a tight turn for an emergency landing on one engine.”

What if the jet had smashed into the ground in the first week of building the company? Would there even be a Southwest Airlines today? If we all have some combination of both heads (lucky flips) and tails (unlucky flips), and if the ratio of heads to tails tends to even out over time, we need to be skilled, strong, prepared and resilient to endure the bad luck long enough to eventually get good luck. The Southwest pilot had to be skilled and prepared before the thrust-reverser deployed.

There’s an interesting asymmetry between good and bad luck. A single stroke of good luck, no matter how big, cannot by itself make a great company. But a single stroke of extremely bad luck, or an extended sequence of bad-luck events that creates a catastrophic outcome, can terminate the quest.

The 10Xers exercise productive paranoia, combined with empirical creativity and fanatic discipline, to create huge margins of safety. If you stay in the game long enough, good luck tends to return, but if you get knocked out, you’ll never have the chance to be lucky again. Luck favors the persistent, but you can persist only if you survive.

After finishing our luck analysis for “Great by Choice,” we realized that getting a high ROL required a new mental muscle. There are smart decisions and wise decisions. And one form of wisdom is the ability to judge when to let luck disrupt our plans. Not all time in life is equal. The question is, when the unequal moment comes, do we recognize it, or just let it slip? But, just as important, do we have the fanatic, obsessive discipline to keep marching, to push the opportunity to the extreme, to make the most of the chances we’re given?

Getting a high ROL requires throwing yourself at the luck event with ferocious intensity, disrupting your life and not letting up. Bill Gates didn’t just get a lucky break and cash in his chips. He kept pushing, driving, working — and sustained that effort for more than two decades. That’s not luck — that’s return on luck.

Jim Collins is the author of the worldwide best seller “Good to Great.” This article was adapted from “Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All,” which was written with Morten T. Hansen and published this month.

Pay a fine if you do not own a gun

Vermont State Rep. Fred Maslack has read the Second Amendment to the U.S. Constitution, as well as Vermont's own Constitution very carefully, and his strict interpretation of these documents is popping some eyeballs in New England and elsewhere.

Maslack recently proposed a bill to register "non-gun-owners"and require them to pay a $500 fee to the state. Thus Vermont would become the first state to require a permit for the luxury of going about unarmed and assess a fee of $500 for the privilege of not owning a gun.

Maslack read the "militia" phrase of the Second Amendment as not only the right of the individual citizen to bear arms, but as a clear mandate to do so. He believes that universal gun ownership was advocated by the Framers of the Constitution as an antidote to a "monopoly of force" by the government as well as criminals.Vermont's constitution states explicitly that "the people have a right to bear arms for the defense of themselves and the State" and those persons who are "conscientiously scrupulous of bearing arms" shall be required to "pay such equivalent.."

Clearly, says Maslack, Vermonters have a constitutional obligation to arm themselves, so that they are capable of responding to "any situation that may arise."

Under the bill, adults who choose not to own a firearm would be required to register their name, address, Social Security Number, and driver's license number with the state. "There is a legitimate government interest in knowing who is not prepared to defend the state should they be asked to do so," Maslack says.

Vermont already boasts a high rate of gun ownership along with the least restrictive laws of any state .... it's currently the only state that allows a citizen to carry a concealed firearm without a permit. This combination of plenty of guns and few laws regulating them has resulted in a crime rate that is the third lowest in the nation.

" America is at that awkward stage. It's too late to work within the system, but too early to shoot the bastards."

This makes sense! There is no reason why gun owners should have to pay taxes to support police protection for people not wanting to own guns. Let them contribute their fair share and pay their own way.

Sounds reasonable to me! Non-gun owners require more police to protect them and this fee should go to paying for their defense!

In God We Trust, all others not so much!

"A well regulated militia, being necessary to the security of a free state, the right of the people to keep and bear arms shall not be infringed." ~ Second Amendment to the U.S. Constitution

How much should I charge for my barbecue sauce?

I get this question often when helping people start their food product business. Many think the “how much” question depends only on the manufactured cost of the product. Wrong! Your selling price depends on the maximum amount a consumer “will spend” for your product in the store. How much is that? It all depends on what store your product are in. If you can have a barbecue sauce in regular grocery stores the product will have to retail for $1.99 but in a gourmet store the same formulation could retail for $4.99. Packaging (bottle size), label design, brand awareness, and other products in the store all have an affect on what your retail price should be. Sounds complicated? It is really not because it comes down to YOUR knowledge of the category and your brand.

When you start to market a barbecue sauce always start with your best guess on what the highest retail price could be. When I started Big Show Foods I had to make that decision. I knew my distribution channel was going to be traditional grocery stores. I knew my customers were going to be middle class working people that enjoyed cooking on the grill (the NASCAR fan which was the JB&B fan). I also had some knowledge of the marketing power to the JB&B Big Show.

With all this marketing knowledge the next step was to study the barbecue sauce category and learn where the retail price levels were. In 1999 the barbecue sauce category had three price levels; Products from $1.00 to 1.99, products from $1.99 to $2.99 and products higher than 2.99. Based on the sales information I had I could see there was a direct relationship between and low price and high case volume. I also noticed that these lower price sauces were manufactured by the leading food corporations (Kraft, Heinz) . Is that a fight I wanted to get in? It’s the “made to sell not to eat” race which did not appeal to me from a marketing stand point. It had been my experience that when your marketing is based on low price you get stuck there with no place to go except even lower. Since your cost are almost always going up it does not take long for margins to disappear. To this day I do not understand why large corporations get in this trap. Kraft tried to get out by creating a new more expensive brand (Bull’s Eye) but most of the time they were buying down that retail to get sales.

My decision was a retail price of $2.99. I was 60% sure our target customer would pay that retail especially when we sold them our brand story on the radio show. If I was wrong I could always buy down the retail with an off invoice allowances. With this retail price decision made I could work down the ladder to get my delivered cost.

How much was I going to let the grocery retailer make? At that time 26% gross profit margin was standard in the category. Based on a $2.99 retail the gross profit was .79 per unit or $9.48 per case.

I knew to get on the wholesaler deal sheets and to guarantee a $2.99 unit retail in the chains I had to have some kind of allowance off invoice to use all year. I decided $4.80 per case would be the correct amount. Working with these numbers I came up with this pricing:

Delivered List Cost $ 31.20 2.60 unit

Less allowance Off Invoice 4.80 .40

Deal case cost $ 26.40 2.20 unit

Retail at $2.99

Case Retail $ 35.88

Case profit $ 9.48

Ok, that is the story for the retailer but what about the profit picture for Big Show Foods?

This is sensitive information that a lot of people are curious about. To get the rest of the store you are going to have to send me an e-mail at tom.price@earthlink.net  and ask by putting “I want the rest of the store” in the subject line.

Something to think about.....

There is a statistic from June '09 issue of Parade Magazine that states by 2019 over 40% of the work force is going to be independent contractors.

This means that 40% of the population will be their own business identity.

This is a major paradigm shift for how the majority of people earn their wages.

Take a moment to reflect on this…

We all can see the world rapidly changing. But sometimes the hardest change to be made is the change we need to make inside ourselves.

Predominantly, values have been focused on security and benefits. Robert Kioysaki calls this the ‘E’ Quadrant.

If you’re going to be among the 40% who – whether by choice or necessity – are their own business identity, your values will shift to what Kioysaki calls the ‘B’ Quadrant.

How are you getting to the ‘B’ Quadrant?

He says it’s not money that will make you rich, its business skills.

It’s this shift of focus to building business, investing your time into the development of yourself and others and the understanding that the number one asset a person can attain is a business.

Doing so will allow your money to work hard for you, not the other way around.

If you are currently employed you should be thinking about "what can I do NOW to insure my life long security"? The answer? A business you own and control that can be started part time without interfering with your regular work. Click here if you want some ideas.

How do you pick the right home base business for long term success?

The basic requirements for a long term income producing home based business are:

(1) You should be personally interested in the product or service
(2) The product sold must have a consumer advantage and be competitively priced
(3) The business must be sold by NON-sales type people (everyone is not a sales person)
(4) The Pay plan must be fair and offer weekly checks
(5) The business should be at least three years old

You should be personally interested in the product (business) because you then will be motivated to show it. You can have unlimited knowledge about the business but without personal motivation you will not work your business. Keep in mind you are "the boss". You are the one that has to put out the effort on a regular basis to see positive results.

You should also be using the product or service on a regular basis yourself. When people see you use the product they will see the value and become interested too.

Your business has to be all about the product. If the product is not competitive you will not be able to hold on to customer’s long term. A jazzy, high pressure presentation may get people to sign up, but if they just got caught up in the sales pitch, that’s not going to last long with most people. The product must be competitive and offer a consumer advantage. The product has to be one that people will not get tired of using. It has to offer long term benefits to the user. It can’t be trendy. The product has to solve a problem to make you and your team money.

Everyone cannot "sell". Do not get into a home based business that requires people on your team to have selling talents. You need an army of "customers" on your team with each making you a small amount of monthly income by using the product. The business has to automatically duplicate without individual sales talent. You should "show" your product not "pitch" it. You want people to ask you about the product (after they see it) then you can "show" the features and benefits.

Do not be a recruitment mill. You want people on your team with ambition, instead of a “sucker list” of people who will buy into something but never do anything with it. By that I mean the dreamers, newsletter junkies, or people in such a bad financial situation they’ll fall for anything.

Finally the company itself has to be stable if you want your residual checks to keep coming for years down the road. You can spend countless hours working your business and it is all for zero if the company goes out of business. My rule is not to look at any home based business opportunity unless the company has been in business three years or longer. Companies that pay a weekly benefit along with deep down line monthly checks without balancing or break-a- away are the best. Weekly benefits are important because when team members make some cash fast they get (and stay) excited. Build your team wide for income and deep for long term security.

If you would like to see information about a company that meets the aforementioned criteria click here. Go to my web page here to learn more about me.