In his book “Good to Great”, Jim Collins talks about great companies having a “hedgehog concept”. His hedgehog concept comes from the story of a fox plotting time-after-time to get the hedge hog for his next meal. The fox uses one tricky plot after another to catch the hedgehog off guard, but the hedgehog always uses the same strategy, every single time. Every time the fox pursues the hedgehog, he rolls himself up in a ball. And every single time he successful in deterring the fox.
Great companies have their own hedgehog concepts because they find that one strategy that they can use over and over again to be the best in world at something. One of the examples given by Collins is when Krogers supermarkets went from dingy neighborhood stores focused on cost savings to new, clean, convenient stores focused on providing a wide number of choices. That decision cost the company huge amounts of money because they had to close down all of their existing stores and convert them to this new model of doing business. But when they did so, they slowly took more and more of their market.
Jim Collins explains how the hedgehog concept works using the diagram below.
As you can see, these great companies have figured out how to focus on the intersection of what the company can really really be good at (its strength), what it’s people can be passionate about, and what it can make money doing.
The process of of a company discovering its hedgehog concept is certainly not an overnight process. But it is a key step in any company becoming a great company.
O.K., so the hedgehog concept works well for big business. How about small business? How about us as real estate investors?
It absolutely has application if you have an interest in being a successful real estate investor. There was a time when I tried to do “everything” really well. I was trying to do buy and hold, wholesale flips, rehab and flip, lease options, subject to, short sales, and anything else I thought would make money. That included some things even outside of real estate, such as trying trade stocks.
When I tried to do all of those things well, I had no focus. I wasn’t able to develop specific knowledge, skills, contact, etc. in any particular area.
But when I started focusing in on just buy and hold, some surprising things started to happen. The cash flow for the business improved for a number of reasons. We found ways to become much more efficient in operating the business. We were able to get better traction with financing.
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