Jim Collins is a brave man. Collins is best known for his best-selling book “Good to Great” in which he courageously crowns victors among publicly-traded corporations. He and his team analyzed thousands of companies before deciding on 11 winners. This post is an endorsement for the 2011 sequel “Great by Choice”. What makes Collins books so powerful is his ability to discover and explain core similarities between high-performing companies in an easy to understand format. Before looking at the key points of “Greater by Choice”, here is a postmortem on “Good to Great.”
“Good to Great” was released October 16, 2001.
Here is how the cohort has performed since its publication date till today (June 26, 2017).
- Abbot Labs (ABT): stock increase of 89.52%
- Circuit City (Bankrupt)
- Fannie Mae* (FNMA) (* government buyout during financial crisis): loss (96.45%)
- Gillette (acquired by Procter & Gamble)
- Kimberly-Clark (KMB): stock increase of 122.26%
- Kroger (KR): stock increase of 79.82%
- Nucor (NUE): stock increase of 485.50%
- Philip Morris (PM): stock increase of 143.96%
- Pitney Bowes (PBI): loss (58.95%)
- Walgreens (WBA): stock increase of 17.6%
- Wells Fargo (WFC): stock increase of 158.56%
Dow performance: increase of 129.34%
Only Nucor has handily beaten the Dow Jones Industrial average during this span. When asked about the relative sub-par performance of the list subsequent to the book’s publication, Collins stands firm. He explains that his methodology is based on a backwards-looking analysis of what made these companies great, which cannot reliably predict future results.
A pessimist may refute the evidence and the recommendations that Collins espouses in “Good to Great” based on these results. A Collins defender may point the blame on the companies in this cohort getting away from the attributes which made them great. An in-depth analysis of what happened to this cohort after the “Good to Great” analysis period is necessary to truly understand if Collins’ keys to success are no longer valid, or worse may have been misattributed in the first place.
Nobel Prize winner in Economics and author of “Thinking Fast and Slow”, Daniel Kahneman, is perhaps the most vocal critic of “Good to Great”. He argues that luck and a regression to the mean is more impactful than Collins credits. Kahneman, like Billy Beane in “Moneyball” seems overly influenced by raw statistics and the power of the randomness of nature and luck. Unlike Collins who optimistically believes that great leaders can control outcomes, Kahneman sees too many emperors without clothes. Somewhere in the middle the truth can be found. In a Kahneman world, there would be no business superheros like Steve Jobs and Elon Musk. There would only be expendable managers like Art Howe who serve to do their best to optimize the luck and randomness the world presents. In Collins’ world, there would be a clear correlation between great leaders and companies and their ultimate success. We know from the rapid rise and fall of seemingly can’t fail ventures, that the fates have more influence than we would like to believe. We also come to realize that we put far to much faith in winners when they are on top, and far too much condemnation when they fall. See also Marissa Mayer, Andrew Mason and Travis Kalanick.
We’ll leave the academic discourse on “Good to Great” as unresolved. Kahneman and Collins both have written important business books that deserve review. The fact these well-respected academicians are unable to agree on these matters should serve as an important reminder to temper the faith anyone stores in how-to or business books. Business is hard, fluid, and ever-changing. The answers can not be gleaned from a single publication. Great business books should not be used as instructions guides to be followed step-by-step. Like history books, these books help us understand human nature and our predisposition to repeat the past. Armed with this knowledge, we still cannot achieve clairvoyance. What we can gain is a more informed decision process which will hopefully lead to superior outcomes. We should consider business books in the same light. We should read them with a healthy dose of skepticism and apply the insights and advice with care.
Now that this warning disclaimer is finally complete, we can move on to a review and endorsement of “Great by Choice.”
“Good to Great” focuses on leadership qualities that separate the great from the good. “Great by Choice” looks at the execution approaches of great companies. 7 companies made the cut for “Great by Choice”. The companies were selected from public companies who greatly outperformed their industry counterparts from Dec 31, 1972 (or their IPO date) till Dec 31, 2002.
- Amgen
- Biomet
- Intel
- Microsoft
- Progressive Insurance
- Southwest Airlines
- Stryker
made the cut.
As Collins and Hansen compared these superstar performers, they discovered striking similarities and stark contrasts to their lower performing sector comparison companies. For example, Intel was contrasted with AMD, while Amgen was paired against Genentech. The findings would have put made Aesop proud. It turns out the tortoise indeed wins the race against the hare.
Commonalities among the elite performers:
- They subscribe to a “20 Mile March” approach.
- The “fire bullets, then cannonballs”.
- They rarely take bet-the-company gambles.
- They believe in operating a SMaC system (Specific, Methodical and Consistent).
These terms Collins and Hansen coined or adopted were taken from metaphoric examples. “Great by Choice” was influenced by the race to the South Pole between Roald Amundsen and Robert Falcon Scott. If you are unfamiliar with the story, check out “The Last Place on Earth” by Roland Huntford. Scott used untested and bleeding-edge technology such as teams of ponies (seriously) and snowmobiles. Amundsen used tried-and-tested teams of sled dogs. Scott would sprint and cover huge distances on fair weather days, and would hunker down when the winter winds were howling. Amundsen’s team would log 15–20 miles in fair or fowl weather. In the end, one team would reach the South Pole on the exact date they predicted. The other team would not return a single member from the ill-fated journey. This methodical approach to the race is the inspiration for the “20 Mile March” designation.
The “fire bullets, then cannonballs” is somewhat self-explanatory. The high performers rarely make huge bets without running numerous small experiments first. Their less successful counterparts are much more likely to launch major initiatives without these precautionary pilots. Even with successful trialing, cannonball shots sometimes go astray. The difference is that uncalibrated launches rarely hit their target.
The high-performing companies are more risk-adverse. They know winter is coming and build a cash war-chest to preserve when disaster strikes. In another of Aesop’s fables, appropriately titled “The Ant and the Grasshopper”, the ant toils storing food during the mild summer and fall weather, while the grasshopper plays. The ants are ready when winter comes, while the grasshopper expires. The great companies do not overextend. They use their superior cash reserves to operate as close to business-as-usual regardless of extreme macro-economic events. During the dot-com meltdown, AMD had to suspend R&D projects. In contrast, Intel continued to press forward. After 9/11, while other airlines were cancelling flights and trying to avoid bankruptcy, Southwest continued to fly their normal routes. With each external crises, the leading companies grab market share over their less resilient competitors.
Finally, the higher performing companies have a deeply-ingrained operating procedure that they rarely change. While their competitors often reset their plans to capture the wave of the latest technology or industry fad, the great companies resist these temptations. They stay the course and execute against their guiding principles and core strengths. When the business landscape shifts, they carefully observe the impact on their industry and business before responding. Their operating guide provide a level of detail to drive the culture and core competencies of the enterprise, while allowing for broad enough interpretation for expansion, growth and innovation. Only on extreme and rare situations will the charter be radically changed to address new threats and opportunities.
Collins proves again why he is a respected thought leader for business strategy. His critics claim that his observations are obvious and of little value. We can dispel this unfair notion by listing the non-obvious myths “Great by Choice” busts.
- Great companies outpace their competition with superior innovation.
- Great companies are quick to action. They recognize and embrace opportunity before their competitors.
- Companies who catch a tail-wind should step on the gas and out-scale their foes.
- Business need to continuously reinvent before their competitors force them to.
Read “Great by Choice” and you realize why these seemingly self-evident truths may be hazardous to the health of your enterprise.
