From Good to Great … to Below Average

I almost never read business books anymore. I got my fill of them years ago when I was a management consultant before I went back and got a Ph.D.

Last week, however, I picked up Good to Great by Jim Collins. This book is an absolute phenomenon in the publishing world. Since it came out in 2001, it has sold millions of copies. It still sells over 300,000 copies a year. It has been so successful that seven years later the book is still in hardcover. I’ve been hearing about it for years and never looked at it. People are always asking me about it. I figured it was about time I took a look.

The book focuses on eleven companies that were just okay, and then transformed themselves into greatness — where greatness is defined as a sustained period over which the stock dramatically outperformed the market and its competitors. Not only did these companies make the transition from good to great, but they also had the sorts of characteristics which made them “built to last” (which is the title of Collins’s earlier book).

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Ironically, I began reading the book on the very same day that one of the eleven “good to great” companies, Fannie Mae, made the headlines of the business pages. It looks like Fannie Mae is going to need to be bailed out by the federal government. If you had bought Fannie Mae stock around the time Good to Great was published, you would have lost over 80 percent of your initial investment.

Another one of the “good to great” companies is Circuit City. You would have lost your shirt investing in Circuit City as well, which is also down 80 percent or more. Best Buy has cleaned Circuit City’s clock for the last seven or eight years.

Nine of the eleven companies remain more or less intact. Of these, Nucor is the only one that has dramatically outperformed the stock market since the book came out. Abbott Labs and Wells Fargo have done okay. Overall, a portfolio of the “good to great” companies looks like it would have underperformed the S&P 500.

I seem to remember that someone did an analysis of the companies highlighted in Peters and Waterman‘s 1980′s classic book In Search of Excellence and found the same thing.

What does this all mean? In one sense, not much.

These business books are mostly backward-looking: what have companies done that has made them successful? The future is always hard to predict, and understanding the past is valuable; on the other hand, the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success.

To the extent that this doesn’t actually turn out to be true, it calls into question the basic premise of these books, doesn’t it?

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  1. Kip says:

    Assuming that is not a rhetorical question, the answer is “yes.”

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  2. PDB says:

    All prediction books that are meant to be taken seriously should be mocked and ridiculed before being burned (possibly for heat this winter if heating oil prices get too high). Interestingly, the book I have read with the most accurate predictions is The Dilbert Future, by Scott Adams, which is mostly satirical.

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  3. Chris Harris says:

    It depends on your time horizon. The things that make a company outperform over short time horizons are mostly luck, over the medium term it’s probably something like sustained efforts at mining an existing competitive advantage, over the long-long run… it’s probably just the willingness to leave a line of business and enter a new one that keeps you around.

    After all – by just existing don’t you outperform the “average company” over the long-long run?

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  4. JAK says:

    You said “… the implicit message of these business books is that the principles that these companies use not only have made them good in the past, but position them for continued success”

    I think, what this book or for that matter most of the other business books seem to imply is that, there are some principles that can help a company succeed, but future success is dependent on the condition that these companies continue to follow the same practices.

    So may be ‘Circuit City’/’Fannie Mae’ forgot their own recipe of success, or took some risks that were not in line with their principles. We need to remember that companies are constantly evolving and therefore liable to change their personality/culture/vision that got them to the place they were before they changed.

    Coming back to the question of what these business books teach, IMO, they just try to show you some examples of what the book’s author thinks as good decisions and its underlying principles. If you can manage to replicate that philosophy in your business you might have a better chance at success.

    I must confess, I have not read “Good to Great”, and may be this book does give the advise in a more literal fasion, or it may be suggesting that these companies are built to succeed no matter what. But if anyone reading the book takes any of the suggestions literally, I think they might miss the best points that the nook might have in offer.

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  5. jimi says:

    #2- that and ’1984′.

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  6. Susanna K. says:

    I’m not surprised Circuit City is doing so badly. A couple years ago, they instituted new employment guidelines which resulted in either the firing or quitting of their most experienced employees. You can read more about what went wrong there by searching for “Circuit City” on consumerist.com.

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  7. Nils says:

    For accurate predictions, leave it to Professor Parkinson.

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  8. Thomas Brownback says:

    This has implications for management as well as investors, doesn’t it?

    While in law school I took one class from the business school. All of the company case studies were backward looking, inventing rationales for why a company succeeded or failed. And for every maxim of business success, it seemed like there was a contrasting maxim: keep a business lightweight, but take advantage of new markets, but don’t expand so much that you lose track of your core competency…

    Maybe we should just teach MBAs to look busy to and hope they get lucky.

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