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).
From Yahoo Finance.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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One of the subjects that engrossed me in college and grad school was economic history. There’s more to learn from companies that have lasted for more than a hundred years and did some real innovations. An example would be Western Union that turned itself around in the remittance business. Recent management books are nothing but fads and analyze the trends in a very narrow way. Japanese management technique was the fad in the ’80′s until the Japanese economy hit a wall. I still read and re-read Peter Drucker as he dissected management to its essentials like risk-taking and seizing economic opportunities, creating a franchise and expanding markets.
Apparently, you and the commenters have all missed the point: A company, although considered a “person” under the law, is not really a person. It doesn’t “behave” or “perform”; it’s managers and leaders do. And when managers and/or leaders change, there is no reason to suppose that the company will continue to “perform” the same way. One person can make the difference — Steve Jobs comes to mind — in whether a company is merely good or occasionally great.
#8 “Maybe we should just teach MBAs to look busy to and hope they get lucky. ”
This is brilliant. I think luck is the deciding factor between success and failure in 95% of all businesses. There are execptions of course (google, ibm, microsoft), but that’s why those exceptions tend to dominate the landscape.
And yes, it does call into question the basic premise of the book.
In recent decades, “great” has been defined by the level of executive compensation and how successful these executives were at “managing” the share price. This was accomplished by not investing and forcing remaining employees to work double time after laying off major portions of their work force.
Such “successful” strategies eventually come to a bad end, but only after those implimenting them have taken the money and run.
It would be cool if the answer to running a great company could be printed in no more than 300 pages.
“The Halo Effect” by Phil Rosenweig covers all these topics in detail including the subsequent performance of the companies from “In Search of Excellence” that Levitt mentions. He – more or less – draws the same conclusions as Levitt does in the post. Even has some funny examples where CEO’s are getting awards one year and vilified the next … from the same business publications.
http://www.amazon.com/Halo-Effect-Business-Delusions-Managers/dp/0743291255
By the time the book was first published, most of the ideas in the book were probably already reflected in the market prices. You’d have to go back to when the changes within each company described in the book were made and compare the performance over the period between then and when the book was published against the market to see whether there was anything special about these companies. Even then, I would look at the financial statements in addition to the stock price. There are times when a company that is doing well will be underpriced and a company that is doing poorly overpriced. Sadly, the people who are really good at doing this and sorting it out tend not to publish papers with their results. They trade on them.
if you skim the first 20-30 pages of “A Random Walk Down Wall Street” you will never have to read another boring business book again – including the rest of ARWDWS…