Tuesday, January 10, 2012

Book Review (#1 of 2012) Jim Collins - Good to Great

Good to Great: Why Some Companies Make the Leap...and Others Don't by Jim Collins (2001).  This is one of those must-read MBA texts that many people talk about but I just now got around to reading. 

Collins teaches at the Stanford Graduate School of Business. His research team looked at 1,435 Fortune 500 companies from 1970 to 2000 in order to find ones that had 15 years in which the stock price grew by about the same rate as the overall average, followed by 15 consecutive years of growth well above the market average. 11 companies fit the bill: Abbott Laboratories, Circuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris, Pitney Bowes, Walgreens, and Wells Fargo.

The team then found firms in the same industry to compare these firms to, companies that maybe had a few years of outstanding growth and then fizzled. This allowed the researchers to compare and contrast characteristics of firms, so 28 companies are mentioned in total.

The common characteristics of the "Good to Great" companies are interesting.  Most of the CEOs preferred almost anonymity, and were fairly disciplined about spending and often forwent bonuses and large amounts of compensation. They had the Warren Buffett characteristic of living in the same house for 50 years, driving a used car, etc.  In a few companies, executives were rewarded purely by their titles rather than perks and pay, creating a corporate ethos that seemed to foster productivity.  The humility of the successful CEOs was a huge insight.

The companies also stuck doggedly to core principles, whatever those may be. Collins terms this the "hedgehog" concept. Never straying from your core business and defining your mission was crucial. There is also the "three circles" concept, the 11 companies pursued success in areas where they could be highly successful, in which they were highly motivated, and which fit their profile.  Collins admits that that some of the companies probably created a few products that may not have added much long-run value to our society (Phillip Morris).

The companies utilized technology where it fit the company, but none of the companies relied on a particular set of technology for a homerun.  These companies were studied during the tech boom of the 90's, and many were the antithesis of the fly-by-night companies of that era.

However, something that jumps out about the 11 companies is that just a few years later two of them (Fannie Mae, Wells Fargo) would require extraordinary government help to survive. Collins lauds Fannie Mae's helping pioneer the use of credit default swaps and other financial instruments that helped funnel credit into the housing market, particularly the subprime market, helping to fuel the housing boom. Collins never mentions that Fannie got to borrow at below-market rates because the market knew it had an implicit government guarantee that would keep it from ever defaulting. Wells Fargo was obviously also a large player in the subprime market, though it was interesting to hear how it responded to deregulation and excelled in comparison to other banks.  I remember reading in Capital Ideas how Wells Fargo was a pioneer of some areas of financial innovation, and its focus on hiring the absolute best and brightest is highlighted by Collins. To be fair, these companies thrived in an atmosphere of deregulation with certain government supports, but they thrived much more than firms they were competing with in the same environment.

The housing market crash and ensuing recession wiped out Circuit City. I'd like to read a follow-up on how Circuit City went from great to defunct by 2009.  Best Buy relegated it to #2 and Wikipedia records that CC had 567 stores nationwide when it went bankrupt.

I've found a few bloggers who have increasingly looked back on this book with a critical eye.  You'll also find a number of organizations that give out "Good to Great" awards to employees, managers, etc.

MBA literature is worth reading for the insights it gives into successful companies. But the constant creation of new vernacular (like "Level Five Leader") are a turn-off for me.. too many fads!  There's nothing new under the sun, as Solomon put it.  What I see from the leadership of the Good to Great companies is very Psalm 15, and that's what I primarily gleaned from the book.

I give it 4 stars out of 5.  

1 comment:

Carole said...

I agree. This book is really powerful. I blogged about it http://caroleschatter.blogspot.co.nz/2012/02/from-good-to-great.html