By Michael Arndt
GOOD TO GREAT
Why Some Companies Make the Leap...and Others Don't
By Jim Collins
HarperBusiness -- 300pp -- $27.50
Author Jim Collins had every reason to be smug. The 1994 blockbuster Built to Last, which he co-wrote with Jerry I. Porras, had gone through 40 printings and had been translated into 13 languages. Now, two years later, Collins was preparing a new introduction for the paperback edition, which was all but guaranteed to go right back on best-seller lists. Then one night, a former colleague from McKinsey & Co. leaned over the dinner table and, figuratively, jabbed him in the eye. His table-mate had one word for the book: "useless."
Merck & Co. (MRK), General Electric Co. (GE), and the other 16 visionary enterprises profiled in Built to Last had always been great, the McKinsey exec complained. A better exercise, he argued, would be digging into a more practical question: How can a run-of-the-mill business transform itself into one as extraordinary as those in Built to Last's pantheon?
After five years of research, Collins has answered that challenge with the publication of a solo venture, Good to Great, and it's just as astute and accessible as his earlier work. The follow-up spotlights 11 big U.S. corporations that went from average to A+ performers on Wall Street, or from good to great. The book, which has the same quick-read tone and format of Built to Last, right down to the Socratic Q&A at the end, also crunches decades of data and uses interviews and archives to divine what separates these overachievers from a control group of peers that didn't make the leap. "Five years after that fateful dinner, we can now say, without question, that good to great does happen," Collins writes.
The 11 are generally not the marquee names routinely praised on the covers of business magazines. Indeed, the chief executives of these newly great companies are almost anonymous. And some of their successors did lose their way, allowing their firms to slide back toward mediocrity. Yet for a long stretch, these companies managed to outshine everyone else: The share price of each exemplar in Good to Great advanced three times as fast as the overall stock market during the 15 years from the company's breakthrough point. Not even GE under recently retired CEO Jack Welch was able to clear that bar. "The surprising list--a dowdier group would be hard to find--taught us a key lesson right up front," writes Collins. "It is possible to turn good into great in the most unlikely of situations."
Before we go further, here's the list: Abbott Laboratories (ABT), Circuit City Stores (CC), Fannie Mae (FNM), Gillette (G), Kimberly-Clark (KMB), Kroger (KR), Nucor (NUE), Philip Morris (MO), Pitney Bowes (PBI), Walgreen (WAG), and Wells Fargo (WFC). The laggard in the group, tissue-products maker Kimberly-Clark Corp., saw its stock climb 3.42 times as far as the market in its 15-year post-breakthrough period, while consumer-electronics retailer Circuit City Stores Inc. rose 18.5 times as fast. Dowdy, perhaps. But with returns like that, who needs flashy?
So how did they go from good to great? Not, Collins found, by doing things that many in the business world advise, such as tapping a hard-charging celebrity commandant from the outside. Of the 11 CEOs who put their companies on the fast track, 10 had come up through the ranks. And three of them were the ultimate insiders: members of the family dynasty that controlled the outfit. Nor did any of these corporate alchemists get there through layoffs, megadeals, high-tech pursuits, or far-flung diversification. Most could not even recall a "eureka" moment.
Yet these CEOs rose above their peers. Collins dubs them "Level 5" managers. By this definition, each was humble to a fault and hid from the limelight. At the same time, though, all of them went to extraordinary lengths to make their companies great. For Darwin E. Smith of Kimberly-Clark, that required jettisoning the core business when he sold its paper mills. For George Cain at Abbott, it meant firing his own relatives. These leaders' ambition was "first and foremost for the company," writes Collins. They were "concerned with its success, rather than their own riches and personal renown."
Next, even before they had settled on a business plan, these CEOs surrounded themselves with smart, hard-working people who were not afraid to face their shortcomings and hurdles--the "brutal facts," as Collins puts it--but who had faith they would ultimately win. After settling on a course, the companies on the list never lost sight of what they did best, and they maintained tough standards for their people. New hires either fit right in--or were quickly ejected. Then, through perseverance and the careful use of technology, the enterprises lifted off. "The process resembles relentlessly pushing a giant heavy flywheel in one direction, turn upon turn, building momentum until a point of breakthrough, and beyond," Collins concludes.
Kroger, for instance, blew past its competitors in the early 1970s by realizing that the superstore would overtake the traditional grocery store. Then, market by market over the next 20 years, it went with the new format, as its closest rival, A&P, clung to its original stores until it was too late. "Sure, there was some skepticism at first," former Kroger CEO Lyel Everingham told Collins. "But once we looked at the facts, there was really no question about what we had to do. So we just did it."
As instructive as Collins' research is, his book isn't perfect. He uses just one gauge to measure a company's greatness: its share price over 15 years. He points out that he picked a long time frame to edit out one-hit wonders, but as we've seen from the phenomenal upsurge and subsequent bust in the Internet and telecom sectors, stock prices may not be the best way to judge a company's real and lasting nature. The market leaders are not always share-price superstars or profit leaders.
Also, a few of the Good to Great companies no longer seem so great. Nucor Corp., for example, had a spectacular run from 1975 to 1990, when the steelmaker's share price rose 5.16 times as rapidly as the overall market. Over the next 10 years, however, Nucor trailed every major stock index, as it has gone through four CEOs. Gillette, too, has been on a steady decline since early 1998, and Wells Fargo was taken over that same year. So much for its legacy.
Still, it's clear that Collins has found a clutch of companies that did transform themselves from so-so to outstanding for at least a 15-year run. And he makes a reasoned argument for how this occurred. Management how-to books can be as faddish as pop music. But Collins again has written a book that seems built to last.
Corrections and Clarifications
"Breaking free of the corporate pack" (Books, Oct. 29), a review of Good to Great by Jim Collins, should have included Fannie Mae in the list of 11 companies profiled, and not Federal Home Loan Mortgage Corp.
Arndt covers management issues from Chicago.