Of the millions of books published in 2001, one of the more successful business advice books, Good to Great, was written by Jim Collins. Since its original publication, the book has been translated from English to Spanish, Portuguese, Arabic, French, German and 30 other languages. The book has also appeared on best seller lists of the New York Times, Wall Street Journal, Business Week and several other prominent lists.
In the book, the author reports his research of more than 1,000 businesses over a 15 year period. He identified 11 that made the transition from below average to average or much better than average performance. Next, using these 11 companies, the author identified practices that these companies put in place that he believed would help other companies make similar good or great improvements.
The eleven companies that were identified include the following:
- Abbott Laboratories
- Circuit City Stores
- Fannie Mae
- Gillette Company
- Philip Morris
- Pitney Bowes
- Wells Frago
Of course, several of these companies that he considered “great” have experienced extreme turbulence. For example, Circuit City went bankrupt. The only company that outperformed the market was Nucor. Further, in 2001 when the book was published, shares of Fannie Mae were valued at $70 per share. By 2009, when government regulators finally seized control, shares were valued under $1. While Abbott Laboratories and Wells Fargo have performed positively, investment in these 11 companies would have done much worse than the market as a whole.
Current consensus deems the logic behind the book faulty in a number of ways. First, Collins attempted to establish a correlation between specific actions and policies of firms with the driving determiner of their success. In actuality, just because a business acts in a particular way does not mean that the action significantly factors into the business’s performance. Another fact that Collins ignored is that high-performing businesses have ever-increasing difficulty in maintaining high performance and innovation. Further, when businesses do report exceptional growth, the market tends to react quickly. Customers, employees, suppliers and competitors work quickly to claim their piece of the success and eat away profitability.
The author also made the mistake of attributing estimated future growth to past performance. Future growth, however, is much too complex to tie it to backwards-looking research, which is never adequate as the sole base for making future predictions.