04
Oct

Separating the Good From the Great

Can a good company become a great company? How? It took [tag]Jim Collins[/tag] and his team of researchers 5 years to come up with the answers: 11 companies made the leap from good to great and then sustained those results for at least 15 years. How great was great? The good-to-great companies averaged cumulative stock returns 6.9 times the general market in the 15 years after their transition points. The actual screening-and-selection process was a rigorous one. The criteria were:

1. The company had to show a pattern of good performance, punctuated by a transition point, after which it shifted to great performance. “Great performance” was defined as a cumulative total stock return of at least three times the general market for the period from the transition point through 15 years.

2. The transition from good to great had to be company specific, not an industrywide event.

3. The company had to be an established and ongoing enterprise — not a startup. It had to have been in business for at least 25 years prior to its transition, and it had to have been publicly traded with stock-return data available for at least 10 years prior to its transition.

4. The transition point had to occur before 1985 to give the team enough data to assess the sustainability of the transition.

5. Whatever the year of transition, the company had to be a significant, ongoing, stand-alone company.

6. At the time of its selection, the company still had to show an upward trend.

The study began with a field of 1,435 companies and emerged with a list of 11 good-to-great companies: Abbott Laboratories, Circuit City, Fannie Mae, Gillette Co., Kimberly-Clark Corp., the Kroger Co., Nucor Corp., Philip Morris Cos. Inc., Pitney Bowes Inc., Walgreens, and Wells Fargo.

The next step in the study was to isolate what it took to make the change. At this point, each of the 11 good-to-great companies was paired with a comparison company — a company with similar attributes that could have made the transition, but didn’t.

Then the research began. Collins and his team reviewed books, articles, case studies, and annual reports covering each company; examined financial analyses for each company, totaling 980 combined years of data; conducted 84 interviews with senior managers and board members of the companies; scrutinized the personal and professional records of 56 CEOs; analyzed compensation plans for the companies; and reviewed layoffs, corporate ownership, “media hype,” and the role of technology for the companies.

The findings are contained in Good to Great: Why Some Companies Make the Leap … And Others Don’t (HarperBusiness, 2001). If you have not read this book, you are definitely missing something. Don’t just visit the nearest bookshop to pick your copy of this book, start reading NOW…

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