Great Companies can be found in all industries

great companies

If I were to indulge myself in a Sunday brunch, sip on a cup of coffee, and think about the great companies in America today, they would come from the most exciting industries in the country – like the internet companies and the space age industries. It’s hard for me to imagine great companies springing from lacklustre industries. The research data, however, would show me to be dead wrong.

The companies that Jim Collins qualifies as “good to great” in his book Good to Great: Why Some Companies Make the Leap and Others Don’t come from run of the mill industries. Industries without flare or panache. That’s not what I had expected at all.

But before we look at companies that made the transition from good to great, we need to understand the criteria Collins used. He is the first to admit that his criteria are arbitrary. His criteria are very strict. Companies that he excluded today he might include a decade from now – simply because they would have been around long enough to have a 30-year history. His criteria were companies that:

  • Had 15 years of mediocre financial achievements followed by a turning point and then 15 years of extraordinary achievements. In fact, the companies Collins selected had average cumulative stock returns 6.9 times the general market.
  • Outstripped their respective industries 3 to 1. If the entire industry went through a massive ramp up and the subject company rode the surf with its cohorts, it was not a “good to great” company.

In fact, there are many great companies in America that have far outstripped the market year after year for decades. Collins excluded these great companies precisely because they had been great for a long time. He was only interested in “good to great” companies. The eleven “good to great” companies and their industries are listed below:

Abbott Health care
Circuit City Consumer electronics
Fannie Mae Mortgages
Gillette Consumer packaged goods
Kimberly-Clark Personal paper products
Kroger Grocery
Nucor Steel
Philip Morris Consumer products
Pitney Bowes Business services
Walgreens Retail
Wells Fargo Financial services

What is instructive here is that these “good to great” companies come from a wide range of industries. This means that any company can become a great company. It’s a matter of the senior management or the board making that decision – and then following through.

Hiring the right people

hiring the right people

Hiring the right people is more important than having the right strategy.

When I took my first job in the corporate world, I was eager to learn the secrets of success of large corporations. I learned one ‘secret’ that stuck with me throughout my career and that I never questioned.

It said that every organization needed to begin by defining its purpose. Once it knew its purpose, it needed to design an organizational structure that would enable it to achieve its purpose. Once the organizational structure was in place, the enterprise would hire to the chart. In no case was it acceptable to hire someone just because she was a prima donna if you didn’t know where she would fit into the organization.

Once the enterprise had designed its organizational structure, Human Resources would go to great lengths to draft job descriptions, develop selection criteria, and then filter candidates against those criteria.

I just finished reading the remarkable book, Good to Great by Jim Collins. Unlike other scholars, Jim did not start his study of corporations that had made the transition from being good companies to being great companies by forming an hypothesis. Instead, he let the research data speak for itself. He learned from the data even when it ran contrary to his preconceived notions. This is the source of counterintuitive wisdom.

One of his findings is startling. He found that great companies hire the right people first and then figure out where to slot them into the organization later. This is the very antithesis of the truths we hear from Human Resources! As a consequence, it is vital for companies to treat their organization charts as suggestions only. They should not be worshipped.

I’m sure everyone has HR horror stories to tell, so I hope you will indulge me if I tell you a couple of my own.

The first occurred while the ink was still wet on my Master’s degree in Computer Science from one of the world’s 25 leading universities. Eager to start my career, I applied for a position in the IT department at Air Canada. I made the mistake of applying through Human Resources. The HR officer told me that if I wanted to proceed with my application, I would need to take a test to assess my aptitude for programming. I quickly pointed that I had eight years successful experience in the discipline and an advanced degree as well, just to drive the point home. Nonplussed, she would not budge. It was a requirement and there was no way to escape it. It didn’t take me long to realize that a company that was this rigid would be no place for me to ply my craft.

The second story deals with staffing a project management position with the City of Vancouver when it was implementing its first library IT system. My hiring manager and I agreed on a starting salary. He told me he would advise HR or our agreement. I was to contact HR on Monday, make the necessary arrangements, and start the following Monday. I was stunned when HR refused to honour our agreement and offered me a couple thousand less – take it or leave it. I left it. The City hired another manager, the project failed, and the City lost $2 million and thousands of hours of management time. That is not to say that the project would not have failed had I been at the helm. One will never now. But at least I felt the need to ask the question.

My real point here is that we need to seriously question the guidelines HR offers. HR practices often jeopardize the success of their host organizations. Whenever there is a conflict between HR and real-world experience or common sense, go with the latter.

Real-world data shows that great organizations hire the best talent they can find and restructure the organization to leverage their strengths. Good organizations hire to their charts.

Myths taught in Business Schools

business school

The management principles taught by even the top schools might be outdated. Much of the foundation for our modern business management comes from the Industrial revolution of the 19th century.

We’ve all heard about what we need to do to turn mediocre companies around and make them stellar. I’ve either worked for or had first-hand knowledge about companies that have done all these things. I’m sure you have, too. We’ll step through them one by one.

The problem is that objective research has shown that NONE of these initiatives is pivotal in driving a meteoric improvement in a company’s performance! Jim Collins and his team of researchers from Stanford undertook a meticulous study of companies that rose from mediocrity to stardom and published their results in their book Good to Great: Why Some Companies Make the Leap. This is what they learned.

Myth 1: Bring in a star CEO from the outside. This doesn’t work. In fact, the evidence shows that bringing in these star performers from the outside negatively impacts revenues and profits. The companies that managed turn arounds successfully have been promoted from within.

Myth 2: The right compensation program drives the right behaviors. The facts don’t bear this out. You need to offer the right pay to attract the right executives, but they will be star performers because they believe in what the company is doing and they have the freedom to be effective. Tweaking the compensation system does not tweak behavior.

Myth 3: Top companies have better strategies than the low performers. Again, not true. The run-of-the-mill companies had strategic plans and implementation plans that were just as well thought through as the top performers. There is an excellent book, Execution – The Discipline of Getting Things Done – that shows that enterprises fail because they fail to execute their plans, not because they fail to plan.

Myth 4: Top companies focus on what they need to do. Again, as counterintuitive as that seems, it’s not true. They focus on what not to do! Steve Jobs’ biography is particularly instructive on this point. When Jobs came back to take over the helm of Apple, he cut out hundreds of projects. He focused on building just a few products. He wanted products that were mind-bendingly great. To do that, he started by cutting out all but a handful of projects.

Myth 5: Technology investments will help turn a company around. Not true! Technology investments accelerate turnarounds but do not launch them.

Myth 6: Mergers and acquisitions will pick a company up by filling in missing parts of a product portfolio and trigger a rebirth. The merger of two mediocre companies does not make a great company. A company needs to be on a success trajectory first and then merge or acquire to accelerate that growth later.

Myth 7: Turnarounds require close attention to managing change, motivating staff, and ensuring alignment. The data does not support any of that. Companies that actually make the move from mediocrity to superior performance do it one day at a time. One tiny step at a time. They take the right steps and the alignment, staff motivation, and organizational change falls into place naturally. No need to make a big deal of it.

Myth 8: The launch from mediocrity to superiority is launched with a tag line, major announcement, and well-defined programs. Actually, it doesn’t work that way at all. What turn around companies really do is far more mundane. They make thousands of small adjustments. Take thousands of small steps. Move people around as the opportunities present themselves. Drop the deadwood when possible. Make one sale at a time. There is no major trigger event or major announcement.

Myth 9: Good-to-great companies are in great industries. Again, the evidence does not bear this out. These companies come from run-of-the-mill industries. Industries like the mortgage industry or the grocery industry. Moving an enterprise from adequate to exceptional can – and does – occur in all industries.

Here is the lesson we need to take away. Forget the hoopla. Instead, management needs to think through its business, develop its core values, and start making gradual progress. Middle management will eventually sense a change in the environment. Then the rank and file will sense the change. Then the market will sense the change. Then the investment community will sense the change. All the parties will see the results without big announcements. When the change is finally recognized, it will look like an overnight success. In fact, it will be anything but that.