Success in the Age of 'Disruption'? How to Measure What Really Makes a Company Great
Perhaps no business consultant enjoys higher esteem in the corporate world than Jim Collins. Over three decades, he has sold millions of copies of his books describing the characteristics of what he terms “great” companies.
It's hard not to admire his diligence. Along with a large team of researchers, Collins spends years gathering evidence and analyzing companies. The primary measure he uses for greatness is how well a company performs for its shareholders over a given period of time. The problem—as we have all been warned—is that past financial performance is no guarantee of future results.
For Good to Great, his most successful book, published in 2001, Collins selected 11 companies as truly elite performers. They included Circuit City (now bankrupt and defunct); Fannie Mae (taken over by the government in 2008 after huge mortgage losses); Pitney Bowes, whose stock has progressively tanked over the last decade; and Altria, the world’s largest tobacco company, which has actually performed well in the marketplace, but earns its revenues almost exclusively from a product that causes five million deaths a year.
In Great by Choice, published in 2011, Mr. Collins and a co-author, Morten T. Hansen, call out seven companies for “spectacular” results—outperforming the overall stock market and their industry competitors by at least 10 times over a 15-year period. They also set up comparisons with companies in the same industries that performed markedly less well.
The most striking comparison involves Microsoft, which Collins and Mr. Hansen identify as a great performer, and Apple, which they cite as the comparative laggard. Yes, you read that right. Here’s why: The 15-year period the authors happened to examine was 1987 to 2002.
How could so much research miss the mark by so far?
An obvious explanation is that huge changes in technology in the last decade have redefined what it takes to be successful—elevating factors like the role of disruptive innovation, quickness to market and speed of responsiveness to competitors. What worked for Microsoft in the era that Mr. Collins and Mr. Hansen studied proved to be wholly inadequate to compete with Apple in the era that immediately followed.
But the primary issue, I am convinced, is the definition Collins uses for greatness. For this understanding, I owe a considerable debt to John Mackey, chief executive of Whole Foods, and Rajendra Sisodia, co-authors of the powerful new book, Conscious Capitalism: Liberating the Heroic Spirit of Business.
Maximizing returns for shareholders over a given period of time is narrow, one-dimensional and woefully insufficient. In an increasingly complex and interdependent world, a truly great company requires a far richer mix of qualities.
So how about this for a new value proposition?
A company’s greatness is grounded in doing the greatest good for the greatest number of people, and the least harm. It is neither first nor foremost about maximizing short-term return for shareholders. Rather, it is about investing in and valuing all stakeholders—employees, customers, suppliers, the community and the planet—in order to generate the greatest value over the longest term for all parties, including the shareholders.
By that definition, a tobacco company like Altria can never be considered great, no matter how much return it generates for shareholders. The damage the company causes to the world vastly outweighs the value it generates for a few. To be great, a company must add some sort of positive benefit in the world with its products. Similarly, a company that fails to pay its employees a living wage, or to treat them with care and respect, can never be considered great.
Greatness also requires a company to treat its customers with the same care and respect, in part through an unwavering commitment to excellence in the products it produces, and fairness in the prices it charges for them. A great company must also take seriously its continuing responsibility to the communities in which it operates, and to the planet, on whose resources it depends. Above all else, great companies must add more value to the world than they extract.
This is admittedly a high bar, far higher than the one Collins sets in his books. After 15 years of working with scores of large companies, I have yet to come across one that fully measures up to this high standard. But here is what I find heartening. There are small numbers of Fortune 500 companies making an honest effort to value all stakeholders in a conscious way, and they are consistently and widely outperforming their peers.
In an earlier book, Firms of Endearment: How World-Class Companies Profit from Passion and Purpose, Mr. Sisodia, a business professor and researcher, compiled a list of companies that pay and treat employees significantly above average; provide high value and service to customers; do not squeeze suppliers for the lowest possible prices; invest significantly in their local communities; minimize their environmental impact; and do not cite as a primary goal “maximizing shareholder returns.”
Over the 15 year period, 1996 to 2011, the “Firms of Endearment” companies outperformed the Standard & Poor’s 500-stock index by 10.5 to 1. They returned a cumulative 21 percent, while Collins’s “Good to Great” companies earned an annualized return of just 7 percent during the same period, barely outpacing the broader market.
Here is the inescapable conclusion: When a company truly seeks to take care of all its constituencies, it serves not just the collective good, but also its own long-term best interest.