Great by Choice

Jim Collins, Morten T. Hansen

• Publisher: Harper Business
• Year: 2011
• ISBN:
  9780062121004
• Topic: Business
• Subtopic: Gestione
• Index: Business

Ten years after the worldwide bestseller Good to Great, Jim Collins returns withanother groundbreaking work, this time to ask: why do some companies thrive inuncertainty, even chaos, and others do not? Based on nine years of research, buttressed by rigorous analysis and infused with engaging stories, Collins andhis colleague Morten Hansen enumerate the principles for building a truly greatenterprise in unpredictable, tumultuous and fast-moving times. This book isclassic Collins: contrarian, data-driven and uplifting.

1

THRIVING IN UNCERTAINTY

“We simply do not know what the future holds.”

—Peter L. Bernstein¹

We cannot predict the future. But we can create it.

Think back to 15 years ago, and consider what’s happened since, the destabilizing events—in the world, in your country, in the markets, in your work, in your life—that defied all expectations. We can be astonished, confounded, shocked, stunned, delighted, or terrified, but rarely prescient. None of us can predict with certainty the twists and turns our lives will take. Life is uncertain, the future unknown. This is neither good nor bad. It just is, like gravity. Yet the task remains: how to master our own fate, even so.

We began the nine-year research project behind this book in 2002, when America awoke from its false sense of stability, safety, and wealth entitlement. The long-running bull market crashed. The government budget surplus flipped back to deficits. The terrorist attacks of September 11, 2001, horrified and enraged people everywhere; and war followed. Meanwhile, throughout the world, technological change and global competition continued their relentless, disruptive march.

All of this led us to a simple question: Why do some companies thrive in uncertainty, even chaos, and others do not? When buffeted by tumultuous events, when hit by big, fast-moving forces that we can neither predict nor control, what distinguishes those who perform exceptionally well from those who underperform or worse?

We don’t choose study questions. They choose us. Sometimes one of the questions just grabs us around the throat and growls, “I’m not going to release my grip and let you breathe until you answer me!” This study grabbed us because of our own persistent angst and gnawing sense of vulnerability in a world that feels increasingly disordered. The question wasn’t just intellectually interesting but personally relevant. And as we spent time with our students and worked with leaders in both the business and social sectors, we sensed the same angst in them. In the intervening years, events have served only to reinforce this sense of unease. What’s coming next? All we know is that no one knows.

Yet some companies and leaders navigate this type of world exceptionally well. They don’t merely react; they create. They don’t merely survive; they prevail. They don’t merely succeed; they thrive. They build great enterprises that can endure. We do not believe that chaos, uncertainty, and instability are good; companies, leaders, organizations, and societies do not thrive on chaos. But they can thrive in chaos.

To get at the question of how, we set out to find companies that started from a position of vulnerability, rose to become great companies with spectacular performance, and did so in unstable environments characterized by big forces, out of their control, fast moving, uncertain, and potentially harmful. We then compared these companies to a control group of companies that failed to become great in the same extreme environments, using the contrast between winners and also-rans to uncover the distinguishing factors that allow some to thrive in uncertainty.

We labeled our high-performing study cases with the moniker “10X” because they didn’t merely get by or just become successful. They truly thrived. Every 10X case beat its industry index by at least 10 times. If you invested $10,000 in a portfolio of the 10X companies at the end of 1972 (holding each enterprise at the general stock market rate of return until it came online on the New York Stock Exchange, the American Stock Exchange, or NASDAQ), your investment would have grown to be worth more than $6 million by the end of our study era (through 2002), a performance 32 times better than the general stock market.²

To grasp the essence of our study, consider one 10X case, Southwest Airlines. Just think of everything that slammed the airline industry from 1972 to 2002: Fuel shocks. Deregulation. Labor strife. Air-traffic-controller strikes. Crippling recessions. Interest-rate spikes. Hijackings. Bankruptcy after bankruptcy after bankruptcy. And in 2001, the terrorist attacks of September 11. And yet if you’d invested $10,000 in Southwest Airlines on December 31, 1972 (when it was just a tiny little outfit with three airplanes, barely reaching break-even and besieged by larger airlines out to kill the fledgling) your $10,000 would have grown to nearly $12 million by the end of 2002, a return 63 times better than the general stock market. It’s a better performance than Wal-Mart, better than Intel, better than GE, better than Johnson & Johnson, better than Walt Disney. In fact, according to an analysis by Money Magazine, Southwest Airlines produced the #1 return to investors of all S&P 500 companies that were publicly traded in 1972 and held for a full 30 years to 2002.³ These are impressive results by any measure, but they’re astonishing when you take into account the roiling storms, destabilizing shocks, and chronic uncertainty of Southwest’s environment.

Why did Southwest overcome the odds? What did it do to master its own fate? And how did it accomplish its world-beating performance when other airlines did not? Specifically, why did Southwest become great in such an extreme environment while its direct comparison, Pacific Southwest Airlines (PSA), flailed and was rendered irrelevant, despite having the same business model in the same industry with the same opportunity to become great? This single contrast captures the essence of our research question.

We’ve been asked by many of our students and readers, “How is this study different from your previous research into great companies, especially Built to Last and Good to Great?” The method is similar (comparative historical analysis) and the question of greatness is constant. But in this study, unlike any of the previous research, we selected cases not just on performance or stature but also on the extremity of the environment.

We selected on performance plus environment for two reasons. First, we believe the future will remain unpredictable and the world unstable for the rest of our lives, and we wanted to understand the factors that distinguish great organizations, those that prevail against extreme odds, in such environments. Second, by looking at the best companies and their leaders in extreme environments, we gain insights that might otherwise remain hidden when studying leaders in more tranquil settings. Imagine being on a leisurely hike, wandering along warm, sunlit meadows, and your companion is a great mountaineer who has led expeditions up the most treacherous peaks in the world. You’d probably notice that he’s a little different from others, perhaps more watchful of the trail or more careful in packing his small daypack. But overall, given the safe predictability of a glorious spring day, it would be hard to see what really makes this leader so exceptional. Now, in contrast, envision yourself on the side of Mount Everest with this same climber, racing a murderous storm. In that environment, you’d see much more clearly what makes him different and what makes him great.

Studying leaders in an extreme environment is like conducting a behavioral-science experiment or using a laboratory centrifuge: throw leaders into an extreme environment, and it will separate the stark differences between greatness and mediocrity. Our study looks at how the truly great differed from the merely good in environments that exposed and amplified those differences.

In the remainder of this introductory chapter we briefly outline our research journey and preview some of the surprises we encountered along the way. (You can find a more detailed description of our research methodology in the Research Foundations appendices.) Starting in Chapter 2, we delve into what we learned about the individual people who led these companies, and in Chapters 3 through 6, how they led and built their companies differently from their less successful comparisons. In Chapter 7, we come to what, for us, was a particularly fascinating part of our journey: studying luck. We defined luck, quantified luck, determined if the 10X cases were luckier (or not), and discovered what they do differently about luck.

FINDING THE 10X CASES

We spent the first year of our efforts identifying the primary study set of 10X cases, searching for historical cases that met three basic tests:

1. The enterprise sustained truly spectacular results for an era of 15+ years relative to the general stock market and relative to its industry.

2. The enterprise achieved these results in a particularly turbulent environment, full of events that were uncontrollable, fast-moving, uncertain, and potentially harmful.

3. The enterprise began its rise to greatness from a position of vulnerability, being young and/or small at the start of its 10X journey.

From an initial list of 20,400 companies, we systematically sifted through 11 layers of cuts to identify cases that met all our tests. (See Research Foundations: 10X-Company Selections.) Because we wanted to study extreme performance in extreme environments, we used extreme standards in our selections. The final set of 10X cases (see the following table) delivered extraordinary performance during the dynastic eras we studied.

Before we move on, let’s address a key point about the cases in our study. We studied historical eras of dynastic performance that ended in 2002, not the companies as they are today. It’s entirely possible that by the time you read these words, one or more of the companies on the list has stumbled, falling from greatness, leaving you to wonder, “But what about XYZ company? It doesn’t seem to be a 10X performer today.” Think of our research as comparable to studying a sports dynasty during its best years. Just because the UCLA Bruins basketball dynasty of the 1960s and 1970s under Coach John Wooden (with its 10 NCAA championships in 12 years) declined after Wooden retired does not invalidate insights obtained by studying the Bruins during its dynastic era.⁶ In this same vein, a great company can cease to be great (see How the Mighty Fall by Jim Collins), yet this does not erase its dynastic era from the record books, and it’s on that historical dynastic era that we focused our research lens and based our findings.

THE POWER OF CONTRAST

Our research method rests upon having a comparison set. The critical question is not “What did the great companies share in common?” The crucial question is “What did the great companies share in common that distinguished them from their direct comparisons?” Comparisons are companies that were in the same industry with the same or very similar opportunities during the same era as the 10X companies, yet that did not produce great performance. Using a rigorous scoring framework, we systematically identified a comparison company for each 10X case. (See Research Foundations: Comparison-Company Selections.) As a group, the 10X companies outperformed the comparison companies by more than 30 to 1 (see diagram “A Study In Contrasts”).⁷ The contrast between the 10X cases and the comparisons during the relevant era of analysis led to our findings.

Here then is the final study set of 10X cases and their comparisons: Amgen matched to Genentech; Biomet to Kirschner; Intel to AMD; Microsoft to Apple; Progressive to Safeco; Southwest Airlines to PSA; and Stryker to United States Surgical Corporation (USSC). Regarding the selection of Apple as a comparison case, we’re aware that as of this writing in 2011, Apple stands as one of the most impressive comeback stories of all time. Our research lens for the Microsoft-versus-Apple contrast focused on the 1980s and 1990s, when Microsoft won big and Apple nearly killed itself. If you’d bought Apple stock at the end of December 1980, the month of its initial public offering (IPO), and held it to the end of our era of analysis in 2002, ...