Back in 2001, Jim Collins had a monster of a business bestseller with his book Good to Great: Why Some Companies Make the Leap. . . and Others Don't. In it, Collins explored companies that have become hugely successful and found that success generally comes as a result of focusing resources on things that you're good at instead of mindlessly diversifying.Arkansas Business writer Jeff Hankins read the book again to see how the companies profiled have weathered the downturn. The companies profiled were Abbot Laboratories (NYSE: ABT), Kroger (NYSE: KR), Kimberly-Clark (NYSE: KMB), Walgreens (NYSE: WAG), Altria (NYSE: MO), Nucor (NYSE: NUE), Pitney Bowes (NYSE: PBI), Wells Fargo (NYSE: WFC) and tragically, Fannie Mae and Circuit City. Gilette was eliminated from contention because of a merger.
Over the past year, Collins' "great companies" have declined by 43.12% compared with 41.55% for the S&P 500, according to Hankins. Of course, that by itself doesn't tell us anything: Being a great company and being one that outperforms the expectations of investors are two very different things. It may well be that, with the exception of real freakshows and Fannie and Circuit City, the market had already priced in the greatness of these companies.
The moral of the story is one of two things: Either Jim Collins is wrong or great companies do not necessarily make great investments. I'm inclined to go with the latter: The price you pay matters as much as the greatness of the company you invest in, and the greatness of companies like Altria and Kroger may simply have been too well-known.
The moral of the story is one of two things: Either Jim Collins is wrong or great companies do not necessarily make great investments. I'm inclined to go with the latter: The price you pay matters as much as the greatness of the company you invest in, and the greatness of companies like Altria and Kroger may simply have been too well-known.
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Reader Comments (Page 1 of 1)
2-23-2009 @ 3:54PM
SKris said...
Also, one of the most important variables to a great company is management and culture according to the book. Changes in management happen, and cultures can deteriorate. All great institutions will become less great at some point. Just ask the Romans; the Rome of Julius and Augustus was much different that that of Nero though.
An important lesson to take from this book though is that the "great" companies were defined by the fact that they were great investments. The study began with outsized stock market returns. All great companies make great investments, but timing matters.
3-15-2009 @ 7:19PM
Jt said...
Interesting post, I actually have 2 copies of this book, and was just re-reading it thinking- hmmmm are these foundational thoughts still true... the profile of a good leader et, hmmm.
3-17-2009 @ 12:30AM
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4-25-2009 @ 4:32PM
Artemis34 said...
The prinicpals that make a great company are like the principals that make a healthy person, if you cease to live by them, you don't get the desired outcomes. It doesn't negate the principals (I'm trying to paraprhase Jim Collins).
Re: your comment on the fall, well I assume you included those that abandoned the principals like Fannie Mae and Circuit City. And the bigger you are, the harder you fall. If they we're already at the pinnacle of what is possible this reduction is quite natural.