Why do some companies thrive while others don't?
That's a fundamental question for businesses and investing but one that perhaps doesn't receive much attention.
Now, I don't mean to say there is no academic research or even books that talk about successful businesses.
There are many books that chart the course of 'home run' businesses, and there are countless biographies of the most successful business leaders. You can find hundreds of titles in your favourite book store.
But for every successful business, there are several that blow up in their infancy and many that survive but never achieve greatness.
It's a tough nut to crack because we can't run experiments that tweak various factors such as 'luck', 'leadership', or 'innovation' in a laboratory setting and evaluate what matters and what doesn't.
If you are curious — and perhaps we should be if we want to be better investors, business people, or just plain old well-informed citizens — "Great By Choice" by Jim Collins and Morten Hansen beautifully tackled these fundamental questions.
It's an engaging read with many, possibly counterintuitive, takeaways.
First, a word on the methodology, which I thought was standout. The authors perform a "paired" study, comparing in each case a "winner" with a relevant "control" company.
In their study, the "winner" is an enterprise that beat its industry index by at least ten times over a period of at least 15 years; Collins and Hansen call these the "10x'ers".
The "control" in each case were companies operating in the same industry, and at the start of the evaluation period were more or less at a similarly early stage in their respective evolution.
The match-ups are somewhat dated. But it doesn't deter from the main takeaways, while giving us an up-close view on some of the battle royales of the last 30 years!
It includes classics such as Intel (Winner) versus AMD; Amgen (Winner) versus Genentech; and Microsoft (Winner) versus Apple. That last comparison is interesting because Apple in the post-2002 period engineered an amazing turnaround with the iPod and later the iPhone.
One fascinating insight was about the impact of luck, or "return on luck" in the authors' parlance.
Collins and Hansen find that the paired companies had similar numbers of good and bad luck events. So good or bad luck doesn't appear to be a key factor in success, rather what leaders did in those events that determined the outcome. It all boils down to disciplined leadership, calibrated risk-taking, and a slow-and-steady approach amongst the winners.
Their conclusions: management of the 10x'ers made better use of good luck events and came out stronger from bad luck events.
I also find their take on the role of innovation intriguing: the successful companies weren't more innovative than the control companies. That's not to say that the 10x'ers didn't innovate but that there are no significant gains from being a first mover.
Instead, what mattered more was the ability to take the right solution and scale it up. Successful companies are more disciplined, driven by empirical data and are paranoid about productivity.
"Great By Choice" is a metaphor-driven book.
It revisits the race to the South Pole. Norwegian explorer Roald Amundsen was the first to reach the South Pole on 14 December 1911 and return to base; Briton Robert Falcon Scott and team arrived four weeks later only to perish on their journey back.
Collins and Hansen claim that the 10x'er leaders fit the Amundsen mould — careful planners, those that meticulously walk "20-miles" each day, making sure not to over- or undershoot their target. At a meta-level, this makes sense and maybe states the obvious: don't overreach during good times because that might leave a business exposed when there are headwinds.
If anything, the key criticism might be a small sample set.
Can we draw any meaningful lessons from a case study of seven pairs of businesses?
Aside from the above criticism, we need to be aware of some practical limitations. I don't doubt the concept of "return on luck".
But evaluating how a business is responding to luck is extremely challenging as it unfolds. It involves the dual challenge of isolating the luck event and evaluating actions taken, without the benefit of hindsight. That's just plain hard!
Foolish takeaway
All criticism aside, "Great By Choice" leaves us with some valuable takeaways.
One of them is over-glorification of innovation. Getting somewhere first is an academic prize. But a business win involves scaling a solution. That means keeping an eye on the market share gains and watching out for competition. Apple has famously never been first to most things (smartphones, tablets, streaming music etc.), yet when it enters it wins big time! It's something we should keep an eye on for all our businesses.
We also shouldn't underestimate the importance of making regular progress. Twice a year, we get to see how our companies are performing. That's our opportunity to evaluate whether or not enough progress has been made.
We want sustainable growth, over the long term. We want Amundsen, not Falcon Scott, in charge of our ship.
Grab a copy, make yourself a cuppa, and give it a read. There's a lot more in the book, which I haven't covered. Trust me; it is time well spent.
Fool on!
Anirban Mahanti
Director of Research
Motley Fool Australia
