Good to Great: Neither Good nor Great
| Peter Klein |
I’m not a fan of “guru” books like In Search of Excellence, Built to Last, and Good to Great, for reasons well documented by Phil Rosenzweig in his excellent Halo Effect. These books suffer from ad hoc generalization, sampling on the dependent variable, and a host of related methodological and expository flaws. If Rosenszweig’s critique is startling, then two articles from the November 2008 Academy of Management Perspectives on Jim Collins’s Good to Great — perhaps the leading guru book of our time — are devastating. Here is Bruce Resnick and Timothy Smunt:
With sales of more than 4.5 million copies, Good to Great by Jim Collins provides an inspiring message about how a few major companies became great. His simple but powerful framework for creating a strategy any organization can use to go from goodness to greatness is certainly compelling. However, was Collins truly able to identify 11 great companies? Or was the list of great companies he generated merely the result of applying an arbitrary screening filter to the list of Fortune 500 companies? To test the durability of his greatness filter, we conducted a financial analysis on each of the 11 companies over subsequent periods. We found that only one of the 11 companies continues to exhibit superior stock market performance according to Collins’ measure, and that none do so when measured according to a metric based on modern portfolio theory. We conclude that Collins did not find 11 great companies as defined by the set of parameters he claimed are associated with greatness, or, at least, that greatness is not sustainable.
Later they add:
Our analysis of Collins’ Good to Great study methodology suggests that it suffered from three major problems: 1) data mining with respect to the selection of the starting month of the company transformation period, 2) the failure to test for the sustainability of greatness over subsequent time periods, and 3) the failure to use modern portfolio theory that accounts for the costs of risk and then whether the performance differences are statistically significant.
“Good to Great, or Just Good?” by Bruce Niendorf and Kristine Beck is equally damning:
Good to Great has been on BusinessWeek’s best-seller list since its October 2001 release. In Good to Great, author Jim Collins identified a set of 11 firms as great, then used them to derive five management principles he believed led to “sustained great results.” We contend that due to two fatal errors, Good to Great provides no evidence that applying the five principles to other firms or time periods will lead to anything other than average results. We explain the two errors and empirically test our contention. When ranked with the 2006 Fortune 500, the 11 Good to Great firms have an average ranking of 202nd. In addition, in terms of long-term stock return performance, the Good to Great firms do not differ significantly from the average company on the S&P 500. Our evidence is consistent with the conclusion that although the Good to Great firms may be good, they aren’t great.