What happened to the world’s “greatest” companies?
We tracked the long-term fortunes of the 50 companies lauded in the seminal business books of the past three decades. What did we find? Take greatness with a grain of salt—even the greatest answer to trends and forces.
Three books sit on more executives’ bookshelves than any others: “In Search of Excellence” (1982), “Built to Last” (1994), and “Good to Great” (2001). They turned their authors into management gurus, especially Tom Peters (“In Search of Excellence”) and Jim Collins (the other two titles).
All three use the same basic method: list companies that are “great” or “excellent” or “enduring,” then attempt to infer the transferable formulae behind said greatness, excellence and endurance. The promise is that by mimicking their practices, you will be able to mimic their performance too. (For an excellent overview of the pitfalls of doing this, check out Phil Rosenzweig’s “The Halo Effect.”) But what actually happened to them? And what does their fate suggest about the future of today’s corporate greats?
To begin, let’s set a few things straight. First, these books are definitely worth reading (more than 10 million readers can’t be wrong). Second, the prescriptions in them are fairly sensible, if somewhat vague. Finally, the authors selected these companies for a good reason.
It’s this final point that I find most interesting. In the zeitgeist of the day, they were truly incredible organizations with enviable performance, widely admired leaders, and strong cultures. So looking at what happened to them makes for a great natural experiment where the company’s quality is a given — the variable is the context in which it operated.
Our three books mention 50 companies — well, actually 60, but 10 of them get the honor of appearing twice (in fact, half of the “Built to Last” companies were in “In Search of Excellence” almost a decade before). This combined list is interesting in itself. When I talk to our newest batch of McKinsey recruits about a great company called Wang Labs that made these things called mainframes and word processors, they look at me like I’m strange. This is even more the case when I tell them Kodak was once one of the most respected companies on earth.
To see how these great companies fared, our research team dug out their share price and dividend data, and assessed their performance 20 years after the books’ publication (or, in the case of “Good to Great,” 15 years up to December 2016). We then created a “buy and hold” portfolio of $100 invested in each stock. If a stock had been de-listed, we assumed the closing amount was reinvested into the index. Let’s call these portfolios ISOE, BTL and GTG, after their respective books.
So what did we find? If you bought a portfolio of these companies and held them for two decades, you would have beaten the S&P 500 index by 1.7 percentage points. Not bad! GTG is in the lead at a 2.6 percentage-point outperformance, followed by BTL at 1.6 percentage points and ISOE at 1.5 percentage points.
But this rosy picture looks a little different up close—as experienced by the companies themselves. Their fates could not have diverged more:
Performance of the “excellent,” “lasting” and “great” companies vs. the S&P
|“In Search of Excellence”||“Built to Last”||“Good to Great”|
|Stars (more than||Wal-Mart||Philip Morris||Phillip Morris|
|5 percentage points||Intel||Marriott||Nucor|
|better than the market)||Merck|
|Johnson & Johnson|
|Outperformers (more than||Procter & Gamble||American Express||Kroger|
|2 percentage points||Avon Products||Johnson & Johnson||Wells Fargo|
|better than the market)||Walt Disney||IBM|
|Middle||Dow Chemical||Procter & Gamble||Gillette (a)|
|Amoco (a)||Merck||Abbott Labs|
|Emerson Electric||Hewlett Packard|
|Underperformers (more||Maytag (s)||Ford|
|than 2 percentage points||Hewlett-Packard|
|worse than the market||IBM|
|Delta Air Lines (s)|
|Failures (more than 5 pct.||Schlumberger||Citicorp||Pitney Bowes|
|pts. worse than the market)||Kodak (s)||Motorola||Fannie Mae|
|Raychem (a)||Sony||Circuit City (b)|
|(a) Acquired during||Dana (s)|
|evaluation period||National Semiconductor (a)|
|(b) went bust during||DEC (a)|
|evaluation period||Data General (a)|
|(s) subsequently acquired||Kmart (b)|
|or went bust||Wang Labs (b)|
We came to some interesting, even surprising, conclusions.
Great companies were more likely to do really badly than really well.
Their odds of outperforming the stock market were 52-48, hardly better than a coin toss. But there are more big losers than big winners on the lists. Just eight companies outperformed the index by more than 5 percentage points, while twice that number underperformed by the same percentage. Given the difficulty of beating the market, it’s no surprise that the biggest group is in the middle band of plus or minus 2 percentage points.
A few great companies is all it takes for a portfolio to outperform.
So if the typical company didn’t do so well, why did the portfolios outperform? The magic of compounding means a few extremely good stocks can offset many poor ones. When you take the four best performers—actually, three companies: Wal-MartWMT, +0.64% and Intel INTC, +0.97% in ISOE, and Philip Morris PM, +0.87%which appears in both GTG and BTL—out of the portfolios, the positive margin almost completely disappears.
In other words, if it were not for cigarettes, Jim Collins’s outperformance would literally go up in smoke. This elite group of four would end up being worth 27% of the 60-company portfolio.