Book review: “Great by Choice” – Jim Collins

41hqlz67n1l-_sx327_bo1204203200_

“Great by Choice” seems to be the most recent book (2011) from management “guru” Jim Collins. Similar to “Built to last” he focuses on companies that have achieved great success. However in “Great by Choice” he includes a certain twist: He looks at 8 pairs of competing companies which more or less had the same starting point, but where one of them became super successful and the other not.

He then tries to work out why the successful ones were successful. The pairs are as follows:

Southwest Airlines vs. PSA
Progressive Insurance vs. Safeco
Stryker vs. USSC
Intel vs. AMD
Microsoft vs. Apple
Amgen vs. Genentech
Biomet vs. Kirschner

After “Built to last”, where out of the 11 featured companies many of them either went outright bankrupt or experienced other big problems, I was a little bit suspicious about the value of looking at super succesful companies and trying to reverse engineer the “secret sauce” on a hindsight basis. However, to spoiler the review upfront: I was genuinely surprised that I found the book’s results quite useful for me as value investor.

Collins destroys some myths early in his book. The succesful companies (He calls them 10x companies) are not faster or more innovative.

According to his insights, the succesful companies are more disciplined, driven by empirical data  and are paranoid about productivity,

He then introduces a couple of concepts which he thinks are common characteristics of very succesful companies:

  1. “20 Mile March” principle: Growing steadily, not over extending oneself in good times, keep reserves for bad times
  2. “Fire Bullets, then Cannonballs”:  Test innovation with little projects before going “all in” (also with regard to acquisitions)
  3. “Leading above the Death Line”: Build reserves, buffers and shock absorbers (financially). Prudent risk management, succesful companies actually take less risk.
  4. “Specific, Methodological and Consistent (SMaC)”: A clear “recipe” how to do things and what not to do
  5. “Return on luck”: It is not important how much luck a company has but what it makes out of it

Overall I found the characteristics Collins worked out very intuitive and common sense proof. The first 3 points  are actually in my opinion a more granular description of “Great Capital Management”. I especially liked the 4th concept which clearly enables a company to stay its course even in difficult environments.

As a summary, despite my prejudices, I found the book very interesting to read and I think I learned some important lessons which I plan to incorporate into my analysis process.

I can recommend this book especially for people interested in analyzing “quality” companies.

 

 

 

 

 

 

 

 

3 comments

  • Larry.Livingston

    Read this book three years ago and really liked it. IIRC Collins’ study ends somewhere around 2002, so AAPL looked like the obvious loser. In a final statement Collins adressed this issue and said why he still included the MSFT AAPL pair.

  • Without having read the book, I find that it is sometimes hard to say which company of the pair has been more successful. For example, I would consider both Genentech and Amgen very successful companies (except that Genentech was taken over by Roche whereas Amgen is still independent). Same goes for Apple and Microsoft.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s