I don’t know how much stock I would put in the things Jim Collins says. Thinking Fast and Slow had an interesting critique of one of his books:
The halo effect and outcome bias combine to explain the extraordinary appeal of books that seek to draw operational morals from systematic examination of successful businesses. One of the best-known examples of this genre is Jim Collins and Jerry I. Porras’s Built to Last. The book contains a thorough analysis of eighteen pairs of competing companies, in which one was more successful than the other. The data for these comparisons are ratings of various aspects of corporate culture, strategy, and management practices. “We believe every CEO, manager, and entrepreneur in the world should read this book,” the authors proclaim. “You can build a visionary company.”
The basic message of Built to Last and other similar books is that good managerial practices can be identified and that good practices will be rewarded by good results. Both messages are overstated. The comparison of firms that have been more or less successful is to a significant extent a comparison between firms that have been more or less lucky. Knowing the importance of luck, you should be particularly suspicious when highly consistent patterns emerge from the comparison of successful and less successful firms. In the presence of randomness, regular patterns can only be mirages.
Because luck plays a large role, the quality of leadership and management practices cannot be inferred reliably from observations of success. And even if you had perfect foreknowledge that a CEO has brilliant vision and extraordinary competence, you still would be unable to predict how the company will perform with much better accuracy than the flip of a coin. On average, the gap in corporate profitability and stock returns between the outstanding firms and the less successful firms studied in Built to Last shrank to almost nothing in the period following the study. The average profitability of the companies identified in the famous In Search of Excellence dropped sharply as well within a short time. A study of Fortune’s “Most Admired Companies” finds that over a twenty-year period, the firms with the worst ratings went on to earn much higher stock returns than the most admired firms.
You are probably tempted to think of causal explanations for these observations: perhaps the successful firms became complacent, the less successful firms tried harder. But this is the wrong way to think about what happened. The average gap must shrink, because the original gap was due in good part to luck, which contributed both to the success of the top firms and to the lagging performance of the rest. We have already encountered this statistical fact of life: regression to the mean.
Stories of how businesses rise and fall strike a chord with readers by offering what the human mind needs: a simple message of triumph and failure that identifies clear causes and ignores the determinative power of luck and the inevitability of regression. These stories induce and maintain an illusion of understanding, imparting lessons of little enduring value to readers who are all too eager to believe them.
+1 I appreciated the writeup. Amongst many positive things about the post, I think it really helps for there to be open conversation about what it looks like when things don’t work out as hoped, to help people understand what they’re signing up for.
Thanks for the extended quote! :-) As I wrote, I’m sceptical of Jim Collins’ claims. On the other hand – people can’t just noodle around and expect to be lucky. There must be certain activities that lead to more success than others. So there is some value in Collins-type research in that it finds likely candidates for success-inducing activities.
Thanks for the writeup.
I don’t know how much stock I would put in the things Jim Collins says. Thinking Fast and Slow had an interesting critique of one of his books:
+1 I appreciated the writeup. Amongst many positive things about the post, I think it really helps for there to be open conversation about what it looks like when things don’t work out as hoped, to help people understand what they’re signing up for.
Thanks for the extended quote! :-) As I wrote, I’m sceptical of Jim Collins’ claims. On the other hand – people can’t just noodle around and expect to be lucky. There must be certain activities that lead to more success than others. So there is some value in Collins-type research in that it finds likely candidates for success-inducing activities.