Good to great to bust?
So the other day I wondered: How have the 11 companies deemed to have made the leap from "good to great" back in 2001 performed during the past year amid recession? Collectively, they were slightly worse than the Standard & Poor's 500.
Does this mean those companies weren't as great as Collins and his team thought? Or does their collective performance prove how tough today's business environment has become, particularly for publicly traded companies, no matter how well they are run? I can make a case either way.
Assessing these companies based on one year might not be entirely fair, but shouldn't our expectations be higher for companies deemed to be great by Collins for their ability to "convert long-term mediocrity or worse into long-term superiority"?
One of the 11, Gillette Co., isn't in the picture because the firm was sold to Procter & Gamble in 2005 for $57 billion. One could say that its management team was incredibly smart to sell in the middle of a bull market, but P&G shareholders have seen a 23 percent decline in value during the past year.
Of the remaining 10, two companies have evolved from good to great to disastrous: Circuit City Stores and Fannie Mae.
Circuit City, the big-box electronics retailer, was struggling a year ago with its stock down to $4.75. It finally filed for bankruptcy and is liquidating its stores. When asked to rank the top five factors for his company's success back in 2001, Collins' team was surprised to hear CEO Alan Wurtzel list "luck" first. (Note to self: Don't bank on luck to get you through a recession.)
Wurtzel, who saved the company from bankruptcy in the early '70s and left the company in 2001, agreed with the "Good to Great" concept of "getting the right people on the bus." He was a proponent of being willing to move honest, able people two or three times to other positions where they might blossom instead of firing them. This makes me wonder if there is significant downside to trying to save people who couldn't handle the job for which they were hired, but Wurtzel has been quoted as blaming Circuit City managers for not taking competitor Best Buy seriously and for becoming too focused on short-term profits.
Fannie Mae is at the center of the housing crisis and would have fallen apart without a government bailout last year. The stock closed last week at 59 cents after reaching a 52-week high of $35.50.
Reading again about Fannie Mae is painful. The company's hedgehog concept--a central principle in the book that focuses on what companies determine they can be the best in the world at--was that it could become "the best capital markets player in anything that pertains to mortgages." The book added that Fannie Mae thought it "could develop a unique capability to assess risk in mortgage-related securities." By 2004, the government determined Fannie Mae had been manipulating its accounting to inflate profits, and by early 2007, it became clear the company had absolutely no ability to assess risk as its acquisition of bad mortgage loans proved to be a fatal strategy.
The only other "Good to Great" company that has performed worse than the S&P 500 is Wells Fargo. While its 56 percent decline is horrific, the performance is far better than Citigroup, Bank of America and dozens of other financial conglomerates.
Abbott Laboratories is the star of the group with just a 2.5 percent decline in stock price during the past year. Kroger Co. is off nearly 18 percent and turns in the second-best performance. Kimberly-Clark, Walgreens and Philip Morris have lost between 24 percent and 28 percent of their stock values, while Nucor and Pitney Bowes are average negative performers for the year. With the exception of Philip Morris, simply because of philosophical differences, these are all stocks that I would feel confident buying today.
I'm not ready to abandon Collins' findings or the common traits of these 11 "great" companies, but I'm reminded we still have no magic formulas to guarantee business success. We can't rest on our past performances, control the world economy or assume another strong competitor won't come along.
It's sort of fitting to see Collins' book on sale on Amazon.com for $17.99, down 35 percent from its $27.50 original price. Perhaps his $50,000 speaking fee has taken a plunge as well so I can finally afford to bring him to Little Rock.
Jeff Hankins can be reached via e-mail at firstname.lastname@example.org.
`Good to Great' Company Performance Ranked by one-year return on investment Closing Closing One- Price Price Year Closing Price 2/18/09 2/19/08 Return Abbott Laboratories 54.20 55.57 -2.47% Kroger 21.72 26.35 -17.57% Kimberly-Clark 48.43 64.01 -24.34% Walgreens 25.64 35.42 -27.61% Philip Morris 35.40 49.39 -28.33% Nucor 38.69 63.89 -39.44% Pitney Bowes 21.73 37.51 -42.07% Wells Fargo 13.05 29.86 -56.30% Fannie Mae 0.59 28.98 -97.96% Circuit City Stores 0.00 4.75 -100.00% $1,000 Investment in Each "Good to Great" Company 5,688.00 10,000.00 -43.12% S&P 500 788.42 1,349 -41.55% Return Since 52-Week 52-Week Closing Price High High Abbott Laboratories 59.95 -9.59% Kroger 30.99 -29.91% Kimberly-Clark 66.66 -27.35% Walgreens 39.00 -34.26% Philip Morris 56.26 -37.08% Nucor 83.56 -53.70% Pitney Bowes 39.98 -45.65% Wells Fargo 44.75 -70.84% Fannie Mae 35.50 -98.34% Circuit City Stores 5.75 -100.00% $1,000 Investment in Each "Good to Great" Company S&P 500 1,440.24 -45.26% Note: Gillette Co., the 11th company featured in "Good to Great," was sold to Procter & Gamble in 2005 for $57 billion. P&G stock traded at $50.95 on Feb. 18, down 23 percent from its close at $66.31 on Feb. 19, 2008.
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|Title Annotation:||Publisher's Note|
|Date:||Feb 23, 2009|
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