Overview of Research Steps - Good to Great: Why Some Companies Make the Leap... and Others Don't - Jim Collins

Good to Great: Why Some Companies Make the Leap... and Others Don't, 1st Edition Hardcover - Jim Collins (2001)

Appendix 1.D. Overview of Research Steps

Once the twenty-eight companies had been selected (eleven good-to-great, eleven direct comparison, six unsustained comparison), the following steps and analyses were taken by the research team.

COMPANY CODING DOCUMENTS

For each company, a member of the team would identify and collect articles and published materials on the company, including:

1. All major articles published on the company over its entire history, from broad sources such as Forbes, Fortune, Business Week, the Wall Street Journal, Nation’s Business, the New York Times, U.S. News,the New Republic, Harvard Business Review, and the Economist and from selected articles from industry- or topic-specific sources.

2. Materials obtained directly from the companies, especially books, articles, speeches by executives, internally produced publications, annual reports, and other company documents.

3. Books written about the industry, the company, and/or its leaders published either by the company or by outside observers.

4. Business school case studies and industry analyses.

5. Business and industry reference materials, such as the Biographical Dictionary of American Business Leaders, the International Directory of Company Histories, Hoover’s Handbook of Companies, Development of American Industries, and similar sources.

6. Annual reports, proxy statements, analyst reports, and any other materials available on the company, especially during the transition era.

Then for each company, the researcher would systematically code all of the information into a “coding document,” organized according to the following categories, proceeding chronologically from the founding of the company to the present day:

Coding Category 1Organizing Arrangements: “Hard” items such as organization structure, policies and procedures, systems, rewards and incentives, ownership structure.

Coding Category 2Social Factors: “Soft” items such as the company’s cultural practices, people policies and practices, norms, rituals, mythology and stories, group dynamics, management style, and related items.

Coding Category 3Business Strategy, Strategic Process: Primary elements of the company’s strategy. Process of setting strategy. Includes significant mergers and acquisitions.

Coding Category 4Markets, Competitors, and Environment: Significant aspects of the company’s competitive and external environment—primary competitors, significant competitor activities, major market shifts, dramatic national or international events, government regulations, industry structural issues, dramatic technology changes, and related items. Includes data about the company’s relationship to Wall Street.

Coding Category 5Leadership: Leadership of the firm—key executives, CEOs, presidents, board members. Interesting data on leadership succession, leadership style, and so on.

Coding Category 6Products and Services: Significant products and services in the company’s history.

Coding Category 7Physical Setting and Location: Significant aspects of the way the company handled physical space—plant and office layout, new facilities, etc. Includes any significant decisions regarding the geographic location of key parts of the company.

Coding Category 8Use of Technology: How the company used technology: information technology, state-of-the-art processes and equipment, advanced job configurations, and related items.

Coding Category 9Vision: Core Values, Purpose, and BHAGs: Were these variables present? If yes, how did they come into being? Did the organization have them at certain points in its history and not others? What role did they play? If it had strong values and purpose, did they remain intact or become diluted?

Coding Category 10A (for Direct Comparisons Only)—Change/Transition Activities during Transition Era of Corresponding Good-to-Great Company: Major attempts to change the company, to stimulate a transition, during the ten years prior and ten years after the transition date in the corresponding good-to-great company.

Coding Category 10B (for Unsustained Comparisons Only)—Attempted Transition Era: For the ten years leading up to and then during the “attempted transition era,” major change/transition initiatives and supporting activities undertaken by the company.

Coding Category 11 (for Unsustained Comparisons Only)—Posttransition Decline: For the ten years following the attempted transition era, major factors that seem to have contributed to the company not sustaining its transition.

FINANCIAL SPREADSHEET ANALYSIS

We conducted extensive financial analysis for each company, examining all financial variables for 980 combined years of data (35 years on average per company for 28 companies). This comprised gathering raw income and balance sheet data and examining the following variables in both the pre-and posttransition decades:

Total sales in nominal and real (inflation-adjusted) dollars

Sales growth

Profit growth

Profit margin

Return on sales

Sales per employee in nominal and real dollars

Profit per employee in nominal and real dollars

PP&E (property, plant, and equipment)

Dividend payout ratio

Selling, general, and administrative expenses as a percent of sales

Research and development as a percent of sales

Collection period in days

Inventory turnover ratio

Return on equity

Ratio of debt to equity

Ratio of long-term debt to equity

Interest expense as a percent of sales

High stock price to earnings per share

Low stock price to earnings per share

Average stock price to earnings per share

EXECUTIVE INTERVIEWS

We conducted interviews of senior management and members of the board, focusing on people who were in office during the transition era. We transcribed all interviews and synthesized the data into content analysis findings.

img

Interview Questions

Could you briefly give an overview of your relationship to the company—years involved and primary responsibilities held?

What do you see as the top five factors that contributed to or caused the upward shift in performance during the years [ten years before transition] to [ten years after transition]?

Now let’s return to each of those five factors, and I’d like you to allocate a total of 100 points to those factors, according to their overall importance to the transition (total across all five factors equals 100 points).

Could you please elaborate on the [top two or three] factors? Can you give me specific examples that illustrate the factor?

Did the company make a conscious decision to initiate a major change or transition during this time frame?

[If a conscious decision:] To the best of your recollection, when did the company begin to make the key decisions that led to the transition (what year, approximately)?

[If a conscious decision:] What sparked the decision to undertake a major transition?

What was the process by which the company made key decisions and developed key strategies during the transition era—not what decisions the company made, but how did it go about making them?

What was the role, if any, of outside consultants and advisors in making the key decisions?

On a scale of 1 to 10, what confidence did you have in the decisions at the time they were made, before you knew their outcome? (Ten means you had great confidence that they were very good decisions with high probability of success. One means you had little confidence in the decisions; they seemed risky—a roll of the dice.)

[If had confidence of 6 or greater:] What gave you such confidence in the decisions?

How did the company get commitment and alignment with its decisions?

Can you cite a specific example of how this took place?

What did you try during the transition that didn’t work?

How did the company manage the short-term pressures of Wall Street while making long-term changes and investments for the future?

Many companies undertake change programs and initiatives, yet their efforts do not produce lasting results. One of the remarkable aspects of [good-to-great company’s] transition is that it has endured—it was not just a short-term upswing. We find this extraordinary. What makes [good-to-great company] different? What were the primary factors in the endurance of the transition far beyond the first few years?

We will be comparing [good-to-great company] to [comparison company], which was in your industry at the time of your transition but—unlike [good-to-great company]—did not show a significant and lasting shift in performance. What was different about [good-to-great company] that enabled it to make this transition? Other companies could have done what you did, but didn’t; what did you have that they didn’t?

Can you think of one particularly powerful example or vignette from your experience or observation that, to you, exemplifies the essence of the shift from good to great at [good-to-great company]?

Who else would you strongly recommend that we interview?

✵ Inside management during and after the transition.

✵ External board members or other key outside people.

Are there any questions we didn’t ask, but should have?

SPECIAL ANALYSIS UNITS

We undertook a series of special analysis units. These units were designed to shed light on the question of good to great by systematic comparison and (where possible) quantification of key variables between the good-to-great companies and the comparison companies.

Acquisitions and Divestitures

This analysis unit sought to understand the role of acquisitions and divestments in the transition from good to great.

Objectives:

1. What is the quantitative difference in acquisitions and divestments, if any, between the pretransition and posttransition eras for the good-to-great companies?

2. How do the good-to-great companies differ in acquisitions and divestments from the direct comparisons?

3. How do the good-to-great companies differ in acquisitions and divestments from the unsustained comparisons?

To do this analysis, we created a database for each company, year by year:

1. List of acquisitions made during the year and their financial attributes.

2. Total number of acquisitions made during the year.

3. Total combined size of all acquisitions made during the year.

4. List of divestments made during the year and their financial attributes.

5. Total number of divestments made during the year.

6. Total combined size of all divestments made during the year.

Using this data, we did eight major analyses:

1. Good-to-great companies: pre-and posttransition.

2. Good-to-great companies versus comparison companies: pre-and posttransition.

3. Unsustained transition companies: pre-and posttransition decades.

4. Summary pre-and postdecade analysis: good-to-great companies versus direct comparisons versus unsustained comparisons.

5. Good-to-great companies: transition date to present.

6. Good-to-great companies versus comparison companies: transition date to 1998.

7. Unsustained comparisons: transition date to 1998. Do the same analysis as for the good-to-great companies from transition date to 1998.

8. Summary, transition date to 1998: good-to-great companies versus direct comparisons versus unsustained comparisons.

In addition, this analysis looked at the qualitative aspects of acquisitions and divestitures, examining questions such as:

1. Overall strategy of acquisitions.

2. Overall strategy of integrating acquisitions.

3. The ultimate success of each major acquisition.

4. Ultimate success of the overall acquisition strategy.

Industry Performance Analysis

In this analysis, we looked at the performance of the companies versus the performance of the industries. The purpose of the analysis was to determine whether the companies were in highly attractive industries at the time of the transition. We created spreadsheets that quantified each industry versus the company, to determine the relationship between the two.

We compared each good-to-great company’s industry relative to all other industries that appeared in the Standard & Poor’s Analyst’s Handbook for a period from the transition year to 1995. We used the following procedure:

1. For each good-to-great company, determine all industries that are listed in the S&P Analyst’s Handbook from the year of transition to 1995.

2. For each of these industries, use the total returns from the transition year of the corresponding company to 1995 to determine the percentage change in total returns for a period from the transition year to 1995.

3. Rank the industries according to their percentage returns over this period.

Executive Churn Analysis

This analysis unit looked at the extent to which the executive teams changed in the companies during crucial points in their history.

Using Moody’s Company Information Reports, we calculated churn in the good-to-great companies versus comparison companies:

✵ Average percent of departures over pretransition decade.

✵ Average percent of departures over posttransition decade.

✵ Average percent of additions over pretransition decade.

✵ Average percent of additions over posttransition decade.

✵ Average total churn percentage over pretransition decade.

✵ Average total churn percentage over posttransition decade.

✵ Same analyses repeated out to 1998.

Objectives:

1. What is the quantitative difference in executive churn and/or continuity, if any, between the pretransition and posttransition eras for the good-to-great companies?

2. How do the good-to-great companies differ in executive churn and/or continuity from the direct comparisons?

3. How do the good-to-great companies differ in executive churn and/or continuity from the unsustained comparisons?

CEO Analysis:

We examined a total of fifty-six CEOs. For each set of CEOs during the transition era in all three sets of companies (good-to-great, direct comparison, and unsustained comparison), we did a qualitative examination of:

1. Management style.

2. Executive persona.

3. Personal life.

4. What they saw as their top five priorities as CEO.

Also, for each good-to-great company, direct comparison, and unsustained comparison, we examined the CEO background and tenure. Beginning with CEOs in place ten years prior to the transition year through 1997, we determined:

1. Whether the CEO was brought in from the outside directly into the role of CEO (i.e., hired as CEO).

2. Number of years of employment with the company prior to becoming CEO.

3. Age at the time of becoming CEO.

4. Start year and end year of tenure in CEO role.

5. Number of years CEO position was held.

6. Responsibility held immediately prior to becoming CEO.

7. Factors in selection of that person as CEO (why picked as CEO).

8. Education (especially study areas—e.g., law, business—and degrees held).

9. Work experience and other experiences (e.g., military) prior to joining the company.

Executive Compensation

This unit examined executive compensation across the companies in our study. For the twenty-eight companies in the study, from ten years before the transition point to 1998, we collected data and performed a wide variety of analyses.

1. Total of all officers’ and directors’ salary + bonus as a percent of net worth at transition year.

2. CEO’s total cash compensation as a percent of net worth at transition year.

3. CEO’s salary + bonus as a percent of net worth at transition year.

4. Difference between CEO’s salary + bonus and average of top four executives’ salary + bonus as a percent of net worth at transition year and at transition year + 10 years.

5. Average of all officers’ and directors’ salary + bonus as a percent of net worth at transition year.

6. Total of all officers’ and directors’ salary + bonus at transition year.

7. Total of all officers’ and directors’ salary + bonus as a percent of sales at transition year.

8. Total of all officers’ and directors’ salary + bonus as a percent of assets at transition year.

9. Top four executives’ total cash compensation as a percent of net worth at transition year.

10. Top four executives’ salary + bonus as a percent of net worth at transition year.

11. Average of all officers’ and directors’ salary + bonus at transition year.

12. CEO’s salary + bonus as a percent of net income.

13. Difference between CEO’s and average of top four executives’ salary + bonus.

14. Difference between CEO’s and average of top four executives’ salary + bonus as a percent of sales.

15. Difference between CEO’s and average of top four executives’ salary + bonus as a percent of net income.

16. Average of all officers’ and directors’ salary + bonus as a percent of sales at transition year.

17. Average of all officers’ and directors’ salary + bonus as a percent of net income at transition year.

18. Total of all officers’ and directors’ salary + bonus as a percent of net income at transition year.

19. CEO’s total cash compensation as a percent of net income at transition year.

20. Value of stocks granted per year to CEO as a percent of net worth at transition year.

21. Value of stocks granted per year to top four executives as a percent of sales at transition year.

22. Value of stocks granted per year to top four executives as a percent of assets at transition year.

23. Value of stocks granted per year to top four executives as a percent of net worth at transition year.

24. CEO salary + bonus as a percent of sales at transition + 10 years.

25. Top four executives’ salary + bonus as a percent of sales at transition year + 10 years.

Objectives:

1. What is the quantitative difference in executive compensation, if any, between the pretransition and posttransition eras for the good-to-great companies?

2. How do the good-to-great companies differ in executive compensation from the direct comparisons?

3. How do the good-to-great companies differ in executive compensation from the unsustained comparisons?

Role of Layoffs

In this unit, we sought to examine the good-to-great companies, the direct comparisons, and the unsustained comparisons for evidence of layoffs as a significant conscious tactic in an attempt to improve company performance. We examined:

1. Total employment head count year by year, from ten years prior to transition through 1998.

2. Evidence of layoffs as a significant tactic in an attempt to improve company performance during the ten years prior and ten years after the date of transition.

3. If layoffs did occur, then calculate the number of people laid off, nominally and as a percent of the total workforce.

Corporate Ownership Analysis

The point of this analysis was to determine if there were any significant differences in the corporate ownership of the good-to-great and direct comparisons. We looked at:

1. The presence of large-block shareholders and groups.

2. The extent of board ownership.

3. The extent of executive ownership.

Media Hype Analysis

This unit looked at the degree of “media hype” surrounding the good-to-great companies, direct comparisons, and unsustained comparisons. For the period ten years before to ten years after the transition date for each of the companies, we looked at:

1. Total number of articles in the pre-and posttransition decades and for the two decades combined.

2. Total number of “feature” articles on the company in the pre-and post-transition decades and for the two decades combined.

3. Total number of the above articles that explicitly talk about a “transition,” “rebound,” “turnaround,” “transformation,” under way at the company in the pre-and posttransition decades and for the two decades combined.

4. Total number of “highly positive” articles, total number of “neutral” articles (from slightly negative to slightly positive), and total number of “highly negative” articles in the pre-and posttransition decades and for the two decades combined.

Technology Analysis

This unit examined the role of technology, drawing largely upon executive interviews and written source materials:

1. Pioneering applications of technology.

2. Timing of technology.

3. Criteria for selection and use of specific technologies.

4. Role of technology in decline of comparison companies.

COMPARATIVE ANALYSES FRAMEWORKS

Finally, in addition to the above, we performed a number of comparative analyses frameworks as we moved through the project. These were less detailed analyses than those above, although they all did derive directly from the research evidence. They included:

The use of bold corporate moves

Evolutionary versus revolutionary corporate process

Executive class versus egalitarianism

Causes of decline in once-great comparison companies

Three-circle analysis and fit with core values and purpose

Length of buildup period before breakthrough

Timing of Hedgehog Concept with breakthrough date

Core business versus Hedgehog Concept analysis

Succession analysis and success rates of successors

Role of leadership in the decline of once-great comparison companies