In defense of "Built to Last"

Jim Collins and Jerry Porras wrote Built to last: successful habits of visionary companies back in 1994. The book has sold millions of copies. It identified 18 great companies and compared them to 18 merely good companies. Based on this research, the authors identified a number of management principles. I would not recommend reading the book today, but I want to defend the book in this posting.


The book has been widely criticised. Some of the critique says more about the critic than the book (here), i.e. the critic has an axe to grind or generally like to kick on things that are already down. Collins does not have a PhD, but purports to do research. It is easy to kick him with an instrumental variable. Other critique is more principled. Here is Nobel Prize winner Kahneman on the book:

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. (Thinking, fast and slow)

This is a remarkably shallow statement. In fact there is no such thing as luck, because luck is really randomness. In the world we live in, there is no randomness. If we toss a coin, the outcome is not random. Theoretically, the result of the toss could be predicted if we had better measurement instruments. Before antibiotics, many people died of simple infections. That might have been seen as due to luck, but modern science shows us otherwise. Likewise, if Marriott Hotels came up with a new customer segmentation scheme or IBM with a new service offering, luck did not play a role. Management research is about identifying managerial practices that lead to good results. This is not an easy task, but one thing is certain, good results are not genuinely caused by luck or randomness. (I will have more to say about a company's control over its environment and luck in a later post.)

The companies in Collins's and Porras's book outperformed from 1926 to 1990 and that certainly was not due to luck. We could, and should, argue whether there was a causal relationship between the principles suggested by the authors and the companies' performance. For instance the authors argued for audacious goals, cult-like corporate culture and constant experimentation to be better. Such prescriptions should be discussed and researched. To be fair some of the issues brought up in the book has been researched, e.g. insider or outsider as new CEO.

So what happened to the 18 companies identified by the authors since 1990? I tracked their stock market performance from January 1, 1991 to March 31, 2013. (The analysis can me much more sophisticated, but this is just a blog post afterall.)

• Investing in a portfolio of the companies would have resulted in 8.2% average yearly return (excluding dividends). This should be compared to 7.2% yearly return for S&P 500 index. (I excluded Marriott which was not listed during the full period.) However, only 11 of the 17 companies (excluding Marriott) outperformed the S&P 500 index.
• All 18 companies are still listed on the stock market, which means that they have not been acquired. In contrast, only 4 of the 18 companies on the comparison list are still listed companies. Most have been acquired. Being acquired is neither good nor bad, but it seems reasonable to believe that the 18 companies are different somehow.
• Since only 4 of the 18 comparison companies are still listed companies it is difficult to do a pairwise comparison. Some of the comparisons have performed better (Texas Instruments, Colgate) and others have performed worse (General Motors).
• The 18 companies included some losers like Sony (down 15%), Citicorp (up 145%), and Ford (up 145%), but also spectacular winners like American Express, Johnson & Johnson, Nordstrom and P&G. The overall return of 7.5% is somewhat sensitive. Had for instance Citicorp been sold before 2008, its return would have been 2,600% instead of 145% (equivalent to a portfolio return of 9.3%).

The authors would probably argue that some of the losers had given up on the relevant management principles. Maybe this was the case, maybe not. Personally, I am convinced that there is no such thing as sustainable competitive advantage. If a company gets ten or twenty years of out-performance it should consider itself lucky (sic!). Still, beating index with 1.0% per year over 22 years might not sound like a lot, but very few professional fund managers could match such performance. Still the authors are far behind Warren Buffet's gold-standard, 5.2% over performance per year during the same time period.

What I personally find interesting is that the authors mostly focus on corporate strategy as opposed to business-unit strategy in the book. We know that business-unit effects explain something like ten times the amount of variance compared to corporate effects (i.e. Rumelt; McGahan & Porter). Still, the book is able to find differences on the corporate level.

The details in Collins's and Porras's book (and Collins's subsequent best-sellers) should be critiqued and scrutinised, but the book does not deserve to be lumped together with thousands of other management books that are truly useless. I'm talking about management books that are merely marketing material for a consulting practice, management books that turn one article into a book length treatment, or management books that are part of a serial author's later output. In contrast Collins & Porras is an attempt towards inductive theory building. Not a perfect attempt, but still a serious attempt. We need more authors like that. We do not need another book just ripping the standard HBS case studies (e.g. Inditex, Zara, Edward Jones).

Further reading: A thoughtful article about the book without an axe to grid is found here. An interesting article about the author's personality is found here.

If you want to read a book from the author I would recommend Good to Great. The second choice to read is his first book Built to Last. I don't think there is a need to read later books because we tend to get too much repetition.