The year was 1988. Jim Collins, a young lecturer at Stanford University, glanced at the syllabus for the course on small businesses. The syllabus opened with the words, “This will be a course on how to manage the challenges of a small enterprise.” On a whim, Collins deleted that sentence and replaced it with, “This will be a course on how to turn a small business into an enduring, great company.”
“I looked at that and I thought, wow! I better learn something about that,” he recalls.
Twenty-five years later, after researching 6,500 years of business history, Collins is considered a groundbreaker thanks to his research into what makes companies great. His books “Built to Last” (1994), “Good to Great” (2001), “How the Mighty Fall” (2009) and “Great by Choice” (2011) offer in-depth answers to that question, and pose repeated challenges to corporate theory. In his first interview with an Israeli news outlet, Collins discusses some of the important principles in his work and their implications for the local market.
What is a great company? What’s the definition?
“You’re really not a great company unless you’ve achieved three outcomes. One is superior performance, and in business that means superior returns on invested capital,” says Collins. “If you don’t achieve sustained, outstanding financial results, you’re not a great company, period.
“The second requirement is that your company make a distinctive impact. I like to think of that as asking the question, ‘If we went away, if our company disappeared, who would miss us and why?’ If your company could go away and no one would really miss you because what you do could easily be replaced by somebody else, then you are not a great company.”
As for why a company could be missed, he notes, “that could be because you do something really unique but it also could be because you do something fairly common but execute it so well that no one else can do it as well as you.”
The third outcome is endurance, he says. “There’s a big difference between a company that has a great product, or having a particularly great market or riding a particular economic cycle or even having a great leader. None of these demonstrate you’re a great company unless you can transcend all of these.”
Why is it important that we have great companies?
“I do see this as an if-then clause,” says Collins. “If you’re inspired by the idea of building a great company, if you’re inspired by building something that could outlast you, if you’re inspired by something that could make a much bigger impact on the world and generate many more jobs and create much more long-term innovation than simply having a successful start-up, or making some money and cashing out, or having a single product ... if you want to build a company that has a sort of enduring legacy ... if you’re inspired by that, then what we’ve found might be useful. If you’re not inspired by that, that’s okay. I’m not saying you need to do that,” he says.
Is “built to last” the same as great?
“No. Built to last is a great title,” he says, noting that his publisher came up with it. “But it’s really not about just thinking what will last. There are a lot of things that are mediocre that last. It’s about making something truly worth lasting and something that is extremely excellent for a long period of time.”
What kinds of companies should not be built to last?
“There are some creations that make a genuine contribution to the economy and society where the company itself is like a disposable injection device, to put that concept, that idea, that product into the world,” he says, noting that this is particularly applicable to medical inventions such as drug breakthroughs. “If you create a product, [with the goal of getting it into the world] that’s a perfectly legitimate form of making a tremendous contribution. That’s a very different motivation,” he says.
Another kind of company that is not built to last is one whose founder is primarily motivated by making a profit, he notes.
“The real question is why you are doing this,” he says. “If it’s just to start something, to flip it, so you can make something and go off and retire, and it doesn’t matter if you’ve actually contributed something, that’s a very different kind of built not to last.”
A matter of scale
How important is it for a country or nation like Israel to have many built-to-last companies? Do they make a country stronger?
“Let me come at that from two angles,” he says. The first one is the flywheel effect and its impact on growth over time.
“If you take [medical technology company] Stryker, which is one of the companies in “Great by Choice,” it took Stryker nearly four decades to create its first 1,000 jobs. By the early 2000s, it was creating that many in a single year,” he says. “If you look at Intel, which is I think one of the companies to really look at ... it added four times more jobs in the third decade of its life than in its first and second decades,” he notes.
“It’s when you’re able to build a company to scale ... then over time you’re going to have tremendous growth in both economic wealth and employment, because you’re adding so many more people,” he says. “A 10% return on a big number is a big number, whereas a 100% return on a tiny number is a tiny number.”
The second aspect is the ability to scale innovation, he says.
“We keep thinking the great American strength is our innovation and innovation and innovation, and I’ve come to a different conclusion,” he explains. “Perhaps the great American strength is the ability to scale innovation. If you look at Intel, it’s a scaling story” over the course of decades, he says.
“If all they had done was come out with the first 1103 memory chip and stop, their impact economically, in job growth, technologically, transforming society ... would have been left off the table. That capacity to blend a culture of discipline with your knowledge and to scale ... is actually the true economic story in America. It’s innovation, blended with discipline, to create a scaling of innovation, and that’s where we have been at our best.
“If we believe that American economic strength has been something that serves us well and we’ve done it well, then I would say there’s something to learn from that,” he concludes.
Learn from Intel
There’s no question that Israel has plenty of engineering and innovation but the skills necessary to scale it are lacking.
“That’s a tremendous opportunity for Israel. Because if you’re able to add discipline to the innovation, you could see an inflection point in tremendous economic power,” he says. He cites another story from “Great by Choice,” about Intel’s beginnings. “Why did people pick Intel? The tagline was not ‘Intel innovates’ − it was ‘Intel delivers.’
“Think about that. When IBM had to pick a microprocessor for the IBM PC and it had the choice between a more innovative chip, and a chip that’s innovative enough but you know that company has the discipline and the manufacturing and the capacity to scale so that it will have the chips for you when you need them at the capacity that you need and the time that you need, on which company are you going to bet the IBM PC?”
He encourages Israel’s technology entrepreneurs to learn from Intel’s story.
“Intel’s discipline combined with creativity and done over time − this is where the great x-factor came, and as a result, that is where the great opportunity is,” he says. “I believe it can be done − if Israel can add that to what you already have, that bubbling cauldron of tremendous innovation, the accelerator effect could be truly dramatic.”
In 2000, at the peak of the dot-com bubble, you wrote an article for Fast Company stating that built to flip is dangerous to the social fabric of a nation. You wrote that if this were to become the dominant entrepreneurial model, the result would be a rise in instability because an almost inevitable outcome would be a decoupling of wealth from contribution. Part of the discussion in Israel is that if the built-to-flip approach were to become pervasive, it would create trouble for the economy, job growth, the gap between rich and poor.
“I still stand by what’s in that article,” he says. “The notion that there’s a beauty in capitalism when it’s at its best, which is when the creation of economic wealth goes hand-in-hand with contribution and that profitability is a reflection of having created something that is of value and there’s no question that the greatest entrepreneurs that we study were interested in making an impact,” he says.
“When [capitalism] works at its best, there is a relationship between contribution and wealth creation and when people see that and they believe that connection is there, there is very little begrudging − you applaud someone who creates value because that value reflects the contribution,” he says. “If people feel though that there’s only wealth transfer, meaning people basically transferring wealth to themselves without adding any value, that’s a very different question.”
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