The leadership expert sits down with Inc. editor-at-large Bo Burlingham to talk about what makes great companies tick.
Over the course of nearly 25 years and four best-selling books, Jim Collins has set out to systematically unlock the mystery of what makes great companies tick. In his most recent book, Great by Choice, Collins and his co-author, Morten T. Hansen, examine companies that have turned in exceptional performance—10 times the industry average—despite operating in turbulent environments marked by constant surprises. He says he wrote the book with entrepreneurs in mind—"to help them navigate from small to great, especially when they feel like small, vulnerable specks out there in a tumultuous world." Inc. editor-at-large caught up with Collins at his office in Boulder, Colorado.
As much as you have written about what makes great companies tick, I don't think I have ever actually heard your definition of a great company. You must have one.
Yes, I do. In defining greatness, I think it's important to differentiate between inputs and outputs. People sometimes confuse the two. There are a lot of important inputs, but greatness is in the outputs. For example, I don't think a company is necessarily great because it has a great culture. Culture is an input. Or what about a company with great systems? Also an input.
So what are the outputs? I would say there are three. The first is truly superior performance in the arena in which you operate. In sports, your team has to win championships, or it really can't be called a great team. In business, the measure is financial—return on invested capital. I think that, to be considered great, a company must have sustained returns on invested capital substantially in excess of other companies in its industry. But that's not enough, in my view. To be great, a company also has to make a distinctive impact. I define that by a test: If your company disappeared, would it leave a gaping hole that could not easily be filled by any other enterprise on the planet?
If your company disappeared, would it leave a gaping hole that could not easily be filled by any other enterprise on the planet?
Now, that doesn't mean the company has to be big. A restaurant could have such great relationships with customers—such a great community presence and such great food—that, if it went away, people would feel a gaping hole, and no one could easily come in and fill it.
You are talking about George Bailey, the banker in It's a Wonderful Life.
Exactly. The Wonderful Life factor. People would miss the company if it went away. It could be something unique or different or innovative, or the distinctiveness could be in the execution—you do something so well that you're irreplaceable. If you can't answer what would be missed, then you haven't yet made a distinctive impact.
The third factor is endurance. A truly great enterprise has the capacity to last beyond any product cycle, any founder, any individual leader, and still maintain superior performance and distinctive impact.
Those are, in my view, the three outputs that define greatness: superior performance, a distinctive impact, and endurance. If you fail in any one of those three, you may have done fine. You may have built a good business that's made a real contribution. But I would not use the word great to describe it.
How important is it that we have great companies as you have just defined them? Given that there are relatively few of them, how big an impact can they have?
I think that, as role models, they're very important. Role models are important for all of us. In the end, Bill Hewlett and David Packard may have had their greatest impact in the incredible role-modeling they did for an entire generation of entrepreneurs. People were tremendously inspired when they looked at Hewlett-Packard and realized the kind of company they could build if they put their minds to it. These companies epitomize what I believe is the distinctive American strength. We tend to believe that our ultimate trump card is innovation. But go back to Henry Ford, and then think about Moore's law and about Bill Gates and Microsoft. Maybe the real American strength is our ability to scale innovation. How we scale it varies, depending on the technologies, the times, the way the world's unfolding. But we didn't win the Second World War because we invented tanks. It was our ability to scale production. Maybe job creation is also related to our scaling ability. The great companies I've written about are classic examples of how we've done it.
The Internet has been an integral part of doing business for years now. What do you think has changed the most?
I'll start with an observation about social systems that Peter Drucker made 40 years ago. I think it's one of the most underappreciated insights of the 20th century. The alternative to tyranny, he said, isn't democracy. It's management—because well-managed organizations are what allow a free society to work. They are the only means by which a free society can compete with totalitarian dictatorships, which are very effective.
So what ties that into the changes happening today? It seems to me that this era is marked by something having to do with connectivity and networks and the ability to operate and lead within them. The Internet is all about networks and connectivity across networks. So one possibility is that there's a shift to a new fundamental building of society, namely, the network. We may be moving to a world of networks well led, as opposed to organizations well managed. You can't really manage a network, but you can help lead within a network. In any case, networks are very alive and real and are becoming building blocks.
