Babcock professors scrutinize methodology in best-selling business book

Recently published research by two professors at the Wake Forest University Babcock Graduate School of Management takes issue with methodology and conclusions promoted by Jim Collins in his best-selling book, “From Good to Great.”

In the article, published Nov. 1 in The Academy of Management Perspectives, authors Bruce G. Resnick and Timothy L. Smunt say Collins failed to find 11 great companies as “defined by the set of parameters he claimed are associated with greatness, or, at the least, that greatness is not sustainable.”

Resnick is Joseph M. Bryan Jr. Professor of Banking and Finance, and Smunt is Professor of Management and Sisel Fellow in Operations. Resnick is the co-author of the book “International Financial Management.” Smunt’s expertise includes supply-chain management, electronic commerce, technology management, business process management and international operations.

Resnick said, “I was first introduced to ‘Good to Great’ when serving as a member of a strategic planning task force headed by Tim. Upon reading the book I became interested in Collins’ study methodology. Tim and I conferred and decided that detailed investigation was in order — the result is our article. In many business schools it is doubtful if a finance researcher would ever become exposed to a management book like ‘Good to Great.’ At Babcock, however, our integrated curriculum easily lends itself to professors from different disciplines, such as Tim and me, collaborating on an interesting research project.”

In Collins’ book, which sold more than 4.5 million copies, the author used as examples 11 companies that, as the title suggests, went from good to great. Collins’ book details management practices, based on five basic principles, which lead companies to transcend conventional thinking and outperform their competitors in the long term.
Smunt said he first read “Good to Great” as an American Council on Education (ACE) Fellow studying academic leadership at the University of Chicago.

“The lessons and strategic planning framework presented by Collins in this book were clear and powerful, and I decided to use them to structure our strategy discussions at Babcock,” Smunt said. “The book definitely had a positive impact on our planning process, but a number of strategic planning task force members, including me, wondered if the ‘great’ companies identified by Collins would remain ‘great’ and if it is really possible to identify the factors that move an organization from good to great as Collins proposed. Bruce suggested that we work together on a research project that addressed these concerns. Indeed, there are few business schools in the world where you would find a finance professor working with an operations professor testing the hypotheses of a strategy book. Babcock is one of them.”

Resnick and Smunt say that, according to their analysis, Collins’ study methodology suffered from three major problems – data mining with respect to the starting month of the company transformation period, the failure to test for the sustainability of greatness over subsequent time periods, and the failure to use modern portfolio theory that accounts for the costs of risks and then whether the performance differences are statistically significant.

Because Collins’ book is required reading in many top business schools, and because of the prevalence of Collins’ idea in “classrooms and boardrooms,” Resnick and Smunt wrote of the need to “scrutinize the methodology he used to identify his list of great companies to determine if weaknesses exist that may have bearing on his findings.”
Resnick and Smunt ask: Was Collins truly able to identify 11 great companies or was his list a result of applying an arbitrary screening filter to the list of Fortune 500 companies?

The authors did a financial analysis on each of the 11 companies over subsequent periods, finding, their article said, that “only one of the 11 companies continues to exhibit superior stock market performance according to Collins’ measure, and that none do so when measured according to a metric based on modern portfolio theory.”

Resnick said he has a “high regard for Mr. Collins and his management ideas. As we say in the article, his simple but powerful framework is certainly compelling. My only qualm is that I doubt you can get to these conclusions through financial analysis. I have spent my career performing empirical analyses of financial data, and after 30 years I believe I have a pretty clear understanding of what market data can tell you and what they cannot.”