In the book ‘Great by Choice’ co-authored by Jim Collins & Morten T. Hansen, the two consider the factors that cause some companies to significantly outperform others in economically turbulent times.
In their analysis, they tend to discount the role of luck in this success concluding that it is the decisions taken by a company’s leadership which determine whether a company performs well during difficult times (Holtz 2008).
The book’s ideas are based on a controlled research covering seven small firms operating in highly unstable environments. Some of the companies include Microsoft and Intel and they are all based in the U.S.
Concentration of the sample population was due to limitation on the availability of share data of other eligible companies. The research used a historical approach to collect data.
The research found that the seven companies that had been selected outperformed their industries’ averages consistently by a rate of more than ten percent (Holtz 2008).
The findings showed that the success of companies during economically chaotic times is not a matter of luck but is rather caused by three distinctive qualities of a company’s leadership. These factors are: tenacious discipline, making use of empirical data, and being constructively paranoid.
Thus, the basic argument of the book is that businesses have the power to determine their own destiny in turbulent times or environments.
Discipline
Discipline is a vital factor in determining success not only in business but also in life in general. As a matter of fact, the main factor that differentiates successful entrepreneurs from unsuccessful ones or non-entrepreneurs is self-discipline.
Self-discipline in the broader context refers to the ability of a person to do something even when he or she does not feel like doing that thing. As described in theory X and theory Y, humans are generally lazy and they tend to avoid work whenever possible.
Thus, indiscipline is human nature but one which can be controlled. Self-discipline results from disciplining one’s mind to follow plans as scheduled.
Just like self-discipline is required for personal success, collective discipline of organizational members is necessary to achieve organizational success (Kalbfleisch 2007).
As Collins and Hansen found out in their research, those companies which sustain success in tough times are those ones that pursue measured growth and which set both threshold and upper-limit performance standards.
These companies commit themselves to reach the lower limit irrespective of the prevailing economic conditions. On the other hand, the upper limit should be reached during good times. The upper-limit is meant to ensure that the company does not overstretch its resources during good times only to suffer from resource shortage in lean times.
It also helps the company to maintain a stable performance making it more reliable in the eyes of investors in spite volatility in its operating environment. In contrast, those companies that fail to perform well during difficult economic conditions are characterized by lack of commitment to plans and they register high performance only during good economic times.
They lack measured growth and are susceptible to over-utilizing their resources during favorable economic times only to find that they have no buffers when the economic environment turns bleak.
These companies are characterized by highly fluctuating performance ranging from dramatic earnings when the environment is good, to resounding losses in unfavorable environment.
Thus, a key factor differentiating consistently high performance companies from others is steadfast discipline to plans and having lower-limit goals that must be achieved under any economic environment, plus an upper threshold for good economic times to avoid stretching the company resources.
Essentially, organizational discipline calls for consistency in following plans and accomplishing the set objectives and goals.
Using Empirical Data/Knowledge
Gathering existing knowledge on a subject is one of the key ways of reducing uncertainty. Using empirical data or knowledge entails finding out what is known about a subject and then using this information creatively to innovate.
In a company context, this innovation could take various forms such as developing a new improved product, making organizational processes leaner and more efficient, establishing a new organizational culture, or even introducing a break-through technology (Venables 2010).
Gathering empirical information may take either analytical or experiential approach. An analytical approach involves gathering the existing data on a topic and then analyzing it to see if one can come up with new insights into the topic or discover something new.
This approach is usually used to generate new information from the existing data. For example, a company in the foods and beverage industry may notice that its sales go down substantially during a certain period of the month.
As a result of this discovery, the company undertakes an analysis of its clients’ information to determine the reason behind the dip in sales during the particular period. In this case, the company will be using an analytical approach to obtain empirical information.
The experiential approach, on the other hand, is not aimed at generating new information but rather obtaining what is known about a topic. In business, for instance, asking consumers to describe their experience with a given product could be regarded as an experiential approach to gathering empirical data.
Companies that sustain high performance employ both approaches in obtaining empirical information. Such information is useful for avoiding duplication of efforts that have been exercised by other businesses, providing a basis for decision-making, generating insights, avoiding risks such as financial risks, etc.
Overall, empirical information helps to reduce uncertainty giving confidence to management in the decision-making process.
Constructive Paranoia
Fear is destructive in most situations. However, constant fear regarding what may go wrong can also be constructive and much so in business situation (Taylor 2008). As a matter of fact, any success process, business included, has inherent in it the elements of its destruction.
The only way to avoid this destruction is to harness the power of fear by converting it into more constructive energy. This is, in turn, done by creating buffers to take care of any contingencies that could materialize and impact negatively on the business.
Perennially successful companies are often those that are constantly on the lookout for factors that imperil their business, and those that are flexible enough to adjust in order to adapt to the changing environment.
Such flexibility is aided partly by making margin of safety provisions; for instance, maintaining excess cash reserves for rainy days when the company becomes a victim of a liquidity crunch.
Companies whose leaders feel complacent and unthreatened are very susceptible to unstable environment and they are unlikely to perform well consistently. Therefore, it pays dividends to be constructively fearful at least in a business situation.
Conclusion
In the book ‘Great by Choice’, Jim Collins & Morten T. Hansen argue that the ability of some companies to defy tough economic conditions is not a matter of luck but rather, its leaders share three essential characteristics namely; unrelenting discipline, reliance on empirical data, and being constantly paranoid.
According to the two authors, these are the factors that set continuously successful companies apart from the less successful ones.
Works Cited
Holtz, Evans. “Sticking it Out: Entrepreneurial Survival and Liquidity Constraints.” Journal of Political Economy. 102.1 (2008): 53-75. Print
Kalbfleisch, Prentice. The Statistical Analysis of Failure Time Data, New York: John Wiley and Sons Inc., 2007. Print
Taylor, Mishra. “Survival of the Fittest.” Economic Journal 109.454 (2008): 140-55. Print
Venables, Warner. Modern Applied Statistics, New York: Springer-Verlag, 2010. Print