Hankins: Good to Great to Bust? Assessing Collins’ 11 ‘Great’ Firms During Recession

Good to Great?

Good to Great?

(Update: The Motley Fool and BloggingStocks weigh in on Hankins’ “Good to Great” assessment.)

About seven years ago, the business book of the moment was Jim Collins“Good to Great,” which asked, “Can a good company become a great company and if so, how?”

In the book, Collins studied 11 firms, including including Walgreen’s, FedEx, Philip Morris, and, er, Fannie Mae and, er, Circuit City. Those companies, Collins said, had found ways to make the transition from merely “good” companies to “great” ones, and every company could learn from the decisions they made.

This week, Arkansas Business Publisher Jeff Hankins, a huge fan of the book those many years ago (believe me, he made all of us read it), takes a look back at Collins’ studies and, specifically, those 11 companies, to see how they’ve performed in the economic downturn.

Of course, we know that two companies, Fannie Mae and Circuit City, haven’t negotiated the choppy waters of recession very well. From Hankins’ column:

Circuit City, the big-box electronics retailer, was struggling a year ago with its stock down to $4.75. It finally filed for bankruptcy and is liquidating its stores. When asked to rank the top five factors for his company’s success back in 2001, Collins’ team was surprised to hear CEO Alan Wurtzel list “luck” first. (Note to self: Don’t bank on luck to get you through a recession.)

Fannie Mae is at the center of the housing crisis and would have fallen apart without a government bailout last year. The stock closed last week at 59 cents after reaching a 52-week high of $35.50.

Reading again about Fannie Mae is painful. The company’s hedgehog concept – a central principle in the book that focuses on what companies determine they can be the best in the world at – was that it could become “the best capital markets player in anything that pertains to mortgages.” The book added that Fannie Mae thought it “could develop a unique capability to assess risk in mortgage-related securities.” By 2004, the government determined Fannie Mae had been manipulating its accounting to inflate profits, and by early 2007, it became clear the company had absolutely no ability to assess risk as its acquisition of bad mortgage loans proved to be a fatal strategy.

In all, the 11 companies declared “great” in 2001 have performed slightly worse than the S&P 500 during the past year. You can see a PDF chart on their performance here.

To read Hankins’ complete column, click here.

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