Great by Choice: Uncertainty, Chaos and Luck – Why Some Thrive Despite Them All

The authors set out to answer these questions in "Great by Choice," which builds on Jim Collins' best-selling book of a decade ago "Good to Great." Through rigorous research conducted over nine years, the authors analyze the behavior and strategies of top-performing companies compared with less successful companies operating in the same, rocky environment. They then pinpoint the qualities shared by the businesses that thrived, with some surprising results.

The book aims to help leaders build and maintain great organizations in challenging times, by learning from past successes and failures.

So who's this book for? Well, if you're a director or manager of a company – no matter its size – you'll be acutely aware of the challenges facing businesses today. "Great by Choice" spells out how companies in diverse industries – from computer software to insurance – thrived through years of uncertainty and even chaos.

But "Great by Choice" isn't only relevant to businesses. Its conclusions apply equally to schools, hospitals, churches, sports teams, non-profits and other organizations. Institutions of all types face budget restraints, cost increases, changing staffing needs and, at times, major crises. This book offers solid advice for weathering the storms.

It's worth noting that if you've read "Good to Great," you'll come across some of the same concepts in this book. The authors go to great lengths to stress "Great by Choice" is different because it takes into account operating environment and performance in uncertain times, rather than just focusing on what makes a company great. Nevertheless, there is an overlap of concepts and theories, which at times will seem repetitive if you've read "Good to Great."

At other times, though, this overlap is quite helpful, as the authors expand on their earlier conclusions, adding depth. And the fact they've done extensive research on similar themes prior to writing this book lends them greater authority.

Collins has authored or co-authored six books that together have sold more than 10 million copies worldwide, including "Good to Great," "Built to Last," and "How the Mighty Fall." He's also an experienced management consultant.

Morten Hansen is management professor at the University of California, Berkeley, and at INSEAD business school. He also works as a management consultant and wrote the book "Collaboration," which we've covered in a different Book Insight podcast.

So keep listening to hear why a steady plod is better than a series of sprints, how to turn paranoia into profit, and why it's best to fire a lot of bullets before launching cannonballs.

"Great by Choice" is founded on data and meticulous research. The authors sifted through a list of more than 20,000 companies before choosing seven high-performing case studies. They selected these companies based on three criteria: they had sustained spectacular results for a period of more than 15 years relative to the general stock market and their industry; they had achieved these results in a turbulent environment; and they had humble beginnings.

The authors call these businesses ten-ex companies or 10Xers, because each one beat its industry index by at least ten times. They include Southwest Airlines, Progressive Insurance, Intel and Microsoft.

Now you may be wondering why Microsoft is on the list, given Apple's inroad into its territory in recent years. The reason is that the authors studied historical eras of performance, beginning between 1965 and 1980 and ending in 2002. They admit that some of their chosen companies may have changed direction since they finished their research. But they believe this doesn't invalidate the conclusions they drew from the successful years. For its part, Microsoft performed 56 times better than the general stock market between 1975 and 2002.

Throughout the book, the authors support their theories with charts, tables and graphs. If you're concerned that this makes for a dry read, you needn't worry. "Great by Choice" is written in an engaging style. The authors have a knack for narrative and combine gripping anecdotes from outside the business world with relevant corporate stories.

One fascinating tale provides a common thread throughout the book: the race to the South Pole by two teams of adventurers in 1911. Norwegian Roald Amundsen and Englishman Robert Falcon Scott were of similar age and experience, and both led teams that aimed to be the first to reach the South Pole.

Amundsen's team got there first, and made it safely back to base. By contrast, Scott's five-strong team froze to death on the way home, after reaching the Pole second.

The authors use this story to illustrate many of the points they make about corporate success in a challenging environment: the benefits of near-exhaustive planning and preparation based on evidence, the need to respect one's own limitations, and the advantages of a steady, slow march rather than a fast sprint.

With this latter point in mind, let's now look at one of the high-performing companies, Southwest Airlines, and measure it against the success criterion the authors call the Twenty Mile March.

Imagine you and a friend are starting out on a 3000-mile hike across the United States, and you're doing it different ways. You choose to walk 20 miles a day, no matter what the conditions. You plow on in bad weather to meet your daily target, and when the conditions are good, you don't speed up.

Your friend, on the other hand, chooses to alter his mileage in line with the conditions. If it's too hot or too cold, he'll wait a day or two, and then make a dash for it when the weather is favorable, logging 40 or 50 miles a day. Those mammoth hikes tire him out. So when poor weather returns or he faces an uphill trek, he's depleted. You both reach the final destination, but you arrive first, while your friend struggles in behind you.

The authors say the same applies in business. Their research found that companies that kept a steady pace of growth within an upper and lower ceiling far outperformed those that expanded quickly when times were good and held back when the going got rough.

Southwest is a case in point. The Texas-based airline demanded a profit of itself every year, even in years when the entire industry lost money. While other carriers were shedding jobs or filing for bankruptcy, Southwest generated consistent profit – and did so every year for 30 consecutive years.

Even when business was looking good, it didn't take any chances with an ambitious expansion program. In fact, it didn't even expand outside Texas until nearly eight years after starting service and even then, it only took a tiny step to New Orleans.

Its following steps were equally modest. The authors say more than a hundred cities were clamoring for Southwest service in 1996 but the airline only opened in four. And it didn't start operating on the eastern coast of the United States until twenty-five years after it was founded.

The point is that Southwest was prepared to say "No" to growth even during boom times. The authors found that all their high-performing companies followed this strategy of steady and sometimes restrained growth.

Returning to the analogy of the South Pole expedition, Amundsen stuck firmly to a regime of consistent progress, plodding on in bad weather but never going too far even if conditions were good. In contrast, Scott would cover as much ground as physically possible on good days and wouldn't travel when the weather was poor. We really liked this South Pole analogy and how it threads through the book – it brings the authors' theories to life and drives their messages home.

The authors use another snow-packed analogy in their discussion of what they call "productive paranoia" – another quality found in leaders of high-performing companies. This time, it's the story of the climb to the summit of Everest by American filmmaker and mountaineer David Breashears, in 1996.

Breashears' goal was to make the first-ever IMAX movie from the highest point on earth. He did so, but he called off his first attempt because the conditions looked bad and the mountain seemed crowded. When the day came to set off, Breashears ran through a series of "what ifs" in his head, thinking about the worst-case scenarios, and decided to postpone his expedition.

On the same day, two experienced guides froze to death on Everest. They chose to ignore the inclement weather and took risks. Eight people died within 24 hours – the worst death toll in the mountain's history.

In business, decisions tend not to have such drastic consequences but, on occasion, they can mean life or death for a company or a product.

The leaders of the high-performing firms the authors studied all practiced productive paranoia. Microsoft founder Bill Gates is a good example. In 1991, a leaked memo written by Gates described a nightmare scenario for his company. He wrote about his worries around competition, potential legal cases, technology, intellectual property and the company's poor customer support service. It showed that Gates lived in fear. But he also took action around these fears. He built cash reserves, kept costs down, kept developing new technology, and hired the best people he could. His paranoia was productive.

In fact, the leaders of the high-performing companies in the book have three things in common: first, they built cash reserves to cushion themselves against unexpected events before they hit. Second, they took a conservative, risk-averse approach to everything, and any risks they took were carefully calculated. And third, they stayed hyper-vigilant to changing market or industry conditions and responded accordingly.

Defined in this way, productive paranoia sounds like common sense and you may be wondering what's so startling about these findings. Taking calculated risks, maintaining a healthy balance sheet, and adjusting strategy as market conditions change all make good business sense.

The authors show that there's more to it than that. They excel in backing up their theories with hard data and specific examples – and in providing comparative case studies that show why certain companies succeeded in challenging environments while others floundered. If it were merely common sense, all companies would thrive.

Let's now look at another strategy the high-performers had in common: they fired bullets first, and then cannonballs. In other words, they tested the market to figure out what worked best with a series of small bets and once they'd gathered empirical evidence, they made a bigger bet.

In this scenario, a bullet has three criteria: it's low cost, relative to the size of the company; it's low risk, meaning the consequences are minimal should it go wrong; and it's low distraction, that is it doesn't take over your whole business.

Biomet, a replacement joints manufacturer, is a case in point. The company used acquisitions to explore new markets and technologies but it did so conservatively. It took on little or no debt and made sure its balance sheet stayed healthy after any purchase, meaning its acquisitions were low risk, low cost, and didn't distract from its core operations.

The authors compare Biomet's approach to that of its competitor Kirschner. Kirschner made cannonball acquisitions. It took big risks, supported by large amounts of debt. Its purchases had to be successful or it would be in trouble. Unfortunately for the company, those bets didn't always turn out well, and in 1994 a debt-laden Kirschner was forced to sell out to Biomet.

Just like mountaineers use picks and axes to test the ice before walking on it, so successful businesses test the market first to avoid a fall.

In the last chapter of the book, the authors pose a fascinating question: what's luck got to do with success and failure? They ask whether the "ten-ex" companies were simply lucky and their comparison cases unlucky. They put forward some interesting theories and conclude that it's not luck itself that matters, but what you do with the luck you're dealt. In other words, it's all about the return you get on luck.

They show how some high-performing companies even got a good return on bad luck. There's a good lesson for us all here, in business and in life: there'll always be circumstances that are out of our control – what's important is how we respond to them.

"Great by Choice," then, has some great tips for anyone trying to build and maintain a successful business in difficult times. And despite being based on rigorous research, it's also an excellent read.

On the downside, there's overlap in the content of some chapters, and the qualities for success that the authors highlight are quite generic: consistency, preparedness, and discipline, for example.

But at least this keeps the messages simple and easily applicable to many situations. There's no doubt that this book offers valuable lessons for any organization operating in a tough climate: innovation must go hand-in-hand with discipline and self-restraint, fast action isn't the way to success, you don't need to change as much as you think, and paranoia can be productive.

"Great by Choice," by Jim Collins and Morten T. Hansen is published by Random House Business Books.

That's the end of this episode of Book Insights. Click here to buy the book from Amazon. Thanks for listening.