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Chicago Booth Professor: why this best selling business book was wrong

Strategy Strategy
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Thomas Gerke

It’s become too easy to get hung up on the personality of CEOs. Fascinating as it may be, when it comes to business, an analysis of strategy is far more powerful.

James Schrager is a Clinical Professor of Entrepreneurship and Strategy at the University of Chicago Booth School of Business, where he teaches a popular course on New Venture Strategy. He also advises firms on matters of strategy.

There is nothing much more enjoyable than reading about companies that have done well. It gives us all a warm glow, a hopeful outlook, no matter how dreary the evening news may be.

Jim Collins’ masterwork, “Good to Great” chronicles the ups and downs of 11 companies that completed dramatic turnarounds, with each firm’s success lasting a minimum of 15 years.

Yet the best selling business book of all time is wrong. How do I know that? The author told me so in his follow-up book, “How the Mighty Fall,” acknowledging the failure of “Good to Great.” The data show two of his eleven “outperformers” later got into big trouble, and if we were counting–and we are–these constitute about 18% of his sample, a rather large proportion. A paper published in “The Journal of Private Equity” five years after “GtG” was published reported the following performance of his eleven companies: five up, five down, one the same. This outcome mimics a performance roughly equal to drawing company names out of a hat.

How can this be?

Collins finds CEOs in his firms have distinctively similar personalities. Shy, reticent, desirous of remaining out of the spotlight, quiet, perhaps even reclusive–but driven–are the secrets of executive success in his view.

Take nothing away from the companies he studies. Each performed brilliantly over the periods analyzed, and credit Mr. Collins for matching each firm against a panel of peers. The critical question is: Why did these companies succeed? Was it all about the personality of the CEO? Will the driven meek really inherit the business world?

If so, then what do we make of the fantastic success stories for CEOs who don’t fit the bill? What about Bill Gates, Sam Walton, Herb Kelleher, Warren Buffett, Soichiro Honda, each of whom built fantastic wealth–from scratch–and carved for themselves a rather large and public role, front and center? And what to make of soft-spoken Ken Lay, former CEO of Enron, who seems almost as the leader from central casting, were Jim Collins producing the show?

While his detailed personality profiles can be assailed simply because they are drawn predominately from media sources, there is a far stronger case to be made against the cult of CEO personality Collins develops. Fascinating as it is to study personal styles, far more powerful is an analysis of strategy.

Strategy is how your company differs from your competitors. It’s what you do to make your company effective, the grand plan, a special approach, how your firm chooses to fight.

Not only are strategy observations more objective than personality studies (How much can a reporter learn about a CEO’s personality after a few interviews?), but strategy adds a vital element that Mr. Collins overlooks: what competitors were doing while his leaders under study were quietly minding their business.

To think about a unified theory to explain why CEOs of all different personalities can excel–or fail–we start by reviewing strategy for a few of the companies Mr. Collins selected. We will ignore the personality of the CEO for this task. Instead we’ll concentrate on what we can observe the company did, always in comparison to its peers.

Let’s start with one of the most studied companies in business schools, Nucor Steel. Mr. Collins tells us wonderful anecdotes about how Nucor worked hard to remove the executive perks that divided top managers from factory workers. This is good stuff, no one can argue with that.

The story is that Nucor used small mills and advanced technology to make an end-run around the bigger steel mills stuck with giant investments in large scale facilities. Still good, so far.

Missing from Collins’ analysis is that the largest single cost difference between Nucor and US Steel was not technology, but retiree pension and healthcare expenses.

Nucor had none for years and still has very little. US Steel has loads. The managers at Nucor had the insight–and a brilliant strategic insight it was–to realize they could be low cost producers of steel by starting with no retiree pension and healthcare costs.

Beyond labor costs, Collins recounts that Nucor fired its smaller mills with scrap, rather than the conventional process which uses iron ore and coking coal. The use of scrap became another part of Nucor’s lower-cost formula. But when commodity prices started to rise, that formula changed.

Today, humbled a bit, Nucor is planning on building large-scale, capital intensive, integrated mills. Their scrap-based cost of raw inputs was good, until it wasn’t any good any more. All the personality stuff is great, but it’s the strategy that drives the business.

Walgreen’s pursued a strategy centered around location. Collins properly notes that Walgreen’s sought the very best sites. But he doesn’t acknowledge that competitors were unwilling to pay the top dollar that superb locations warrant, or build fresh facilities and then be forced to maximize return on the expensive real estate. This was a big investment, a sizable gamble. Since no other company took this strategy and Walgreen’s executed well, it all worked.

The key insight for Charles Walgreen was to pursue non-pharma products with quick inventory turns and margins which were not being pressured by health-care insurers. It was tough to get “pharmacies” to become deeply involved with “merchandising,” but this strategy allowed Walgreen’s to pay for its superb locations against a backdrop of declining pharma margins. The magic was that anyone could offer prescriptions at a lower price but once a customer was in the store, no one else could sell them something extra they hadn’t planned on buying.

This approach also helped everyone in the organization understand the power of location as a driver of stores sales. Walgreen’s was never afraid to move to a better location, even if only several blocks away, because they had a plan to make it pay off.

Did the personality of the CEO matter? We can’t be sure. But did the strategic position make a difference? Sure seems so. Is effective strategy the direct outcome of the CEO’s personality? An unanswerable and perhaps irrelevant question.


Sam Walton is not profiled in the book, because he started a company from scratch rather than turning one around. However, he produced far more shareholder wealth than any of the others. His personality? All business, to be sure. But self-effacing, shy, happy to stay in the back room while others took credit? Don’t think so. How did he do it?


Sam developed a rural distribution strategy to lower freight costs and allow large stores to flourish in small towns. As local merchants closed their noncompetitive stores, he quietly developed monopoly pricing power. His secret? Nothing to do with personality, everything to do with a brilliant strategy, carefully implemented.


When observing strategy, we see nothing about the management style of the executives. Instead, through direct observation, we begin to perceive the decisions behind these great successes. Rather than guess about personality traits–assuming they can be accurately measured at all–an analysis of strategy requires that we observe how the company has charted its course in relationship to its competitors. Instead of guessing about how the CEO spoke to employees, we wonder, what did they do? What can we see? What was the outcome?

Only through strategy can we reconcile the fantastic success of Sam Walton, who had the personality to do the hula on Wall Street, with the self-effacing but utterly effective Charles R. Walgreen III, who completed a dramatic turn-around for the drug store chain. We can also better understand the calamity that befell the calm, soft-spoken, serious, Ken Lay of Enron.

It is all about people, but not their personalities. Rather, it’s about the strategic decisions which drove the progress of their companies.

So be hopeful: even if your boss is a loud mouth consistently claiming center stage, he (or she) and your organization can still be quite successful.