Old Stars Don’t Lead New Bulls

I’ve never been a fan of “What’s hot, what’s not” lists. However CNN money has a very interesting article about how the Jack Welch business dogma may be working its way over to the “not” list.

Now I will admit that Welch has probably forgotten more about running a business just this week than I’ll ever know. But I have to wonder if we’re nearing a sort of Copernican revolution in business. Has much of what we’ve held to be true, including Welch, only seemed true because of our limited perceptions? The west was quite sure the earth was the center of the universe before Copernicus and Kepler provided the theory with Galileo and Brahe providing the evidence that the sun and not the earth is the true center (of course with even a little more perspective we “know” that the universe’s center is everywhere and its circumference nowhere, making all of these guys right but for varying wrong reasons–but that’s a topic for another blog).

Daniel Scocco at Innovation Zen posted something that got me thinking about what the CNN articles really means, which reminded me of this chart from Barry Ritholtz.

I’ve looked pretty carefully, and despite Welch’s book being widely read, none of the stars from 89-99 continued to shine between 02-06. As Ritholtz says in an earlier post, old stars don’t lead new bulls.

Furthermore as Kaplan and Foster point out in Creative Destruction (and as Scocco points out in his post, and as you can read in this pdf):

In 1987, Forbes republished its original “Forbes 100” list and compared it to its 1987 list of top companies. Of the original group, 61 had ceased to exist. Of the remaining thirty-nine, eighteen had managed to stay in the top one hundred… They survived. But they did not perform. As a group these great companies earned a long-term return for their investors during the 1917-1987 period 20% less than that of the overall market. Only two of them, General Electric and Eastman Kodak, performed better than the averages, and Kodak has since fallen on harder times… Similarly, of 500 companies in the original S&P 500 list in 1957, only 74 remained on the list in 1997 and of these only 12 outperformed the S&P 500.

With this sort of long-term failure rate something must be wrong in our theories of prudent business management as wrong as Ptolemy was about the sun going around the earth, and as wrong as the Catholic Church for adhering to such dogma for over a millennium despite centuries of glaringly obvious contradictory evidence. Scocco suggests what’s wrong: MBA programs are about administration, not innovation. And I’d go a step further by adding that administration and innovation are not just different but antithetical (like puzzle problems and wicked problems).