Studying Great Industrial Companies (Book Review: Lessons from the Titans)
“The truth is that their secrets are hardly secrets at all—continuous improvement, rigorous benchmarking, disciplined investment, principled leadership, solid business systems.”
If you enjoy learning about business models and get a thrill out of the rise and fall of legendary companies, Lessons from the Titans might be for you. The book is a collection of case studies on industrial companies, from conglomerates like GE to compounders like Transdigm and Danaher, written by a group of equity research analysts who covered the companies for decades. The book’s strength is its mix of analysis and anecdotes from countless site visits and management meetings.
I was at first reminded of the book The Outsiders, but Lessons from the Titans follows a different path. It deals with both successes and failures and the lessons aren’t always straightforward. Much emphasis is placed on a company’s culture, systems, leadership, and incentives. Some chapters simply illustrate the difficulty of forecasting market cycles and evaluating long-term investments in R&D. Rather than presenting a clean formula for success, they call for humility. M&A is discussed and, in some cases, a key factor for success. But capital allocation was not the book’s focus.
“We believe that greater focus should be applied to the basic old-fashioned principles that we observe in the best-run companies.”
I enjoyed learning about these companies through the lens of experienced analysts and came away with two main takeaways. First, there are key lessons relating to culture, systems, and leadership that apply broadly in industrials and other industries. Second, it’s valuable to train one’s pattern recognition by breaking down the playbooks that created “compounder” companies like Danaher, TransDigm, or Roper. Their successes were built on a combination of identifying a unique market opportunity and applying the right processes and incentives over long periods of time.
My only quibble is that the book would have benefited from more detailed financial information and annotated stock charts linking events and decisions (or even highlights from earnings calls).
I’m going to outline some of my favorite stories and share a few takeaways. I took a lot of notes and this is not meant to be comprehensive. If you find these highlights interesting, I’d encourage you to check out the book. I also had the chance to interview one of the book’s authors last week and look forward to sharing that conversation with you soon.😊
Disclaimer: I write solely for entertainment purposes. This is not a recommendation to buy, hold or sell any securities or other financial instruments and does not constitute an investment recommendation or investment advice. Always do your own research and consult your investment advisor. I may at any time own or transact in any of the securities mentioned.
The book is anchored by the rise, really the resurgence, of General Electric under Jack Welch (twitter notes). Welch created a demanding culture: He let go of 100,000 employees in his first five years and turned the executive suite into a shark tank. He drove factory-floor excellence and bet on key long-term growth areas such as healthcare and aerospace. He dazzled with brilliant deals such as taking over RCA, selling its consumer electronics business and using the proceeds to buy into medical devices while retaining the NBC TV network “practically for free.” Under his tenure GE became the world’s most valuable company.
However, he also created a culture of arrogance and started smoothing earnings in tune with Wall Street’s expectations. Growth of GE Capital became unrestrained. Under his successor Jeffrey Immelt the company came unglued in dramatic fashion. Complexity became overwhelming, quality declined, one bad acquisition followed another. The company focused on managing perception by managing earnings and pressuring analysts and journalists with negative opinions. It’s a story rich in anecdotes (the author claims that GE tried to get him fired when he was an analyst) and a cautionary tale that great companies can implode in mismanagement.