SELECTION PROCESS
FOR GOOD- TO- GREAT COMPANIES Research-team member Peter Van was instrumental in the creation of the selection criteria and in the "death march of financial analysis" required to use the criteria to find the good-to-great companies.
C rite r i a for Selection as a Good- to- Great C om pan y 1. The company shows a pattern of "good" performance punctuated
by a transition point, after which it shifts to "great" performance. We define "great" performance as a cumulative total stock return of at least
3 times the general market for the period from the point of transition through fifteen years T
+
15). We define "good" performance as a cumulative total stock return no better than 1.25 times the general stock market for the fifteen years prior to the point of transition. Additionally, the ratio of the cumulative stock return for the fifteen years after the point of transition divided the ratio of the cumulative stock return for the fifteen years prior to the point
of transition must exceed 2. The good-to-great performance pattern must be a company shift, not an industry event. In other words, the company must demonstrate the pattern not only relative to the market, but also relative to its industry.
3.
At the transition point, the company must have been an established, ongoing company, not a startup. This was defined as having operations for at least twenty-five years prior to the transition point. Additionally, it had to have been publicly traded with stock return data available at least ten years prior to the transition point.
4. The transition point had to occur before 1985 so that we would have enough data to assess the sustainability of the transition. Good-to-great transitions that occurred after 1985 might have been
good-to-great shifts however, by the time we completed our research, we would be unable to calculate their fifteen-year ratio of cumulative returns to the general market.
5 . Whatever the year of transition, the company still had to be a significant,
ongoing, standalone company at the time of selection into the next stage of the research study. To satisfy this criterion, the company had to appear in the 1995 Fortune 500 rankings, published in 1996.
220 Appendix
6. Finally,
at the time of selection, the company should still show an upward trend. For any company where T
+
15 falls before 1996, the slope of cumulative stock returns relative to the market from the initial point of transition to 1996 should equal or exceed the slope of 3/15 required to satisfy criterion for the T
+
15 phase.
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