ColHowt 09-09-133

How the Mighty Fall

And Why Some Companies Never Give In


Jim Collins

HarperCollins, 2009, 221 pp., ISBN 978-0-97-732641-9



Jim Collins, student of companies, is the noted author of the highly regarded leadership books Built to Last and Good to Great.  "Decline, it turns out, is largely self-inflicted, and the path to recovery lies largely within our own hands."  (back flyleaf)


For effective teaching, "don't try to come up with the right answers; focus on coming up with good questions." (2) 


"I've come to see institutional decline like a staged disease: harder to detect but easier to cure in the early stages, easier to detect but harder to cure in the later stages.  An institution can look strong on the outside but already be sick on the inside, dangerously on the cusp of a precipitous fall." (5)


"Every institution is vulnerable, no matter how great … Anyone can fall and most eventually do." (8) 


"Clearly, the solution to decline lies not in the simple bromide 'Change or Die'; Bank of America changed a lot, and nearly killed itself in the process.  We need a more nuanced understanding of how decline happens…" (22) 


This study is done by comparing pairs of companies that succeeded and failed within the same businesses and the same time frame.  


Five Stages of Decline:

Stage 1:  Hubris Born of Success

"Great enterprises can become insulated by success … and lose sight of the true underlying factors that created success in the first place."

Stage 2:  Undisciplined Pursuit of More

Companies in stage 2 may overreach by making undisciplined leaps into areas where they cannot be great or growing faster than their ability to fill key spots with capable people. 

Stage 3:  Denial of Risk and Peril

Companies in stage 3 begin to discount or explain away disturbing data, blame outside forces, and take outsized risks without giving enough weight to the consequences.

Stage 4:  Grasping for Salvation

Instead of getting back to the disciplines that made them great, companies take dramatic action, seeking a silver bullet solution.

Stage 5:  Capitulation to Irrelevance or Death

Some companies move quickly through the stages while others take years or decades.


"One of the keys to sustained performance lies in understanding how greatness can be lost." (24) "Great companies can stumble, badly, and recover. …Most companies eventually fall…  Yet our research indicates that organizational decline is largely self-inflicted, and recovery largely within our own control." (25)


Stage 1:  Hubris Born of Success

Past accomplishment guarantees nothing about future success.  (28) 


"A core business that meets a fundamental human need…rarely becomes obsolete."  (32)  Unless your primary flywheel faces inevitable demise or you have lost your passion for it, "continue to push your primary flywheel with as much imagination and fanatical intensity as you did when you first began."  This means never-ending creative renewal.  (35) Foster a productive tension between continuity and change.  Adhere to the principles that produced success but continually evolve and modify with creative and intelligent adaptation.  (36)  Maintain humility and a learning orientation.


Stage 2:  Undisciplined Pursuit of More

Big acquisitions that do not fit your core values or undermine your culture or defy economic logic can bring you down.  The problem is not necessarily complacency or lack of energy.  Overambitious growth targets and frenetic innovation, while failing at the basics, can start a downward spiral.  Undisciplined pursuit might be action inconsistent with your core values, launching into activities that do not fit, addiction to scale, neglecting your core business, focusing on your own personal success, compromising your values, or losing sight of your core purpose are all examples of undisciplined pursuit.


Perhaps the best warning sign is a declining proportion of key seats filled with the right people.  (57) 


"Leaders who fail the process of succession set their enterprises on a path to decline."  "…one of the most significant indicators of decline is the reallocation of power into the hands of leaders who fail to comprehend and/or lack the will to do what must be done--and equally, what must not be done--to sustain greatness." (60) 


"…overreaching tends to increase after a legendary leader steps away."  "But whatever the underlying dynamic, when companies engage in Stage 2 overreaching and bungle the transfer of power, they tend to hurtle downward toward Stage 3 and beyond." (61)  "…the wrong leader vested with power can almost single-handedly bring a company down."  (62)


Stage 3:  Denial of Risk and Peril

Making big bets in the face of mounting evidence to the contrary.  Luck is not a reliable strategy.  "The greatest danger comes not in ignoring clear and unassailable facts, but in misinterpreting ambiguous data in situations when you face severe or catastrophic consequences if the ambiguity resolves itself in a way that's not in your favor."  (70) (Read Challenger O-rings.) 


"For businesses, our analysis suggests that any deterioration in gross margins, current ratio, or debt-to-equity ratio indicates an impending storm. … Customer loyalty and stakeholder engagement also deserve attention."  Externalizing blame is an indicator. 


"Reorganizations and restructurings can create a false sense that you're actually doing something productive." (80) 


Stage 4:  Grasping for Salvation

Stage 4 begins when an organization reacts to a downturn by lurching for a silver bullet.  This can take a wide range of possible forms, such as betting big on an unproven technology, pinning hopes on an untested strategy, relying upon the success of a splashy new product, seeking a 'game changing' acquisition, gambling on an image makeover, hiring consultants who promise salvation, seeking a savior CEO, expounding the rhetoric of 'revolution,' or in its very late stages, grasping for a financial rescue or buyout.  The key point is that they go for a quick, big solution or bold stroke to jump-start a recovery, rather than embark on the more pedestrian, arduous process of rebuilding long-term momentum." (89) 


"The signature of mediocrity is not an unwillingness to change.  The signature of mediocrity is chronic inconsistency." (92)


"…rebuilding greatness requires a series of intelligent, well-executed actions that add up one on top of another.  Some decisions are bigger than others, but even the biggest decisions account for only a small fraction of the total outcome that makes a great company.  Most 'overnight success' stories are about twenty years in the making." (94) 


"…our ongoing research…shows a distinct negative correlation between building great companies and going outside for a CEO." (95)


"If you want to reverse decline, be rigorous about what not to do." (97)


One marker is confusion and cynicism.  "Instead of passionately believing in the organization's core values and purpose, people become distrustful, regarding visions and values as little more than PR and rhetoric." (101)


Stage 5: Capitulation to Irrelevance or Death

The company either capitulates or runs out of options and cash.  Hope alone is not enough; you need resources. 


Near this stage, ask, "What would be lost, and how would the world be worse off, if we ceased to exist?"  If the noble course is to fight on, it should be "to build an enterprise that makes such a distinctive impact on the world it touches, … with such superior performance, that it would leave a gaping hole…if it ceased to exist."  (111-12)


Well-Founded Hope

"The path to recovery lies first and foremost in returning to sound management practices and rigorous strategic thinking." (117)  "…lack of management discipline correlates with decline, and passionate adherence to management discipline correlates with recovery and ascent." (118) 


"If you're still strong, be vigilant for early markers of decline."  Remember that "circumstances alone do not determine outcomes." (120)  "…the main message of our work remains: we are not imprisoned by our circumstances, our setbacks, our history, our mistakes, or even staggering defeats along the way.  We are freed by our choices." (120) 


Following Churchill's speech, "Never give in.  Be willing to change tactics, but never give up your core purpose.  Be willing to kill failed business ideas, even to shutter big operations you've been in for a long time, but never give up on the idea of building a great company.  Be willing to evolve into an entirely different portfolio of activities, even to the point of zero overlap with what you do today, but never give up on the principles that define your culture.  Be willing to embrace the inevitability of creative destruction, but never give up on the discipline to create your own future.  Be willing to embrace loss, to endure pain, to temporarily lose freedoms, but never give up faith in the ability to prevail.  Be willing to form alliances with former adversaries, to accept necessary compromise, but never--ever--give up on your core values."  (123) 


Appendix 3: Fannie Mae and the Financial Crisis of 2008

"Whenever people begin to confuse the nobility of their cause with the goodness and wisdom of their actions-- 'We're good people in pursuit of a noble cause, and therefore our decisions are good and wise' --they can perhaps more easily lead themselves astray.  Bad decisions made with good intentions are still bad decisions." (148) 


Appendix 5: What Makes for the 'Right People' in Key Seats?

The right people

  • fit with the company's core values
  • don't need to be tightly managed
  • understand that they do not have 'jobs'; they have responsibilities
  • fulfill their commitments
  • are passionate about the company and its work
  • display 'window and mirror' maturity (they give credit to others and take blame themselves.  (159-60)



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