I recently read Jim Collins’ new book “How the Mighty Fail” and thought it provided good fodder for constructive conversation during these difficult times. I liked his model of comparing the companies that succeeded in difficult times and those who failed. The following is a summary with some commentary:
How The Mighty Fall: And Why Some Companies Never Give In
by Jim Collins
Amidst the desolate landscape of fallen great companies, Jim Collins began to wonder: How do the mighty fall? Can decline be detected early and avoided? How far can a company fall before the path toward doom becomes inevitable and unshakable? How can companies reverse course? In How the Mighty Fall, Collins confronts these questions, seeking to offer hope to leaders that they can learn how to prevent decline and, if they find themselves falling, reverse their course. Collin’s research project—more than four years in duration—uncovered five step-wise stages of decline:
Stage 1: Hubris Born of Success
Stage 1 begins when people become arrogant, regarding success virtually as an entitlement and they lose sight of the true underlying factors that created success in the first place. The loss of penetrating insight and a clear understanding what leads to (or interferes with success) allow people to fall off the train of success. “We will see hubris in bold, risky decisions that fly in the face of conflicting or negative evidence.” When leaders cease to realize that they are still at risk of falling, that luck plays a role, that they must still be careful, diligent and disciplined, they manifest the arrogance that can bring them down.
Stage 2: Undisciplined Pursuit of More
The development of arrogance is the key indicator of stage one. Acting on the arrogance by growing beyond the actual abilities of the organization (based on an exaggerated sense of capability and infallibility) is the defining characteristic of stage two. Making “undisciplined leaps” into areas where they cannot be great or without the appropriate human resources to manage the growth are elements of this stage. While many people feel complacency is a risk factor (and it can be), when the “great” fall, it is because they have more often tried to do more than they can manage. “…big acquisitions, made out of bravado, rather than penetrating insight and understanding, can bring you down.”
Stage 3: Denial of Risk and Peril
While data begin to show that trouble is brewing and all is not good in the kingdom, the negative data is explained away, discounted or ignored. Like the parable of the emperor who wears no clothes, everyone becomes fearful of telling him the truth that he is naked.
The disciplined collection and analysis of data that helped lead to good decisions prior to the downfall diminishes as is the open, thorough dialogue that characterizes highly functioning teams. “When those in power begin to imperil the enterprise by taking outsized risks and acting in a way that denies the consequences of those risks, they are headed straight for Stage 4.”
Stage 4: Grasping for Salvation
Once again we see that those who fail, do not respond in a manner that is characterized by the disciplines of good management and judgment that characterized a climb to “great.” Rather they seek a silver bullet, a savior, and a quick fix that can turn things around miraculously. This is leadership characterized by panic or anxiety, rather than calm, careful analysis, planning and execution. Those that come to this point and respond constructively are able to pull the company out of the spin downwards. Others look to a bold, untested strategy, a radical transformation a “game changing acquisition” or rearranging the deck chairs (on the Titanic) rather than turning the ship around. “The signature of mediocrity is inconsistency”
Stage 5: Capitulation to Irrelevance or Death
The continual struggle of stage 4 and the accumulation of issues, losses and despair over the first 4 stages catapult the formerly great company to its demise: sell out or bankruptcy. Had the companies in stages 1-4 adhered to management disciplines anywhere along the line, they could have avoided Stage 5. They could have turned the ship around if they had looked realistically at internal and external factors (data), applying rigorous analysis and carefully following a systematic approach to recovery (rather than untenable growth, denial of limitations and issues, grasping at miracles or saviors).
Collins: “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.” (p. 5)
Some thoughts of significance in the book or on the book:
- One of the biggest takeaways may well be for external board directors (or owners of closely held businesses). The symptoms and behaviors of leadership in an organization that is in decline are extremely valuable markers for board members
- Other markers which observers of ventures use to identify potential fall from great include:
- Dissatisfied customers (who are not getting the service, product quality, timeliness or price)
- Increasing receivables (customers are not able or willing to pay)
- Mounting debt (from unhealthy acquisitions)
- Rapid liquidity drain
- Collin’s one marker above all to indicate the fall from grace is the declining number of seats filled by the right people. People who know what they are to accomplish, (what they are accountable for) are passionate about doing it and know how.
- Overcoming denial meant looking carefully at data. Facing reality head on is the only way to turn the ship around. That includes gross margins, and debt to equity.
- The successful companies in his comparison were able to manage an important paradox: a dynamic tension between continuity and change. This is particularly important in family owned businesses where continuity represents a legacy; and change represents updating processes, products and tools to address the ever-changing business environment.
The interesting observation about how this balance was achieved was that the successful companies continually asked “why” and explored “how” they have been successful and then understood the conditions in which old practices lead to success and when they need to be changed because they are no longer effective.
- Collins’ final message: Maintain a firm hold of your core purpose, the principles and values that define your culture, and go forward with disciplined action and faith, adapting the strategies and tactics needed in difficult times and you can prevail. This is good leadership.
I have developed a team assessment scale based on his observations that I would be happy to share.
Just ask!
