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Book Review: How the Mighty Fall by Jim Collins

June 12, 2010

The silent creep of impending doom is the title Collins chose for the first chapter in this excellent review of how companies go astray. As usual, Collins did an in depth research to discover why companies fail and how that failure is shaped. He determined that there are five stages of decline for an organization:

  1. Stage 1 is characterized by hubris born of success
  2. Stage 2 is marked by undisciplined pursuit of more
  3. Stage 3 is the peak of ascendancy and characterized by denial of risk and peril
  4. Stage 4 begins the precipitous decline with the organization grasping for salvation
  5. Stage 5 is the final capitulation to being irrelevant or accepting death

How the Mighty FallCollins points out that a company does not have to go through all stages of decline, they can determine when they are in decline and can turn things around with some effort and attention. He also points out that not all companies deserve to survive; it’s good that some fail. To make his case on the stages of decline and the results, Collins has provided many examples from companies we might know.

What stands out most in this book is how we can see that in our very success lie the seeds of our own demise. It makes Andy Grove’s view of “only the paranoid survive” one that makes sense. If we are always concerned and afraid that we won’t make it to the next year and that competitors are about to best us and customers abandon us then we are not too likely to become victims of hubris and excess. We can learn from that attitude.

As an example of Stage 1, Collins recounts the track Motorola is on from about 1983 through the 1990’s explaining that their success in growing the company from $5 Billion to $27 Billion lead to arrogance and neglect. He also traced Circuit City’s demise and drives home the point that our very success leads us to be blind to the things going on around us. This is true of individuals and organizations of all makes, models and sizes!

Collins provides the following as “markers” for Stage 1:

  • Success entitlement, arrogance
  • Neglect of a primary flywheel
  • “What” replaces “Why”
  • Decline in learning orientation
  • Discounting the role of luck

In the chapter on Stage 2, Collins discusses Ames and its undisciplined pursuit of growth starting with the acquisition of Zayers. Here he makes the distinction between overreaching and complacency. Collins points out that of the cases he studied only one had a clear cut case of complacency and that was A&P in retail. Because the acquisition of Zayers, Ames destroyed the momentum it had built up over a decade. Meanwhile, WallMart was minding its “p’s and q’s,” relentlessly building its stores across the country. One followed their plan and was content to manage growth, the other was intent on growth for the sake of growth and overreached to the point of failure.

stages of decline

Collins provides the following as “markers” for Stage 2:

  • Unsustainable Quest for Growth, confusing big with great
  • Undisciplined discontinuous leaps
  • Declining proportion of right people in key seats
  • Easy cash erodes cost discipline
  • Bureaucracy subverts discipline
  • Problematic succession of power
  • Personal interests placed above the organizational interests

Motorola makes another appearance in Stage 3. This time it is for making big bets in the face of mounting evidence that you’re going in the wrong direction. But Motorola was intent on establishing satellite telephone (recall Iridium?) and disregarded all the signs that they were attacking a market that didn’t exist – full on denial of risk and peril. Collins warns “audacious goal stimulate progress, but big bets without empirical validation, or that fly in the face of mounting evidence, can bring companies down, unless they’re blessed with unusual luck. And luck is not a reliable strategy.”

In addition, Collins reviewed the issue with Challenger. “Can you prove that it’s safe to launch?” was the traditional guide for a launch decision. However, the frame had inverted to “Can you prove that it’s unsafe to launch.” If NASA had not made that frame shift, or if the data had been absolutely definitive, Challenger very likely would have remained on the launch pad until later in the day.

  • Collins provides the following as “markers” for Stage 3:
  • Amplify the positive, discount the negative
  • Big bets and bold goals without empirical validation
  • Incurring huge downside risk based on ambiguous data
  • Erosion of healthy team dynamics
  • Externalizing blame
  • Obsessive reorganization
  • Imperious detachment

After a successful run from 1992 through 1998, HP’s CEO Lew Platt found himself being described as “struggling, perhaps even failing,” as the company ran into the Internet economy. Fiorina joined HP and created a real sense of urgency. They were embarking on a Stage 4 decline where they were grasping for salvation. As a contrast, Collins brings up the Gerstner years at IBM. Gerstner took his time, analyzed what needed to be done, steadily increased profitability and revenues. Fiorina admitted in her book, Tough Choices, “I was in a hurry . . . .” Collins advises that we, “Breathe. Calm yourself. Think. Focus. Aim. Take one shot at a time.” He identifies the following as “markers” for Stage 4:

  • A series of silver bullets
  • Grasping for a leader-as-savior
  • Panic and haste
  • Radical change and “revolution” with fanfare
  • Hype precedes results
  • Confusion and cynicism
  • Chronic restructuring and erosion of financial strength

Stage 5 is characterized as being “Capitulation to irrelevance or Death.” It’s important to remember that a company can be profitable and bankrupt. The case study here is Scott Paper who fell so far behind P&G and Kimberly-Clark that it had little choice but to take on huge debt to reinvest in a series of last-gasp efforts to catch up. The board hired Al Dunlop who slashed 11,000 jobs including more than 70% of upper management.

Collins makes it clear that no company they studied was destined to fall all the way through Stage 5. There is hope because companies have figured out that they were headed for disaster and then turned things around. It means a quick culture change, overcoming the panic, the desire for quick fixes, silver bullets and denial of the reality of the situation.

This is a must read book for those in leadership and management positions.

Click here to see the book on Amazon.