How the Mighty Fall

As Nortel disappears, like the carcass of a stranded whale on shore being dismembered by a pre-historic tribe, a good book to review is Jim Collins recently released book. The book covers the five stages that a company will go through prior to dying. It appears that in recent times the speed that companies disappear is unprecedented as attested by the almost overnight bankruptcy of Lehman Brothers and the sudden collapse and fire sale of Bear Stearns. These companies seemed to be fine weeks prior to their bankruptcies. In Nortel’s case, its demise comes only 10 years after then CEO, John Roth had boldly moved Nortel to a global brand supplying the infrastructure technology for the internet. If you read John Collins’ book you will be able to see how Nortel’s decline and failure occurred and what steps were not taken to reverse the decline. With the right leadership the Nortel bankruptcy should not have happened.

Also as an aside I believe that our senior politicians and their deputy ministers through lack of leadership and vision have failed Canada badly in not helping companies such as INCO, Falconbridge/Noranda, Alcan and Nortel remain global leaders. The same holds true of the many large Canadian forest products companies that have disappeared taking away thousands of executive jobs at the corporate level. But let’s put the past aside as what happened cannot be changed and concentrate on growing our current companies and avoiding the pitfalls leading to a company’s downfall.

How The Mighty Fall by Jim Collins. 171 pages. ISBN 978-0-97-732641-9

Jim Collins is a world-renowned bestselling author of two well researched books-.”Built to Last” and “Good to Great.” I believe that “Good to Great” is one of the most valuable business book written since 2001 and some of the concepts for becoming a great company are used by Mastermind Solutions during strategic planning retreats to help companies grow in a disciplined and profitable manner.

While a full exploration of the five stages is beyond the scope of this book review here is a brief summary. For those who have been following the demise of Nortel or who lost a lot of money through their Nortel investments you may be able to track the changes that Nortel went through over the past 10 years as you review Collins’ five stages of decline.

STAGE 1: HUBRIS BORN OF SUCCESS

Great enterprises can become insulated by success; accumulated momentum can carry an enterprise forward for a while, even if its leaders make poor decisions or lose discipline. Stage 1 kicks in 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. When the rhetoric of success (“We’re successful because we do these specific things”) replaces penetrating understanding and insight (“We’re successful because we understand why we do these specific things and under what conditions they would no longer work”), decline will very likely follow. Luck and chance play a role in many successful outcomes, and those who fail to acknowledge the role luck may have played in their success – and thereby overestimate their own merit and capabilities – have succumbed to hubris.

The best leaders never presume they’ve reached ultimate understanding of all the factors that brought them success. For one thing, they retain a somewhat irrational fear that perhaps their success stems in large part from fortuitous circumstance. Suppose you discount your own success (“We might have been just really lucky/were in the right place at the right time/have been living off momentum/have been operating without serious competition”) and thereby worry incessantly about how to make yourself stronger and better-positioned for the day your good luck runs out. What’s the downside if you’re wrong? Minimal: If you’re wrong, you’ll just be that much stronger by virtue of your disciplined approach. But suppose instead you succumb to hubris and attribute success to your own superior qualities (“We deserve success because we’re so good/so smart/so innovative/so amazing”). What’s the downside if you’re wrong? Significant. You just might find yourself surprised and unprepared when you wake up to discover your vulnerabilities too late.

STAGE 2: UNDISCIPLINED PURSUIT OF MORE

Hubris from Stage 1 (“We’re so great, we can do anything!”) leads right to Stage 2, the Undisciplined Pursuit of More – more scale, more growth, more acclaim, more of whatever those in power see as “success.” Companies in Stage 2 stray from the disciplined creativity that led them to greatness in the first place, making undisciplined leaps into areas where they cannot be great or growing faster than they can achieve with excellence – or both. When an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall. Although complacency and resistance to change remain dangers to any successful enterprise, overreaching better captures how the mighty fall.

Discontinuous leaps into areas in which you have no burning passion is undisciplined. Taking action inconsistent with your core values is undisciplined. Investing heavily in new arenas where you cannot attain distinctive capability, better than your competitors, is undisciplined. Launching headlong into activities that do not fit with your economic or resource engine is undisciplined. Addiction to scale is undisciplined. To neglect your core business while you leap after exciting new adventures is undisciplined. To use the organization primarily as a vehicle to increase your own personal success – more wealth, more fame, more power – at the expense of its long-term success is undisciplined.

STAGE 3: DENIAL OF RISK AND PERIL

As companies move into Stage 3, internal warning signs begin to mount, yet external results remain strong enough to “explain away” disturbing data or to suggest that the difficulties are “temporary” or “cyclic” or “not that bad,” and “nothing is fundamentally wrong.” In Stage 3, leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data. Those in power start to blame external factors for setbacks rather than accept responsibility. The vigorous, fact-based dialogue that characterizes high-performance teams dwindles or disappears altogether. When those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences of those risks, they are headed straight for Stage 4.

Bill Gore, founder of W.L. Gore & Associates, articulated a helpful concept for decision-making and risk-taking, what he called the “waterline” principle. Think of being on a ship, and imagine that any decision gone bad will blow a hole in the side of the ship. If you blow a hole above the waterline (where the ship won’t take on water and possibly sink), you can patch the hole, learn from the experience, and sail on. But if you blow a hole below the waterline, you can find yourself facing gushers of water pouring in, pulling you toward the ocean floor. And if it’s a big enough hole, you might go down really fast, just like some of the financial firm catastrophes of 2008. To be clear, great enterprises do make big bets, but they avoid big bets that could blow holes below the waterline.

STAGE 4: GRASPING FOR SALVATION

The cumulative peril and/or risks gone bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all. The critical question is: How does its leadership respond? By lurching for a quick salvation or by getting back to the disciplines that brought about greatness in the first place? Those who grasp for salvation have fallen into Stage 4. Common “saviors” include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a “game-changing” acquisition, or any number of other silver-bullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.

When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct and our fear can prompt lurching – reactive behavior absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise. Of course, their leaders can later claim: “But look at everything we did. We changed everything. We tried everything we could think of. We fired every shot we had, and we still fell. You can’t blame us for not trying.” They fail to see that leaders atop companies in the late stages of decline need to get back to a calm, clear-headed, and focused approach. If you want to reverse decline, be rigorous about what not to do.

STAGE 5: CAPITULATION TO IRRELEVANCE OR DEATH

The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. In some cases the company’s leader just sells out; in other cases the institution atrophies into utter insignificance; and in the most extreme cases the enterprise simply dies outright.

The point of the struggle is not just to survive, but to build an enterprise that makes such a distinctive impact on the world it touches (and does so with such superior performance) that it would leave a gaping hole – a hole that could not be easily filled by any other institution – if it ceased to exist. To accomplish this requires leaders who retain faith that they can find a way to prevail in pursuit of a cause larger than mere survival (and larger than themselves) while also maintaining the stoic will needed to take whatever actions must be taken, however excruciating, for the sake of that cause.

Examples from Jim Collins’ book describing how once mighty companies have fallen:

The Great Atlantic & Pacific Tea Company

Founded in 1859
Era of Focus for Analysis of Decline: 1950-1970s
Primary Business: A&P Supermarkets
Success Contrast: Kroger
Example of “Fallen” Behavior: Assuming that its position as the world’s No. 1 retailer made it exempt from having to develop new store concepts; leadership failing to ask what were the fundamental reasons for A&P’s success.
Result: Had 16,000 stores in the Depression; in 2008 it had 460 stores.

Merck

Founded in 1891
Era of Focus for Analysis of Decline: 1990s-2000s
Success Contrast: Pfizer
Primary Business: Pharmaceuticals
Example of “Fallen” Behavior: Merck’s pursuit of becoming a top-tier growth company and its reliance on blockbuster drug Vioxx allowed its purpose-driven philosophy to become of secondary importance.
Result: When data showed that Vioxx might not be safe, it was voluntarily removed from the market, and $40 billion in shareholder value dissolved in six weeks.

Motorola

Founded in 1928
Era of Focus for Analysis of Decline: 1990s-2000s
Success Contrast: Texas Instruments
Primary Business: Cell Phones
Example of “Fallen” Behavior: In 1995, its StarTAC phone, used analog technology; wireless carriers wanted digital-technology based phones.
Result: After enjoying almost 50% market share, Motorola saw its market share plummet to 17%.

Rubbermaid

Founded in 1920 as Wooster Rubber Company
Era of Focus for Analysis of Decline: 1980s-1990s
Success Contrast: None qualified
Primary Business: Kitchen Utensils
Example of “Fallen” Behavior: Ambitious growth and new product introductions that made it vulnerable to rises in raw materials prices and problems filling orders on time.
Result: Sold to Newell Corp. Oct. 21, 1998; company is now known as Newell Rubbermaid.

Hewlett-Packard (HP)

Founded in 1939
Era of Focus for Analysis of Decline: 1990s-2000s
Success Contrast: IBM
Primary Business: Computers, Printers
Example of “Fallen” Behavior: The 2002 $24 billion acquisition of Compaq computers, which the authors cite as an example of Stage 4 (Grasping for Salvation) behavior. While the move increased HP’s market share, earnings became erratic.
Result: Carly Fiorina, the architect of the deal, was ousted as CEO. HP has since made a strong recovery under CEO Mark Hurd.

For more information on the cognitive ability used by Mark Hurd to rebuild HP please click here

If you read this book you will see that Jim Collins used 11 business cases to construct his theory. The other companies were: Addressograph, Ames, Bank of America, Circuit City, Scott Paper and Zenith.

Conclusion

If you are a senior executive or a President this book will give you some sage advice on what not to do to kill your company. It is a very short read with only 123 pages prior to reaching the appendix describing the companies that were selected as fallen companies. One of the key points if your company is slipping is to get back to basics and ensure that you have the people in the right place. Getting back to your proven “flywheel” for success is also important. The flywheel concept is a key concept in the “Good to Great” book.

It is interesting that whether your company endures or dies, depends more on what you do yourself as a leader than on what the world does to your company. Consider the spectacular company failures-Hollinger International, Livent, Enron, Nortel and WorldCom. These organizations at one time were all successful companies that disappeared because of executive egos and greed.

Another concept that I noticed for these spectacular failures is that the executives did not want to change because their company had made money in the past. Even if they had a poor strategy, decreasing sales and a failure to execute they did not want to mess with what had been a historically winning horse. The implications are interesting and huge when you tie this to the recent spectacular failures of GM and Chrysler and their reluctance to change from a winning formula from 20 years ago.

However the good news about this Jim Collins book is that company leaders can identify the “silent creep of impending doom” and systematically set a viable correction course. In these troubled times, when every business stands to strengthen its bottom line, this book provides tools to get through and thrive. I recommend that executives read this well researched book.

Click here for more about Strategic Planning