How The Mighty Fall: And Why Some Companies Never Give In | Jim Collins
STAGE 1: HUBRIS BORN OF SUCCESS
Great enterprises can become insulated by success; accumulated momentum can carry an enterprise forward, for a while, even ifits 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.
STAGE 2: UNDISCIPLINED PURSUIT OF MORE
Hubris from Stage 1 ("We're so great, we can do anything!" ) leads right into Stage 2, the Undisciplined Pursuit of More—more scale, more growth, more acclaim, more ofwhatever 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.
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 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 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
The cumulative peril and/or risksgone-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 silverbullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.
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, their leaders just sell out; in other cases, the institution atrophies into utter insignificance; and in the most extreme cases, the enterprise simply dies outright.
It is possible to skip a stage, although our research suggests that companies are likely to move through them in sequence. Some companies move quickly through the stages, while others languish for years, or even decades. Zenith, for example, took three decades to move through all five stages, whereas Rubbermaid fell from the end of Stage 2 all the way to Stage 5 in just five years. (The collapse of financial companies like Bear Stearns and Lehman Brothers that happened just as we were finishing up this work highlights the terrifying speed at which some companies fall.) An institution can stay in one stage for a long time, but then pass quickly through another stage; Ames, for instance, spent less than two years in Stage 3 but more than a decade in Stage 4 before capitulating to Stage 5. The stages can also overlap, the remnants of earlier stages playing an enabling role during later stages. Hubris, for example, can easily coincide with Undisciplined Pursuit of More, or even with Denial of Risk and Peril ("There can't be anything fundamentally wrong with us— we're great!"). The following diagram shows how the stages can overlap.
IS THERE A WAY OUT?
When I sent a first draft of this piece to critical readers, many commented that they found our turn to the dark side grim, even a bit depressing. And you might have the same experience as you read through the five stages ofdecline, absorbing story upon story of once-great companies that precipitated their own demise. It's a bit like studying train wrecks—interesting, in a morbid sort of way, but not inspiring. So, before you embark on this dark journey, allow me to provide two points of context.
First, we do ourselves a disservice by studying only success. We learn more by examining why a great company fell into mediocrity (or worse) and comparing it to a company that sustained its success than we do by merely studying a successful enterprise. Furthermore, one of the keys to sustained performance lies in understanding how greatness can be lost. Better to learn from how others fell than to repeat their mistakes out of ignorance.
Second, I ultimately see this as a work of well-founded hope. For one thing, with a roadmap of decline in hand, institutions heading downhill might be able to apply the brakes early and reverse course. For another, we've found companies that recovered—in some cases, coming back even stronger—after having crashed down into the depths of Stage 4. Companies like Nucor, Nordstrom, Disney, and IBM fell into the gloom at some point in their histories yet came back.
Great companies can stumble, badly, and recover. While you can't come back from Stage 5, you can tumble into the grim depths of Stage 4 and climb out. Most companies eventually fall, and we cannot deny this fact. Yet our research indicates that organizational decline is largely self-inflicted, and recovery largely within our own control. [...]
A core business that meets a fundamental human need— and one at which you've become best in the world—rarely becomes obsolete. [...]
If you're struggling with the tension between continuing your commitment to what made you successful and living in fear about what comes next, ask yourself two questions:
- Does your primary flywheel face inevitable demise within the next five to ten years due to forces outside your control—will it become impossible for it to remain best in the world with a robust economic engine?
- Have you lost passion for your primary flywheel?
If you answer no to both these questions, then continue to push your primary flywheel with as much imagination and fanatical intensity as you did when you first began. (Of course, you also need to continually experiment with new ideas, both as a mechanism to stimulate progress and as a hedge against an uncertain future.) [...]
MARKERS FOR STAGE 1
At the end of each of the first four stages, I'll summarize the stage with a series of markers. Not every marker shows up in every case of decline, and the presence of a marker does not necessarily mean that you have a disease, but it does indicate an increased possibility that you're in that stage of decline. You can use these markers as a self-diagnostic checklist. Some of the markers listed have little or no text dedicated to them in the preceding pages, for the simple reason that they're highly self-explanatory.
SUCCESS ENTITLEMENT, ARROGANCE: Success is viewed as "deserved," rather than fortuitous, fleeting, or even hard earned in the face of daunting odds; people begin to believe that success will continue almost no matter what the organization decides to do, or not to do.
NEGLECT OF A PRIMARY FLYWHEEL: Distracted by extraneous threats, adventures, and opportunities, leaders neglect a primary flywheel, failing to renew it with the same creative intensity that made it great in the first place.
"WHAT" REPLACES "WHY": The rhetoric of success ("We're successful because we do these specific things") replaces understanding and insight ("We're successful because we understand whywe do these specific things and under what conditions they would no longer work").
DECLINE IN LEARNING ORIENTATION: Leaders lose the inquisitiveness and learning orientation that mark those truly great individuals who, no matter how successful they become, maintain a learning curve as steep as when they first began their careers. [...]
The greatest leaders do seek growth—growth in performance, growth in distinctive impact, growth in creativity growth in people—but they do not succumb to growth that undermines long-term value. And they certainly do not confuse growth with excellence. Big does not equal great, and great does not equal big. [...]
MARKERS FOR STAGE 2
UNSUSTAINABLE QUEST FOR GROWTH, CONFUSING BIG WITH GREAT: Success creates pressure for more growth, setting up a vicious cycle of expectations; this strains people, the culture, and systems to the breaking point; unable to deliver consistent tactical excellence, the institution frays at the edges.
UNDISCIPLINED DISCONTINUOUS LEAPS: The enterprise makes dramatic moves that fail at least one of the following three tests:
- Do they ignite passion and fit with the company's core values?
- Can the organization be the best in the world at these activities or in these arenas?
- Will these activities help drive the organization's economic or resource engine?
DECLINING PROPORTION OF RIGHT PEOPLE IN KEY SEATS: There is a declining proportion of right people in key seats, because of losing the right people and/or growing beyond the organization's ability to get enough people to execute on that growth with excellence (e.g., breaking Packard's Law).
EASY CASH ERODES COST DISCIPLINE: The organization responds to increasing costs by increasing prices and revenues rather than increasing discipline.
BUREAUCRACY SUBVERTS DISCIPLINE: A system of bureaucratic rules subverts the ethic of freedom and responsibility that marks a culture of discipline; people increasingly think in terms of "jobs" rather than responsibilities.
PROBLEMATIC SUCCESSION OF POWER: The organization experiences leadership-transition difficulties, be they in the form of Poor succession planning, failure to groom excellent leaders [...]
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 yourselffacing gushers of water pouring in, pulling you toward the ocean floor.86 And if it's a big enough hole, you might go down really fast, just like some of the financial-company catastrophes in 2008.
To be clear, great enterprises do make big bets, but they avoid big bets that could blow holes below the waterline. When making risky bets and decisions in the face of ambiguous or conflicting data, ask three questions:
- What's the upside, if events turn out well?
- What's the downside, if events go very badly?
- Can you live with the downside? Truly? [...]
MARKERS FOR STAGE 3
AMPLIFY THE POSITIVE, DISCOUNT THE NEGATIVE: There is a tendency to discount or explain away negative data rather than presume that something is wrong with the company; leaders highlight and amplify external praise and publicity.
BIG BETS AND BOLD GOALS WITHOUT EMPIRICAL VALIDATION: Leaders set audacious goals and/or make big bets that aren't based on accumulated experience, or worse, that fly in the face of the facts.
INCURRING HUGE DOWNSIDE RISK BASED ON AMBIGUOUS DATA: When faced with ambiguous data and decisions that have a potentially severe or catastrophic downside, leaders take a positive view of the data and run the risk of blowing a hole "below the waterline."
EROSION OF HEALTHY TEAM DYNAMICS: There is a marked decline in the quality and amount of dialogue and debate; there is a shift toward either consensus or dictatorial management rather than a process of argument and disagreement followed by unified commitment to execute decisions.
EXTERNALIZING BLAME: Rather than accept full responsibility for setbacks and failures, leaders point to external factors or other people to affix blame.
OBSESSIVE REORGANIZATIONS: Rather than confront the brutal realities, the enterprise chronically reorganizes; people are increasingly preoccupied with internal politics rather than external conditions. [...]
Gerstner took a very different approach, stating at his first public discussion about IBM, "The last thing IBM needs right now is a vision." By this, Gerstner did not mean that IBM shouldn't ever have a vision, but that his first priorities lay in more basic activities: making sure he had the right people in key seats ("my top priority during those first few weeks"), regaining profitability, increasing cash flow, and above all, putting the customer back at the center of everything IBM did. 108 Gerstner took a pedestrian approach, building on existing strengths and working with "massive amounts of quantitative analysis." 109 He took nearly three months to thoroughly understand IBM's situation. "It would not be believable that after 30 days somebody could lay out a timetable for changing a company of this size," Gerstner told Fortune editor David Kirkpatrick. "Besides, I really do want to disabuse your readers of the concept that there's going to be this grand plan that's going to emerge from the new management at some point. It isn't going to happen." [...]
The leaders at Tl understood that 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. [...]
When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct—and our fear—can evoke 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. [...]
If you want to reverse decline, be rigorous about what not to do. In the early 1990s, I invited a former Marine turned entrepreneur to guestlecture in my course on creativity at the Stanford Graduate school of Business. He'd done multiple tours of jungle combat in the Vietnam War. When asked what lessons, if any, carried over to his civilian life as an entrepreneur, he thought about it for a moment and then responded, "When you have just a few people, and there is enemy all around you, the best thing is to say, 'You take this section from here to here, and you take this section from here to here, and do not fire on automatic. Take one shot at a time."
Breathe. Calm yourself. Think. Focus. Aim. Take one shot at a time. Otherwise, you can find yourself in some version of the calamity that befell Addressograph Corporation, the onceleader in office addressing and duplicating machines. Every $10,000 invested in Addressograph at the start of 1945 and held through 1960 generated half a million dollars.129 In 1965, however, Xerox introduced the 2400 copier, a direct threat to Addressograph's duplicating products. Panicking, Addressograph launched a crash program, releasing twenty-three new products in three years. It lost track of billing and accounts receivable, creating $70 million in late, unpaid, and untraceable customer Orders strewn about, scrawled on scraps of paper and backs of envelopes. Sixteen of the twenty-three new products failed. [...]
MARKERS FOR STAGE 4
A SERIES OF SILVER BULLETS: There is a tendency to make dramatic, big moves, such as a "game changing" acquisition or a discontinuous leap into a new strategy or an exciting innova_ tion, in an attempt to quickly catalyze a breakthrough—and then to do it again and again, lurching about from program to program, goal to goal, strategy to strategy, in a pattern of chronic inconsistency.
GRASPING FOR A LEADER-AS-SAVIOR: The board responds to threats and setbacks by searching for a charismatic leader and/ or outside savior.
PANIC AND HASTE: Instead of being calm, deliberate, and disciplined, people exhibit hasty, reactive behavior, bordering on panic.
RADICAL CHANGE AND "REVOLUTION" WITH FANFARE: The language of "revolution" and "radical" change characterizes the new era: New programs! New cultures! New strategies! Leaders engage in hoopla, spending a lot of energy trying to align and "motivate" people, engaging in buzzwords and taglines.
HYPE PRECEDES RESULTS: Instead of setting expectations low—underscoring the duration and difficulty of the turnaround—leaders hype their visions; they "sell the future" to compensate for the lack of current results, initiating a pattern of overpromising and underdelivering.
INITIAL UPSWING FOLLOWED BY DISAPPOINTMENTS: There is an initial burst of positive results, but they do not last; dashed hope follows dashed hope; the organization achieves no buildup, no cumulative momentum.
CONFUSION AND CYNICISM: People cannot easily articulate what the organization stands for; core values have eroded to the point of irrelevance; the organization has become "just another place to work," a place to get a paycheck; people lose faith in their ability to triumph and prevail. Instead of passionately believing in the organization's core values and purposey people become distrustful, regarding visions and values as little more than PR and rhetoric.
CHRONIC RESTRUCTURING AND EROSION OF FINANCIAL STRENGTH: Each failed initiative drains resources; cash flow and financial liquidity begin to decline; the organization undergoes multiple restructurings; options narrow and strategic decisions are increasingly dictated by circumstance. [...]
The signature of the truly great versus the merely successful is not the absence of difficulty, but the ability to come back from setbacks, even cataclysmic catastrophes, stronger than before. Great nations can decline and recovers Great companies can fall and recover. Great social institutions can fall and recover. And great individuals can fall and recover. As long as you never get entirely knocked out of the game, there remains always hope.