How the Mighty Fall and Why Some Companies Never Give In: Jim Collins

Summary

For companies, there are Five Stages of Decline

1. Hubris (excessive pride) born of success
   
   1. When “we are successful because we do these specific things” replaces the understanding and insight that “we are successful because we understand why we do these specific things and under what conditions they would no longer work.”
      
2. Undisciplined pursuit of more
   
   1. When an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall
      
3. Denial of risk and peril
   
   1. The vigorous fact-based dialogue that characterizes high performance teams dwindles or disappears altogether
      
4. Grasping for Salvation
   
   1. Common “saviors” of a visionary leader, a bold new strategy, a radical transformation
      
5. Capitulation to irrelevance or death
   
   1. 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.
      

Hubris Born of Success

1. Hubris
   
   1. Excessive pride that brings down a hero
      
   2. Outrageous arrogance that inflicts suffering upon the innocent
      
2. Flywheel
   
   1. You cannot remain static
      
   2. You need to continue to renew your businesses
      
   3. Any business that becomes complacent and refuses to change or innovate will eventually fail
      
3. Best leaders are learning people
   
   1. Always students
      
   2. Why? Why? Why?
      
   3. Discipline and modesty to learn from others
      

Undisciplined Pursuit of More

1. Overreaching often explains how many once-invincible companies self-destruct
   
2. Packard’s Law (David Packard of HP)
   
   1. A company is more likely to die of indigestion from too much opportunity than starvation from too little.
      
3. No company can consistently grow revenues faster than its ability to get enough of the right people (self-managed and self-motivated) to implement that growth and still remain a great company.
   
   1. Many companies begin to fill key seats with the wrong people. To compensate for the wrong people’s inadequacies, they institute bureaucratic procedures. This, in turn, drives away the right people (because they chafe under the bureaucracy or cannot tolerate working with less competent people or both).
      
4. Key markers
   
   1. Declining proportion of key seats filled with the right people
      
   2. 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
      
   3. The organization responds to increasing costs by increasing prices and revenues rather than increasing discipline
      
   4. Bureaucracy subverts discipline
      
5. The best leaders have a genius for seeing themselves as not that important.
   
   1. In the cases of decline, we find a more pronounced role for the powerful individual, and not for the better.
      
   2. “Genius with a Thousand Helpers”
      

Denial of Risk and Peril

1. Waterline principle
   
   1. Make sure that any big bet that the company makes is above the waterline and that the company will not sink as a result of the bet failing
      
2. Signs of growing mediocrity
   
   1. Decline in customer engagement
      
   2. Loss in pricing power
      

Grasping for Salvation

1. Behaviors that exemplify and perpetuate the decline
   
   1. Embark on a program of radical change (often with the help of a consulting company), a revolution to transform or upend nearly every aspect of the company, jeopardizing or abandoning core strengths
      
   2. Leaders engage in hoopla, working to “align and motivate” people, engaging in buzzwords and taglines
      
   3. Hype precedes results
      
2. Companies grasping for salvation try all sorts of new programs, new fads, new strategies, new visions, new cultures, new breakthroughs, new acquisitions, and new saviors.
   
   1. In short, at the moment when a company needs to take calm, deliberate action, its runs the risk of doing the exact opposite (by doing too much) and bringing about the very outcome the company most fears
      
   2. “If we have any plan at all, it is that we will take a shot at everything.” (Zenith)
      
   3. “We have a wide ranging program that involves a total revision of our philosophy, tactics, strategy and regional priorities.” (Bank of America)
      
3. Focus
   
   1. Leaders need to get back to a calm, clear-headed and focused approach.
      
   2. If you want to reverse decline, be rigorous about what not to do
      
   3. When in decline, “take one shot at a time”
      

Capitulation to Irrelevance or Death

1. In this stage, companies spiral downward, increasingly out of control. Each cycle – grasping for salvation followed by disappointment, followed by more grasping – erodes resources. Cash tightens. Hope fades. Options narrow.
   
2. Always remember: You pay your bills with cash. You can be profitable and bankrupt.
   

Well Founded Hope

The right leadership can create a well-founded hope for a “falling” company

1. Yes, “a crisis is a terrible thing to waste.” But, the right leaders feel a sense of urgency in good times and bad, whether facing threat or opportunity, no matter what
   
2. The path to recovery is in returning to sound management practices and rigorous strategic thinking
   
3. Circumstances alone do not determine outcomes
   
4. Be willing to evolve, but never give up on the principles that define your culture
   
   1. Never – ever – give up on your core values
      
5. Success is falling down and getting up one more time without end
   

Some Examples of Companies Reversing Decline

1. IBM under Lou Gerstner
   
   1. There was no need for a grand vision or new strategy
      
   2. IBM just had to do the “boring stuff” much better
      
      1. Make sure that the right people are in key seats
         
      2. Put the customer back at the center of everything that IBM did
         
2. Nucor
   
   1. It is better to hire people with the right work ethic and character and teach them how to make steel than to hire people who know how to make steel but lack the Nucor work ethic and character traits.
      
   2. Culture of Discipline – If a team produced a bad batch of steel, its members would lose their bonuses; if that batch reached the customer; they could lose three times that amount
      
   3. Hold values and principles constant, while changing practices and strategies to endlessly adapt to a changing world
      
3. Nordstrom
   
   1. “Success for our company is not going to take a new strategy or an entirely new business model. Instead it’s taking what we already do well and continuing to execute those strengths.”