How The Mighty Fall
By Jim Collins
HarperCollins, 222 pages, $31.50
By Sydney Finkelstein,
and Andrew Campbell
Harvard Business Press,
236 pages, $33.95
Jim Collins has made his reputation by telling us what leads to a successful company, first in Built To Last, co-written with Jerry Porras, and then in his mammoth bestseller, Good To Great.
But now he has reversed his focus, after being asked an incisive question by an apprehensive chief executive officer of one of America's top companies (not named in the book): When you are riding high, the most successful company in your industry, how do you know if your very power and success are covering up the fact that you have started to decline?
The question came as Mr. Collins had been discussing looking into corporate decline with his researchers, spurred in part by the fact that some of the great companies he had profiled in his two books had subsequently lost their patina of excellence.
He didn't feel those reversals invalidated his findings, any more than studying a successful sports franchise in its heyday would mean the findings were irrelevant if it subsequently abandoned the principles for its success.
But he found himself becoming increasingly curious: How do the mighty fall?
"If some of the greatest companies in history can collapse from iconic to irrelevant, what might we learn by studying their demise, and how can others avoid their fate?" he writes in How The Mighty Fall.
He focused on 11 companies that had, at one point, been very successful but then faltered, many of them familiar to devotees of his other books: A&P, Addressograph, Ames Department Stores, Bank of America, Circuit City, Hewlett-Packard, Merck, Motorola, Rubbermaid, Scott Paper and Zenith.
As with his previous research, he twinned each of them with a company that had risen in the same industry in which they declined. For example, Ames Department Stores and Wal-Mart Stores Inc. had the same business model, similar revenues and profits, and strong entrepreneurial leaders at the helm -but from the mid-eighties to the early nineties, Ames plummeted while Wal-Mart soared.
He found there are more ways to fall than to become great. He developed a five-stage framework that helps to explain the process of decline in many cases (although, he stresses, not all cases, since his model doesn't cover sudden collapse from fraud, scandal or catastrophic bad luck).
The five stages proceed in sequence:
Hubris born of success
The organization becomes arrogant, views success as an entitlement and loses sight of the factors that led to success in the first place. In the mid-1990s, Motorola not only ignored the fact that its soon-to-be-released StarTAC cellphone was behind the times because it used analog technology when the world was going digital, but tried to strong-arm telephone companies into heavy promotion of the phone because it was assumed once again it had a hit.
Convinced they can do anything, the companies stray from the disciplined creativity that led them to greatness and leap into new areas - often several at one time - where they cannot be great. While Wal-Mart remained focused on rural and small towns and an "everyday low prices" strategy, Ames strayed by buying Zayre Department Stores, making it a significant urban player overnight, and began to rely on loss-leader promotions. Although it's commonly believed that complacency kills successful companies, Mr. Collins found the reverse: In all but one of the companies in his sample, the problem was that they tried to do too much.
Denial of risk and peril
Internal warning signs begin to mount, but external results remain strong enough to suggest the difficulties are only temporary or not that bad, and the leaders ignore the danger, blaming it on external factors or other circumstances. The fact-based dialogue in the company - confronting brutal reality - that was required for success dissipates. Motorola executives ignored the fact that the growth of cellphones worldwide made its bulky, expensive Iridium handsets and their backup satellite system a looming disaster for the company.
Grasping for salvation
As the peril finally becomes obvious, the company lurches for salvation, opting for either a charismatic, visionary leader, a bold but untested strategy, a radical transformation, a hoped-for blockbuster product or some other saviour. Hewlett-Packard's silver bullet was high-profile CEO Carly Fiorina, who opted for a takeover of Compaq Computer Corp., initially deemed a disastrous move and she lost her job.
to irrelevance or death
As the company spirals downward, leaders give up hope and either sell it, let it atrophy into utter insignificance, or simply shut the doors. Scott Paper in the late 1980s had fallen so far behind competitors that it brought in Al Dunlap, better known as "Chainsaw Al," to chop and prepare the company to be sold.
As with all of Mr. Collins's work, the book is absorbing, written in a clear, practical way. This one is also unusually short: The main argument is set out in 123 pages, and only takes a few hours to get through. The book lacks the juice of Good To Great - perhaps because its focus is more negative - but it ends with a section on failing companies that rebounded and is another worthy contribution to understanding business.
In Addition: In Think Again, Sydney Finkelstein, a professor at the Tuck School of Business at Dartmouth College, and Jo Whitehead and Andrew Campbell, researchers with the Strategic Management Centre at Ashridge Business School in London, probe why smart, experienced leaders can make flawed or even catastrophic decisions.
They highlight four conditions in which flawed thinking is most likely to happen:
Misleading experiences, when one situation seems like another earlier in the executive's career;
Misleading prejudgments, when the individual makes an early judgment on the situation that is incorrect;
Inappropriate self-interest, when the individual lacks objectivity because he or she has something personal at stake;
Inappropriate attachments, when the executive is too emotionally tied to someone or something, be it the firm's old logo or a long-time employee.
The authors then set out four safeguards to help reduce the risk when you encounter those red flag conditions: You can seek more information, data and analysis; create an internal debate to challenge assumptions; have the governance team - usually the board of directors - intervene; or monitor the effect of the decision carefully to be alert to danger.
The findings are interesting, if not all that unexpected or unusual. The strength of the book lies in the detailed psychological exploration of these issues and the hold that emotions have on our decision making - if you want that detail - as well as the fascinating case studies of bad decisions.
Like Mr. Collins's book, it can help prevent you from finding yourself the case study in some future book on corporate folly.