How The Mighty Fall


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How top-tier companies disintegrate, rapidly altered his intended trajectory. Collins knows a good idea when it latches its hooks into his mind. He’s the author of one of the most referenced and celebrated business “must-reads” of the last 30 years, Good to Great. If that book chronicled the arduous trek to the zenith of the business world, How the Mighty Fall stands on the shadowy side of the mountain, where businesses tumble down at varying rates of speed and terror.

The strange coincidence concerning Collins’ book is that its creation occurred largely before the 2008 global economic apocalypse. Fearing accusations of an attempt to capitalize on the current financial crisis, Collins is quick to assert that How the Mighty Fall is not about Wall Street, nor are its observations confined to the latter half of this decade.

Published in: Leadership & Management

How The Mighty Fall

  1. 1. Some Impressionistic takes from the book of Jim Collins’s “ How the Mighty Fall” Ramaddster @
  2. 2. This is the third book in a series of studies ….
  3. 3. The Changing Focus of World Class Companies-1990s  Having a strong core ideology (vision &values) that guides the company’s decisions and behavior.  Building a strong Corporate Culture.  Setting audacious goals that can inspire and stretch people –Big Hairy Audacious Goals (BHAG’s).  Developing people and promoting them from within.  Creating a spirit of experimentation and risk taking.  Driving for excellence Build to last, Collins and Porras, 1994
  4. 4. The Changing Focus of World Class Companies-2000s  Humble Leadership  Right people on board: “First who … then What”  Face reality: “Confront the brutal facts”  Breakthrough is about focus: “the Hedgehog concept”  Execution: “Culture of discipline”  Using technology to reinforce progress: “Technology accelerators” Greatness is not a matter of circumstances. Greatness, it turns out, is largely a matter of conscious choice. Jim Collins Good Results What is inside the black box Great Results Good to Great, Collins, 2001
  5. 5. Good to Great Disciplines
  6. 6. Starting universe included 60 corporations from 30 sectors from research database used in Good to Great and Built to Last studies. Selection criteria:  A great company at some point in history  Candidate for decline: From great company to mediocrity or worse Final Study Set, Fallen Cases & Success Contrast
  7. 7. Institutional Decline Institutional decline like a staged disease: Harder to detect but easier to cure in the early stages, Easier to detect but harder to cure in the later stages. An institution can look strong on the outside but already be sick on the inside, dangerously on the cusp of a steep fall.
  8. 8. Underlying Message Every company/ institution , no matter how great , is vulnerable to decline. Any company can fall and most eventually do But decline as it turns out, is largely self-inflicted & the path of recovery lies largely within our own hands
  9. 9. We are not imprisoned by our circumstances, our history, or even our staggering defeats along the way. As long as we never get entirely knocked out of the game, hope always remains. The mighty can fall, but they can often rise again. Decline can be avoided Decline can be detected Decline can be reversed Underlying Message
  10. 10. Five Stages of decline
  11. 11. Not every marker shows up in every case of decline. The presence of a marker does not necessarily mean that one has a disease. It does indicate an increased possibility that one is in that stage of decline. Use these markers as a self-diagnostic checklist Markers of Decline
  12. 12. Stage -1 Hubris of Success
  13. 13. Stage 1: Hubris Born of Success The concept of hubris is defined as excessive pride that brings down a hero, or outrageous arrogance that inflicts suffering upon the innocent
  14. 14. Markers for Stage -1-Hubris of Success  Success entitlement, Arrogance -Success is viewed as “deserved” rather than fortuitous, fleeting or even hard earned in the face of daunting odds.  Ignoring “Core Competencies”-invest in the “new”.  Neglect of a primary flywheel  Distracted by extraneous threats, adventures & 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” -Resistance to improve-we are “good and great”  The rhetoric of success  (“We’re successful because we do these specific things”)  Replaces understanding and insight  (“We’re successful because we understand why we do these specific things and under what conditions they would no longer work”).
  15. 15. Markers for Stage -1-Hubris of Success  Decline in learning  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.  Discounting the role of luck  Instead of acknowledging that luck and fortuitous events might have played a helpful role, people begin to presume that success is due entirely to the superior qualities of the enterprise and its leadership
  16. 16. Collins on Hubris  Undisciplined leaps into areas where a company cannot become the best  A company’s pursuit of growth beyond what it can deliver with excellence  Bold, risky decisions that fly in the face of conflict ing or negative evidence.  Denial of the possibility that the enterprise could beat risk, imperiled by external threats or internal erosion.  Arrogant neglect.
  17. 17. Collins on Change  The point here is not as simple as “they failed because they didn’t change.”  Companies that change constantly but without any consistent rationale will collapse just as surely as those that change not at all.  There’s nothing inherently wrong with adhering to specific practices and strategies (indeed, we see tremendous consistency over time in great companies), but only if you comprehend the underlying why behind those practices, and thereby see when to keep them and when to change them.
  18. 18. Company 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%. Motorola case
  19. 19. Motorola 1. 1989-high marks a) Adherence to core values b) Willingness to experiment c) Management continuity d) Self-Improvement –leader in Six- Sigma e) Ten year “ Technology road maps” anticipate the future 2. Mid 90’s a) Ten years growth – US $ 5 b to $ 27 B b) Shift from humility to arrogance c) New launch- StarTAC cell phone – small & sleek-but analog d) Wireless carriers – the future is digital e) Motorola tried to strong-arm the wireless Co’s –StarTAC is hot f) StarTAC rules- 75% of the phones had to be Motorola g) StarTac rules- promote with stand alone advertising 3. Arrogance gave competitors an opening a. 1999-market share went from 50% (#1 position) to 17%
  20. 20. Stage -2 Undisciplined Pursuit of more
  21. 21. Stage 2: Undisciplined Pursuit of More
  22. 22. 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?
  23. 23. Markers for Stage 2  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).  Packard’s law states that no company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company.  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 off freedom and responsibility that marks a culture of discipline; people increasingly think in terms of “jobs” rather than responsibilities.
  24. 24. Stage 2: Collins’ Law of “First who” If I were to pick one marker above all others to use as a warning sign, it would be a declining proportion of key seats filled with the right people.  24 hours day, 365 days a year, you should be able to answer the following questions: What are the key seats in your organization?  What percentage of those seats can you say with confidence are filled with the right people?  What are your plans for increasing that percentage?  What are your back up plans in the event that a right person leaves a key seat?
  25. 25.  The right people fit with the company’s core values.  The right people don’t need to be tightly managed.  The right people understand that they do not have “jobs”; they have responsibilities.  The right people fulfil their commitments.  The right people are passionate about the company and its work.  The right people display “Window and Mirror” maturity What makes the “Right people” in key seats?
  26. 26. Markers for Stage 2  Problematic succession of power:  The organization experiences leadership-transition difficulties, be they in the form of poor succession planning, failure to groom excellent leaders from within, political turmoil, bad luck, or an unwise selection of successors.  Personal interests placed above organizational interests:  People in power allocate more for themselves or their constituents–more money, more privileges, more fame, more of the spoils of success–seeking to capitalize as much as possible in the short term, rather than investing primarily in building for greatness decades into the future.
  27. 27. Signs of Lack of Discipline  Discontinuous leaps in to arenas for which you have no burning passion  Taking action in consistent with your core values  Investing heavily in new arenas where you cannot attain distinctive capability, better than your competitors  Launching head long in to activities that do not fit with your economic or resource engine  Addiction to scale  Neglecting your core business while you leap after exciting new adventures  Using 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  Compromising your values or lose sight of your core purpose in pursuit of growth and expansion.
  28. 28. 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. Rubbermaid case
  29. 29. Rubbermaid case 1. 1980-1993 a) Increased revenues more than 6 times – earning 15 times b) Innovation machine- 1991- 30% revenue from new products – past 5 years c) Innovation machine-1992-averaged one new product every day for 365 days d) 1999’s-Goal- One new market segment every 12-18 months e) Intense drive for growth and self-reinvention f) Objective- double sales, earnings , earnings per share every 5 years 2. 1994- Leap growth-new market acquisitions, technologies, joint ventures 3. What happened a) Choking on 1000 new products in 3 years b) Raw material costs doubled in 18 months c) Failing at basics- controlling costs & delivering on time d) 1995 – reported first loss e) Eliminated 6000 product variations- closed plants – laid off 11700 f) Made a large acquisition g) Recast the incentive compensation & bet on the internet 1998 sold out to Newell
  30. 30. Stage -3 Denial of Risk & Peril
  31. 31. Stage 3: Denial of Risk & Peril
  32. 32. 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 down side 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”.
  33. 33. Collins on 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 the hole is above the waterline, you can patch the hole, learn from experience, and sail on.  If you blow a hole below the waterline, you can find your self facing gushers of water pouring in, pulling you toward the ocean floor.  If the hole is big enough, you might go down really fast.
  34. 34. Markers for Stage 3  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 setback sand failures, leaders point to external factors or other people to affix blame.
  35. 35. Leadership-team Dynamics: On the way down versus On the way up
  36. 36. Leadership-team Dynamics: On the way down versus On the way up
  37. 37. Denial of risk & peril 1. Amplify the positive-discount the negative 2. Big bets and bold goals without empirical validation. 3. Incurring huge downside risk based on ambiguous data. 4. Erosion of healthy team dynamics-management does not listen. 5. Externalizing blame-not us-them 6. Obsessive Reorganizations. 7. Imperious detachment- Management is detached from reality.
  38. 38. Founded in 1879 Era of Focus for Analysis of Decline: 1960s-1990s Success Contrast: Kimberly-Clark Primary Business: Consumer paper products Example of "Fallen" Behavior: When faced with increased competition from various companies, Scott spent five years reorganizing rather introducing new products of its own. Result: The company was sold to Kimberly-Clark in December 1995. Scott Paper case
  39. 39. Scott Paper case 1. 1961 a) Most successful paper based consumer product franchise b) Commanding positions in all products such as napkins, tissues & towels c) P & G entered Scott’s market , while Kimberly Clark & George Pacific nibbled d) P & G launched Bounty towels on the high-end private brands attacked bottom 2. 1960-1971 a) Scott’s market share dropped from 50% to a third b) P & G launched in 1971 Charmin toilet tissue 3. Response a) Re-organize- marketing & research b) No vigorous response to Charmin for 5 years c) More restructure- 3 times in four years d) Eroding market share Result –Sold company to Kimberly-Clark in 1995
  40. 40. Stage -4 Grasping for salvation
  41. 41. Stage 4: Grasping for Salvation
  42. 42. Markers for Stage 4  A series of silver bullets  There is a tendency to make dramatic, big moves, such as a“gamechanging” acquisition or  A discontinuous leap into a new strategy or  An exciting innovation, 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 threat sand setbacks by searching for a charismatic leader and/or outside savior.  Panic and haste:  Instead of being calm, deliberate, & disciplined, people exhibit hasty, reactive behavior, bordering on panic
  43. 43.  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 buzz words and taglines.  Hype precedes results:  Instead of setting expectation slow–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 over-promising and under-delivering.  Initial up swing 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 build-up, no cumulative momentum. Markers for Stage 4
  44. 44.  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 pay cheque; people lose faith in their ability to triumph and prevail.  Instead of passionately believing in the organization’s core values and purpose, 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 Markers for Stage 4
  45. 45. Stage 4: Grasping for Salvation
  46. 46. Stage 4: Grasping for Salvation
  47. 47.  Stage 4 grasping can produce a brief improvement, but the results do not last.  Dashed hope follows dashed hope follows dashed hope yet again.  Companies stuck in Stage 4 try all sorts of new programs, new fads, new strategies, new visions, new cultures, new values, new break throughs,new acquisitions, and new saviors.  And when one silver bullet fails, they search for another and then yet another.  The signature of mediocrity is not an unwillingness to change. The signature of mediocrity is chronic inconsistency. Stage 4: Grasping for at least another Silver bullet
  48. 48. Stage 4: Panic and Desperation  When we find ourselves in trouble, when we find ourselves on the cusp of failing, 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 The KEY POINT is that they go for a quick, big solution or bold stroke to jump-start a recovery, rather than embark on the more pedestrian, arduous process of rebuilding long-term momentum Most “overnight success” stories are about twenty years in the making
  49. 49. Company Founded in 1892 Era of Focus for Analysis of Decline: 1960s-1980s Primary Business: Office addressing and duplicating machines Success Contrast: Pitney Bowes Example of "Fallen" Behavior: When Xerox introduced the 2400 copier in 1964, a panicked Addressograph brought out 23 new products in three years, 16 of which failed, and lost track of $70 million in customer orders. Result: Filed for Chapter 11 in 1982. Addressograph case
  50. 50. 1. 1945-1960 a) Leader in office addressing & duplicating machines b) $ 10000 invested in stock in 1945 produced $ 500000 in 1960 c) 1965 Xerox introduced the 2400 copier 2. Response a) Panicked-crash program-launched 23 new products in 3 years b) Ignored position in offset printing –high volume –high quantity print jobs c) Lost track of billing & accounts receivables, $ 70 M in orders d) 16 out of 23 new products failed e) Early 1970’s hired a visionary leader a) Reinventions, Psychological transformation & Corporate revolution b) Office of the Future- Word processing & electronic office machines c) Let offset position fade d) Chaos-Leader fired 3. 1981 - Posted losses equaling 50 years of accumulated net worth Churned through 4 CEO’s and 2 bankruptcies in a 12 years Addressograph case
  51. 51. Stage -5 Capitulation to irrelevance or death
  52. 52. 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; and in the most extreme cases the enterprise simply dies outright. Stage 5: Capitulation to Irrelevance or Death
  53. 53. Principle- 1 As Institutions hurtle toward Stage 5, they spiral downward, increasingly out of control . 1. Each cycle grasping followed by disappointment followed by more grasping –Erode resources. 2. Cash tightens. 3. Hope fades 4. Options narrow Capitulation to Irrelevance or death
  54. 54. Principle- 2  No company we studied was destined to fall all the way to Stage5,and each company could have made different decisions earlier in the journey to reverse its downward slide.  But by the time a company has moved through Stages1,2,3,and 4, those in power can become exhausted and dispirited, and eventually abandon hope.  And when you abandon hope, you should begin preparing for the end. Capitulation to Irrelevance or death
  55. 55. Principle- 3  But hope alone is not enough; you need resources to continue the fight.  If you lose the ability to make strategic choices, forced into short-term survival decisions that cripple the enterprise, then the odds of full recovery become increasingly remote Capitulation to Irrelevance or death
  56. 56. Principle- 4  Not all companies deserve to last.  Perhaps society is better off getting rid of organizations that have fallen from great to terrible rather than continuing to let them inflict their massive inadequacies on their stakeholders.  Institutional self-perpetuation holds no legitimate place in a world of scarce resources; institutional mediocrity should be terminated, or transformed into excellence Capitulation to Irrelevance or death
  57. 57. Principle- 5  When should a company continue to fight, and when does the refusal to capitulate become just another form of denial?  If you cannot marshal a compelling answer to the question, “What would be lost, and how would the world be worse off, if we ceased to exist?” the perhaps capitulation is the wise path.  But if you have a clear and inspired purpose built upon solid core values, then the noble course might be to fight on, to reverse decline, and to try to rekindle greatness. Capitulation to Irrelevance or death
  58. 58. Principle- 6  The point of the struggle is not just to survive, but to build an enterprise that makes such an 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 able to easily filled by any other institution – if it ceased to exist. Capitulation to Irrelevance or death
  59. 59. Principle- 7  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.  This is the very type of leader who finds a path out of the darkness and gives us well-founded hope. Capitulation to Irrelevance or death
  60. 60. Founded in 1918, introduced its first B&W TV in 1948 Era of Focus for Analysis of Decline: 1960s-1980s Success Contrast: Motorola Primary Business: Manufacturing of black & white TVs Example of "Fallen" Behavior: Ignored the threat from Japanese manufacturers; took on excessive debt to increase manufacturing capacity and lowered prices to gain market share; went into various businesses, including personal computers. Result: Crippled by its excessive debt and the TV division, the company sold the profitable computer division in 1989. Zenith
  61. 61. Finally two part questions to be answered  "What happened leading up to the point at which decline became visible, and what did the company do once it began to fall?“  "What do we learn by studying the contrast between success and failure?"
  62. 62. Learning's  Changing the leadership  Focused  Dedicated  Experienced  Disciplined  Take inventory-what is working what is not  Keys-cost cutting and long term investment-stop the bleeding  Belief that the company will survive  Return to sound management practices  Rigorous strategic thinking  Make sure that you do not run out of cash  Communicate
  63. 63. Conclusion  The point of the struggle is not just to survive, but to build an enterprise/ institution that makes such a distinctive impact on the world it touches.  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.
  64. 64. Some more Cases
  65. 65. The Great Atlantic & Pacific Tea Company  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
  66. 66. Ames Department Store Founded in 1958 Era of Focus for Analysis of Decline: 1980s-1990s Success Contrast: Wal-Mart Primary Business: Discount retailing Example of "Fallen" Behavior: Bringing in an outsider who was interested in quick growth instead of appointing a successor from within who would have maintained focus on Ames' core values. Result: After filing for bankruptcy more than once, the company announced it would close its last stores in 2002.
  67. 67. Bank of America Founded in 1929 Era of Focus for Analysis of Decline: 1970s-1980s Success Contrast: Wells Fargo Primary Business: Banking Example of "Fallen" Behavior: Removing responsibility for making loans from individual loan managers to committees, allowing mediocre performers to hide behind bureaucracy. Result: The concepts of responsibility and meritocracy were compromised, and the company lost many "good young people" who could have constituted the next generation of leaders.
  68. 68. Circuit City Founded in 1949 as Wards Company Era of Focus for Analysis of Decline: 1990s-2000s Success Contrast: Best Buy Primary Business: Electronics Retailer Example of "Fallen" Behavior: Not recognizing the potential for growth in its core business after concentrating on its CarMax and Divx businesses. Result: Filed for bankruptcy on Nov. 10, 2008.
  69. 69. Circuit City in decline exemplifies a cycle of arrogant neglect that goes like this: 1. You build a successful flywheel. 2. You succumb to the notion that new opportunities will sustain your success better than your primary flywheel, either because you face an impending threat or because you find other opportunities more exciting (or perhaps you’re just bored). 3. You divert your creative attention to new adventures and fail to improve your primary flywheel as if your life depended on it. 4. The new ventures fail outright, siphon off your best creative energy, or take longer to succeed than expected. 5. You turn your creative attention back to your primary flywheel only to find it wobbling and losing momentum.
  70. 70. Hewlett-Packard 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
  71. 71. 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
  72. 72. Happy Reading & Learning Your comments