Jim Collins' new book, How the Mighty Fall...And Why Some Companies Never Give In, made for some fast summer reading. Susan and I loved his other books Built to Last and Good to Great. So when Susan planned to be in the Bahamas last week (doing some lighter reading, I hope) I asked if I could review the book.
"All happy families are alike; each unhappy family is unhappy in its own way." Leo Tolstoy in his novel Anna Karenina
At first I thought this book was an excuse to explain the demise of some of the great companies Collins profiled in his books Built to Last and Good to Great. In fact, Collins devotes a whole page in the book to "Why the Fall of Previously Great Companies Does Not Negate Prior Research."
To answer the question, "How would you know if your company was on the road to decline when it was the most successful company in the industry and the best player in the game?" Collins took some of his great companies and showed how even they could fall. The fall consists of the following 5 stages:
Hubris Born of Success (You might call this Being Arrogant)
I hadn't heard the word "hubris" in a while so I looked it up. It means overbearing pride or arrogance. In this stage companies view success as an entitlement and lose sight of what made them successful to begin with. Leaders lose their learning orientation, presume their success is due entirely to their superior qualities and are egotistical enough to think that luck and fortuitous events haven't played a role in their success.
Motorola enjoyed exponential success until the mid-1990s when they felt great pride in their soon-to-be-released StarTAC cell phone. There was only one problem: the StarTAC phone used analog technology just as the wireless carriers were shifting to digital. Motorola tried to strong-arm carrier companies by saying, "If you want the hot StarTAC then you must agree to our rules." Along this same line is a quote from the Bank of America CEO prior their fall who admonished his managers by saying, "We don't have time to learn from others' mistakes. Let others learn from us."
Undisciplined Pursuit of More (You might call this Getting WAY too Big for Your Britches)
In this phase companies become obsessed with growth and are frequently very innovative. Rubbermaid aimed to introduce one new product a day, 7 days a week, 365 days a year. Three years later they were choking on the nearly 1,000 new products, raw material costs and growth targets. Merck became obsessed with growth early this century with their drug Vioxx. One hundred million prescriptions later Merck voluntarily removed Vioxx from the market because of studies revealing it could cause heat attacks and strokes.
In this stage, companies lose sight of hiring the right people and succession planning. Collins introduces my favorite research with 6 characteristics for getting the right people in key seats across organizations.
Denial of Risk and Peril (You might call this Not Having a Clue)
By Stage 3 the cumulative effects of the previous stages are causing strain. At this stage companies externalize the blame, take big bets that aren't based on facts and reorganize as a form of denial. Restructuring can create a false sense that you're actually doing something productive.
Collins says leaders need to answer these questions before making decisions at this stage:
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?
He tells the haunting story of NASA's Challenger explosion that killed all 7 crew members and how the above 3 questions should have been asked.
Just for fun, watch this silly clip from The Office about the question Dwight asks himself before making a decision.
Grasping for Salvation (You might call this Scrambling)
Companies in this stage reach for one silver bullet. The silver bullet could be betting on an unproven technology, relying on a new flashy product, a "game-changing" acquisition, an image makeover or seeking a savior CEO. Incidentally, evidence shows a strong correlation between companies who fall and going outside for a CEO during their era of decline.
Texas Instruments (TI) has one of the best examples of reversing their fall in 1985 when they promoted 25-year employee Jerry Junkins to CEO. Then in 1996 when Junkins unexpectedly died from heart failure on a business trip to Europe the CEO position was given to 20-year veteran Tom Engibous. In turn, it was a smooth transition that Engibous repeated upon retirement by turning over his job to another TI-grown leader Richard Templeton.
In the haste of the situation, companies at this stage are operating out of desperation. Collins says they need to "Breath. Calm yourself. Think. Focus. Aim."
Capitulation to Irrelevance or Death (you might call this The Bugle Playing Taps)
Companies in this stage have run out of options and given up the fight. At this point, only one word matters: CASH. If you don't have it, you're in big trouble. These companies have suffered through Stages 1, 2, 3 and 4 and the leaders are exhausted and dispirited. Zenith went through all 4 stages and then became the #2 maker of IBM-compatible computers. But their cash position was so depleted from hanging on to their television business that they fell into bankruptcy.
The moral of the story, according to Collins, is "Every institution is vulnerable, no matter how great...Anyone can fall and most eventually do." But wait, he also says, "We are not imprisoned by our circumstances, out setbacks, our history, our mistakes, or even staggering defeats along the way. We are freed by our choices."