Book Summary of “How The Mighty Fall” by Jim Collins (Part 2 of 2)

This article is part 2 of 2 in what I wrote a week ago on “How the mighty fall”. Part one is located here. This article serves to help you understand how mighty and big companies fall and what you can do about it.

 

Stage 3: Denial of Risk and Peril


As companies move past stages 1 and 2, they will fall deeper into Stage 3 when they begin to ignore accumulated warnings. They tend to overlook obvious data that something is not doing well in their new ventures and believe that things will get better. They continue to bet big on the new ventures while denying the cracks of risk and peril.

Collins shares about how the leadership plays a part in the growth or decline of an organization.

 

Leadership-Team Dynamics:
On the Way Down versus On the Way UP (Taken from Page 77)

Teams on the Way Down

Teams on the Way Up

People shield those in power from grim facts, fearful of penalty and criticism for shining light on the harsh realities. People bring forth unpleasant facts – “Come here, look, man, this is ugly” – to be discussed; leaders never criticize those who bring forth harsh realities.
People assert strong opinions without providing data, evidence, or a solid argument. People bring data, evidence, logic and solid arguments to the discussion. 
The team leader has a very low questions-to- statements ratio, avoiding critical input and/or allowing sloppy reasoning and unsupported opinions. The team leader employs a Socratic style, using a high questions-to-statements ratio, challenging people, and pushing for penetrating insight.
Team members acquiesce to a decision yet do not unify to make the decision successful, or worse, undermine the decision after the fact. Team members unify behind a decision once made and work to make the decision succeed, even if they vigorously disagreed with the decision.
Team members seek as much credit as possible for themselves yet do no enjoy the confidence and admiration of their peers. Each team member credits other people for success yet enjoys the confidence and admiration of his or her peers.
Team members argue to look smart or to improve their own interests rather than argue to find the best answers to support the overall cause. Team members argue and debate, not to improve their personal position, but to find the best answers to support the overall cause.
The team conducts “autopsies with blame” seeking culprits rather than wisdom. The team conducts “autopsies without blame,” mining wisdom from painful experiences.
Team members often fail to deliver exceptional results, and blame other people or outside factors for setbacks, mistakes, and failures. Each team member delivers exceptional results, yet in the event of a setback, each accepts full responsibility and learns from mistakes

In seven out of the eleven cases, Collins found evidence of externalizing blame during the era of decline. CEOs blame a huge range of factors like the environment, inflation, company hit by strikes, unfair competition and ignorance. While it is true that these factors hit the company hard, the company’s denial of it made it much worst.

Here are the indicators for Stage 3:

  1. Amplify the positive and discount the negative.
  2. Bet big on new goals without empirical evidence or validation of previous small wins.
  3. Erosion of healthy team dynamics. Debate and dialogue is replaced with consensus or dictatorial management.
  4. Externalizing blame rather than accepting failures.
  5. Obsessive reorganisations within an organisation rather than confronting brutal realities.

Stage 4: Grasping for Salvation


Companies at this stage know that they are in deep trouble and its board of directors look to a new fast moving CEO who will launch a new vision, be the messiah that will save the day. Some look to a dramatic cultural revolution, game changing acquisitions or a number of sliver bullet solutions.

HP exemplified stage 4 behaviour when it launched a conversational $24 billion merger with Compaq. It was a sliver bullet move, hoping that it will be the game changer and rescue them out of their woes.

 

Behaviours that can exemplify stage 4 or reverse the downward trend

(Taken from page 90)

 

Behaviors That Exemplify and Perpetuate Stage 4

Behaviors That Can Help Reverse the Downward Spiral of Stage 4

Pin hopes on unproven strategies – discontinue leaps into new technologies, new markets, new businesses – often with much hype and fanfare. Formulate strategic changes based on empirical evidence, and extensive strategic and quantitative analysis rather than make bold, untested leaps.
Seek a big, “game changing” acquisition (often based on hoped-for, but as yet unproven, “synergies”) to transform the company in a single stroke. Understand that combining two struggling companies never makes one great company; only consider strategic acquisitions that amplify proven strengths.
Make panicky, desperate moves in reaction to threats that can imperil the company even more, draining cash and further eroding financial strength. Get the facts, think, and then act (or not) with calm determination; never take actions that will imperil the company long-term.
Embark on a program of radical change, a revolution, to transform or upend nearly every aspect of the company, jeopardizing or abandoning core strengths. Gain clarity about what is core and should be held firm, and what needs to change, building upon proven strengths and eliminating weaknesses.
Sell people on the promises of a brighter future to compensate for poor results. Focus on performance, letting tangible results provide the strongest case for a new direction.
Destroy momentum with chronic restructuring and/or a series of inconsistent big decisions. Create momentum with a series of good decisions, supremely well executed, that build on one upon another.
Search for a leader-as-savior, with a bias for selecting a visionary from the outside who’ll ride in and galvanize the company. Search for a disciplined executive, with a bias for selecting a proven performer from the inside.

Every company in Collins’ study indicated late stages of decline that made them grasp for at least one sliver bullet. The stage 4 behaviour worsened the situation these companies are already in. Collins also found out that eight out of the eleven fallen companies in the analysis went for an outside CEO during their era of decline, which usually worsened under saviours from the outside.

Here are the indicators for stage 4:

  1. A tendency for sliver bullets or a game changing strategy that will help the organization catapult them out of the decline rapidly.
  2. Searching of leaders as saviours, often for charismatic leaders and/or from outside the organization.
  3. Introduction of new buzzwords and radical changes. Leaders engage in new slogans, new programs, new culture to align or motivate people.
  4. Panic and haste, instead of being calm and disciplined on strategy.
  5. Hype before results- leaders tend to sell the future to compensate the lack of current results, initiating a pattern of over promising and under delivering.
  6. No sustainability of results. There is a trend of initial positive results but they do not last since there is no cumulative buildup and momentum.
  7. Confusion and cynicism of what the company stands for. There is confusion on the ground over what their core values are, the workplace just becomes another place to work, a place to get a paycheck. People become distrustful regarding vision and values as little more than Public Relations.

 

Stage 5: Capitulation to Irrelevance or Death

Collins remarked that no company that they have studied fell into Stage 5 and each company made their different decisions to reverse its downward slide. By the time a company has moved from stage 1 to 4, those in power can be exhausted, dispirited and eventually abandon hope. Some of the leaders just sell out, in other cases, the organization spirals down to utter insignificance or dies out right.

Zenith Corporation held onto dominant positions in television and radio. For every dollar invested in Zenith at the start of 1950 and held through to 1965 increased in value more than one hundred times, generating cumulative results ten times more than the market. However, over time, Zenith faced problems and threats from the Japanese who were building better television sets at lower cost. They brushed it aside believing that the Japanese were not able to build quality products (stage 1). In addition, leadership succession problems helped to plague the company when a chosen successor died (stage 2).

Zenith also blamed external problems such as the struggling US economy, labour unrest, oil shocks and so forth, rather than confronting its lack of competitiveness (stage 3). Profitability ratios went down to levels not seen in thirty years. The lack of a specific plan and leap into all kinds of opportunities like VCRs, videodiscs, telephones linked to televisions, home security video cameras, cable TV decoders and computers, drove its debt-to-equity ratio to 140 percent (stage 4).

In their grasp for salvation, Zenith stumbled upon a new opportunity that made them great again. They became the number two maker of IBM compatible personal computers. However, even with their success, they were dragged down by their television business, which deteriorated their financial position and cash on hand dropped to five percent of current liabilities. This lead to the selling of Zenith to Bull Corporation.

 

How do you recover when your organization faces decline?

Collins shares his insights on how you can make a difference by the following methods:

  1. Understand how other great companies fall and learn from their mistakes.
  2. There is hope that even when companies fall in stage 4, they have proven that they could recover from it. Examples like Nucor, Nordstrom, Disney and IBM fell but bounced back.
  3. Never give in and be willing to change tactics. Never give up on your core purpose. Be willing to kill of failed business ideas and even close big operations when they fail to produce results.
  4. Never give up on your core values and what you stand up for. Be willing to embrace loss, endure pain but never give up faith that you will prevail.

 

PS: I have prepared a book summary as a PDF so that you can download it and read it in its entirety. You can download it here.