Reference some of the companies highlighted in the book How the Mighty Fall- James Collin as examples to help relay your understanding of each of the following stages of decline: (1/2 page per point)
a. Hubris born of success
b. Undisciplined pursuit of more
c. Denial of risk and peril
d. Grasping for salvation
e. Capitulation to irrelevance or death
Over the long holidays, I took the liberty of reading How The Mighty Fall And Why Some Companies Never Give In. It always intrigued me to find out how large companies, with rich history and successful businesses can actually slowly reach to a stage of decline. I mean these are companies who are well known and have brilliant staff working with them, and yet can catapult into oblivion.
This shows that companies, no matter how successful they once were, can slowly or quickly spiral towards its destruction if they are not careful. By learning how the mighty fall, we can start asking better questions like how can decline be avoided? What are the stages of decline? How can my company reverse course?
In Collin’s research project of more than four years, he has uncovered five stages of decline that is consistent with the studied companies:
Stage 1: Hubris Born of Success Stage
2: Undisciplined Pursuit of More Stage
3: Denial of Risk and Peril Stage
4: Grasping for Salvation Stage
5: Capitulation to Irrelevance or Death
Companies that were evaluated based on the criteria that Collins and his research team had were the following:
A&P. Addressograph, Ames, Bank of America, Circuit City, HP, Merck, Motorola, Rubbermaid, Scott paper and Zenith. Not all of them fell into bankruptcy, but a lot of them fell to stage 4, with except of Merck. In is important to take note that at the point of writing the book, HP and Merck might have already reversed their steep decline and show improved results.
Here are the explanations in greater detail of every stage:
Stage 1: Hubris Born of Success Pride comes before destruction. Stage 1 starts when people become complacent with their success and sees success as an entitlement. They fail to remember what made them great and take it for granted that what has worked before could work again. They make statements like “We’re successful because we do these specific things”. Instead they should be focusing on “We are successful because we understand why we do these specific things and under what conditions they would no longer work.”
Collins cites the story of Motorola who invented StarTAC cell phones, which were the smallest phones in the world, using analog technology where digital slowly became the next wave. Motorola became arrogant and did not listen to the market, stating that “43 million analog customers can’t be wrong.” Their arrogance gave their competitors a growing market share and they fell from being the number 1 cell phone maker in the world to only having 17% share by 1999. By 2003, the number of employees dropped to 88,000- losing nearly 60,000 jobs from their 2001 figures.
Here are the indicators for Stage 1:
1. Neglect of primary flywheel: Leaders get distracted by other exciting potential earnings that they fail to focus on what make them great in the first place. They made a diversion and failed to improve their primary flywheel (their primary business).
2. Losing passion of their primary flywheel.
3. Focusing on practices and strategies that worked in the past and not the fundamental reasons for its success.
4. Refusing to attribute ‘luck’ random events. They think that success was due to their superior qualities of leadership and enterprise.
Stage 2: Undisciplined Pursuit of More
Reeking in their pride, companies pursue new ventures which promise better revenue and growth. There is nothing wrong with that, the problem is that it is done at the cost of reducing their focus on their core business and what made them successful. They started to pursue more and more new ventures that could generate money, without growing their team with the right people for the growth.
Rubbermaid aimed at introducing new products everyday, 365 days a year, while entering a new product category every twelve to eighteen months. Growth will come from doing a lot of new things, new geographies, new technologies, new joint ventures and new product innovations. The constant press and drive towards growth made Rubbermaid unfocused. For the first time in 1995, it reported its first loss. By then, the company closed six thousand product variations, nine plants and 1170 jobs.
Here are the indicators for Stage 2:
1. Excessive growth that is not sustained will lead to the breaking point in an organization.
2. Undisciplined discontinuous Leaps: The enterprise makes dramatic moves that fail at least one of the following tests: a. Do they ignite passion and fit with the company’s core values?
b. Can the organization be the best in the world at these activities or in these arenas?
c. Will these activities help drive the organization’s economic or resource engine?
3. Easy cash erodes the discipline that sustained the company in the first place.
4. The company becomes bureaucratic and people increasingly thinks of jobs rather than responsibilities.
5. Poor succession planning and inability of grooming next generation leaders.
6. Excessive focus on personal interests or ego, rather than what is good for the company in the long term.
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
People shield those in power from grim facts, fearful of penalty and criticism for shining light on the harsh realities.
People assert strong opinions without providing data, evidence, or a solid argument
The team leader has a very low questions-to- statements ratio, avoiding critical input and/or allowing sloppy reasoning and unsupported opinions.
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 seek as much credit as possible for themselves yet do no enjoy the confidence and admiration of their 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.
The team conducts “autopsies with blame” seeking culprits rather than wisdom.
Team members often fail to deliver exceptional results, and blame other people or outside factors for setbacks, mistakes, and failures.
Teamson the Way Up
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 bring data, evidence, logic and solid arguments to the discussion.
The team leader employs a Socratic style, using a high questions-tostatements ratio, challenging people, and pushing for penetrating insight.
Team members unify behind a decision once made and work to make the decision succeed, even if they vigorously disagreed with the decision.
Each team member credits other people for success yet enjoys the confidence and admiration of his or her peers.
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 without blame,” mining wisdom from painful experiences.
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
Pin hopes on unproven strategies – discontinue leaps into new technologies, new markets, new businesses – often with much hype and fanfare.
Seek a big, “game changing” acquisition (often based on hoped-for, but as yet unproven, “synergies”) to transform the company in a single stroke.
Make panicky, desperate moves in reaction to threats that can imperil the company even more, draining cash and further eroding financial strength.
Embark on a program of radical change, a revolution, to transform or upend nearly every aspect of the company, jeopardizing or abandoning core strengths.
Sell people on the promises of a brighter future to compensate for poor results.Destroy momentum with chronic restructuring and/or a series of inconsistent big decisions.
Search for a leader-as-savior, with a bias for selecting a visionary from the outside who’ll ride in and galvanize the company.
Behaviors That Can Help Reverse the Downward Spiral of Stage 4
Formulate strategic changes based on empirical evidence, and extensive strategic and quantitative analysis rather than make bold, untested leaps.
Understand that combining two struggling companies never makes one great company; only consider strategic acquisitions that amplify proven strengths.
Get the facts, think, and then act (or not) with calm determination; never take actions that will imperil the company long-term.
Gain clarity about what is core and should be held firm, and what needs to change, building upon proven strengths and eliminating weaknesses.
Focus on performance, letting tangible results provide the strongest case for a new direction.
Create momentum with a series of good decisions, supremely well executed, that build on one upon another.
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.