How does the Mighty Fall !

Originally what was designated to be an article which eventually got transformed into a small book. It emerged from the wildfire of 2008 GFC where majority of the markets crumbled. Stocks like Lehman Brothers collapsed into bankruptcy after 158 years of growth and success. Fannie Mae and Freddie Mac, crippled, succumbed to government conservatorship. Merrill Lynch, the symbol of bullish America, capitulated to a takeover bid.

From “Good to Great” to “How does the Mighty Fall” - Principles in Good to Great were derived primarily from studying specific periods in history when the good-to-great companies showed a substantial transformation into an era of superior performance that lasted fifteen years. The research did not attempt to predict which companies would remain great after their fifteen-year run. Indeed, as this work shows, even the mightiest of companies can self-destruct.

Collins uses data and collects a pack of about 11 companies- A&P, Addressograph, Ames Department Stores, Bank of America (before it was acquired by NationsBank), Circuit City, Hewlett-Packard (HP), Merck, Motorola, Rubbermaid, Scott Paper, and Zenith. In this book he combines a number of quantitative and qualitative parameters and gave a five-stage framework derived from the analysis. It depicts What happened leading up to the point at which decline became visible and what did the company do once it began to fall?

This is the third book after Built to Last and Good to Great. The aim of this piece is to offer a research-grounded perspective of how decline can happen, even to those that appear invincible, so that leaders might have a better chance of avoiding their tragic fate.

The Disease Analogy - 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 precipitous fall.

“Assembling a data-driven framework of decline proved harder than constructing a data-driven framework of ascent."

Collins take up matched-pair contrast method comparing successful outcomes to unsuccessful outcomes,  controlling as much as possible to pick similar companies facing similar environmental conditions.

An institution can stay in one stage for a long time, but then pass quickly through another stage. The stages can also overlap, the remnants of earlier stages playing an enabling role during later stages. 

STAGE 1 – Hubris Born of Success

Hubris is defined as excessive pride that brings down a hero, or alternatively outrageous arrogance that inflicts suffering upon the innocent.

It starts with Motorola case study –being the #1 cell phone maker in the world, at one point garnering nearly 50 percent market share, to having only 17 percent share by 1999. How the company entered stage 1 and declined overtime.

Another case study from Good to Great, Circuit City as with most climbs to greatness, it involved sustained, cumulative effort, like turning a giant, heavy flywheel to filing for bankruptcy in 2008. Reason being losing up of primary flywheel (stores) and not realizing that mistake. The Next Big Thing in the arrogant belief that its success will continue almost automatically—is hubris.

How untamed arrogance can destroy businesses worth billions in a matter of few quarters. As seen in Circuit City, Walmart vs Amex, etc. Collins lists the following reasons for stage 1 – SUCCESS ENTITLEMENT, ARROGANCE: Success is viewed as “deserved”, rather than fortuitous. NEGLECT OF A PRIMARY FLYWHEEL: Distracted by extraneous threats, adventures, and opportunities. “WHAT” REPLACES “WHY”: The rhetoric of success  replaces understanding and insight. DECLINE IN LEARNING ORIENTATION and DISCOUNTING THE ROLE OF LUCK.

STAGE 2 – Undisciplined Pursuit of More

Ames going for Zayre’s acquisition which led to the company to fall on its head to Rubbermaid’s one product per day strategy, Merck’s overemphasis on growth to Motorola’s patent productivity, HP’s undisciplined actions and breaking Packard’s law (a great company is more likely to die of indigestion from too much opportunity than starvation from too little.)  This stage is filled with enthusiasm and energy. Some prominent makers of stage 2 are :

Unsustainable quest for growth, problematic succession of power, personal gains, undisciplined leaps –Collins gives 3 objective tests to determine it-

1. Do they ignite passion and fit with the company’s core values? 2. Can the organization be the best in the world at these activities or in these arenas? 3. Will these activities help drive the organization’s economic or resource engine?

“Innovation can fuel growth, but frenetic innovation—growth that erodes consistent tactical excellence—can just as easily send a company cascading through the stages of decline.”

STAGE 3 – Denial of Risk and Peril

Motorola’s iridium from a revolutionary product and expensive affair, filed for bankruptcy, defaulting on $1.5 billion in loans which helped accelerate Motorola’s plummet toward Stage 4.

Vis a vis Texas Instruments and its gradual evolution to become the Intel of digital-signal processing, or DSP.TI  bet big only once it had the weight of accumulated empirical evidence on its side.

Reasons – Amplify the positive, discount the negative; externalizing blame; erosion of healthy team dynamics; obsessive reorganizations.

REMEDY :

When making risky bets and decisions in the face of ambiguous or conflicting data, ask three questions:

1. What’s the upside, if events turn out well?

2. What’s the downside, if events go very badly?

3. Can you live with the downside? Truly?

“Audacious goals stimulate progress, but big bets without empirical validation, or that fly in the face of mounting evidence, can bring companies down, unless they’re blessed with unusual luck.”

STAGE 4 – Grasping for Salvation

HP case study – How from Lew Platt(humble, hardworking CEO) to Carly Fiorina(the superstar CEO), how the business transitioned from profitable and steady growth to uncertain and erratic sales pattern. Fiorina was removed from the post in 2005 but HP took the damage in terms of time and opportunity cost. Stage 4 begins when an organization reacts to a downturn by lurching for a silver bullet. This can take a wide range of possible forms, such as betting big on an unproven technology, pinning hopes on an untested strategy, relying upon the success of a splashy new product, seeking a “gam changing” acquisition, gambling on an image makeover, hiring consultants who promise salvation, seeking a savior CEO, expounding the rhetoric of “revolution,” or in its very late stages, grasping for a financial rescue or buyout. The key point is that they go for a quick, big solution or bold stroke to jump-start a recovery.

Collins gave a number of case studies to present the stage –from Zerox vs Addressograph, to Circuit City, HP and IBM to substantiate his observations.

Reasons for stage 4 – series of silver bullets, grasping of a leader as savior, hype over results, confusion and cynicism, panic and haste (Circuit City changing CEO’s), chronic restructuring and erosion of financial strength.

“The signature of mediocrity is not an unwillingness to change. The signature of mediocrity is chronic inconsistency.”  

“Breathe. Calm yourself. Think. Focus. Aim. Take one shot at a time.”

STAGE -5 Capitulation to Irrelevance or Death

This is the final stage in fall. It has two versions, in the first version, those in power come to believe that capitulation offers a better overall outcome than continuing to fight. In the second version, those in power continue the struggle, but they run out of options, and the enterprise either dies outright or shrinks into utter irrelevance compared to its previous grandeur. Collins takes up the case of Scott Paper(sold to Kimberly Clarke), and Zenith Corporation( filed bankruptcy). CASH dominant to high debt position which lead the companies towards capitulation.

There can be a turnaround after stage 4 as seen in Zerox (cutting costs, increasing R&D expenditure and incurring loss to coming back as antifragile company). Further, there are case studies on IBM, Nucor and Nordstorm to bring out Well Founded Hope.

Be willing to evolve into an entirely different portfolio of activities, even to the point of zero overlap with what you do today, but never give up on the principles that define your culture. Be willing to embrace the inevitability of creative destruction, but never give up on the discipline to create your own future. Be willing to embrace loss, to endure pain, to temporarily lose freedoms, but never give up faith in the ability to prevail. Be willing to form alliances with former adversaries, to accept necessary compromise, but never—ever—give up on your core values.

From Built to Last to Good to Great and now to How does the Mighty Fall Collins just adds to his research and forms established facts to work again.

How does the Mighty Fall is short read which summarized the rise and fall of American business using objective screening parameters, subjective quality analysis bound together by common pattern of behavior. Overall, a short and highly knowledge filled read.