In the Executive Link Professional Development Program we’ve been exploring the concepts in Good To Great in which Jim Collins describes common characteristics of 11 uncommon companies. What made these companies uncommon was that they had produced only average results, as measured by stock market returns for 15 years, then produced great results (at least three times higher than the stock market average) for the next 15 years.
Good To Great was published in 2001. Since then a lot has happened and a few of the “great” companies described in Good To Great are gone! In fact, of the 60 companies described in Good to Great and Collins’ previous book Built To Last, 11 have fallen on hard times or worse.
Collins began researching why and how great companies lose their edge and described his conclusions in How The Mighty Fall. Collins says there are five stages in a successful company’s demise. By understanding and learning to recognize these five stages, perhaps your business can avoid the same fate.
The five stages are:
- Hubris Born of Success
The people who led their companies from good to great were all known for their genuine humility. They credited their team, hard work, circumstances and luck for their success. They stepped into the spotlight only to accept responsibility for the inevitable mistakes that every company makes.
In the years leading up to their steep decline the culture changed. Leaders acted as though they were bullet proof and could do no wrong. Rather than crediting the team, hard work, circumstances and luck for their success, they tended to take credit personally and even exaggerate their role. When things started to go wrong they ducked responsibility and blamed others, circumstances or bad luck.
- Undisciplined Pursuit of More
Feeling like they could do no wrong, companies stopped focusing on their core business and began to spin off new ventures. Some of those new ventures were very successful (e.g. Car Max created by Circuit City). Unfortunately, while focusing on the new ventures, their core business eroded and in some cases completely collapsed.
- Denial of Risk and Peril
Leaders tended to see what they wanted to see. They accepted and even inflated the good news and down-played or even dismissed the bad. They put a positive spin on ambiguous data and then made some big bets based on that data.
Collins advises his readers to evaluate risk by asking whether it is “above or below the water line.” Think of a hole in the hull of a ship. If it is above the water line it can be fixed and we can sail on. Below the water line and the ship sinks. Collins recommends asking three questions when making a decision based on ambiguous data:
- 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?
If the potential upside is worthwhile and you can live with the potential downside (the hole is above the water line) go for it.
- Grasping for Salvation
As they started to collapse, companies restructured, began bold new programs, and merged with other companies to try to regain their health. Collins points out that merging two mediocre companies doesn’t create one great company. It just creates a larger mediocre company.
- Capitulation to Irrelevance or Death
You don’t have to go down with the ship. The challenge is to recognize as early as possible when the game is lost. That’s the time to get out and save what you can.
Some companies pulled out of their decline and rebuilt to their former stature. They had several things in common too. Most importantly they resisted the temptation to launch sweeping reforms and they got back to basics.
To illustrate, Collins contrasts Louis Gerstner Jr., who was made CEO of IBM in 1993, and Carly Fiorina, who was brought on to lead Hewlett Packard in 1999. Prior to their coming on board both companies had faced several tough years and had been struggling.
In her first months on the job Fiorina was featured in Business Week and Vogue magazine. She appeared on Oprah, The Today Show and in commercials for prime-time TV. In his first months Gerstner declined media interviews, telling the press, “We’re going dark for a bit while we assess the task at hand.” Fiorina called HP employees “change warriors” and announced to them, “We owe you a very clear vision of the future…and that’s what we intend to give you.” In contrast, when Gerstner was asked about his vision for IBM he responded, “Vision? The last thing we need is a vision!” There’s no question that vision is important, but when you are about to go down your first step is not to chart a new course. It is to patch the holes and stop the leaking.
Gerstner’s approach led to IBM’s resurgence. HP continued to struggle making one false start after another under Fiorina’s leadership.
You might think that a book about how successful companies fail would be depressing. I had just the opposite reaction. Collins shows, “Whether you prevail or fail, endure or die, depends more on what you do to yourself than what the world does to you.”