Every great institution stumbles at some point in its history. All companies, no matter how established or successful, can fail. The crucial questions are, “how do you know if you’re on the verge of a decline”, and “how can you turn things around”? Through four years of research, Jim Collins discovers that most great companies fall through five stages of decline, which can be detected early and avoided. In this review, we’ll give a synopsis of each of these five stages of decline, and how to prevent, detect or reverse the decline before it’s too late.
Jim Collins’ bestselling books, “Good to Great” and “Built to Last” looked at how good companies broke away from the rest to consistently outperform the market, and how visionary companies like Disney and 3M lasted the test of time to lead and shape their industries. Yet, some of these great companies (e.g. Merck, Motorola) eventually fell. This book builds on earlier research to uncover what happened, and to identify if such decline could be foreseen, avoided or reversed.
Jim Collins shares the research methodology leading to the selection of 11 companies that demonstrated the rise-and-fall phenomenon: Great Atlantic and Pacific Tea Company (A&P), Addressograph, Ames Department Stores, Bank of America, Circuit City, Hewlett-Packard (HP), Merck, Motorola, Rubbermaid, Scott Paper, and Zenith.
Stage 1: Hubris from success
“Hubris” refers to excessive pride or arrogance. Stage 1 starts when people become over-confident and forget the true foundations of their success. People start to take success for granted, lose the hunger for learning, get distracted by non-core areas, and confuse their “Why” and “What”.
Stage 2: Undisciplined pursuit of more
The arrogance from Stage 1 leads the company to overstretch, jumping into areas where it can’t be great, or pursuing growth without the right people or resources. They become obsessed with growth (to the point of losing focus and discipline), and make the fatal error of growing faster than they can get the right people, and/or don’t put the right successors in place.
Stage 3: Denial of risk and peril
At this stage, the company is still delivering results, but there are growing signs of danger. Unfortunately, leaders view the data through colored lenses and neglect the threats. Leaders play up the positives, play down the negatives, read ambiguous data favorably, and attribute problems to external factors. Fanatical reorganization, and deterioration of team dynamics and culture are common.
Stage 4: Grasping for salvation
At this phase, the decline becomes undeniable. But, the organization’s death is not yet imminent. Leaders’ responses at this point determine if the organization sinks or swims. Those who panic and seek quick salvation (e.g. bringing in an external “Savior”, or jumping into drastic, untested changes) will accelerate their fall to Stage 5. Revival is only possible with a return to fundamentals, i.e. the organization must laboriously rebuild and reinforce the flywheel once again, one step at a time.
Stage 5: Resignation to downfall
The longer an institution stays at Stage 4, and the more its people try to find magic solutions, the faster its downward decline. Eventually, the financial resources dry up and people run out of steam. Collins calls this stage “Capitulation to Irrelevance or Death”. At this point, there are usually two paths a company can take: (a) give up and sell the company, or (b) keep going until it exhausts its options.
All great companies stumble at some point, e.g. IT, IBM, Nordstrom, Disney, Boeing, HP and Merck. So long as you haven’t fallen too far to run out of options, you can still refocus and rebuild, one step at a time. The book ends with how Xerox managed to make such a turnaround.
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