Kausambhi Majumdar

Book Review – How the Mighty Fall

Kausambhi Majumdar

“Whether you prevail or fail, endure or die, depends more on what you do yourself than on what the world does to you.”

— Jim CollinsCover_Web

It is usually the way of the world; the old and the mighty fall to usher in the new and the young. However, some of the older ones manage to sustain, sometimes by re-inventing themselves or re-generating or just by staying true to their core values.  Amidst the backdrop of the 2008 financial crisis that gripped the US economy and sent out ripple effects across the globe, Jim Collins’ book How the Mighty Fall lays down a framework to understand what might lead to the downfall of a corporate house and what makes some stick around. For instance, e-commerce in India is rapidly on the rise and replacing brick-and mortar retailers. Collins’ framework might be used to analyse which of the traditional retail chains will manage to survive and stay relevant. The book is an attempt at answering the question of how a company, which is in the best of its health, could know that it might be on the path of decline. It also outlines what leaders of such companies should look out for to spot the oncoming decline and what action might prove futile against what might prove useful. The book illustrates these points by citing eleven case studies of companies and corporations that once were the epitome of success but faded into oblivion over time. Backed with extensive research, Collins asks the following set of questions that delve deeper into understanding how the mighty fall:

– Are there clearly distinguishable stages of decline?

– If so, can you spot decline early?

– Are there tell-tale markers of decline?

– Can you reverse decline, and if so, how?

– Is there a point of no return?

 In his earlier book Good to Great, Collins focused on what makes good companies great. What sets them apart from the rest? What lies behind the greatness and success of such companies? But as he quotes Leo Tolstoy’s Anna Karenina, ‘All happy families are alike; each unhappy family is unhappy in its own way’, he concludes that there are more diverse ways in which companies fall than ways they become great. By going over to the dark side, as Collins calls it, lessons can be learned by studying the mistakes of the fallen ones. He takes us through five stages that companies go through when they are on the verge of going downhill. These stages have been focused on the two-part question – What happened leading up to the point at which the decline became visible and what did the company do once it began to fail?  Collins also conducts a contrast study that compares two companies from same sectors. Going downhill, each reacts and implements strategies of their own but one of them emerges from the ashes and the other burns down. The five stages that a company may go through while sliding towards decline are:

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

However, Collins admits that this framework of five stages is not definite. Companies may fall due to other reasons too: fraud, catastrophic bad luck, scandal and so on. But the model put forth by Collins may be useful for leaders to prevent, detect, or reverse decline. How the Mighty Fall is based on a research analysis conducted over four years. Taking care to avoid retrospective data, the research is based on statistics and news reports of the time period when the particular company studied was in decline. According to Collins, retrospective information tends to be biased and hence may not lead to objective observations and conclusions. The history of each of the eleven companies was studied along the following parameters: financial ratios and patterns, vision and strategy, organization, culture, leadership, technology, markets, environment and competitive landscape.

Stage 1 – Hubris Born of Success

1Ascent to greatness generally involves a sustained cumulative effort. It is similar to turning a big flywheel, each push building on the efforts of previous work, creating momentum from one turn to ten and so on. Once its core flywheel is in motion, an organization might add a second or third wheel. Even when the organization goes on to diversify into different areas, it is essential to maintain the initial momentum and keep the primary flywheel, that is its core business, running. A company develops hubris when it denies the possibility that it could be at risk from external threats or internal erosion. Hubris manifests in many forms like a company venturing into areas where it cannot become the best, a company pursuing growth beyond what it can deliver with excellence, or in bold risky decisions taken despite conflicting or negative evidence. Hubris might also arise from the arrogant belief that the core business will run on autopilot and be successful while the organisation puts all its focus on The Next Big Thing.

It might be argued that organisations need to change and expand to keep themselves relevant. This is true. However, this change should not be at the expense of neglecting the core business which it specialises in and has developed expertise in since its inception. The change should be with a consistent rationale. It is necessary to understand the why behind the traditional practices and strategies before implementing any change in the organisation. This reasoning will enable the organization to understand when to keep the core practices and when to change them. Rather than saying ‘We are successful because we do these specific things’, an organisation will understand when to adapt to change when its rhetoric of success is ‘We’re successful because we understand why we do these specific things and under what conditions they would no longer work.’

Another marker to detect hubris is when leaders of the organisation no longer invest themselves in developing a consistent learning curve. They lose their inquisitiveness and willingness to learn more. The organisation might also succumb to hubris if they fail to acknowledge the luck factor in their successful outcome and overestimate their own capabilities.

Stage 2 – Undisciplined Pursuit of More

2If and when an organisation succumbs to hubris, it has a tendency to make brash commitments and elevate expectations. The general perception about companies that decline is that they become complacent as they become successful. However, according to the analysis conducted for How the Mighty fall, Jim Collins states in the book that it is not complacency but overreaching that leads to self-destruction. For instance, HP in 1999 launched its ‘Invent’ campaign and had doubled the number of patents in two years. Its revenues had multiplied 2.6 times in the five-year period from 1992 to 1997. It acquired Verifone and made a significant move in the ecommerce sector. But in 1999, HP was in the middle of Stage 4 decline. It is not complacency but the unsustainable quest for growth and confusing big with great that propels an organisation through Stage 2 of decline. After achieving success, an organisation is under constant pressure to increment growth that leads to a vicious cycle of expectations. At such a time it may make undisciplined discontinuous leaps. The following three tests can be used to understand if such dramatic moves might be tactical mistakes:

– Do the new strategies ignite passion and fit with the company’s core values?

– Can the organization be the best in the world at these activities or in these arenas?

– Will these activities help drive the organization’s economic or resource engine?

 If the answers to above questions are negative, the new changes might put undue pressure on the people, the culture and the systems and take it to a breaking point. The organisation might fail to deliver consistent excellence and fray at the edges. To keep up with the new strategies and increasing costs to maintain them, it may increase prices and revenues rather than increase discipline. In Stage 2, there are a declining proportion of right people in key positions. Companies in this stage of decline, commit the mistake of breaking the ‘Packard’s Law’. This law, Collins states, is based on the cofounder of HP, David Packard’s statement that no company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company. Filling key positions with the wrong people leads to implementation of stringent policies and bureaucratic procedures to compensate for the inadequacies of the wrong people. This results in a culture of bureaucratic mediocrity instead of disciplined excellence. The organisation also faces problems during leadership-transition in the form of poor succession planning, failure to groom excellent leaders from within, political turmoil, sheer bad luck or an unwise selection of successors. Such organisations also tend to give more importance to personal interests of employees and leaders in terms of money, privileges, and appraisals rather than on organizational interests.

Stage 3 – Denial of Risk and Peril

3Hubris from stage 1 leads to overreaching in Stage 2, thus setting the stage for Stage 3 of decline. The first marker of this stage is amplification of external praise and publicity and explaining away and ignoring negative data that might hint at oncoming downfall. Organisations in this stage tend to undermine the value of irreversible decisions that might have significant, negative consequences if they go wrong. Such ‘launch decisions’ (a term coined after the fiasco of NASA’s Challenger catastrophe) should be preceded by intense scrutiny of empirical evidence that says it is safe to go ahead and implement them. Leaders should avoid making big bets and bold goals if the empirical data does not justify such decisions and ask the following questions:

– 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?

 Leaders of the organisations in Stage 3 of decline tend to go on denial mode and take positive view of ambiguous data which might cause severe downside. In this stage, there is lack of healthy team dynamics. The process of arguments and disagreement followed by unified commitment to execute decisions is replaced by consensus or dictatorial management. Leaders tend to look outside the window rather than towards the mirror in the face of setbacks. That is, they blame external factors than accept responsibility for their failures. The organisation goes on an obsessive reorganisation spree. Collins gives the analogy of responding to diagnosis of a terminal disease by rearranging the living room. Restructuring and reorganisation, though essential for institutional evolution, gives false sense of productivity and is a sign of denial when faced with warning signs of decline.

Stage 4 – Grasping for Salvation

4Companies that go to Stage 4 take a tumble towards decline, but they still have hope of saving themselves. However if they succumb to the markers of this stage, they end up worsening their situation and are forced into taking desperate measures without any long-term results. Continuing with making big moves from Stage 3, organisations go on an overdrive with ‘game changing’ acquisitions, innovations and strategies in hopes of a catalytic change. They go on a loop of chronic inconsistency. Their behaviour borders on panic and they tend to exhibit hasty, reactive behaviour rather than being deliberate and disciplined. In the face of decline, the company’s board responds to threats by bringing in a charismatic leader or an outside saviour. The assumed rationale behind this is that downfall can be prevented by the sheer image and personality of the new leader. The new leader brings in ‘revolution’ and ‘radical’ changes with new programs, new strategies and lots of buzzwords and taglines to motivate the people. There is a hyped vision that leads to overpromising but under-delivering instead of setting expectations low and over-delivering. Although this might lead to initial bursts of positive results, it does not gain momentum and the results tend to crash and burn. As all initiatives fail, resources start to dwindle, options become narrow and strategic decisions are made based purely on circumstances. Towards the end of this stage, core values of the organisation become irrelevant and the vision and values become just PR and rhetoric.

 Stage 5 – Capitulation to Irrelevance or Death

5In this final stage of decline, the point of no return, organisations spiral out of control as they descend to downfall. This is accompanied by a cycle of grasping followed by disappointment eroding resources, tightening cash and narrowing options. Stage 5 has two versions. Version 1 is when leaders of companies on decline believe that capitulations will result in better outcome than continuing to fight. Version 2 is when the leaders continue to struggle but they run out of options and the organisation falls. Companies do not necessarily fall all the way down to Stage 5. The decline can be reversed if effective decisions are made in any of the previous stages. However, it is highly likely that leaders of companies on decline may lose enthusiasm and become exhausted as the company moves through stages 1, 2, 3 and 4; ultimately leading to total decline of the organisation in Stage 5.

At the end, How the Mighty Fall leaves us with hope, re-iterating the successful contrast stories. The most inspiring of them: the story of Xerox. In 2004, Xerox was in the middle of Stage 4 decline. Its stock had plummeted to 92 percent in less than two years with $273 million losses and wiping out more than $38 billion in shareholder value. Its bonds were rated as junk by the rating agency Moody’s and the company was in a debt of $19 million. In the middle of the crisis, Xerox brought in, as the president and COO, Anne Mulcahy. Mulcahy had been with Xerox’s sales and human resource division for nearly 25 years. Instead of restoring to rhetoric of success and bringing in “revolutionary” tactics, Mulcahy without taking a weekend off in two years, shut down a number of Xerox’s businesses and cut $2.5billion out of the company’s cost structure. Instead of heeding to outsider advice to cut down on R&D, Mulcahy had the vision to understand that Xerox’s Research division could bring back good returns in terms of long-term investment. She increased R&D as a percentage of sales. In 2000 and 2001, Xerox had a total loss of $367 million. In 2006, after Anne Mulcahy took up the reigns of the company, it posted profit in excess of $1 billion. Organisations need leaders who do not struggle to survive but struggle to sustain the company. Leaders who have faith that they can lead the company to prevail and at the same time have a stoic will to take the most excruciating decisions and actions. Effective leaders are the ones who use decline as a catalyst and break out of its trajectory.

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