What You Will Learn from How the Mighty Fall

How the Mighty Fall explores responses to the following questions: How do great companies fall? Can we detect a potential decline earlier and avoid it? How far can a company fall before the path towards doom becomes inevitable? Is this something reversible? 

Jim Collins conducted a research project on this topic for four years and discovered the ultimate 5 step-wise stages of decline—in hope of providing a guide to leaders on reducing their risks of falling all the way to the bottom. Through How the Mighty Fall, Jim Collins offers leaders a well-founded hope that they can learn to prevent decline or alter their course.

Every institution is vulnerable to collapse, no matter how great. No matter how much you’ve achieved, no matter how far you’ve gone, no matter how much power you have garnered—you are vulnerable to decline. There is no law of nature that the most powerful will always remain at the top. Anyone can fall, and most eventually do.

Stage 1—Hubris Born of Success

Like a performer or artist who pursues both enduring excellence and shocking creatives, great companies foster a productive tension between continuity and change. On one hand, they adhere to principles that produced success in the first place. Yet, on the other hand, they continually evolve, modifying their approach with creative improvements and intelligent adaptation.
The reasons companies fail aren’t due to the lack of change. Constant change without any consistent rationale will lead to collapse just as surely as no change at all. There’s nothing inherently wrong with adhering to specific practices and strategies, but only if you understand the underlying reasons behind those practices.

The best corporate leaders remain students of their work. On the other hand, a leader who stops learning and assumes they know everything is more likely to set companies on the path to decline. They become dogmatic about their specific practices and they overreach with strategies that may no longer work as well.

Stage 2—Undisciplined Pursuit of More

When Collins was studying why so many great companies later flopped, he assumed it was because they became complacent. They failed to innovate, initiate bold action, ignite change; or they just became lazy and watched the world pass them by. The theory was plausible, but there was a big problem—that story didn’t at all fit with their data. Certainly, any enterprise that becomes complacent and refuses to change or innovate will eventually fall. But the companies in their analysis showed little evidence of complacency when they fell.

Of the 11 case studies, only 1 of them had died due to complacency. In 10 of the 11 cases, they found that there was tremendous energy immediately preceding the fall—stimulated by ambition, creativity, aggression and/or fear. There was even substantial innovation during this stage, which eliminated the hypothesis that the fall of a great company is necessarily preceded by a decline in innovation.

Innovation can fuel growth. But an unsustainable quest for growth can just as easily send a company cascading through the stages of decline.

Stage 3—Denial of Risk & Peril

A common behaviour of Stage 3 (which often carries into Stage 4) is when those in power blame other people or external factors rather than confront the frightening reality that the enterprise may be in serious trouble. When a company reaches stage 3, there is a tendency to discount negative data rather than presume that something is wrong with the company. Leaders set audacious goals and/or make big bets that aren’t based on accumulated experience. There is a shift toward either consensus or dictatorial management rather than a process of argument and disagreement followed by a unified commitment to execute decisions.

Stage 4—Grasping for Salvation

Stage 4 begins when an organisation reacts to a downturn by lurching for a silver bullet. They go for a quick, big solution or bold stroke to jump-start a recovery, rather than embark on the more pedestrian, arduous process of rebuilding long-term momentum.

You might be thinking that grasping for salvation is the only rational thing to do. Rather than die a slow and painful death, many companies are confronting the inevitable and trying to do something radical to change their destiny. The problem is, the companies may not even be on the verge of death at the start of stage 4. They still have options to fix the mess they’ve gotten themselves into, but the desperation and succumbing to Stage 4 behaviours actually worsen their position.

When we find ourselves in trouble or on the cusp of falling, our fear and survival instinct can evoke lurching, reactive behaviour absolutely contrary to survival. At the very moment when we need to take calm and deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we fear most.

Stage 5—Capitulation to Irrelevance or Death

In researching the final stages of decline and looking at the capitulation of once towering companies, Collins kept thinking back to his mentor Bill Lazier and the course he taught on small business management at Stanford Graduate School of Business. Lazier would walk into the classroom, and ask his students: ‘What’s the central issue in this case?’ The students would say things like their strategic choices, identifying their value chain, or developing a brand.

Lazier would pace around the classroom, saying: ‘No! Think!’ Finally, after all of the fluff, someone took a risk. ‘Well, I don’t know if this is what you’re looking for, but they can’t make payroll next week. The company is running out of cash.’ Lazier would stop his pacing, walk over to the chalkboard and write in massive letters: C-A-S-H.

‘Never forget. You pay your bills with cash. You can be profitable and bankrupt.’ In the entrepreneurial phase, leaders struggle just to get enough cash to become self-sustaining, but as an organisation becomes big and successful, cash consciousness atrophies. Leaders in successful companies worry more about earnings than cash but organisations never die from lack of earnings, they die from lack of cash.

As institutions hurtle toward Stage 5, they spiral downward, increasingly out of control. This isn’t to say that all companies that hit Stage 5 will go on to die. It’s just that, having moved through all of the stages, those in power can become exhausted and dispirited, and eventually abandon hope. When you abandon hope, you should begin preparing for the end.

Conclusion

So how does the mighty fall? The decline that many of these large corporations face is largely self-inflicted. The path to recovery lies first and foremost in returning to sound management practices and rigorous strategic thinking. A lack of management discipline correlates with decline while passionate adherence to management discipline correlates with recovery and ascent. How the Mighty Fall reveals that you can reverse your course from declining further—as long as you have enough resources to get out of the cycle of grasping and have the discipline to rebuild, one step at a time.