The senior executive team of Nortel Networks Corp. were reportedly big fans of Jim Collins’ previous book, Good to Great, which provides a road map to management success.
They might have been better served, however, by this new book – it outlines the process of corporate decline. A former Stanford Business School professor and now a sought-after consultant and speaker, Mr. Collins is the author of a number of management classics including the co-authored Built to Last(1997).
While this book was written as financial markets were collapsing, the timing is purely coincidental. Mr. Collins was motivated by the fact that several of the iconic companies featured in his previous books, such as Circuit City and Motorola, had since fallen from glory. He thus turned his previous research on its head to answer the question of why great companies decline. In particular, Mr. Collins wanted to understand what happened leading up to the point when decline became visible, and what the company’s management did once it began to fall.
How the Mighty Fall echoes many of the conclusions of Matthew S. Olson and Derek Van Bever’s book Stall Points, reviewed previously in this column. Both books make the point that organizational decline is usually self-inflicted. They also agree that signs of decline are present while companies are still visibly healthy and that recovery is completely within management control. Mr. Collins uses the same matched-pairs contrast methodology that he used in Good to Great.
This involves a controlled comparison of successful companies to unsuccessful ones, using similar companies facing similar environmental conditions. Many of the companies used were drawn from the Good to Great and Built to Last research archives. While one must be wary of drawing hard and fast conclusions based on 11 sets of comparisons, Mr. Collins uses this research approach to propose an interesting five-stage framework – the five stages of decline – to describe how great companies fall.
As I read the chapters on each stage, I kept seeing reflections of Nortel. Mr. Collins first stage is titled “Hubris Born of Success.”
Here, senior management have become arrogant, regarding success as an entitlement and losing sight of the factors that created it in the first place. This stage is followed by “The Undisciplined Pursuit of More” – more scale, more growth, more acclaim. I recall the warning of a former professor of mine that more companies died of indigestion than starvation.
Mr. Collins refers to this as “Packard’s Law,” referring to David Packard, a co-founder of HP. It’s a law which he notes that HP later broke. Stage three is “Denial of Risk and Peril.” In this stage, senior management discount negative data and blame external factors for setbacks.
Motorola’s disastrous Iridium venture is cited as a case in point. The warning signs of trouble are likely to be visible at this stage, but are typically discounted or ignored. This is followed by “Grasping for Salvation,” a stage where companies frantically search for a silver bullet such as seeking a game-changing acquisition or a saviour CEO.
Mr. Collins is particularly wary of bringing in an outside CEO to salvage a failing company. He notes that eight of the 11 fallen companies in his analysis went outside for a CEO during their decline. Moreover, both of his earlier books provided evidence of a pronounced negative relationship between building great companies and going outside for a CEO. The final stage is “Capitulation to Irrelevance or Death.”
At this stage, management abandons hope and either look to sell out or watch their companies atrophy into insignificance or die. Mr. Collins’ poster child for this stage is Zenith, a company that arrogantly ignored the threat of Japanese competition and managed over a half-century to go from one of the icons of American business to utter irrelevance. How the Mighty Fall is a fast-paced 123 pages. Each chapter also contains a set of markers or warning signs for the various stages.
There are also seven appendices, one of which documents the recent decline of Fannie Mae and another that lays out the recovery of IBM, Nordstrom and Nucor using the Good to Great framework. Like Mr. Collins’ previous books, this one will no doubt become a bestseller and another management classic.
Micheal Kelly is dean of the Telfer School of Management at the University of Ottawa.