I recently attended a seminar on strategic planning and the presenter provided an interesting observation. He stated that if you would have invested in the 18 companies featured in Jim Collins’ book “Built to Last: Successful Habits of Visionary Companies,” in 10 years, your investment would have grown by 150 percent.
He added: “Not bad, until you consider that a 10-year investment in an S&P 500 index fund over the same period would have yielded a 250 percent return, and if you would have had the foresight to invest in the public companies featured in Fortune’s 1994 edition of 100 Best Companies to Work For, your investment would have grown by 600 percent.”
This was quite coincidental, as I had just picked up a copy of Jim Collins’ latest book, “How the Mighty Fall and Why Some Companies Never Give In.” Although I have no way to know if Collins is specifically aware of the above-mentioned statistics, reading the book made it clear that he is very aware that a number of the companies featured in his preceding books, “Good to Great” and “Built to Last,” had somehow lost their way and, in some cases, have ceased to exist all together.
“How the Mighty Fall” is an exploration of those failures, discussing what common traits exist in those companies that have lost their way and what, if anything, can be done about it.
As in past books, Collins limits his research exclusively to publicly traded companies, building the hypothesis of study and then reviewing the data available for companies that demonstrate the attributes. Public companies provide the historical data for this type of research that is not available from privately held businesses or enterprises. He always makes it clear that his work takes this approach rather than selecting companies that are acknowledged for their leadership and then somehow dissecting them for the reasons or traits of their performance.
Collins lays out for the reader the selection criteria of the companies featured in the book, which include the “fallen” company and a comparative peer that excelled in the same period.
In the heart of the book, Collins identifies and describes what he calls the Five Stages of Decline. In each stage he describes and interprets the actions of the subject “fallen” company, contrasting it to the actions of the peer “successful” company.
The first stage of decline is labeled “Hubris Born of Success,” where the fortunes of Circuit City and Best Buy, Ames and Wal-Mart are contrasted.
The second stage of decline is called “Undisciplined Pursuit of More,” where the companies Merck, Motorola and HP are featured with the overarching theme of being obsessed with growth largely for growth’s sake.
Stage three becomes “Denial of Risk and Peril.” It presents a contrast between how management teams behave on the way down versus those teams on the way up. Zenith and Scott Paper are featured in their stage three decline.
Stage four is called “Grasping for Salvation,” with an interesting contrast between Carly Fiorina at HP and Lou Gerstner Jr. at IBM. Both organizations were in decline, having fallen from their penchants of greatness, but IBM’s Gerstner found a foundation for the return to greatness while Fiorina, with great fanfare, grasped at opportunities that eventually led to being ousted from HP and a new team tasked with stopping the decline of the company.
The fifth and final stage is titled “Capitulation to Irrelevance or Death.” Bankruptcy, being acquired by a competitor, or just plain ceasing to exist were the stories of this stage, and they come with a common theme regarding the importance of cash. This is due to the fact that if the balance sheet has been squandered in the previous four stages of decline, then often even the best teams with the best ideas do not have the financial resources to pull off a reversal of fortune. Enter “Chainsaw Al” Dunlap at Scott Paper, who shut down and cut everything that did not have marketable value, slashed the overhead, and then orchestrated a sale of the company to Kimberly-Clark. The board of directors had ordered Dunlap to “burn the village in order to save it.”
Each of the five stages is organized as a chapter and then summarized by what Collins calls “markers,” which describe the traits of the stage in question. The stages flow as a continuum, and Collins contends that as a company passes from one stage to the next, the attributes of the current stage of decline builds on the foundation of its predecessor stage(s). He also notes that a company can regain its path to greatness from any stage save the last, when it recognizes that it is in decline and then returns to the traits that once made it great, as outlined in the books “Good to Great” and “Built to Last.”
Although the research and featured companies are all publicly traded, the traits and attributes of “good,” “great” and “decline” can be readily applied to any company or organization of most any size. The book is an easy read and I would guess most read it in one sitting.
“How the Mighty Fall” is a must for every business library as once again Collins brings insight on the attributes needed in leadership and organizational dynamics.
Robert Roth is president and second generation of RoMan Manufacturing. He chairs the Family Business Alliance Board and facilitates a Next Generation Peer Group. “How the Mighty Fall” was recommended reading for the group.