When General Motors was on the cusp of failure late last year, it was my belief that we should go ahead and let the company fail. The risk-reward function of business, the philosophical underpinning of why people go into business, was at stake here. If we bailed out the company, we were merely rewarding the countless number of decisions that were made over the past 100 years by company executives and their union partners. The decision to price themselves out of the marketplace, the decision to continue building cars that people didn't want or that the marketplace couldn't support, and the inability to read the future and make adjustments were made by countless executives over the years, but with little consequences. Failure to grow and expand and make a profit one year was rewarded by outlandish executive pay and bonuses only a couple of years later when things seemed to have turned around. But, digging deeper, one may have found the five stages of failure that Jim Collins outlines in his latest book, How the Mighty Fall and Why Some Companies Never Give In (Harper Collins, 182 pages). Collins is well-known for his national bestsellers Good to Great and Built to Last and is known for backing up his books with a vast array of research and sound numbers. Collins can be found working at his management laboratory in Boulder, Colo. and holds degrees in business administration and mathematical sciences from Stanford University and honorary doctoral degrees from the University of Colorado and the Peter F. Drucker Graduate School of Management at Claremont Graduate University.
Very quickly, Collins jumps to a five-stage process of failure among the great companies and provides plenty of analysis and examples. Everyone from Motorola to Newell to Zenith is looked at, and we get a clue into why some of them failed while others succeeded, despite some pretty daunting odds.
The federal government came to the rescue of GM, along with a host of other financial institutions. We will argue for a generation of the value and worthiness of that rescue and whether it should have happened. Collins doesn't get into the proposition of whether failure of the biggest companies is a good idea or not; he does, however, deconstruct past failures and give us the warning posts to look for.
Collins' style is methodical and easy to read. I read this book in a weekend, and he laid it out very clearly. So, what are the five stages and what do they look like?
Stage 1: Hubris Born of Success. Great enterprises can be insulated by success. They succeed in spite of themselves, and they become arrogant with the idea that they cannot fail. Those looking at them from the outside see a company that has the "golden touch." Luck, chance and big gambles are part of this stage. Some companies stay with one great idea and never evolve.
They relish their Stage 1 successes and try to live off that greatness. Collins says these companies must take the company off autopilot and "exit definitively or renew obsessively, but do not ever neglect a primary flywheel." This means you have to be careful to recognize what got you to the dance. Once on the dance floor, it is ok to try new moves, but always remember that fundamental step you learned that first day of dance class. That step, that move, was how you got on the dance floor in the first place.
Stage 2: Undisciplined Pursuit of More. Hubris from stage 1 leads right into stage 2 - undisciplined pursuit of more and more. This is the opposite of complacency. The attitude is that we can do anything, and nothing can stop us, so let's pursue projects and ideas that we really have no business going after.
Companies can continue to grow without understanding the "why" of their growth - pursuit of more. That is the American birthright and, in fact, some would argue, institutionalized in the Constitution. Collins argues that companies that pursue for the sake of pursuing don't necessarily survive. It is one thing to set goals that one is going to grow and achieve, but then, that is merely activity. What is the quality of that growth, and is it sustainable? I have seen it myself working in municipalities and other organizations. Communities grow for the mere sake of growing. They continue to build without regard to whether the growth is sustainable and if the community can survive. Why? Because of the effects of Stage 1. "We are the best! No one can stop us because we are who we are."
Pursuit of growth isn't necessarily bad, according to Collins, but the "undisciplined" pursuit of growth can lead to major issues for longevity. Collins invokes Packard's Law, which states, "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." The law, named after David Packard, one of the founders of Hewlett-Packard, provides the ultimate guide in growth. Are the right people in the right seats? One person who advises me regarding our own organization asks the question this way, "Is everyone on the team an `A Player'?" If there are "B Players", you need to move them up to an A. If they are a "C Player," they need to think about leaving...and soon.
Stage 3: Denial of Risk and Peril. Although data is clear, it is explained ambiguously at best. Information is explained away as "cyclical," "temporary" or "not that bad." Bad news is spun to look at the positive. It seems no one wants to be responsible anymore. Constant denial launches companies into projects and programs that steer them headlong into Stage 4.
How many financial services companies and banks fell into this trap over the past several years? Buoyed by hubris (Stage 1) and undisciplined pursuit of more (Stage 2), big companies, the ones too big to fail, repeatedly ignored the signs of impending doom and failure. We have lived this during the recession of the past year, and it has not only hurt the companies, banks and financial institutions that practiced these poor habits, they took the entire economy down with them.
Stage 4: Grasping for Salvation. All the denial that occurred in Stage 3 has now manifested itself in Stage 4 where the weaknesses and failures of the company are visible to all. "Saviors" come into play here; someone who will come in and appear to save the day with a bold new strategy, product or concept, but ultimately fails. Initial results are positive, but don't really take.
Remember the stories about "Chainsaw Al" who was to come and save the day at Sunbeam? Well, after a few blustery years, his personality was overcome by reality. The company was doomed to fail even with the savior having just walked through the door. You see this in politics and public life, as well. It reminds me of the sheriff in Arizona who requires his inmates to wear pink jumpsuits and does all types of unconventional things in the pursuit of his job. Is it to make headlines? Or does it really mean something that will be sustainable and worthwhile in the end? Those who will deny what is really coming through the door, are there for short-term successes and not long-term sustainability.
Stage 5: Capitulation to Irrelevance or Death. All the fancy efforts tried in previous stages, particularly Stage 4, are tried again and, after a while, people are either demoralized or the saviors of the companies sell out and head for the door. The company either becomes insignificant or dies a spectacular death publicly.
You can't get out of Stage 5, but you can come crawling back from the depths of Stage 4. Some have done it. IBM is an example. Will car companies like GM and Chrysler do it?
I have to admit, I have never read Collins' other books, but I am familiar with his concepts and ideas. What I do know about his work is that it is well-researched and well-documented. This book ends after 123 pages, and pages 128 through 182 are appendices and notes to the text. Over 80 pages of strong documentation and examples of research are supporting his ideas.
In the end, Collins argues that we all need setbacks, but the great companies who are not practicing or manifesting the five stages of failure can deal with these setbacks and bounce back. We all know people who have had significant setbacks and come back to be as successful as before or more successful than ever. I'm sure many are waiting to see if Tiger Woods can become that person who came from total and colossal failure in his personal life (assuming all the tabloid articles are true), and be, once again, at the top of the golf world.
Collins himself outlines the abject failures of what most would consider one of the most successful people of the 20th century, Winston Churchill. His decisions and failures leading up to World War II were well-chronicled and he was at once vilified and disdained as one who could not lead. Yet, in the throes of crises he stood up against the Nazis and unified a country. Churchill's core legacy was to never give in, and he never did. He never gave in; he just changed tactics. That, according to Collins, is the key to survival and success. Failure is only in the eye of the beholder.
Now, what will it take to get you into that Impala today?Get more detail about How The Mighty Fall: And Why Some Companies Never Give In.
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