About the book
For great many companies the Internet is the beginning of the fall. I hope this book helps us to stay focused and no to fall.
What are the key learnings?
“What should we do if we find ourselves falling? It turns out that much of the answer lies in adhering to highly disciplined management practices.”
Key learnings of the book are:
– Use highly disciplined management practices to avoid the fall.
– Learn to recognize the five stages of fall.
Jim Collins and Morten Hansen have identified the five stages of decline. Understanding and recognizing the five stages of decline helps leaders to reduce the chances of falling. Or as Collins and Hansen says
“Tumbling from iconic to irrelevant. Decline can be avoided. The seeds of decline can be detected early.”
“Bank of America gained a reputation as one of the best managed corporations in America. An article in the January 1980 issue of Harvard Business Review opened with a simple summary: “The Bank of America is perhaps best known for its size—it is the world’s largest bank, with nearly 1,100 branches, operations in more than 100 countries, and total assets of about $ 100 billion. In the opinion of many close observers, an equally notable achievement is its quality of management . . .”
The Five Stages of Decline are:
1) HUBRIS BORN OF SUCCESS.
2) UNDISCIPLINED PURSUIT OF MORE.
3) DENIAL OF RISK AND PERIL.
4) GRASPING FOR SALVATION.
5) CAPITULATION TO IRRELEVANCE OR DEATH.
Eleven cases that met rigorous rise-and-fall criteria at some point in their history:
1. A& P
2. Addressograph
3. Ames Department Stores
4. Bank of America (before it was acquired by NationsBank)
5. Circuit City
6. Hewlett-Packard (HP)
7. Merck
8. Motorola
9. Rubbermaid
10. Scott Paper
11. Zenith
Principal effort of Collins and Hansen was on the two-part question:
⁃ What happened leading up to the point at which decline became visible and
⁃ What did the company do once it began to fall?
They studied “historical eras of performance to understand the underlying dynamics that correlate with building greatness (or losing it).”
Anna Karenina. It reads, “All happy families are alike; each unhappy family is unhappy in its own way.”
Five stages
STAGE 1: HUBRIS BORN OF SUCCESS.
Arrogance is a symptom of decline.
“Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place.”
“When the rhetoric of success (“We’re successful because we do these specific things”) replaces penetrating understanding and insight (“We’re successful because we understand why we do these specific things and under what conditions they would no longer work”), decline will very likely follow.”
STAGE 2: UNDISCIPLINED PURSUIT OF MORE.
Set-up for the fall.
More scale, more growth, more acclaim, more of whatever those in power see as “success.”
“Companies in Stage 2 stray from the disciplined creativity that led them to greatness in the first place, making undisciplined leaps into areas where they cannot be great or growing faster than they can achieve with excellence, or both. When an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall. Although complacency and resistance to change remain dangers to any successful enterprise, overreaching better captures how the mighty fall.”
STAGE 3: DENIAL OF RISK AND PERIL.
Denial kicks in.
“As companies move into Stage 3, internal warning signs begin to mount, yet external results remain strong enough to “explain away” disturbing data or to suggest that the difficulties are “temporary” or “cyclic” or “not that bad,” and “nothing is fundamentally wrong.” In Stage 3, leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data. Those in power start to blame external factors for setbacks rather than accept responsibility.”
STAGE 4: GRASPING FOR SALVATION.
The decline becomes visible.
“The cumulative peril and/ or risks-gone-bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all.
The critical question is, “How does its leadership respond?”
“By lurching for a quick salvation or by getting back to the disciplines that brought about greatness in the first place? Those who grasp for salvation have fallen into Stage 4. Common “saviors” include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a “game changing” acquisition, or any number of other silver-bullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.”
STAGE 5: CAPITULATION TO IRRELEVANCE OR DEATH.
This stage is a point of no return or a roadmap of decline.
“The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. In some cases, their leaders just sell out; in other cases, the institution atrophies into utter insignificance, and in the most extreme cases, the enterprise simply dies outright.”
“It is possible to skip a stage, although our research suggests that companies are likely to move through them in sequence. Some companies move quickly through the stages, while others languish for years, or even decades. Zenith, for example, took three decades to move through all five stages, whereas Rubbermaid fell from the end of Stage 2 all the way to Stage 5 in just five years.”
“One of the keys to sustained performance lies in understanding how greatness can be lost. Second, I ultimately see this as a work of well-founded hope.”
“Yet our research indicates that organizational decline is largely self-inflicted, and recovery largely within our own control.”
Stage 1: Hubris Born of Success
“Amongst the eighteen visionary companies we studied at that time, Motorola received some of the highest scores on dimensions such as
0. adherence to core values,
0. willingness to experiment,
0. management continuity, and
0. mechanisms of self-improvement.”
“Hubris is defined as excessive pride that brings down a hero, or alternatively (to paraphrase classics professor J. Rufus Fears), outrageous arrogance that inflicts suffering upon the innocent.”
Fail to improve your primary flywheel
“A cycle of arrogant neglect that goes like this:
1. You build a successful flywheel.
2. You succumb to the notion that new opportunities will sustain your success better than your primary flywheel, either because you face an impending threat or because you find other opportunities more exciting (or perhaps you’re just bored).
3. You divert your creative attention to new adventures and fail to improve your primary flywheel as if your life depended on it.
4. The new ventures fail outright, siphon off your best creative energy, or take longer to succeed than expected.
5. You turn your creative attention back to your primary flywheel only to find it wobbling and losing momentum.”
Stay true to your business….
“It’s like being an artist. Picasso didn’t renew himself by abandoning painting and sculpture to become a novelist or a banker.”
Are you knowing or learning person?
To be a knowing person (“I already know everything about why this works, and let me tell you”) differs fundamentally from being a learning person. The “knowing people” can set companies on the path to decline in two ways. First, they can become dogmatic about their specific practices (“We know we’re successful because we do these specific things, and we see no reason to question them”) as we saw with A& P. Second, they can overreach, moving into sectors or growing to a scale at which the original success factors no longer apply.
• SUCCESS ENTITLEMENT, ARROGANCE: Success is viewed as “deserved,” rather than fortuitous, fleeting, or even hard earned in the face of daunting odds; people begin to believe that success will continue almost no matter what the organization decides to do, or not to do.
• NEGLECT OF A PRIMARY FLYWHEEL: Distracted by extraneous threats, adventures, and opportunities, leaders neglect a primary flywheel, failing to renew it with the same creative intensity that made it great in the first place.
• “WHAT” REPLACES “WHY”: The rhetoric of success (“ We’re successful because we do these specific things”) replaces understanding and insight (“ We’re successful because we understand why we do these specific things and under what conditions they would no longer work”).
• DECLINE IN LEARNING ORIENTATION: Leaders lose the inquisitiveness and learning orientation that mark those truly great individuals who, no matter how successful they become, maintain a learning curve as steep as when they first began their careers.
• DISCOUNTING THE ROLE OF LUCK: Instead of acknowledging that luck and fortuitous events might have played a helpful role, people begin to presume that success is due entirely to the superior qualities of the enterprise and its leadership.
Stage 2: Undisciplined Pursuit of More
“This provokes a question: Why do we instinctively point to complacency and lack of innovation as a dominant pattern of decline, despite evidence to the contrary?”
“First, those who build great companies have drive and passion and intensity and an incurable itch for progress somewhere in their DNA to begin with; if we studied companies that never excelled, those that fell from so-so to bad, we might see a different pattern.”
“Second, perhaps people want to attribute the fall of others to a character flaw they don’t see in themselves rather than face the frightening possibility that they might be just as vulnerable.”
OBSESSED WITH GROWTH
“In his 1995 annual letter to shareholders, Merck’s chairman and CEO Ray Gilmartin delineated the company’s #1 business objective: being a top-tier growth company.”
“To be clear, the problems of Stage 2 stem not from growth per se, but from the undisciplined pursuit of more.”
“Packard’s Law states 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.”
What are the key seats in your organization?
“If I were to pick one marker above all others to use as a warning sign, it would be a declining proportion of key seats filled with the right people. Twenty-four hours a day, 365 days a year, you should be able to answer the following questions: What are the key seats in your organization?”
“One notable distinction between wrong people and right people is that the former see themselves as having “jobs,” while the latter see themselves as having responsibilities.”
“We observed each of the following modes of turmoil in at least one of the fallen companies:
• A domineering leader fails to develop strong successors (or drives strong successors away) and thereby creates a leadership vacuum when he or she steps away.
• An able executive dies or departs unexpectedly, with no strong replacement to step smoothly into the role.
• Strong successor candidates turn down the opportunity to become CEO.
• Strong successor candidates unexpectedly leave the company.
• The board of directors is acrimoniously divided on the designation of a leader, creating an adversarial “we” and “they” dynamic at the top.
• Leaders stay in power as long as they can and then pass the company to leaders who are late in their careers and assume a caretaker role.
• Monarchy-style family dynamics favor family members over nonfamily members, regardless of who would be the best leader.
• The board brings in a leader from the outside who doesn’t fit the core values, and the leader is ejected by the culture like a virus.
• The company chronically fails at getting CEO selection right.”
Confusing big with great
MARKERS FOR STAGE 2
• UNSUSTAINABLE QUEST FOR GROWTH, CONFUSING BIG WITH GREAT: Success creates pressure for more growth, setting up a vicious cycle of expectations; this strains people, the culture, and systems to the breaking point; unable to deliver consistent tactical excellence, the institution frays at the edges.
• UNDISCIPLINED DISCONTINUOUS LEAPS: The enterprise makes dramatic moves that fail at least one of the following three tests: 1. Do they ignite passion and fit with the company’s core values? 2. Can the organization be the best in the world at these activities or in these arenas? 3. Will these activities help drive the organization’s economic or resource engine?
• DECLINING PROPORTION OF RIGHT PEOPLE IN KEY SEATS: There is a declining proportion of right people in key seats, because of losing the right people and/ or growing beyond the organization’s ability to get enough people to execute on that growth with excellence (e.g., breaking Packard’s Law).
• EASY CASH ERODES COST DISCIPLINE: The organization responds to increasing costs by increasing prices and revenues rather than increasing discipline.
• BUREAUCRACY SUBVERTS DISCIPLINE: A system of bureaucratic rules subverts the ethic of freedom and responsibility that marks a culture of discipline; people increasingly think in terms of jobs rather than responsibilities.
• PROBLEMATIC SUCCESSION OF POWER: The organization experiences leadership-transition difficulties, be they in the form of poor succession planning, failure to groom excellent leaders from within, political turmoil, bad luck, or an unwise selection of successors.
• PERSONAL INTERESTS PLACED ABOVE ORGANIZATIONAL INTERESTS: People in power allocate more for themselves or their constituents—more money, more privileges, more fame, more of the spoils of success—seeking to capitalize as much as possible in the short term, rather than investing primarily in building for greatness decades into the future.
Stage 3: Denial of Risk and Peril
“Why great companies experiment with a lot of little things that might not pan out in the end.”
For businesses, our analysis suggests that any deterioration in
– gross margins,
– current ratio, or
– debt-to-equity ratio indicates an impending storm.
Our financial analyses revealed that all eleven fallen companies showed a negative trend in at least one of these three variables as they moved toward Stage 4.”
“Yet we found little evidence of significant management concern and certainly not the productive paranoia they should have had about these trends. Customer loyalty and stakeholder engagement also deserve attention.”
Blame other people or external factors
“One common behavior of late Stage 3 (and that often carries well into Stage 4) is when those in power blame other people or external factors—or otherwise explain away the data—rather than confront the frightening reality that the enterprise may be in serious trouble.”
“Reorganizations and restructurings can create a false sense that you’re actually doing something productive.”
“We have no evidence from our research that any one structure is ideal in all situations, and no form of reorganization can make risk and peril melt away.”
MARKERS FOR STAGE 3
• AMPLIFY THE POSITIVE, DISCOUNT THE NEGATIVE: There is a tendency to discount or explain away negative data rather than presume that something is wrong with the company; leaders highlight and amplify external praise and publicity.
• BIG BETS AND BOLD GOALS WITHOUT EMPIRICAL VALIDATION: Leaders set audacious goals and/ or make big bets that aren’t based on accumulated experience, or worse, that fly in the face of the facts.
• INCURRING HUGE DOWNSIDE RISK BASED ON AMBIGUOUS DATA: When faced with ambiguous data and decisions that have a potentially severe or catastrophic downside, leaders take a positive view of the data and run the risk of blowing a hole “below the waterline.”
• EROSION OF HEALTHY TEAM DYNAMICS: There is a marked decline in the quality and amount of dialogue and debate; there is a shift toward either consensus or dictatorial management rather than a process of argument and disagreement followed by unified commitment to execute decisions.
• EXTERNALIZING BLAME: Rather than accept full responsibility for setbacks and failures, leaders point to external factors or other people to affix blame.
• OBSESSIVE REORGANIZATIONS: Rather than confront the brutal realities, the enterprise chronically reorganizes; people are increasingly preoccupied with internal politics rather than external conditions.
• IMPERIOUS DETACHMENT: Those in power become more imperious and detached; symbols and perks of executive-class status amplify detachment; plush new office buildings may disconnect executives from daily life.
Stage 4: Grasping for Salvation
Silver bullets
“Stage 4 begins when an organization reacts to a downturn by lurching for a silver bullet. This can take a wide range of possible forms, such as betting big on an unproven technology, pinning hopes on an untested strategy, relying upon the success of a splashy new product, seeking a “game changing” acquisition, gambling on an image makeover, hiring consultants who promise salvation, seeking a savior CEO, expounding the rhetoric of “revolution,” or in its very late stages, grasping for a financial rescue or buyout.”
Mannaryyni-strategia
“The key point is that 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.”
“Our research across multiple studies (Good to Great, Built to Last, How the Mighty Fall, and our ongoing research into what it takes to prevail in turbulent environments) shows a distinct negative correlation between building great companies and going outside for a CEO. Eight of the eleven fallen companies in this analysis went for an outside CEO during their era of decline, whereas only one of the success contrasts went outside during the eras of comparison.”
“And in our previous research, over 90 percent of the CEOs that led companies from good to great came from inside; meanwhile, over two-thirds of the comparison companies in that study hired a CEO from the outside yet failed to make a comparable leap.”
Jumping from one false salvation to another
“Louis V. Gerstner from IBM understood that whether you’re brought in from the outside or come from the inside, you have to halt the cycle of grasping and cease jumping from one false salvation to another, from silver bullet to silver bullet, from dashed hope to new hope, only to have hopes dashed yet again.”
“The remarkable thing about Gerstner is that he did not accept that frame, a powerful lesson for all leaders, whether coming from within or without.”
“If you want to reverse decline, be rigorous about what not to do.”
MARKERS FOR STAGE 4
“• A SERIES OF SILVER BULLETS: There is a tendency to make dramatic, big moves, such as a “game changing” acquisition or a discontinuous leap into a new strategy or an exciting innovation, in an attempt to quickly catalyze a breakthrough—and then to do it again and again, lurching about from program to program, goal to goal, strategy to strategy, in a pattern of chronic inconsistency.
• GRASPING FOR A LEADER-AS-SAVIOR: The board responds to threats and setbacks by searching for a charismatic leader and/ or outside savior.
• PANIC AND HASTE: Instead of being calm, deliberate, and disciplined, people exhibit hasty, reactive behavior, bordering on panic.
• RADICAL CHANGE AND “REVOLUTION” WITH FANFARE: The language of “revolution” and “radical” change characterizes the new era: New programs! New cultures! New strategies! Leaders engage in hoopla, spending a lot of energy trying to align and “motivate” people, engaging in buzzwords and taglines.
• HYPE PRECEDES RESULTS: Instead of setting expectations low—underscoring the duration and difficulty of the turnaround—leaders hype their visions; they “sell the future” to compensate for the lack of current results, initiating a pattern of overpromising and underdelivering.
• INITIAL UPSWING FOLLOWED BY DISAPPOINTMENTS: There is an initial burst of positive results, but they do not last; dashed hope follows dashed hope; the organization achieves no buildup, no cumulative momentum.
• CONFUSION AND CYNICISM: People cannot easily articulate what the organization stands for; core values have eroded to the point of irrelevance; the organization has become “just another place to work,” a place to get a paycheck; people lose faith in their ability to triumph and prevail. Instead of passionately believing in the organization’s core values and purpose, people become distrustful, regarding visions and values as little more than PR and rhetoric.
• CHRONIC RESTRUCTURING AND EROSION OF FINANCIAL STRENGTH: Each failed initiative drains resources; cash flow and financial liquidity begin to decline; the organization undergoes multiple restructurings; options narrow and strategic decisions are increasingly dictated by circumstance.”
Stage 5: Capitulation to Irrelevance or Death
CASH! “Never forget,” Lazier would say. “You pay your bills with cash. You can be profitable and bankrupt.”
“But organizations do not die from lack of earnings. They die from lack of cash.”
We found two basic versions of Stage 5.
0. In the first version, those in power come to believe that capitulation offers a better overall outcome than continuing to fight.
0. In the second version, those in power continue the struggle, but they run out of options, and the enterprise either dies outright or shrinks into utter irrelevance compared to its previous grandeur.
Fallen from great to terrible
“Recall the Gerstner philosophy: the right leaders feel a sense of urgency in good times and bad, whether facing threat or opportunity, no matter what.”
“Burning platform: The right people will drive improvement, whether standing on a burning platform or not.”
“The path to recovery lies first and foremost in returning to sound management practices and rigorous strategic thinking.”
“It never hurts to review the classics, including Drucker, Porter, Deming, and Peters/ Waterman.”
“If you’ve fallen into decline, get back to solid management disciplines—now! And if you’re still strong, be vigilant for early markers of decline.”
“Be willing to change tactics, but never give up your core purpose.”
How should we change according to the book?
Go back to Good-To-Great Framework:
DISCIPLINED PEOPLE
STAGE 1: DISCIPLINED PEOPLE LEVEL 5 LEADERSHIP: Level 5 leaders are ambitious first and foremost for the cause, the organization, the work—not themselves—and they have the fierce resolve to do whatever it takes to make good on that ambition. A Level 5 leader displays a paradoxical blend of personal humility and professional will.
FIRST WHO, THEN WHAT: Those who build great organizations make sure they have the right people on the bus, the wrong people off the bus, and the right people in the key seats before they figure out where to drive the bus. They always think first about “who” and then about what.
BRUTAL FACTS
STAGE 2: DISCIPLINED THOUGHT CONFRONT THE BRUTAL FACTS—THE STOCKDALE PARADOX: Retain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and at the same time have the discipline to confront the most brutal facts of your current reality, whatever they might be.
THE HEDGEHOG CONCEPT: Greatness comes about by a series of good decisions consistent with a simple, coherent concept—a “hedgehog concept.” The hedgehog concept is an operating model that reflects understanding of three intersecting circles: what you can be the best in the world at, what you are deeply passionate about, and what best drives your economic or resource engine.
ACTION CULTURE
STAGE 3: DISCIPLINED ACTION CULTURE OF DISCIPLINE: Disciplined people who engage in disciplined thought and who take disciplined action—operating with freedom within a framework of responsibilities: this is the cornerstone of a culture that creates greatness. People do not have jobs; they have responsibilities.
THE FLYWHEEL: There is no single defining action, no grand program, no one killer innovation, no solitary lucky break, no miracle moment. Rather, the process resembles relentlessly pushing a giant heavy flywheel, turn upon turn, building momentum until a point of breakthrough, and beyond.
CLOCK BUILDING
STAGE 4: BUILDING GREATNESS TO LAST CLOCK BUILDING, NOT TIME TELLING: Truly great organizations prosper through multiple generations of leaders, the exact opposite of being built around a single great leader, great idea, or specific program. Leaders in great organizations build catalytic mechanisms to stimulate progress and do not depend upon having a charismatic personality to get things done; indeed, many have had a “charisma bypass.”
PRESERVE THE CORE/ STIMULATE PROGRESS: Enduring great organizations are characterized by a fundamental duality. On the one hand, they have a set of timeless core values and core reason for being that remain constant over long periods of time. On the other hand, they have a relentless drive for change and progress—a creative compulsion that often manifests in BHAGs (Big Hairy Audacious Goals). Great organizations keep clear the difference between their core values (which never change) and operating strategies and cultural practices (which endlessly adapt to a changing world).
What should I personally do?
Three things:
– Internet might be the root cause for companies starting to fall
– Try to pinpoint ”How Mighty Fall”-companies and analyse why they have fallen from great to terrible.
– And invest in companies that are on their way from good to great.
Summary
The book in six words – “Effective teaching: don’t try to come up with the right answers; focus on coming up with good questions.” (Bill Lazier)….. “There are more ways to fall than to become great.”
