How the Mighty Fall

Jim Collins

• Editorial: CLBusiness
• Año: 2011
• ISBN:
  9780061956461
• Categoría: Business
• Categoría: Management

Decline can be avoided.

Decline can be detected.

Decline can be reversed.

Amidst the desolate landscape of fallen great companies, Jim Collins began to wonder: How do the mighty fall? Can decline be detected early and avoided? How far can a company fall before the path toward doom becomes inevitable and unshakable? How can companies reverse course?

In How the Mighty Fall, Collins confronts these questions, offering leaders the well-founded hope that they can learn how to stave off decline and, if they find themselves falling, reverse their course. Collins' research project—more than four years in duration—uncovered five step-wise stages of decline:

Stage 1: Hubris Born of Success

Stage 2: Undisciplined Pursuit of More

Stage 3: Denial of Risk and Peril

Stage 4: Grasping for Salvation

Stage 5: Capitulation to Irrelevance or Death

By understanding these stages of decline, leaders can substantially reduce their chances of falling all the way to the bottom.

Great companies can stumble, badly, and recover.

Every institution, no matter how great, is vulnerable to decline. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall and most eventually do. But, as Collins' research emphasizes, some companies do indeed recover—in some cases, coming back even stronger— even after having crashed into the depths of Stage 4.

Decline, it turns out, is largely self-inflicted, and the path to recovery lies largely within our own hands. We are not imprisoned by our circumstances, our history, or even our staggering defeats along the way. As long as we never get entirely knocked out of the game, hope always remains. The mighty can fall, but they can often rise again.

Stage 1: Hubris Born of Success

In December 1983, the last U.S.-made Motorola car radio rolled off the manufacturing line and into Chairman Robert Galvin’s hands as a reminder. Not as a sentimental memento, but as a tangible admonition to continue to develop newer technologies in an ongoing process of creative self-renewal. Motorola’s history taught Galvin that it’s far better to create your own future, repeatedly, than to wait for external forces to dictate your choices.¹⁶ When the fledgling Galvin Manufacturing Corporation’s first business, battery eliminators for radios, became obsolete, Paul Galvin (Robert’s father) faced severe financial distress in 1929. In response, he experimented with car radios, changed the name of the company to Motorola, and started making a profit. But this near-death experience shaped Motorola’s founding culture, instilling a belief that past accomplishment guarantees nothing about future success and an almost obsessive need for self-initiated progress and improvement. When Jerry Porras and I surveyed a representative sample of 165 CEOs in 1989, they selected Motorola as one of the most visionary companies in the world, and we included Motorola in our Built to Last research study. Amongst the eighteen visionary companies we studied at that time, Motorola received some of the highest scores on dimensions such as adherence to core values, willingness to experiment, management continuity, and mechanisms of self-improvement. We noted how Motorola pioneered Six Sigma quality programs and embraced “technology road maps” to anticipate opportunities ten years into the future.

By the mid-1990s, however, Motorola’s magnificent run of success, which culminated in having grown from $5 billion to $27 billion in annual revenues in just a decade, contributed to a cultural shift from humility to arrogance. In 1995, Motorola executives felt great pride in their soon-to-be-released StarTAC cell phone; the then-smallest cell phone in the world, with its sleek clamshell design, was the first of its kind. There was just one problem: the StarTAC used analog technology just as wireless carriers began to demand digital. And how did Motorola respond? According to Roger O. Crockett, who closely covered the company for BusinessWeek, one of Motorola’s senior leaders dismissed the digital threat: “Forty-three million analog customers can’t be wrong.”¹⁷ Then Motorola tried to strong-arm carrier companies like Bell Atlantic. If you want the hot StarTAC, explained the Motorola people, you’ll need to agree to our rules: a high percentage (along the lines of 75 percent) of all your phones must be Motorola, and you must promote our phones with stand-alone displays. Bell Atlantic, irritated by this “you must” attitude, blasted back that no manufacturer would dictate how much of their product to distribute. “Do you mean to tell me that [if we don’t agree to the program] you don’t want to sell the StarTAC in Manhattan?” a Bell Atlantic leader reportedly challenged the Motorola executives. Motorola’s arrogance gave competitors an opening, and Motorola fell from being the #1 cell phone maker in the world, at one point garnering nearly 50 percent market share, to having only 17 percent share by 1999.¹⁸ Motorola’s fall from greatness began with Stage 1, Hubris Born of Success.

ARROGANT NEGLECT

Dating back to ancient Greece, the concept of 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.¹⁹ Motorola began 2001 with 147,000 employees; by the end of 2003, the number dropped to 88,000—nearly 60,000 jobs gone.²⁰ As Motorola descended through the stages of decline, shareholders also suffered as stock returns fell more than 50 percent behind the market from 1995 to 2005.²¹

We will encounter multiple forms of hubris in our journey through the stages of decline. We will see hubris in undisciplined leaps into areas where a company cannot become the best. We will see hubris in a company’s pursuit of growth beyond what it can deliver with excellence. We will see hubris in bold, risky decisions that fly in the face of conflicting or negative evidence. We will see hubris in denying even the possibility that the enterprise could be at risk, imperiled by external threats or internal erosion. And we will encounter one of the most insidious forms of hubris: arrogant neglect.

In October 1995, Forbes magazine ran a laudatory story about Circuit City’s CEO. Under his leadership, Circuit City had grown more than 20 percent per year, multiplying the size of the company nearly ten times in a decade. How to keep the growth going? After all, as Forbes commented, in the end every market becomes mature, and this energetic CEO had “no intention of sitting around and waiting for his business to be overwhelmed by the competition.”²² And so Circuit City sought The Next Big Thing. The company had already piloted CarMax, a visionary application of the company’s superstore expertise to the used car business. Circuit City also became enamored with an adventure called Divx. Using a special DVD player, customers would be able to “rent” a DVD for as long as they liked before playing it, using an encryption system to unlock the DVD for viewing. The advantage: not having to return a DVD to the video store before having had a chance to watch it.²³

In late 1998, the Wall Street Transcript interviewed Circuit City’s CEO. There came a telling moment when the interviewer asked what investors should worry about at Circuit City. “[Investors] can be fairly relaxed about our ability to run the business well,” he replied. Then he felt compelled to add, “I think there has been some investor sentiment . . . that our CarMax endeavor and our Divx endeavor is taking attention away from our Circuit City business. I’d refer . . . [to] our 44 percent earnings growth in the Circuit City business in the first half of the year.” He concluded, “This is a company that’s in great shape.”²⁴

Yet Circuit City plummeted through all five stages of decline. Profit margins eroded and return on equity atrophied from nearly 20 percent in the mid-1990s to single digits, leading to the company’s first loss in more than a quarter of a century. And on November 10, 2008, Circuit City announced that it had filed for bankruptcy.

Circuit City originally made the leap from good to great, a process that began to gain momentum in the early 1970s, under the inspired leadership of Alan Wurtzel. As with most climbs to greatness, it involved sustained, cumulative effort, like turning a giant, heavy flywheel: each push builds upon previous work, compounding the investment of effort—days, weeks, months, and years of work—generating momentum, from one turn to ten, from ten to a hundred, from a hundred to a thousand, from a thousand to a million. Once an organization gets one flywheel going, it might create a second or third flywheel. But to remain successful in any given area of activity, you have to keep pushing with as much intensity as when you first began building that flywheel, exactly what Circuit City did not do. Circuit City in decline exemplifies 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.

A core business that meets a fundamental human need—and one at which you’ve become best in the world—rarely becomes obsolete. In this analysis of decline, only one company, Zenith, fell largely because it stayed focused on its core business too long and failed to confront its impending demise. Furthermore, in 60 percent of our matched pairs, the success-contrast company paid greater attention to improving and evolving its core business than the fallen company during the relevant era of comparison.

My point here is not that you should never evolve into new arenas or that Circuit City made a mistake by investing in CarMax or Divx. Creating CarMax required an impressive leap of imagination; Circuit City invented an entirely new business concept, doing for used cars what it had done for consumer electronics (bringing a professional chain-store approach to an industry that had previously been unprofessional and fragmented).²⁵ Indeed, Circuit City would have done well to keep CarMax rather than sell it. And with Divx, while the idea ultimately failed in the marketplace, it can be viewed as a relatively small experiment that just didn’t work in the end, a positive example of the Built to Last principle “Try a Lot of Stuff and Keep What Works.” The real lesson is that Circuit City left itself exposed by not revitalizing its electronics superstores with as much passion and intensity as when it first began building that business two decades earlier. The great irony is that one of its biggest opportunities for continued growth and success lay in its core business, and the proof rests in two words: Best Buy.

In 1981, a tornado touched down in Roseville, Minnesota, blasting to pieces the showroom of the local Sound of Music store. Customers hurled themselves away from the windows as shards of glass and splintered wood flew about in the gale. Luckily, the storeroom remained largely undamaged, leaving founder Richard Schulze with boxes of stereos and TVs, but no storefront. A resourceful entrepreneur, he decided to throw a “Tornado Sale” in the parking lot. He spent his entire marketing budget on a local ad blitz that created a two-mile traffic jam as droves of customers converged on the lot. Schulze realized that he’d stumbled upon a great concept: advertise like crazy, have lots of n...