How The Mighty Fallby Jim Collins

“Every institution is vulnerable, no matter how great. No matter how much

you’ve achieved, no matter how far you've gone, no matter how much

you’ve garnered, you are vulnerable to decline. There is no law of nature that

the most powerful will inevitably remain at the top. Anyone can fall and

most do!”

“All happy families are alike; each unhappy family is unhappy in its own way” Tolstoy “Anna Karenina”

What Do We Learn By Studying The Contrast Between Success and Failure

There are more ways to fall than to become great

The Five Stages of Decline

1. Hubris* Born of Success2. Undisciplined Pursuit of More3. Denial of Risk and Peril4. Grasping for Salvation5. Capitulation to Irrelevance or Death

*Hubris (also hybris) means extreme haughtiness or arrogance. Hubris often indicates a loss of touch with reality and overestimating one's own competence or capabilities, especially for people in positions of power.

Stage 1Hubris Born of Success

Stage 1 kicks in when:

• Companies become arrogant, regarding success as an entitlement

• Neglect of a primary flywheel, failing to renew it with the same creative intensity that made it great in the first place

Stage 1Hubris Born of Success

When WHAT replaces WHY“We are successful because we do these specific things” replaces “We’re successful because we understand why we do these specific things and under what conditions they would no longer work”

Sam Walton: “Wal-Mart does not exist for the aggrandizement of its leaders; it exists for its customers.”

Stage 1Hubris Born of Success

Decline in learning orientation Leaders lose their inquisitiveness

Discounting the role of luck

Stage 1Hubris Born of Success

Confusing BIG with GREAT

Overreaching explains how the once invincible self destruct

Obsession with growth

Ames vs. Wal-MartCircuit City vs. Best BuyRubbermaid; Motorola; Merck

Stage 2UNDISIPLINED PURSUIT OF MORE

Breaking “Packard’s Law” …“Packard’s Law”:

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

DECLINING PROPORTION OF THE RIGHT PEOPLE IN KEY SEATS

Any exceptional enterprise depends first and foremost upon having self managed and self motivated people

The wrong people see themselves as having a job, while the right people see themselves as having responsibilities.

Review APPENDIX #5 “What Makes For The RIGHT PEOPLE in Key Seats?”

THREE QUESTIONS

1. What are the KEY seats on your bus?

2. What % of those seats can you say with confidence are filled with the right person?

3. What are you going to do to improve on that percentage?

Stage 2UNDISIPLINED PURSUIT

OF MOREEasy Cash Erodes Discipline

Increasing price rather than increasing discipline

Bureaucracy Subverts DisciplinePeople start to think in terms of JOBS rather than

RESPONCIBILITIES

Problematic Succession of PowerLeaders who fail the process of succession set their

enterprise on a path to decline

Stage 2UNDISIPLINED PURSUIT OF MORE

PERSONAL INTEREST PLACED ABOVE ORGANIZATIONAL INTERESTS

Chrysler

Stage 3DENIAL OF RISK AND PERIL

AMPLIFYING THE POSITIVE WHILE DISCOUNING THE NEGATIVE

MAKING BIG BETS IN THE FACE OF MOUNTING EVIDENSE TO THE CONTRARY

Motorola (Iridium) vs. Texas Instrument

TAKING RISKS BELOW THE WATER LINE

• Challenger's “O” rings

Stage 3DENIAL OF RISK AND

PERILThree Important Questions To Ask

When Making A Big Decision:

1. What’s the Upside, if events turn out well?

2. What’s the downside, if events go very badly?

3. Can you live with the downside? Truly?

Stage 3DENIAL OF RISK AND PERIL

What Indicators Should Be Most Closely Watched?

• Deterioration in gross margins• Current Debt to Equity Ratios• Customer Loyalty• Decline of the Right People on your Bus• When those in power blame other people or

external factors

Stage 3DENIAL OF RISK AND

PERIL OBSESSIVE REORGANIZATION

People are increasingly obsessed with internal politics rather than external conditions

IMPERIOUS DETATCHMENT

Executive “perks” and fancy surroundings disconnect executives from daily life

Stage 4GRASPING FOR

SALVATIONThe Silver Bullet

Game changing acquisitionsLurching from goal to goal; strategy to strategy; INCONSISTANCY

Grasping for a leader as a saviorHP / Fiorina Vs. IBM / Gerstner

Stage 4GRASPING FOR

SALVATIONPANIC AND DESPERATION

If you want to reverse decline, be rigorous about what NOT to do.BreathCalm yourselfThinkFocusAim Take one shot at a time

Stage 4GRASPING FOR SALVATION

FANFARE; HYPE; NEW PROGRAMS; NEW CULTURE; NEW STRATEGIES; SPENDING A LOT OF TIME TO MOTIVATE PEOPLE

RESULTPeople cannot articulate what the company is all about; core values disintegrate; the organization becomes “just another place to work”; cash and resources get drained

Stage 5CAPITULATION TO

IRRELEVANCE OR DEATH

You Can Be Profitable and Bankrupt

Companies do not die from a lack of earning, they die because if a lack of CASH

Stage 5CAPITULATION TO

IRRELEVANCE OR DEATH

The Two Versions of Stage 51. Giving Up The Fight2. Denial or Hope

Stage 5CAPITULATION TO IRRELEVANCE OR DEATH

Giving Up The Fight

Scott Paper selling to Kimberly-Clark

Denial or Hope Zenith

What Do All These Companies Have In Common?

Xerox Nucor IBM Texas Instrument Pitney Bowes Nordstrom Disney Boeing HP Merck

What Do All These Companies Have In

Common?Level 5 Leaders Appeared.

Mulcahy of Xerox “I am the culture!”

Dick Clark of Merck “ A crisis is a terrible thing to waste”

Gerstner of IBM describe getting the right people in the right seats on his bus was “…my top priority during those first weeks “

APPENDIX

#s 1 and 2 talk about the selection criteria

# 3 … Fanny Mae

#4 … Important to read since it subverts the complacency hypothesis

# 5 … A must read … Right People in Key Seats

THERE IS HOPE

# 6 View 3 companies from DECLINE TO RECOVERY step by step:

Level 5 Leaders First Who, Then What Confront the Brutal Facts Hedgehog Concept Culture of Discipline Flywheel, NOT Doom Loop Clock Building, Not Telling Time Preserve The Core / Stimulate Progress

6A … IBM6B … Nucor6C … Nordstrom