It's About Hubris, Stupid

Book Review of “How the Mighty Fall”

by Bob Donnelly

How the Mighty FallJim Collins, the well known author of “Good to Great” and coauthor of “Built to Last” has done it again in this book that explains why successful companies stumble, and eventually fail; or are able to recover and continue.

His analysis is captured in clear examples of what he calls the Five Stages of Decline. I have been describing the same path to irrelevance in my column, The Entrepreneurial CEO, in CE Online and to many CEOs for many years in a different way, but coming to the same basic conclusion.

Collins in his description of Stage 1 of his thesis (hubris born of success) concludes that great enterprises can become insulated by success. He says that Stage 1 begins when management becomes arrogant and regards success as an entitlement. When this happens I have watched one company after another start to “market by assumption” assuming that they know more about what customers want than the customers themselves.

This leads to Collins’ Stage 2 (The undisciplined pursuit of more) where he describes management making undisciplined leaps into areas where they cannot be great, or growing faster than they can manage effectively. His analysis here is that these new activities typically stray into areas foreign to what led the company to greatness in the first place or without the right managers in place to achieve excellence.

Collins fundamental conclusion here, and rightly so, is that when an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall.

This leads to Collins Stage 3 (denial of risk and peril) where internal warning signs begin to mount, yet external results still remain strong. A classic example of this was Starbucks after Schultz turned over the day-to-day operations to his team in 2000 and the business continued to grow through 2006, even though all the signs of impending doom were obvious and accumulating in the marketplace.

Shultz returned to find that his vision for Starbucks as a unique place to socialize, have impromptu business meetings and relax over great coffee had morphed into another chain of fast food outlets. And, McDonald’s and Dunkin Donuts, the leaders in fast food were luring his customers away with offers of less expensive great coffee themselves.

Collins uses classic examples of “corporate speak” that management uses to explain away disturbing indicators during this stage as “temporary” or “cyclic” or “not that bad”, and “nothing is fundamentally wrong”.

The one I have always liked best is a “temporary aberration”. Collins says that in Stage 3 leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data, which is exactly what I have experienced in my corporate life.

He cites a statement made by the CEO of Circuit City while the company was in Stage 3: “This is a company that’s in great shape”!

Risky Business - No ParachuteThe risks gone bad in Stage 3 eventually assert themselves and typically result in a sharp decline in sales and a staggering loss which leads to Collins’ Stage 4 (Gasping for Salvation). In 2004, for example the Danish Company Lego had a historic loss that shook the owners out of complacency and into action.

Collins explains that there are only two choices at this stage either (1) lurching for a quick salvation, or (2) returning to the disciplines that created greatness in the first place. At this point Collins offers the following courses of action or possible “saviors” as he calls them: find a charismatic visionary leader, launch a bold but untested strategy, have a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a “game changing” acquisition, or other silver bullet solutions.

Lego hired a new visionary CEO with McKinsey planning experience who returned the company to its core technology updated for current customer requirements.

Collins concludes that the longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will continue to spiral downward into his Stage 5 (Capitualtion to Irrelevance or Death).

In Stage 5 Collins explains that accumulated setbacks and costly false starts erode financial strength and the individual spirits of management to such an extent that the leaders abandon all hope of rebuilding a new future. He concludes that eventually the organization atrophies into utter insignificance; and in the most extreme cases simply disappears as a result of running out of cash. Sound familiar?

In “How the Mighty Fall” Jim Collins provides an excellent explanation of what has happened and will continue to happen to companys who are overcome with success, become arrogant to a fault and lose track of what created their success in the first place. The book also cites many good examples of CEOs who were able to arrest this downward spiral such as Lou Gerstner at IBM and Anne Mulcahy at Xerox, as well as suggestions on how to avoid this common pattern of behavior by one CEO after another.

Unfortunately, we have just witnessed this scenario at many financial firms and others that contributed to the current economic situation we are in today. I sincerely hope that CEOs will follow Jim Collins advice and never get to his Stage 1 – Hubris Born of Success.

Collins leaves us with a haunting statement on the back cover that all CEOs should note well: “Whether you prevail or fall, endure or die, depends more on what you do to yourself than on what the world does to you”.

Bob DonnellyBob Donnelly is the Editor of the online Entrepreneurial CEO column for Chief Executive magazine.

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