It’s important to have respect for how easy it is to look back and identify why things went wrong with companies that truly just fell apart.  While you’re in the middle of it however it could be less identifiable.  Keep in mind there were very smart people running the organizations that have fallen. The ones that are talked about, researched and studied in Jim Collins book.

No one wants to think about how a company fails, but by doing so you learn what not to do.  Also, you might even recognize your company is in the early stages of decline.

Jim Collins is the author of numerous books, Good to Great, Built To Last, Great by Choice, and How The Mighty Fall…an American business consultant, and high demand speaker.

In his book Built To Last he looked at companies that endured at a high level. He highlighted how critical it is to realize it can’t be a single leader that makes a company great when they have endured for so long at such a high level. Eventually, leaders go away. “So, it must be something about the enterprise, its culture, the company.” Jim Presents

Jim warns that some of the greatest companies in history brought about their own senseless self-destruction and if it can happen to them, no one is immune. “If you think you are immune, you are already on the path to decline.”

The five stages of how a company fails.

He describes the fall of a company as a stages of a disease. It’s a disease that is easy to cure if detected early.  However, it’s very hard to detect the disease in the early stages. It’s harder to cure later, but easier to detect then.

The First Stage: Hubris Born of Success. (excessive pride or confidence)

1. Success entitlement and arrogance

2. Neglect of a primary fly wheel (i.e., central mechanism leading to success)

3. “What” replaces “why”

4. Decline in learning orientation

5. Discounting the role of luck

Arrogance and regarding success virtually as an entitlement are signs of Stage 1, “Hubris born of success”. In this stage people lose sight of what made them succeed in the first place and start to consider that they can succeed in anything.

A company begins to have an issue with their ego. They begin to think they’re successful because they do certain things.  Colin’s says we should be successful because you understand why you do certain things…not because you do certain things.

Collins gave the example of Motorola. We may think they failed because they didn’t innovate; because they didn’t move to digital. Remember they had the smallest analog phone ever. But ultimately what led to the downfall was not understanding why they were successful.  When they filed for bankruptcy they had more pending patents than they ever had in their history. It wasn’t innovation they were lakcing.  Their issue was they didn’t understand why they were successful in the past.

One of the indicators is neglect of the flywheel. Understanding what you do better than anybody else on the planet, and what contributed the most to your success. Then you forget that and move to something else. When a company drifts away, and begins to get distracted by other things, it’s easy for them to forget that flywheel.

Another indicator is  refusing to believe that luck has anything to do with your success. You begin to think that all of your success is based 100% on what you did.  The best CEOs in the country always take responsibility for their failures. They own those and acknowledge them. In fact they take on failures of their people and make them their own.  They typically attribute all good conditions to someone else. Their team, market conditions, circumstance, etc.

The Second Stage: Undisciplined Pursuit of More

1. Unsustainable quest for growth, while confusing “big” with “great”

2. Undisciplined discontinuous leaps

3. Declining proportion of right people in key seats

4. Easy cash erodes cash discipline

5. Bureaucracy subverts discipline

6. Problematic succession of power

7. Personal interests placed above organizational interests

It’s a short way from Stage 1 to Stage 2, “Undisciplined pursuit of more”, in which companies pursue more growth with undisciplined moves that do not fit into their core business. Either it’s the area the company leaps into or the fast pace of the growth that hinders the company to excel, sometimes both.

Undisciplined pursuit of more. In 2005 and 2006 when Starbucks began to take off they started growing really fast. In fact they began to grow for the sake of growth. They weren’t looking at specific metrics other than number of stores. They weren’t looking at revenue or profit. It was just number of stores.  They realized they can always grow top line revenue with more stores, but it didn’t relate to profit initially.

If you are not measuring growth by the bottom line, you should be very careful.  There are alot of company out there right now getting a lot of money. The problem with that is when they’re not strapped for cash, they don’t get hardened. They don’t ever figure out how to make money.  They don’t learn how to generate net income in a healthy way – because they don’t have to.

You’re adding more and more to the top line for the purpose of adding, but you’re not adding anything to the bottom line. But think about that. It’s very out of balance. If you keep on adding more and more weight to person at the top eventually they’re going to fall over.

The Third Stage: Denial of Risk and Peril

1. Amplify the positive, discount the negative

2. Big bets and bold goals without empirical validation on small wins

3. Incurring huge downside risk based on ambiguous data

4. Erosion of healthy team dynamics – Debate and dialogue is replaced with consensus

5. Externalizing blame rather than accepting failures

6. Obsessive reorganizations

7. Imperious detachment (lose sight of who is in service to whom)

In Stage 3, “Denial of risk and peril”, things look good on the outside, but internal signs of decline are appearing. Companies tend to amplify positive data and discount, or explain away, negative data.

We tend to love big numbers when they are supposed to be big and small numbers when they are supposed to be small.

Things aren’t sustainable and begin to see an issue, even the top line can begin to contract. Instead of addressing the real issues you come up with reasons or find excuses as to why it’s happening. Typically those reasons or excuses are outside influences.

The Fourth Stage: Grasping for Salvation

1. A series of silver bullets (overly dramatic moves intended to “change the game”)

2. Grasping for a leader-as-savior

3. Panic and haste

4. Radical change and “revolution” with fanfare

5. Hype precedes results

6. Initial up-swing followed by disappointments

7. Confusion and cynicism

Denial may lead to Stage 4, “Grasping for salvation”, in which the decline becomes visible to all. It’s instinctive to do everything the leaders can think of to reverse decline in this stage. But the key is not to do everything at a frantic pace, instead to think what not to do with a focused approach.

Are you reaching for solutions?  And going for anything?  To get out of stage 4, gain clarity about what is core and should be held firm and what needs to change. Build upon proven strength and eliminate weaknesses.

Think about Steve Jobs after he came back to Apple. They had all these projects going on, pretty much a stage 4 company. He’s writing down all the assets of the company, all the projects, and white boarding it all out. Department after department. After it was done, he circled 4 thing and wiped everything else away. He said they were going to do just those 4 things better than anyone else on the planet and get rid of everything else.

The Fifth Stage: Capitulation to Irrelevance

The company leader or founder just “sells out”.

A point is reached when the people give in. Any remaining faith in leadership disappears, including from the leaders themselvesKey points:How to avoid this stage?  Sense of urgency.  You need to feel urgency both in good and bad times. This should be ingrained in your culture.

1. No one wants to think about how a company fails, but by doing so you learn about what not to do. Also, you might even recognize your company is in the early stages of decline.

2. Know what the five stages of a company’s decline are and where your company falls. You just might be able to stop your company from sliding into decline.

3. If you recognize your company is in an early stage of decline, act now to stop further decline. It’s possible to stop decline in the early stages, but it’s virtually impossible to stop decline in the last stage.