Why do so many companies crack under pressure? How can a floundering company recover?
While Jim Collins’s book How the Mighty Fall is a warning to companies that have grown complacent, it also serves as motivation for those in the throes of decline. Collins says that by staying vigilant about the threat of failure, you can rechart your course, keep pushing forward, and ensure your company’s survival.
Read below for a brief How the Mighty Fall book overview.
How the Mighty Fall by Jim Collins
How do formidable companies lose their footing and fall into irrelevance—or even cease to exist? And how can other companies avoid the same fate? These are the questions Jim Collins seeks to answer in the How the Mighty Fall book. Backed by years of research into once-mighty companies, Collins contends there are five phases leading to a company’s downfall: overconfidence, overreaching, ignoring the signs, overcorrecting, and surrendering.
Collins is a business adviser and author of best-selling books like Built to Last (1994), Good to Great (2001), and Great by Choice (2011). In 2017, he was included in Forbes’s list of the 100 Greatest Living Business Minds. How the Mighty Fall was published in 2009, but Collins completed work on it prior to the 2008 financial crisis; as such, his analysis doesn’t take the effects of the Great Recession into account.
In this guide, we’ll discuss the five phases that lead to a company’s decline. We’ll then break down Collins’s advice for resuscitating a faltering company. As the book was published in 2009, we’ll also include updates on the companies he mentions and newer developments in the business landscape, as well as connecting Collins’s ideas with concepts in his other books and examining the perspectives of other experts.
The Five Phases Leading to a Company’s Downfall
Collins analyzes companies’ performance through the lens of failure rather than success, arguing that understanding failure helps companies avoid it. To determine the causes of decline, he takes pairs of companies in the same industry, analyzes what the failed companies did differently from the successful ones, and determines what the failed companies had in common.
Collins writes that companies don’t fail overnight. Instead, they decline gradually in a process involving five phases:
- Phase 1: Overconfidence
- Phase 2: Overreaching
- Phase 3: Ignoring—or misreading—the signs
- Phase 4: Overcorrecting
- Phase 5: Surrendering
Collins acknowledges that his work shows correlation, not causation—he can only infer why companies failed based on their similarities. He adds that while the five phases are typical in the case studies he reviewed, companies that deteriorate don’t necessarily undergo all phases, nor do they have to go through them in order. Still, companies should be aware of all the harbingers of failure to better guard against them.
Here, we’ll describe each of Collins’s five phases in turn.
Phase 1: Overconfidence
The first phase of a company’s decline is overconfidence. When companies become successful, some fall into the trap of believing they can do no wrong and that success can only breed more success.
Overconfidence manifests in two ways: Either a successful company arrogantly goes full speed ahead with ill-advised projects, or it takes its focus away from its successful core business because it’s distracted by shiny, new pursuits.
Phase 2: Overreaching
According to Collins, the second phase leading to a company’s downfall is overreaching. This is when a successful company becomes obsessed with growth in all the wrong ways. Rather than pursuing steady, controlled growth in crucial areas like performance and people, the company falls into the trap of thinking that “bigger is better” and looks for ways to grow exponentially and rapidly—even if it means veering away from the company’s core purpose or chasing after growth it can’t sustain.
Collins cites Ames Department Stores as an example of an overreaching company. Ames had seen impressive growth over three decades as a small-town retailer. In a bid to break into the urban market and increase the company to twice its size, Ames acquired Zayre, another department store chain. However, Zayre’s business model and strategies didn’t align with Ames’s, and Ames quickly tried to pivot, moving away from the formula that had helped it succeed. The move led to the company’s downfall: Ames went out of business in 2002.
Phase 3: Ignoring—or Misreading—the Signs
The third phase of a company’s downfall is when it disregards signs of decline and makes reckless decisions with potentially disastrous consequences.
Companies generally don’t collapse overnight. Collins writes that there are warning signs when a company is deteriorating, such as fewer customers and lower profits. However, instead of facing problems head-on and pinpointing internal causes of decline, leaders might respond by blaming outside factors like an economic slump, or by choosing to interpret inconclusive data with an overly optimistic eye.
Turning a blind eye to the subtle markers of trouble, a company’s leaders might then take big risks—ones that could have catastrophic consequences for the company if they don’t pay off. Collins again cites the example of Motorola, which started developing Iridium, a satellite phone, before cellular phones exploded onto the scene. The arrival of the cellphone should have given Motorola pause. The evidence was clear: Cell phones were sleeker, cheaper, and offered better coverage than satellite phones. But the company chose to believe that there was still a need for satellite phones and went full speed ahead, funneling $2 billion into the project. In the end, the all-or-nothing bet didn’t pay off, and Motorola filed for bankruptcy.
Aside from careless risk-taking, a company in denial might also undergo reorganization—sometimes multiple times—favoring cosmetic changes that don’t address the real issues over substantive action.
For example, Collins writes that Scott Paper Company, once the leader in the toilet paper market, restructured three times in four years as a response to Procter & Gamble (P&G) gaining ground with its own brand of toilet paper.
Phase 4: Overcorrecting
Whereas leaders can brush off problems or look at data through rose-colored glasses in the third phase, they eventually have to face reality when the situation gets noticeably worse. This is the fourth phase, writes Collins: Leaders can no longer deny that the company is in trouble, and they scramble for a quick way to stop the decline. Collins explains that this reaction is borne out of instinct—we make desperate moves when we’re fighting to survive.
Collins writes that in this phase, companies pin their hopes on a savior. This may come in the form of an outsider who’s brought in to fix things or an overhaul of the company’s approach to business.
New People
The company might hire consultants or, with much fanfare, bring in a maverick chief executive from the outside, with the hope that new blood will bring fresh ideas to reinvigorate the company. However, Collins argues that hiring an outsider rarely works out.
New Strategy
Another quick fix that a company might attempt is changing its strategy. It might go through another round of restructuring, implement a culture makeover, launch a buzzy new product, or make a hasty acquisition. If all else fails, a company might pin its hopes on a buyout.
Often, a company’s dubious rescuer is a combination of people and strategy. Collins gives the example of Hewlett-Packard (HP), which went through a rough patch in the late ’90s. To turn things around, the company tapped Carly Fiorina to be its CEO. Collins characterizes Fiorina as a media darling who made sweeping changes to the company, including coming up with a bold new vision for HP, restructuring, and making a major acquisition. After HP performed poorly during her six-year tenure, Fiorina was fired.
Phase 5: Giving Up
Collins writes that drastic moves in the fourth phase can lead to improvements in the company’s performance, but any positive change is usually short-lived. Instead, the dramatic changes that the company implements often result in confusion and strained finances: As a company pivots its vision and strategy, employees no longer know what the company stands for. More significantly, as the company pours resources into initiatives that are likely to fail, it further weakens its financial position. Thus begins the fifth phase: giving up, either because the leaders believe it’s the best option or because the company has run out of resources to keep going.
When to Give Up
Collins argues that a company should keep fighting and find any means to get back on the long road to recovery. But he also writes that there is one situation when a company should surrender: when its existence no longer serves a purpose.
How to Turn Things Around
Collins contends that if a company still has a worthy goal and the potential to make a meaningful impact, it should commit to putting in the time and effort required to recover and rise. Collins emphasizes that reversing decline isn’t about looking for a miracle cure (such as a savior CEO or a revolutionary new product) but about playing a long, steady game.
Here, we outline what Collins prescribes for a floundering company: putting the right people in place, sticking to what your company does best, and being disciplined.
Put the Right People in Place
As we earlier discussed, having the wrong people can plunge a company into decline. But what qualities make the “right” people?
First, key people should be a good cultural fit. Collins argues that companies should only hire people whose values are already aligned with those of the company. Trying to fit people into a mold leads to decisions that don’t fit in with the company’s core purpose. In contrast, those who already believe in the company’s mission are more likely to be passionate about their role, which fuels them to keep going through difficult times.
Second, Collins writes that key people should be responsible. They should know what their role is, be committed to doing it to the best of their ability with minimal supervision, and take accountability when things go wrong.
Stick to What You Do Best
As we discussed earlier, one of the key drivers of decline is when a company ignores its flywheel—the core business that made the company successful in the first place. Collins says that you should keep pushing that flywheel as long as you’re passionate about it and it can still serve its purpose. This doesn’t mean that you shouldn’t innovate—just that any innovation should remain within the area you’re already good at.
Be Disciplined
Collins stresses the importance of adhering to time-tested management principles as soon as you realize your company is in a state of decline. He recommends reviewing the work of experts like Peter F. Drucker and Michael Porter to brush up on the foundations of management.
One proven management principle that Collins emphasizes is calmly and rationally evaluating business decisions. He writes that you should carefully weigh risks and only bet on something if it isn’t big enough to sink the company if things don’t work out. This means not going all-in on an idea that may turn things around quickly while exposing the company to catastrophic risks.
Collins says that strong companies should be disciplined as well. This means staying the course and keeping an eye out for the warning signs of deterioration: The earlier you recognize that the company is in trouble, the sooner you can get back on course.
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Here's what you'll find in our full How the Mighty Fall summary:
- How formidable companies can lose their footing and fall
- The five phases that lead to a company's downfall
- How to rechart your course if you're facing the threat of failure
