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How the Mighty Fall

July 08 2019 - by Dr. Kenroy C. Wedderburn, Associate Professor of Finance, Concord University, also Alum of CLP's Leadership Development Programme

James C. Collins is the writer of several famous books on management, some of which include:

  • Built to Last: Successful Habits of Visionary Companies (1994)
  • Good to Great: Why Some Companies Make the Leap... and Others Don't (2001)
  • How The Mighty Fall: And Why Some Companies Never Give In (2009)
  • Great by Choice: Uncertainty, Chaos and Luck - Why Some Thrive Despite Them All (2011)

The length of time that a company exists is really a poor indication of how much longer they will remain viable. In the course of me teaching Strategic Management to MBA students, I have reviewed several companies which failed – some in spectacular fashion, and all with varied reasons. Take for example Barings Bank of London. This was a stellar bank which was founded in 1762 and had some elite clientele including no less than the Queen of England. Barings Bank’s fall from grace came about when one young employee (no more than about 28 years old) was given unfettered, unsupervised autonomy to trade in financial derivatives (a murky world of significant risk) and who charted up losses equivalent to twice the capital of the bank! So in 1995, Nick Leeson became the most renowned rogue trader in the financial world – bankrupting a 230-year-old bank!

A good indication of companies being at the top of their game is when their names become a verb (like Google or Xerox) or part of a globally known phrase (like “kodak moment”). So Kodak is another example. The dramatic irony of Kodak’s situation is that they were the ones that discovered digital photography – but because of poor leadership, the firm sunk because of competitors wiping them out with (you guessed it!) digital photography!

So Jim Collins pondered the reasons why companies fail and proposed some guidelines in his book – How the Mighty Fall: And Why Some Companies Never Give In. His premise is that “every institution is vulnerable, no matter how great. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall, and most eventually do.” After some research and deliberations, Jim Collins outlined a road map of five stages to decline that an organization may use to prevent their ultimate demise. The idea is for companies to realize this decline as early as possible before it is too late. I will review Stages 1 and 2 in this article and follow up with the others next month.

Stage1: Hubris Born of Success

When a company is at the top of its game, at the pinnacle of its industry, the leaders should say like what the late Andrew Grove (founder and former CEO of Intel) said when Intel was the largest semi-conductor producer in the world and widely successful – “Only the paranoid survive!”

Many times when great companies are successful for an extended period of time, they believe themselves to have become superman (forgetting that even he had kryptonite to deal with)! These companies then start to believe that the success’  “accumulated momentum can carry an enterprise forward for a while, even if its leaders make poor decisions or lose discipline.”

Stage 2: Undisciplined Pursuit of More

Stage 1 leads to Stage 2. With the aura of invincibility, many successful companies start taking on projects outside of their core competence, start becoming sloppy, and start expecting that they can be successful at anything. One of the key symptoms of this stage is that they start forgetting their customers, not realizing that that is the basis of their existence. Many times institutional shareholders are also complicit in this stage – ever demanding more returns on top of the previous year’s returns.

Please look out for Stages 3, 4 and 5 in the next blog.

Do you know any strategies to ensure business longevity? Feel free to comment below.

 

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