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How the Mighty Fall - Part 2

November 18 2019 - by Dr. Kenroy C. Wedderburn, Associate Professor of Finance, Concord University, also Alum of CLP's Leadership Development Programme

Longevity in this business is about being able to reinvent yourself or invent the future.

~ Satya Nadella (Microsoft CEO)

 

In Part I we reviewed James Collins’ work on the reasons for the success of some businesses and the demise of others. In his book “How the Mighty Fall: and Why Some Companies Never Give Up”, he outlined the five stages of decline that companies typically go through. Hopefully they heed the road signs before getting to stage five. We looked at the first two stages in Part I, so we will now look at the other three stages.

 

Stage 3 – Denial of Risk and Peril

Companies that do not stop and do some serious evaluation and reversal of current strategies and policies during stages one and two will get to the stage of denial. Ironically, many times this happens when the company has experienced several years of success, and executives are at the stage of being dull to warning signs that would have had them jumping through hoops had the same signs manifested when the organization was much younger. According to Jim Collins, at this stage “leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data.” Other times, because of the malaise in leadership, they just wait for a turnaround. I used to tell my MBA students that leaders not doing anything but sitting around and hoping that things get better is not a management strategy! Another important point to glean from this situation is that past success does not guarantee future success. According to the late Andy Grove – former CEO of Intel, “Only the paranoid survives!”

 

Did you hear the news about Barings Bank - a British bank that was founded in 1762 but collapsed in 1995 because of a rogue foreign exchange trader? This elite bank had no less a client than the Queen of England, but when warning signs started to blare because of the activities of a young upstart that was involved in speculative activities using the bank’s assets, the leadership was slow to respond and take firm corrective actions. They lingered until this rogue trader had racked up debt totaling twice the bank’s asset base – and forced them in to bankruptcy! Again, hope is not a management strategy.

 

Stage 4 – Grasping for Salvation

Companies who pass through Stage Three without fixing the underlying problems get to the stage where they start grasping for salvation. Many times the decisions made in this stage are suboptimal at best and sometimes are actually catastrophic. Leaders grasp for any next big thing that can save the sinking ship, and many times the new visionary leader, or the next great product or service, or the marketing plan that will rescue the firm - have not passed through the rigors of proper vetting because of the existing panic mode.

 

Stage 5 – Capitulation to Irrelevance or Death

In this the final stage, the leaders of the organization abandon all hopes of recovery and succumb to the death spiral. They would have already tried several new products or services, probably went through a series of CEOs in and out through a revolving door, depleted the already low financial assets and even worse, sapped the collective spirit of the company.

 

Conclusion

The morale in this article is that every organization will experience decline and decay unless either the organization’s leadership invents the future or reinvent themselves. This is true not just for profit seeking enterprises but also for government organizations. Government organizations also need to focus on their people, processes and technology, or many will become irrelevant!

We would love to hear your feedback on this article.

 

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David Lee - Reply

Dr. Wedderburn, thanks for brininging these salient points to our attention.  Success can indeed be our worst enemy as complacency and denial set in.  Indeed leadership must keep their eyes on the horizon scanning for opportunities and threats in order to realise a nimble organization to respond to both.  Indeed this may be the way to keep re-inventing ourselves and our organizations and drive innovation.