The Five Stages of Decline

By: James E. Casto
Issue: Fall 2009

Jim Collins has, in his own words, gone over to “the dark side.”

After years of studying successful companies and trying to figure out the “why” behind their success, management guru Collins has turned his attention to the decline and fall of once-great companies.

“We’re turning to the dark side,” he jokingly told his colleagues.

Collins is the author of two of the biggest-selling business books of all time, Built to Last and Good to Great. Both are filled with upbeat portraits of successful companies and advice from Collins for those readers who would put their own businesses on the same upward-bound course.

Now Collins has written a new book that looks at the other side of the coin – failure.

Although Collins wrote his latest effort before the bottom fell out of the nation’s economy, How the Mighty Fall and Why Some Companies Never Give In seems a perfectly timed piece of reading for this recession era. When some of the nation’s biggest and best-known businesses crash and burn, it’s only logical to search their wreckage for clues as to what brought them down.

Today, Collins is one of the most popular (and best paid) speakers on the lecture circuit but he and coauthor Jerry Porras were just two little-known research guys from Stanford University in 1994, when they published Built to Last. At first, the book went mostly unnoticed – just another in the flood of books turned out by the nation’s publishing houses each year. But its sales steadily mounted and ultimately exploded, as eager readers embraced it and recommended it to their friends and colleagues.

Collins and Porras looked at a number of companies and tried to decipher why they had been able to achieve the kind of success that spans generations. Among their findings: Successful companies have a Big Hairy Audacious Goal, or BHAG, a long-term vision that’s so daring in its scope that it seems virtually impossible.

Their message resonated with readers and made Built to Last a business classic. At last report, it had sold more than 3.5 million copies.

In 2001, Collins published Good to Great, which quickly proved equally successful. It’s sold millions of copies and been translated into 35 languages, including Latvian, Mongolian and Vietnamese.

Good to Great addresses a single question: Can a good company become a great company, and if so, how? Based on five years of research comparing companies that made that leap to those that did not, Collins argues that greatness is not primarily a function of circumstances but largely a matter of conscious choice and discipline. Truly great companies are able to achieve that level of success, he says, because they maintain a narrow focus on their core competence rather than branching off in a confusing hodgepodge of directions.

Collins is continuing his research into why some companies endure and prevail but, as he explains in his Preface to How the Mighty Fall, he temporarily put that work aside to write a magazine article exploring some of the reasons companies fail. Then, what he originally had envisioned as a magazine piece kept getting longer and longer and ultimately became a small (220-page) book.

“At our research lab,” he writes, “we’d already been discussing the possibility of a project on corporate decline, in part because some of the great companies we’d profiled in the books Good to Great and Built to Last had subsequently lost their positions of prominence. On one level, this fact didn’t cause much angst; just because a company falls doesn’t invalidate what we can learn by studying that company when it was at its historical best.

“But on another level I found myself becoming increasingly curious: How do the mighty fall? If some of the greatest companies in history can go from iconic to irrelevant, what might we learn by studying their demise, and how can others avoid their fate?

“I’ve come to see institutional decline like a disease: harder to detect but easier to cure in the early stages; easier to detect but harder to cure in the later stages. An institution can look strong on the outside but already be sick on the inside, dangerously on the cusp of a precipitous fall.”

Collins likes to number things. In Good to Great, he offered what he calls the Five Levels of Leadership, and in How the Mighty Fall, he lays out what he calls the Five Stages of Decline:

Stage 1: Hubris Born of Success –

Stage 1 kicks in, says Collins, when “people become arrogant, regarding success as virtually an entitlement, and they lose sight of the true underlying factors that created success in the first place.”

Stage 2: Undisciplined Pursuit of More –

Growth isn’t always a good thing for a business, warns Collins. “When an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall.”

Stage 3: Denial of Risk and Peril –

“When those in power begin to imperil the enterprise by taking out-sized risks and acting in a way that denies the consequences of those risks, they are headed straight for Stage 4.”

Stage 4: grasping for Salvation –

When it’s clear the enterprise is in trouble, the 64-million-dollar question becomes: How does management react? If they lurch from one dubious idea or strategy to another, seemingly desperate to try any remedy, it becomes almost impossible to break out of the downward spiral.

Stage 5: Capitulation to Irrelevance or Death –

The legacy of accumulated setbacks and expensive false starts is failure.

But none of this, Collins says, is inevitable.

He argues that decline can be avoided, detected and, yes, even reversed. “Great companies,” he says, “can stumble, badly, and recover.” Decline, he insists, “is largely self-inflicted, and the path to recovery lies largely within our own hands.”

“We are not imprisoned by our circumstances, our history, or even our staggering defeats along the way. As long as we never get entirely knocked out of the game, hope always remains. The mighty can fall, but they often rise again.”

You can read an excerpt from How the Mighty Fall online at: www.businessweek.com/magazine/content/09_21/b4132026786379.htm?ch

Quotes from the book How the Mighty Fall and Why Some Companies Never Give In by Jim Collins are © 2009 by Jim Collins and used by permission.

Jim Collins is a student and teacher of enduring great companies

— how they grow, how they attain superior performance and how good companies can become great companies.

He has authored or co-authored four best-sellers, including the classic Built to Last and Good to Great: Why Some Companies Make the Leap ... And Others Don’t.

His most recent book, How The Mighty Fall: And Why Some Companies Never Give In, was published in May.

Driven by a relentless curiosity, Collins began his research and teaching career at Stanford Graduate School of Business, where he received the Distinguished Teaching Award in 1992. In 1995, he founded a management laboratory in Boulder, Colorado, where he now conducts research and teaches executives from the corporate and social sectors. He holds degrees in business administration and mathematical sciences from Stanford University, and honorary doctoral degrees from the University of Colorado and the Peter F. Drucker Graduate School of Management at Claremont Graduate University.

Collins has served as a teacher to senior executives and CEOs at more than a hundred corporations and social sector organizations.

James E. Casto is associate director for public information at RCBI.

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