How Successful Businesses Fail

by Eddie Reeves on

I am a huge Jim Collins fan.  I have read just about every one of his books (Built to Last and Good to Great are his best in my view) and have gotten an immense amount of value from them – value that I have been able to pass on to colleagues and clients.

In his concise but cogent 2009 book How the Mighty Fall, Collins explored how and why many businesses, even some which have been quite successful for many years, can still sometimes crash and burn.  Collins studied this phenomenon and came up with a five-stage failure path:

1. Hubris born of success

The company is successful, which leads to arrogance and excessive self-regard. From within, this looks like confidence, but there is a fine line between confidence and courage that leads to more success and blindness to important realities.

A typical action is that once one core business ‘flywheel’ is successful, there is a drive to create more such successes. Do this often results in transferring critical resources to the new projects, starving the core business in the process.

While it certainly makes sense to use cash cows to fund rising stars,  if those stars do not rise or the cows are underfed, the results can be disastrous. Hubris, arrogance born or success, leads to a blindness to the possibility of stuck stars or craving cows.

What is needed from leaders here is sustaining a healthy paranoia, balancing belief and doubt that constantly questions reality.

2. Undisciplined pursuit of more

The hubris from stage 1 leads to a focus on growth, world domination and financial targets that, more often than not,  do not take sufficient account of the company’s real situation.

A key problem at this stage is overreaching.  Periods of rapid or substantial growth often result in major challenges like finding the right people, protecting the company culture and communicating effectively.

Getting the right people in the right jobs, with clear responsibility and authority, is the first job of leaders. This is more important than building control systems and structures (which often compensate for the lack of capable people).

3. Denial of risk

At some point, things start to go wrong. A healthy company will be on the lookout for this, will have prepared for it and will take mitigating and contingency action. The falling company will cling to its arrogance (calling it confidence) for as long as possible.

There is also danger in this phase of even further loss of attention to customers and products as managers squabble and play power games rather than recognizing and addressing the issues. Where issues cannot be avoided, leaders spend time trying to fixing blame instead of fixing the business.

The leader here should be waking up the organization by shaking up the organization.  It is crucial that the leader lets the entire team know that it is not just okay, but crucial to be ope about risks and failures.

4. Grasping for salvation

When things start to go visibly wrong, with products failing, profits falling and people fearing, the company at last wakes up to the fact that they are in deep doo-doo. But instead a clear-eyed and sober search for the real issues, a form of panic sets in.  Big bets and bold strategies get even bigger and bolder. These may succeed for a while but they are seldom enough.  Good money is thrown at bad, and the business continues to founder.

When dramatic actions fail, the organization seeks out a savior who will lead them to former glory, ousting the old and pinning their hopes on the new (and in doing so put all responsibility on the leader, not on themselves).

A common thought is that the organization’s failures are due to its entire leadership and new management is sought externally, when the truth is that effective leaders who understand the real ways for creating success may be found internally. It is not uncommon for companies in this phase to go through a whole series of new CEOs, who are often faced with high expectations, limited resources and complex problems.

5. Capitulation to irrelevance or death

Finally, people reach the point of surrender.  Any remaining faith in leadership disappears, including from the leaders themselves.

It is harder than ever for leaders to do anything at this stage and a dignified closure may be better than one more ‘Hail Mary’ effort. When closure is inevitable, good leaders spend time helping their people before than themselves, for example selling off rather than closing sustainable parts of the business or otherwise helping their people find jobs elsewhere.

Based on these five steps, would you say that your organization is on the path to failure?  If so, which stage are you in?

Comments on this entry are closed.

Previous post:

Next post: