Leadership: Five steps of failure

Management guru Jim Collins has figured out why companies crumple.

(Read an interview with Jim Collins.)

Jim Collins worries his new book, How the Mighty Fall, won’t sell more than a couple dozen copies because it examines the “dark side” of corporations. He probably shouldn’t worry. Yes, his two previous books, Built to Last and Good to Great, explained how highly successful corporations operate, and sold more than seven million copies total. But failing companies and leaders are big news these days, and Collins thinks he knows why they crumple.

“The No. 1 message about whether companies remain great or whether they fall is more of a function of what they do to themselves than what the world does to them,” he says. “If you blame the environment, you’re missing the point.”

Collins believes there are five stages a once mighty corporate titan goes through during its failure, and it starts and ends with the company. The problems start when management becomes so arrogant that they view success as an entitlement and lose sight of what originally made them successful. This is followed by an undisciplined approach to growth, including setting targets that are so aggressive that the company can’t maintain its standards, or growing so fast that the right people aren’t in place — a theme Collins emphasized in Good to Great.

In the third stage of failure, leaders ignore negative data and are prone to blame external factors for poor performance rather than accept any responsibility. At this point, companies often look for a silver-bullet solution, such as “a charismatic visionary leader, a bold but untested strategy, a radical transformation or a dramatic cultural revolution.” Collins warns these quick-fix solutions might initially deliver positive results, but they don’t last. Finally, the company capitulates into irrelevancy or death.

Collins says not all companies fall at the same rate, and some will fall quicker than others. For example, the decline of Zenith was visible long before it hit Stage 5, whereas Lehman Bros. and Bear Stearns seemingly fell overnight. He describes a company’s failure like some people who are stricken with a disease — they can look healthy, but inside disease has taken root. He developed this metaphor from a personal experience. In 2002, he was running just outside of Aspen with his Canadian-born wife, Joanne Ernst. She was beating him in the uphill race, but “two months later, she received a diagnosis that would lead to two mastectomies.”

But just like Collins’s wife, companies can survive even if they’re far into the failure cycle. Xerox, Nucor and IBM are just a few of the giants that have managed to thrive after being pronounced near-dead. But to do so, companies have to return to the basics and ensure they have the right people in the right place.