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Sunday, December 06, 2009

Review: How The Mighty Fall

Recently, someone asked the question of a general mailing list, "How do you know when a company is failing, or on the verge of failing?" At that time, there were several interesting answers, but none of them really satisfying, since no one really had any data to back it up. How the Mighty Fall, written by Jim Collins of Built to Last fame, takes on that question, and to a certain degree of success.

The thesis of the book is that explanations such as "failure to innovate" are rarely the case. In fact, on the contrary, most of the companies who failed innovated at a rapid and ferocious pace. They brought in change leaders from the outside, a frenetically introduced new products, new innovations, and reorganized themselves at a ferocious pace. What that served to do instead of rescuing them from failure was to plunge them into a death spiral from which they could not recover. By contrast, the companies that did succeed in pulling out of death spirals hired CEOs from within, focused on core values while iterating on success, and took big bets only after ideas had first proven themselves in the marketplace.

The first part of the book focused on the process of failure. The first phase is hubris, led by an aura of invincibility and a feeling that "we could do no wrong." At this point, pride overcomes any humility that might have been in place. It is very telling at this point that at this point the role of luck in past success is completely dismissed, and all past success is attributed to skill.

This is followed by over-reach, either through acquisition, entering a new market where there was no reason to believe the company could succeed or compete effectively, and undisciplined growth through hiring too quickly. The key here is that the wrong people are put in key positions, and there is no plan to fix this problem. What this means is that added bureaucracy is required to manage having wrong people all over the place, and that causes good people to leave.

At the height of apparent success, there is then denial of risk: those in power become surrounded by people afraid to tell them the truth or criticize them. Leaders make statements instead of asking questions, and politics take on a life of its own --- what's good for the individual becomes the most important metric, rather than what's good for the company as a whole. (Someone once told me that my biggest failure in managing my career was never asking, "What's in it for me?")

In the stage four of failure, companies grasp at straws for a silver bullet: CEOs from outside, hoping for discontinuous leaps into new technologies and new markets, and one series after another of desperate moves bring the company further and further to the brink. It is very telling that the counter examples do precisely the opposite: they tend to hire CEOs from inside, immediately make changes that ensure survival rather than investing in big acquisitions and new technologies, and refocus the company on the strengths.

In the final stage, the company enters a death spiral as reduction in cash reduces options until the company fails. At this point, the chance for renewal is rare, but it can be done if a sufficiently persistent, humble leader is found to lead.

Overall, the book is great, full of case studies for every stage of the process, and counter examples. What it is lacking is that the first 2 or 3 stages seem particularly tough to distinguish between a company in full steam ahead mode, and a company that's really starting to get too arrogant for its own good. I would definitely have liked Collins to go out on a limb and name a few companies that are in stage 1 and 2 to see what he really means. I would also really like more counter examples, as to how companies can recover and avoid the kind of Hubris he talks about. The reality seems to be the picking the right people to be in the right position from the CEO down. But there's no framework for how to do this, and I consider it an impossible to solve problem --- I'd like to have a few interview questions that bring out whether or not a leader has humility deep in his bones, or whether he's faking it, but I just can't think of a way to do so.

Regardless, this book is highly recommended, and I think that every executive or investor should have a copy in his library to remind himself of how great things look before a big fall.


Unknown said...

I guess the book doesn't talk about a company that's too big to fail, despite all the signs :)

Piaw Na said...

Actually, one of the companies was Fannie Mae.

Peter said...

Mauboussin Think Twice says that diversity in decision-makers is crucial (the "wisdom of crowds" beats experts only if the crowds are sufficiently diverse).