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How Successful Businesses Fail

 

Disciplines > Leadership > Leadership articles > How Successful Businesses Fail

 1. Hubris born of success | 2. Undisciplined pursuit of more | 3. Denial of peril and risk | 4. Grasping for salvation | 5. Capitulation to irrelevance or death | See also

 

Many businesses which have been successful, even for many years, can sometimes turn over and collapse. What happens? Jim Collins (of 'Built to Last' and 'Good to Great' fame) studied this phenomenon and came up with a five-stage failure in his excellent 'How The Mighty Fall'.

Here's Collins' stages and additional comments on them for leaders.

1. Hubris born of success

The company is successful, which leads to arrogance and excessive self-belief. 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. To do this, can mean moving critical resources to the new projects, which starves the core business.

This is a standard process of using cash cows to fund rising stars, but if the stars do not rise or the cows are underfed, the result is bad news. Hubris, arrogance born or success, leads to a blindness to the possibility of stars or cows failing.

What is needed from leaders here (and in other stages) is sustaining a healthy paranoia, balancing belief and doubt that constantly tests, questions and learns. Done well, hubris is kept at bay and the failure cycle is averted. The leader is the key propagator and guardian of the company culture, in which learning can easy be replaced by arrogance.

2. Undisciplined pursuit of more

The hubris from stage 1 leads to a focus on growth, world domination and financial targets that do not take sufficient account of the company to keep up with these demands.

Other studies have also shown that having 'growth' as a primary corporate target may be successful for a while but ultimately lead to sharp decline.

A key problem at this stage is overreaching rather than resting on one's laurels. Sustainable internal growth is hard and problems include finding the right people, inculcating a sound culture, communicating effectively to all and simply keeping track of the sheer complexity of rapid change.

This is different from the accusations of overconfidence and personal ambition that are often used, possibly because in failure people fall into coping and blaming rather than seeking underlying structural issues. Whilst selfishness and empire-building can indeed be a problem, it is often other factors which subtly encourage this.

This stage can be summarized by Dave Packard's comment that a company is more likely to die of indigestion from too much opportunity than starvation from too little.

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 peril and 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.

If I believe fully I am highly capable I may well not countenance failure, as this makes me feel the discomfort of cognitive dissonance. Denial hence leads to 'Nero fiddling as Rome burns', with stupidity such as making big new investments just when you should be retrenching and shoring up the core business.

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, blame is assigned and people punished rather than addressing the underlying issues.

The leader here should be waking up the organization, legitimizing attention to risks and being open about failures. The leader may feel alone in this understanding and should start at the top in creating a cultural realignment and organizational reawakening.

4. Grasping for salvation

When things start to go visibly wrong, with products failing and profits falling, the company at last wakes up to the fact that they are in trouble. However, instead of looking for the real issues, a form of panic sets in and the big bets get even bigger in bold strategies. These may succeed for a while but they are seldom enough and waste money as the rot continues.

When dramatic actions fail, the organization seeks 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, although effective leaders who remember 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. If they are lucky, they will find one who really can turn around the company. 100 day plans, slash-and-burn restructuring and other 'turnaround' actions often fail as staff become change-weary. 

To create a real turnaround, leaders need to listen deeply and intelligently to the organization and so make realistic plans that can and will be carried out to create a sustainable recovery. It takes courage to stick with plans and not listen to blind critics and lurch from one approach to another. The intent is to steadily re-build, not to magically return to glory.

5. Capitulation to irrelevance or death

A point is reached when the people give in. Any remaining faith in leadership disappears, including from the leaders themselves. Whilst blame is still kicked around, the decline is seen as inevitable and people either look elsewhere or cling to the last trees until they are lopped or collapse.

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.

See also

Decisions, The Quiet Leader

 

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