How the Mighty Fall

Business researcher Jim Collins, author of the influential management studies Good to Great and Built to Last, turns his attention to the opposite question: How do once-great companies decline? The book originated at a 2004 gathering at West Point, where Collins led a discussion among generals, CEOs, and social-sector leaders about whether America was renewing its greatness or sliding toward decline. During a break, a CEO posed the question that would drive the project: If you are at the top of the world, how would you know you are already on the path of decline? Collins compares institutional decline to a staged disease that can grow inside an organization while it still looks healthy on the outside. He identifies a critical paradox: Decline is harder to detect but easier to cure in the early stages, and easier to detect but harder to cure in the later stages. Organizational decline, however, is largely self-inflicted.

To illustrate how quickly a seemingly invincible institution can fall, Collins recounts the story of Bank of America. Founded as the Bank of Italy by Amadeo Peter Giannini, who reopened for business the day after the 1906 San Francisco earthquake while other bankers imposed moratoriums, the bank grew to become the largest commercial bank in the world by 1945. By 1980, it was widely regarded as one of the best-managed corporations in America. Yet within eight years, it posted some of the largest losses in U.S. banking history, saw its stock fall more than 80 percent behind the general market, and ousted its CEO. Collins emphasizes that this collapse occurred despite aggressive action by CEO Samuel Armacost, who acquired the brokerage firm Charles Schwab, launched a $100 million ATM program, and led sweeping cultural transformation. The lesson is not "Change or Die," Collins argues, since Bank of America changed enormously and nearly destroyed itself in the process.

Collins and his research team screen sixty major corporations to identify eleven that met rigorous rise-and-fall criteria, including A&P, Ames Department Stores, Bank of America, Circuit City, Hewlett-Packard (HP), Merck, Motorola, Rubbermaid, Scott Paper, and Zenith. For each fallen company, the team constructs a "success contrast": a company in the same industry that thrived while the primary company declined, such as Wal-Mart contrasted with Ames and Best Buy contrasted with Circuit City. The team reads primary historical documents in chronological order, relying on evidence produced at the time of events to minimize bias.

From this analysis, Collins derives a five-stage framework. He acknowledges that companies can skip stages or move through them at varying speeds: Zenith took three decades to pass through all five stages, while Rubbermaid fell from Stage 2 to Stage 5 in just five years.

Stage 1, Hubris Born of Success, begins when leaders become arrogant, viewing success as an entitlement rather than something earned. Collins traces Motorola's trajectory: founded on a culture of humility, the company grew from $5 billion to $27 billion in revenues in a single decade, but by the mid-1990s its executives dismissed the digital technology threat to its analog StarTAC cell phone and attempted to strong-arm wireless carriers. Market share plummeted from nearly 50 percent to 17 percent by 1999. Collins identifies a pattern he calls "arrogant neglect" through Circuit City, which diverted creative energy to new ventures while neglecting its core electronics superstore business, leaving it vulnerable to Best Buy's relentless innovation. He contrasts Wal-Mart founder Sam Walton's deep humility and learning orientation with Ames, which handed leadership to an outsider who boldly redefined the company.

Stage 2, Undisciplined Pursuit of More, occurs when hubris drives companies to overreach. Collins challenges the assumption that complacency causes decline, noting that ten of eleven fallen companies showed tremendous energy during this stage. Rubbermaid, named Fortune magazine's #1 Most Admired Company in America, aimed to introduce one new product per day but choked on nearly one thousand new products in three years. Collins details Merck's growth obsession under CEO Ray Gilmartin, who made the painkiller Vioxx central to the company's ambition to be a top-tier growth company. When alarming cardiovascular data emerged in September 2004, Gilmartin voluntarily withdrew the drug, and Merck lost $40 billion in market capitalization in six weeks. Collins argues that this obsession subtly diluted Merck's founding purpose, articulated by George Merck II as putting medicine for the people ahead of profits. He introduces "Packard's Law," named after HP cofounder David Packard: No company can consistently grow revenues faster than its ability to hire enough of the right people. He also identifies problematic succession of power as a hallmark of this stage, observing it in multiple fallen companies.

Stage 3, Denial of Risk and Peril, describes how internal warning signs are explained away. Collins traces Motorola's Iridium satellite-phone project, conceived in 1985 as a small experiment that consumed more than $2 billion before filing for bankruptcy in 1999, despite evidence that traditional cellular service had erased its value. He contrasts this with Texas Instruments' (TI) disciplined development of digital-signal processing technology: TI made a $150,000 bet in 1979 and set an audacious growth goal only after fifteen years of accumulated evidence. The lesson is that great companies bet big only when empirical evidence supports it. Collins introduces Bill Gore's "waterline" principle, which holds that leaders must distinguish between mistakes that blow holes above the waterline of a ship (recoverable) and those below it (potentially fatal). Stage 3 companies also develop a culture of denial marked by deteriorating financial indicators, externalization of blame, and obsessive reorganization.

Stage 4, Grasping for Salvation, begins when a company reacts to decline by lurching for a silver bullet: a charismatic outside CEO, a game-changing acquisition, or an untested strategy. Collins contrasts HP, whose board hired Carly Fiorina from Lucent Technologies in 1999 as a celebrity change agent, with IBM, whose board hired Louis Gerstner in 1993. Fiorina pushed a controversial $24 billion merger with Compaq Computer and was fired in 2005 after erratic results that included HP's first annual loss in 45 years as a public company. Gerstner declined media attention, took three months to understand IBM's situation, and focused on getting the right people in key seats, steadily increasing profitability. Collins notes a distinct negative correlation between hiring outside CEOs and recovery: eight of eleven fallen companies brought in an outside CEO during decline, versus only one of the success contrasts.

Stage 5, Capitulation to Irrelevance or Death, takes two forms. In the first, leaders conclude that giving up offers a better outcome than fighting on, as when Scott Paper's board brought in Al Dunlap, who slashed over 11,000 jobs and sold the company to archrival Kimberly-Clark. In the second, leaders fight on but run out of options. Zenith exemplifies this path: after decades of decline through all five stages, it churned through five CEOs in ten years, fell into bankruptcy, and reemerged with fewer than 400 employees, down 98 percent from its peak of 36,000.

Collins concludes with what he calls "well-founded hope." He presents the story of Anne Mulcahy, a 24-year insider who became CEO of Xerox in 2001 when the company carried $19 billion in debt and only $100 million in cash. Mulcahy rejected advice to kill Xerox's culture, cut $2.5 billion from costs, refused to consider bankruptcy, and increased R&D spending during the company's darkest days. By 2006, Xerox posted profits exceeding $1 billion. Collins lists ten companies, including IBM, Nordstrom, Disney, and Boeing, that each took tremendous falls and recovered. He argues that organizational decline is largely self-inflicted and recovery largely within one's own control, and that the path out lies in returning to sound management practices and rigorous strategic thinking. He closes with Winston Churchill, whose career fell into disgrace by the early 1930s only for him to lead Britain's resistance to Nazi Germany, invoking Churchill's 1941 address at Harrow: "never give in, never give in, never, never, never, never." The book's message is to be willing to change tactics, kill failed ideas, and endure pain, but never give up on core purpose, core values, or faith in the ability to prevail.