Jim Collins in his latest book, How the Mighty Fall and Why Some Companies Never Give In, investigates the roots and reasons that many successful companies have declined to a level of irrelevance or even death. The author also tries to show how companies can avoid this fall.
He argues that the first stages of decline can start while all the evidences suggest that a company is still climbing the ladder of success, "The Silent Creep of Doom" he names it. Collins characterizes five stages in this decline:
1- Hubris Born of Success: When the success of a company turns its managers to arrogantly believe that they are entitled to win the game no matter what.
2- Undisciplined Pursuit of More: Managers' excessive self confidence makes them to pursue goals way beyond their reach or expertise.
3- Denial of Risk and Peril: The Managers' strong belief that they are destined for success, leads them to amplify the positive data and ignore all signs of possible danger ahead.
4- Grasping for Salvation: When the evidence for the decline of the company become more obvious than anyone can deny it, instead of trying to solve the roots of the problem, the managers try to convince (fool) everyone, including themselves, that there is a dramatic solution that can overhaul the company overnight.
5- Capitulation to Irrelevance or Death: If the company cannot avoid stage 4 by reaching for a solution that addresses the roots of the problem, there is no destination but irrelevance or death.
2- Undisciplined Pursuit of More: Managers' excessive self confidence makes them to pursue goals way beyond their reach or expertise.
3- Denial of Risk and Peril: The Managers' strong belief that they are destined for success, leads them to amplify the positive data and ignore all signs of possible danger ahead.
4- Grasping for Salvation: When the evidence for the decline of the company become more obvious than anyone can deny it, instead of trying to solve the roots of the problem, the managers try to convince (fool) everyone, including themselves, that there is a dramatic solution that can overhaul the company overnight.
5- Capitulation to Irrelevance or Death: If the company cannot avoid stage 4 by reaching for a solution that addresses the roots of the problem, there is no destination but irrelevance or death.
Although the author does not make his argument in the context of risk management, we can find interesting risk management lessons in the way he describes the fall of a successful company. Here are two:
a) The author's notion of "the silent creep of doom" reminds us of the fact that in many cases the source of disaster might be already in the making, hidden in the plain sight, while everyone thinks that nothing is wrong with this successful company. Therefore, it is imperative for companies to put in place detection mechanisms that can warn us before it is too late (early risk detection).
b) Successful companies are poised to suffer from a false sense of security. A sequence of successful results might create this illusion that they are going to do fine no matter what! In other words, success can result in excessive risk-taking behaviors. The false sense of security might even reach a level of risk denial. That is, decision makers might ignore evidences of potential risk. Many of this evidences could be in the form of "near misses". Analyzing near misses is a powerful tool for early detection of risk. However, the decision makers' excessive risk taking and/or risk denial attitude prevent them from learning from near misses.
You can listen to an interview with the author on the "Business Week Cover Story" podcast page.
An excerpt of the Collin's new book appeared in BusinessWeek, May 25, 2009. UMASS Boston students and faculty, click here to find the excerpt.
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