QotD: Creative destruction

In his new book Mr Collins examines 11 of the 60 “great companies” studied in his two earlier books that have since deteriorated to “mediocrity or worse”. Mr Collins says that when he charted the factors that led these firms to greatness, he had never claimed that they were certain to remain great. By comparing each one, where possible, with similar firms that had fared better, Mr Collins identifies five stages in the process of decline. Stage one is hubris born of success (possibly brought on by reading the case study of the firm in one of Mr Collins’s earlier books). Firms start to attribute their success to their own superior qualities. They become dogmatic about their specific practices and fail to question their relevance when conditions change.

Stage two is the undisciplined pursuit of more: firms overreach, moving into industries or growing to a scale where the factors behind their original success no longer apply. Stage three is denial of risk and peril. Warning signs mount, but the firm’s headline performance remains strong enough for bosses to convince themselves that all remains fine. Problems are invariably blamed on external causes.

In stage four the problems are clear enough that firms start grasping for salvation. Rather than returning to the fundamentals that made them great (which Mr Collins regards as the most promising route back to greatness), they gamble on a new, charismatic saviour-boss, dramatically change strategy, make a supposedly transformational acquisition or fire some other supposedly silver bullet. The longer a company remains in stage four, the more likely it will spiral downward into stage five: irrelevance or death. However, inspired (at times, perhaps too much) by the Churchillian belief in never giving up, Mr Collins points out that many still-great firms have bounced back even after getting to stage four, including IBM, Nucor and Nordstrom.

"Good to great to gone: Jim Collins, a management guru, ponders business failure", The Economist, 2009-07-07