Corporate Finance & Governance | Leadership / Management

Why do great companies die? Jim Collins knows

Fail Jim Collins is back.

The author of Good to Great and Built to Last has a new book out, and it's the perfect examination of our recessionary times.

It's called How the Mighty Fall, and Why Some Companies Never Give In. In an exclusive BusinessWeek excerpt, Collins puts forth the question that drove him to write the book: "If some of the greatest companies in history can go from iconic to irrelevant, what might we learn by studying their demise?"

In answer to that question, Collins has identified what he calls the "five stages of decline."

  1. Hubris born of success. Writes Collins: "Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place."
  2. Undisciplined pursuit of more. "Companies in Stage 2 stray from the disciplined creativity that led them to greatness in the first place," Collins writes, "making undisciplined leaps into areas where they cannot be great or growing faster than they can achieve with excellence -- or both."
  3. Denial of risk and peril. Here, writes Collins, "internal warning signs begin to mount, yet external results remain strong enough to 'explain away' disturbing data or to suggest that the difficulties are 'temporary' or 'not that bad,' and 'nothing is fundamentally wrong.'"
  4. Grasping for salvation. "The very moment when we need to take calm, deliberate action," writes Collins, "we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise."
  5. Capitulation to irrelevance or death. "Accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future," Collins writes. "In some cases, the company's leader just sells out; in other cases, the institution atrophies into utter insignificance; and in the most extreme cases the enterprise simply dies outright."

With corporate giant after corporate giant falling by the wayside, it's no longer enough to study how good companies become great. Collins understands that we need to also study and understand the kryptonite that brings great companies down, and be honest with ourselves in assessing our own well-being.

How healthy is your organization?


Bill Sheridan