How the Mighty Fall

What causes great companies to stumble and fall? And more importantly, how can they recover?

1. No Business is Immune to Failure

Even the largest and most established companies are at risk of decline. History shows that success doesn’t guarantee stability or permanence. The Roman Empire, once vast and powerful, eventually crumbled due to internal failures rather than external threats. Similarly, businesses often decline because of their own mismanagement.

In the business world, failure often stems from a company’s inability to adapt or its misguided choices. For instance, Nokia, once a global leader in mobile phones, faltered because it ignored the emerging smartphone market. As Apple and Samsung rushed to innovate, Nokia diverted its resources into less profitable avenues, leaving it unprepared for the industry shift.

Research by Jim Collins reveals that companies rarely collapse due to inactivity; more often, they fail due to misguided efforts. Examples include firms like Bank of America, which in the 1980s tried to modernize by closing branches and hiring new leadership, but still suffered massive losses because their strategies lacked proper execution.

Examples

• The Roman Empire fell not due to external invasions but due to internal mismanagement.
• Nokia lost dominance by failing to recognize the importance of the smartphone revolution.
• Bank of America’s rushed and poorly-planned changes led to huge financial losses.

2. Success Leads to Arrogance

It's common for organizations to become overconfident after hitting major milestones. This overconfidence often blinds them to emerging challenges or mistakes within their current strategies. Greek tragedies illustrate this concept with heroes succumbing to hubris, and businesses often follow the same fate.

Motorola serves as a prime example. In the 1980s and 1990s, the company was riding high, but its development of the StarTAC phone was misaligned with market trends. While competitors moved to digital technology, Motorola clung to analog systems, leading to a significant drop in its market share.

Another common problem is neglecting the core business. Circuit City, once a retail leader in electronics, expanded into areas like used cars and DVD rentals. While these ventures consumed valuable resources, their primary business stagnated and eventually collapsed.

Examples

• Motorola clung to outdated analog technology, ignoring the shift to digital phones.
• Circuit City diverted attention from electronics to other unrelated industries.
• Successful businesses becoming overconfident mirrors the tragedies of Greek heroes.

3. Over-Innovation Can Hurt Businesses

Innovation is vital, but chasing it excessively can destabilize even the strongest companies. Overhauling systems or introducing too many new products often leads to overlooked fundamentals, like cost control and operational efficiency.

Rubbermaid is a case study in over-innovation. Once celebrated for its creativity, the company pushed itself too far by launching almost 1,000 products over three years. This frantic pace eroded their ability to meet orders and control their costs, eventually leading to a decline.

Rapid growth, especially in pursuit of satisfying shareholders, can also harm companies. Financial institutions before the 2008 crisis exemplify this. By focusing on short-term profits through risky investments, they ignored long-term sustainability, leading to catastrophic failures.

Examples

• Rubbermaid lost profitability by launching 1,000 new products in three years.
• Pre-2008 banks prioritized quick profits through risky financial practices.
• Lack of attention to fundamentals undermines over-ambitious companies.

4. Denial and Deflecting Criticism Cause Bigger Problems

When confronted with early signs of decline, companies often respond with denial or excuse-making. They disregard important warnings and continue along failing paths. This approach often accelerates their downward spiral.

Motorola learned this the hard way with its satellite phone project, Iridium. Critics pointed out it was overpriced and inferior to advancing cell phones. Instead of reevaluating, Motorola ignored these warnings and invested heavily. The ultimate failure cost the company billions.

Shifting blame is another damaging reaction. Instead of examining their own faults, organizations might cite external factors like market conditions. This refusal to accept responsibility prevents them from making necessary adjustments.

Examples

• Motorola ignored valid concerns about Iridium’s viability, losing $2 billion.
• Denial of shortcomings creates blind spots, preventing course correction.
• Blaming "bad luck" stops companies from addressing internal problems.

5. Panicking Often Makes Decline Worse

When faced with crises, companies often overreact. In their desperation to stop the decline, they take risky and sweeping measures that can backfire, compounding their problems.

Hewlett Packard's attempt to rejuvenate its brand in the 1990s illustrates this. The company hired Carly Fiorina as CEO, implemented major cultural changes, and attempted a flashy rebranding effort. However, these dramatic shifts failed to provide focus, and growth stagnated.

By contrast, some companies simply give up during crises. For instance, Scott Paper abruptly abandoned attempts at recovery. Instead of solving its issues, the company sold out to its rival, shedding thousands of jobs in the process.

Examples

• HP’s dramatic rebranding efforts caused disruption instead of progress.
• Scott Paper accepted defeat, leading to massive job losses and a sell-off.
• Desperation leads to poor decision-making and worsens instability.

6. Humility and Learning Prevent Decline

Great leaders avoid arrogance and embrace continuous learning. Recognizing that their success depends partly on luck, they stay grounded and open to new ideas.

Sam Walton, the founder of Wal-Mart, exemplified the "learning people" mindset. Instead of resting on his laurels, he actively sought advice and new perspectives, even from less experienced entrepreneurs. This approach allowed him to make informed and balanced decisions.

Leaders who maintain focus on their core values tend to safeguard their businesses from unnecessary risks. Circuit City might have survived if its leaders had concentrated on their core electronics business instead of dabbling in unrelated ventures.

Examples

• Sam Walton exemplified humility by constantly asking for advice, even when successful.
• Staying grounded helps leaders avoid arrogance and emotional decision-making.
• Circuit City’s decline highlights the need to prioritize your core business.

7. Calm Decision-Making Beats Rash Changes

When businesses face problems, clear-headed leadership is vital. Panic often leads to poorly thought-out risks that worsen the situation. The waterline principle reminds leaders to avoid decisions that could 'sink the ship.'

Hewlett Packard made sweeping changes when slow growth hit but struggled because these were risky, transformative moves. Small, calculated steps would have provided more stability.

Instead, companies should take manageable risks and build on incremental successes. Testing the waters gradually improves focus and minimizes damage if things don’t work out.

Examples

• Hewlett Packard's missteps highlight the dangers of sweeping changes.
• Taking gradual risks avoids catastrophic consequences for the company.
• The waterline principle serves as a guide for decision-making under pressure.

8. Resilience and Hard Work Can Reverse Decline

Falling companies can recover if they commit to constant effort and a mental shift. Leaders need to have unshakable faith that their organization can turn the tide.

Xerox is an inspiring example. After losing 92% of its stock value, the company refused to fold. Its CEO, Anne Mulcahy, worked tirelessly over four years to revive its operations, eventually achieving profitability again with a focused strategy.

Other examples, like Winston Churchill, underscore the importance of resilience. Even when written off by others, determination allowed him to lead his country to victory during World War II.

Examples

• Xerox rebounded after CEO Anne Mulcahy dedicated herself to restoring its stability.
• Churchill’s perseverance reminds leaders of the power of belief in tough times.
• Hard work and mental grit enable organizations to rebuild from setbacks.

9. Consistency in Business Practices is Key

As this book shows, companies that stick to tried-and-true practices are more likely to avoid failure. While innovation and growth are important, abandoning what works often leads to chaos.

The downfall of Bank of America and other firms during economic downturns highlights this. Aggressive, speculative strategies both distracted them from their stable business models and made them vulnerable to market shifts.

In contrast, companies that maintain disciplined operations and focus on the basics often endure challenges better. Being adaptable while staying consistent is a winning formula.

Examples

• Bank of America ignored sustainable practices, adding to its financial woes.
• Remembering business basics prevents chaos even during tough times.
• Companies rooted in consistency tend to weather storms effectively.

Takeaways

1. Avoid big, risky changes—focus on small, calculated steps.
2. Maintain humility, and stay open to learning and adapting.
3. Use criticism as constructive feedback, and never shift blame outward.