How the Mighty Fall_And Why Some Companies Never Give In

by Jim Collins

  People assert strong opinions without providing data, evidence, or a solid argument. People bring data, evidence, logic, and solid arguments to the discussion.

  The team leader has a very low questions-to-statements ratio, avoiding critical input and/or allowing sloppy reasoning and unsupported opinions. The team leader employs a Socratic style, using a high questions-to-statements ratio, challenging people, and pushing for penetrating insight.

  Team members acquiesce to a decision yet do not unify to make the decision successful, or worse, undermine the decision after the fact. Team members unify behind a decision once made and work to make the decision succeed, even if they vigorously disagreed with the decision.

  Team members seek as much credit as possible for themselves yet do not enjoy the confidence and admiration of their peers. Each team member credits other people for success yet enjoys the confidence and admiration of his or her peers.

  Team members argue to look smart or to improve their own interests rather than argue to find the best answers to support the overall cause. Team members argue and debate, not to improve their personal position, but to find the best answers to support the overall cause.

  The team conducts “autopsies with blame,” seeking culprits rather than wisdom. The team conducts “autopsies without blame,” mining wisdom from painful experiences.

  Team members often fail to deliver exceptional results, and blame other people or outside factors for setbacks, mistakes, and failures. Each team member delivers exceptional results, yet in the event of a setback, each accepts full responsibility and learns from mistakes.

  One common behavior of late Stage 3 (and that often carries well into Stage 4) is when those in power blame other people or external factors—or otherwise explain away the data—rather than confront the frightening reality that the enterprise may be in serious trouble. As IBM began its historic fall in the late 1980s and early 1990s, it faced the onslaught of distributed computing that threatened its mainframe business. An executive who reported these disturbing trends to IBM senior leadership found himself chastised, a powerful IBM leader brushing his report aside with a dismissive sweep of the hand: “There must be something wrong with your data.” The young executive knew then IBM would fall. “Doing a start-up seemed less risky than working in a climate of denial,” he later quipped about his decision to leave IBM to become an entrepreneur. IBM reorganized and reengineered, but it didn’t successfully address the perilous erosion of its position until it had fallen so far that it would be likened in 1992 to a dinosaur, soon to be extinct. In his historic turnaround of IBM (which we will discuss in subsequent pages), Louis V. Gerstner, Jr. confronted the harsh reality of IBM’s shortcomings head-on, challenging his team early in his tenure, “One hundred and twenty-five thousand IBMers are gone. … Who did it to them? Was it an act of God? These guys came in and beat us.”88

  In this analysis, we found evidence of externalizing blame during the era of decline in seven of eleven cases. When Zenith hit a hard patch in the mid-1970s, its CEO pointed out the window to a range of factors: “Who could have predicted the Arabs could have gotten together on any subject? Who could have foreseen Watergate? The great inflation we had? . . . Then we were hit by a strike.”89 Zenith also began to blame “unfair” Japanese competition for eroding profits and declining market share. Even if the Japanese did compete unfairly (although the Justice Department did not act in response to Zenith’s pleas for help), Zenith’s response to the Japanese resembled that of the American auto industry in the same era, a failure to confront head-on the fact that the Japanese had learned how to lower costs and increase quality. Shortly thereafter, Zenith fell into Stage 4.

  One final manifestation of denial deserves special attention: obsessive reorganization. By 1961, Scott Paper had built the most successful paper-based consumer products franchise in the world, with commanding positions in all manner of products, including napkins, towels, and tissue. Then P&G entered Scott’s territory for the first time, while other companies like Kimberly-Clark and Georgia Pacific persistently encroached on Scott’s markets. P&G launched Bounty paper towels on the high end, while private label brands encircled Scott from below. From 1960 to 1971, Scott’s share of the paper-based consumer business fell from nearly half the market to a third.90 Then in 1971, P&G went national with its Charmin toilet tissue—a direct assault on one of Scott’s most important product lines.

  And how did Scott respond?

  By reorganizing.91

  Scott restructured marketing and research, moving boxes around on the organizational chart, but failed to mount a vigorous response to Charmin for five years.92 Five years! Scott continued to restructure through the 1980s, at one point reorganizing three times in four years.93 With eroding market share in nearly every category, Scott Paper fell into Stage 4.94

  Reorganizations and restructurings can create a false sense that you’re actually doing something productive. Companies are in the process of reorganizing themselves all the time; that’s the nature of institutional evolution. But when you begin to respond to data and warning signs with reorganization as a primary strategy, you may well be in denial. It’s a bit like responding to a severe heart condition or a cancer diagnosis by rearranging your living room.

  There is no organizational utopia. All organizational structures have trade-offs, and every type of organization has inefficiencies. We have no evidence from our research that any one structure is ideal in all situations, and no form of reorganization can make risk and peril melt away.

  MARKERS FOR STAGE 3

  • AMPLIFY THE POSITIVE, DISCOUNT THE NEGATIVE: There is a tendency to discount or explain away negative data rather than presume that something is wrong with the company; leaders highlight and amplify external praise and publicity.

  • BIG BETS AND BOLD GOALS WITHOUT EMPIRICAL VALIDATION: Leaders set audacious goals and/or make big bets that aren’t based on accumulated experience, or worse, that fly in the face of the facts.

  • INCURRING HUGE DOWNSIDE RISK BASED ON AMBIGUOUS DATA: When faced with ambiguous data and decisions that have a potentially severe or catastrophic downside, leaders take a positive view of the data and run the risk of blowing a hole “below the waterline.”

  • EROSION OF HEALTHY TEAM DYNAMICS: There is a marked decline in the quality and amount of dialogue and debate; there is a shift toward either consensus or dictatorial management rather than a process of argument and disagreement followed by unified commitment to execute decisions.

  • EXTERNALIZING BLAME: Rather than accept full responsibility for setbacks and failures, leaders point to external factors or other people to affix blame.

  • OBSESSIVE REORGANIZATIONS: Rather than confront the brutal realities, the enterprise chronically reorganizes; people are increasingly preoccupied with internal politics rather than external conditions.

  • IMPERIOUS DETACHMENT: Those in power become more imperious and detached; symbols and perks of executive-class status amplify detachment; plush new office buildings may disconnect executives from daily life.

  Stage 4: Grasping for Salvation

  From 1992 through 1998, HP’s CEO Lew Platt led his company to quintuple profits and multiply cumulative stock returns by more than five times, a performance that would make Platt #11 on a ranking of wealth creators over a twenty-five-year period according to Chief Executive magazine. Yet by early 1999, Platt would be regarded by many—investors, analysts, the business media—as struggling, perhaps even failing, as HP tried to get its bearings in the new Internet economy.95

  While I do not share the assessment of Platt as a failure, he did make one misstep that set HP and himself up for a fall: trying to grow an increasingly large company at an unsustainable rate. It had taken HP more than half a century to reach $15 billion in annual revenues; under Platt, it took only four years to break $30 billion and only three additional years to surpass $45 billion. Unable to sustain its torrid growth rate, HP hit a wall in 1998 and disappointed Wa
ll Street for five quarters. If Platt had left some growth on the table, thereby making it easier to maintain a smooth growth trajectory, HP might have soared right through the late 1990s as a success story. Instead, Platt was out of a job.96

  In January 1999, HP’s board of directors gathered at the Garden Court Hotel in Palo Alto, California. Two well-written chronicles of this era, Backfire by Peter Burrows and Perfect Enough by George Anders, describe the meeting as a pivotal moment. HP employees had watched first with befuddlement then amazement then fear as the Great Internet Bubble of the late 1990s distorted the laws of economics. By 1999, Internet companies like Amazon and Yahoo! had zoomed from zero to more than $15 billion in market capitalization in five years—a feat that’d taken HP more than ten times as long.97

  Whereas Platt, with his thick glasses, penchant for driving plain-vanilla Ford Taurus cars, and humble eat-in-the-lunchroom-with-employees demeanor, might have been ideal for an earlier era, HP’s stalling growth and languishing stock price (relative to the skyrocketing technology sector) lent credence to a growing worry that HP needed an entirely new type of leader. And so the fifty-seven-year-old Platt suggested that perhaps he should step aside early and give the keys to the next generation. The board accepted his resignation and launched a search for HP’s next CEO.98

  On July 19, 1999, HP announced Platt’s replacement, Carly Fiorina from Lucent Technologies. In 1998, Fortune had named this “supersaleswoman” the #1 “Most Powerful Woman in Business,” beating out Oprah Winfrey for the top spot.99 The announcement that staid, old HP had hired the most powerful, glamorous, exciting, magnetic, superstar female executive in the world ignited a frenzy that stunned even Fiorina. Not only did Forbes, Fortune, and BusinessWeek want a slice of the story, but so did Big Media like The Oprah Winfrey Show, Diane Sawyer, Glamour, and Vogue. To Fiorina’s credit, she did not accept all the invitations, turning down some of the most high-profile ones.100 Still, the calls poured in and HP found itself with a celebrity CEO, a business rock star who could charm and dazzle and whose very presence created a media onslaught. Within forty-eight hours of becoming CEO, Fiorina attracted attention at prominent outlets like the Wall Street Journal, CNBC, the Washington Post, and the New York Times. Within two weeks, BusinessWeek featured her in a cover story.101

  Quite a contrast to Louis V. Gerstner, Jr., the CEO brought in to lead IBM (HP’s success contrast in this analysis) during its dark days in 1993. When USA Today offered to publicize a “daily progress chart” as Gerstner moved through his first 100 days, he replied, “No, thank you. We’re going dark for a bit while we assess the task at hand.”102 Instead of going to headquarters on his first day, he chose to visit an international managers’ meeting. But Gerstner didn’t have an IBM security badge yet, and he found himself stranded and forlorn outside a locked, imposing office building. “There I was, the new CEO, knocking helplessly on the door, hoping to draw someone’s attention to let me in,” Gerstner wrote in his wonderful book Who Says Elephants Can’t Dance? “After a while a cleaning woman arrived, checked me out rather skeptically, then opened the door—I suspect more to stop my pounding on the door than from any sense on her part that I belonged on the inside rather than the outside of the building. I wandered around and eventually found the conference room where the meeting was just about to begin.”103

  Shortly into her tenure, Fiorina starred in a television commercial, standing in front of the fabled Palo Alto garage where Hewlett and Packard started their company in the late 1930s. “The company of Bill Hewlett and Dave Packard is being reinvented,” she beautifully articulated. “The original start-up will act like one again. Watch!”104 In conjunction with an army of fellow “change warriors,” Fiorina led a dramatic and inspiring transformation, motivating the troops with her soaring message.105 She set grand, sweeping strategies, unifying HP’s brand under the slogan “Invent,” creating marketing sizzle, and galvanizing HP people to move at Net Speed. Forbes ran a cover story titled “The Cult of Carly,” the opening page of the article blaring in a font size that filled nearly half a page, “All Carly, All the Time,” and quoting Fiorina later in the article that “Leadership is a performance.”106 Fiorina gave a rousing speech to a packed gathering of HP faithful, “We owe you a very clear vision of the future . . . and that’s what we intend to give you.”107

  Gerstner took a very different approach, stating at his first public discussion about IBM, “The last thing IBM needs right now is a vision.” By this, Gerstner did not mean that IBM shouldn’t ever have a vision, but that his first priorities lay in more basic activities: making sure he had the right people in key seats (“my top priority during those first few weeks”), regaining profitability, increasing cash flow, and above all, putting the customer back at the center of everything IBM did.108 Gerstner took a pedestrian approach, building on existing strengths and working with “massive amounts of quantitative analysis.”109 He took nearly three months to thoroughly understand IBM’s situation. “It would not be believable that after 30 days somebody could lay out a timetable for changing a company of this size,” Gerstner told Fortune editor David Kirkpatrick. “Besides, I really do want to disabuse your readers of the concept that there’s going to be this grand plan that’s going to emerge from the new management at some point. It isn’t going to happen.”

  At the end of Gerstner’s first 100 days, USA Today ran a cover story highlighting the fact that IBM stock had declined 6 percent since he became CEO, in large part because, in the words of one critical analyst, “He’s done nothing.” Another summed up, “Clearly, he is not a miracle worker.” When asked about the sense of crisis at IBM, Gerstner responded tersely, “I don’t have a sense of crisis. I have a sense of urgency that never changes, whether we’re doing well or we’re doing poorly . . . But by no means do I think this company is in crisis.”110

  Gerstner’s self-imposed discipline to get the right people in place first, then proceed to understand IBM’s situation, and only then to settle upon a vision and strategy contrasted with Fiorina’s approach. In a BusinessWeek interview conducted within one day of HP’s announcement of her as CEO, Fiorina mapped out her priorities, with Job One being to craft a vision for HP as an Internet company that could stitch together a vast range of products.111 “I had come into HP with a belief that we were running out of time,” Fiorina later wrote in her memoir, Tough Choices. “I was in a hurry . . .”112 Gerstner and Fiorina also contrasted with each other where it most matters: results. Gerstner steadily increased profitability; Fiorina did not. IBM’s return on sales grew smoothly during Gerstner’s tenure, starting at 5 percent during his first full year and reaching 9 percent during his final full year at Big Blue. In contrast, HP’s return on sales showed a much more erratic pattern, starting at 7 percent during Fiorina’s first full year, turning negative in 2002 with HP’s first annual loss in its 45-year history as a public company (due in large part to restructuring and other charges related to a major acquisition), and ending at 4 percent during her last full year at HP.

  Fiorina’s tenure came to an end on February 7, 2005, when the HP board met in special session at the Chicago airport. Asked to leave the meeting after a short presentation, Fiorina waited in her hotel room for three hours before being called back to the conference room. “When I opened the door and realized all but two Board members had already left,” she later wrote, “I knew I had been fired.”113

  SEARCHING FOR A SILVER BULLET

  That Fiorina’s tenure at HP ended in disappointment cannot be blamed entirely on her. In fact, Fiorina was exactly what the board appears to have wanted: a charismatic, visionary leader who would bring the magnetic star power and passion for change needed to revolutionize the company. By that standard, Fiorina can be judged a success, indeed, the perfect choice. The descent into Stage 4 didn’t begin with HP’s slow response to the dot-com bubble or its falling below Wall Street expectations, but in how the board reacted to falling behind.

  Stage 4 begins when an o
rganization reacts to a downturn by lurching for a silver bullet. This can take a wide range of possible forms, such as betting big on an unproven technology, pinning hopes on an untested strategy, relying upon the success of a splashy new product, seeking a “game changing” acquisition, gambling on an image makeover, hiring consultants who promise salvation, seeking a savior CEO, expounding the rhetoric of “revolution,” or in its very late stages, grasping for a financial rescue or buyout. The key point is that they go for a quick, big solution or bold stroke to jump-start a recovery, rather than embark on the more pedestrian, arduous process of rebuilding long-term momentum. The HP board, for instance, continued to exemplify Stage 4 behavior in how it argued for the controversial $24 billion merger with Compaq Computer Corporation in 2002, with dramatic, we-can-change-everything-with-one-big-sweeping-action rhetoric: the “best and fastest way to increase the value” . . . “in one move, we dramatically improve” . . . “we immediately double” . . . “enable us to quickly address” . . . “in a single strategic move” . . . “will allow HP to accelerate” . . . “will transform our industry” . . . and so on.114 The table below contrasts the behaviors that exemplify and perpetuate Stage 4 with the behaviors that can help reverse the downward spiral.

  Behaviors That Exemplify and Perpetuate Stage 4 Behaviors That Can Help Reverse the Downward Spiral of Stage 4

  Pin hopes on unproven strategies—discontinuous leaps into new technologies, new markets, new businesses—often with much hype and fanfare. Formulate strategic changes based on empirical evidence, and extensive strategic and quantitative analysis, rather than make bold, untested leaps.

  Seek a big, “game changing” acquisition (often based on hoped-for, but as yet unproven, “synergies”) to transform the company in a single stroke. Understand that combining two struggling companies never makes one great company; only consider strategic acquisitions that amplify proven strengths.