by Jim Collins
Make panicky, desperate moves in reaction to threats that can imperil the company even more, draining cash and further eroding financial strength. Get the facts, think, and then act (or not) with calm determination; never take actions that will imperil the company long term.
Embark on a program of radical change, a revolution, to transform or upend nearly every aspect of the company, jeopardizing or abandoning core strengths. Gain clarity about what is core and should be held firm, and what needs to change, building upon proven strengths and eliminating weaknesses.
Sell people on the promises of a brighter future to compensate for poor results. Focus on performance, letting tangible results provide the strongest case for a new direction.
Destroy momentum with chronic restructuring and/or a series of inconsistent big decisions. Create momentum with a series of good decisions, supremely well executed, that build one upon another.
Search for a leader-as-savior, with a bias for selecting a visionary from the outside who’ll ride in and galvanize the company. Search for a disciplined executive, with a bias for selecting a proven performer from the inside.
Every company in this study that fell into the late stages of decline grasped for at least one silver bullet. (See Appendix 4.B for an evidence table.) For example, Circuit City replaced its retiring homegrown CEO with an executive from Best Buy who had been with Circuit City just eighteen months. Then Circuit City fired more than 3,000 of its highest-paid, more-experienced store employees. Within two years, Circuit City hired Goldman Sachs, pinning hopes on a buyout, only to see a bid from Blockbuster evaporate.115 Shortly thereafter, Circuit City filed for bankruptcy. Or consider Scott Paper, which vested hope in expensive strategy consultants and fomented a cultural transformation that Fortune described as “get religion or get shown the door.”116 Ames hired CEOs, jettisoned CEOs, and hired new CEOs, at one point churning through three management teams in thirty-three months—lurching from strategy to strategy, program to program, looking for a fundamental transformation.117 Shaken out of its torpor by fierce new competitors, A&P converted more than four thousand stores to a format called WEO (short for “Where Economy Originates”), driving down prices to regain market share in a desperation move described by one industry observer as “a Kamikaze dive.” The move proved catastrophic to profitability. A&P abandoned the strategy and hired a charismatic savior from the outside who produced a brief return to profitability, only to resign when A&P collapsed yet again into a string of losses.118
Stage 4 grasping can produce a brief improvement, but the results do not last. Dashed hope follows dashed hope follows dashed hope yet again. Companies stuck in Stage 4 try all sorts of new programs, new fads, new strategies, new visions, new cultures, new values, new breakthroughs, new acquisitions, and new saviors. And when one silver bullet fails, they search for another and then yet another. The signature of mediocrity is not an unwillingness to change. The signature of mediocrity is chronic inconsistency.
You might be thinking, “Perhaps grasping for salvation is the rational answer for companies in trouble; dying companies must do desperate things because they’re dying.” But companies don’t generally find themselves on the verge of death at the start of Stage 4. The companies we studied had taken a tumble at the start of Stage 4, to be sure, but not a lethal one. Indeed, by succumbing to Stage 4 behavior, they worsened their position, increasing the likelihood that they would become a dying company forced into taking desperate action.
Compare Motorola and TI, two great companies that stumbled; one fell through Stage 4 while the other did not. In 1998, Motorola lost money for the first time in more than fifty years. Top executives sealed themselves off in a conference room, writing ideas on a whiteboard, searching for a breakthrough. They decided upon a path of radical change, what BusinessWeek labeled “Shock Therapy.”119 Motorola bought General Instruments Corporation for $17 billion, an amount comparable to Motorola’s entire stockholders’ equity.120 It jumped headlong into the Internet and broadband frenzy just before the bubble burst with a strategy called “Intelligence Everywhere.” At first, these moves seemed to work, as Motorola’s cumulative value to investors more than tripled in two years.121 Then the Internet and broadband bubbles burst, and Motorola acknowledged in its own 2001 annual report, “Like others, we inopportunely chased the dot-com and telecom boom in 2000.” The company had built up manufacturing capacity and a global cost structure to support a $45 billion revenue company going into 2001, but 2001 revenues crashed to $30 billion, and Motorola posted a series of losses.122 In late 2003, the board selected an outside leader for the first time in the company’s history, hiring high-profile Ed Zander from Sun Microsystems; he stepped down four years later, hounded by dissident shareholders.123
TI, the success contrast to Motorola, took a completely different approach. TI had been one of the star technology companies of the mid-twentieth century, but it fell from greatness in the 1970s and early 1980s, when it diverged into money-losing consumer businesses such as digital watches and home computers. The board turned to Jerry Junkins in 1985. Unassuming and determined—described by one journalist as “sort of a Texan Jimmy Stewart”—Junkins stepped quietly into the CEO role after working at the company for more than a quarter of a century.124 He led the first phase of TI’s return to greatness by igniting vigorous dialogue and debate, and channeling its efforts into businesses in which it had a chance to become best, a process that ultimately led to the tremendous success of DSP chips that we discussed in Stage 3.125
The leaders at TI understood that rebuilding greatness requires a series of intelligent, well-executed actions that add up one on top of another. Some decisions are bigger than others, but even the biggest decisions account for only a small fraction of the total outcome that makes a great company. Most “overnight success” stories are about twenty years in the making.
On May 29, 1996, Junkins died from heart failure while on a business trip to Europe. The unexpected death of a beloved CEO could throw a company into turmoil, but Tom Engibous, then head of TI’s semiconductor division, had been well prepared to assume chief-executive responsibility. With two decades of up-through-the-ranks experience at TI, Engibous became TI’s second unassuming, self-deflecting, intensely driven CEO in a row. “Hopefully, this story will focus on TI and not too much on me,” he’d admonish those who sought to profile his management style. The company’s success “won’t be due to his charismatic leadership,” wrote Elisa Williams in a Forbes article. “Engibous has a personality that’s about as nondescript as the midwestern plains he grew up on.”126 At the end of his tenure, Engibous engineered a smooth transition to yet another homegrown leader, Richard Templeton, who’d worked his entire twenty-four years deep inside TI.127 At the very time that Motorola was falling from good to worse, TI’s quiet, determined leaders orchestrated an almost textbook transition, and achieved stock performance five times greater than Motorola’s and nearly equal to Intel’s from 1995 to 2005.128
Our research across multiple studies (Good to Great, Built to Last, How the Mighty Fall, and our ongoing research into what it takes to prevail in turbulent environments) shows a distinct negative correlation between building great companies and going outside for a CEO. Eight of the eleven fallen companies in this analysis went for an outside CEO during their era of decline, whereas only one of the success contrasts went outside during the eras of comparison. Now you might be thinking, “But wouldn’t companies in trouble need to go outside?” Perhaps, but keep in mind, in this analysis of decline, performance generally worsened under saviors from the outside. And in our previous research, over 90 percent of the CEOs that led companies from good to great came from inside; meanwhile, over two-thirds of the comparison companies in that study hired a CEO from the outside yet failed to make a comparable leap.
How then do we make sense of the IBM case? After all, while IBM brought Gerstner in from RJR Nabisco, the company nonetheless rebounded. (For a summary of IBM’s comeback, see
Appendix 6.A.) Clearly, an outsider can succeed in turning around a company and resetting it on the path to greatness. So, what’s the difference between this case and the others? Part of the answer lies in the fact that Gerstner returned to the intense, methodical, and consistent approach that produces greatness in the first place. Gerstner understood that whether you’re brought in from the outside or come from the inside, you have to halt the cycle of grasping and cease jumping from one false salvation to another, from silver bullet to silver bullet, from dashed hope to new hope, only to have hopes dashed yet again. When an organization in trouble goes for an outsider, it usually has a tenor of “Help! We need a radical, revolutionary change agent to come in and change everything—and fast!” If the leader buys into this, he or she is likely to perpetuate Stage 4, not reverse it. The remarkable thing about Gerstner is that he did not accept that frame, a powerful lesson for all leaders, whether coming from within or without.
PANIC AND DESPERATION
When I was fourteen years old, I found myself utterly terrified looking down a 100-foot sheer overhanging rock face while learning to rappel as part of a rock-climbing course. The anchor gear unexpectedly shifted, and I instinctively lurched to grab the lip of the overhang and let go of my rappel brake hand (the hand you keep on the rope to control your descent). By reacting in fear and trying to “save myself,” I’d actually increased the danger. Fortunately, my instructor caught me on a backup safety rope, but an important life lesson has stuck with me ever since.
When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct—and our fear—can evoke lurching, reactive behavior absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear.
In looking at companies in decline, I’m struck by this lesson again: by grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise. Of course, their leaders can later claim, “But look at everything we did. We changed everything. We tried everything we could think of. We fired every shot we had and we still fell. You can’t blame us for not trying.” They fail to see that, just like Gerstner at IBM, leaders atop companies in the late stages of decline need to get back to a calm, clear-headed, and focused approach. If you want to reverse decline, be rigorous about what not to do. In the early 1990s, I invited a former Marine turned entrepreneur to guest lecture in my course on creativity at the Stanford Graduate School of Business. He’d done multiple tours of jungle combat in the Vietnam War. When asked what lessons, if any, carried over to his civilian life as an entrepreneur, he thought about it for a moment and then responded, “When you have just a few people, and there is enemy all around you, the best thing is to say, ‘You take this section from here to here, and you take this section from here to here, and do not fire on automatic. Take one shot at a time.’ ”
Breathe. Calm yourself. Think. Focus. Aim. Take one shot at a time. Otherwise, you can find yourself in some version of the calamity that befell Addressograph Corporation, the once-leader in office addressing and duplicating machines. Every $10,000 invested in Addressograph at the start of 1945 and held through 1960 generated half a million dollars.129 In 1965, however, Xerox introduced the 2400 copier, a direct threat to Addressograph’s duplicating products. Panicking, Addressograph launched a crash program, releasing twenty-three new products in three years. It lost track of billing and accounts receivable, creating $70 million in late, unpaid, and untraceable customer orders strewn about, scrawled on scraps of paper and backs of envelopes. Sixteen of the twenty-three new products failed.130
When profitability declined through the early 1970s and culminated in losses, the board grasped for a visionary CEO from the outside. An aggressive “go-getter,” the new leader threw the company into a traumatic reinvention, a complete psychological transformation, a corporate revolution. In his view, Addressograph “was like a boat going in circles in a lake that was going dry,” a situation requiring “massive change in as short a period as possible.”131 He boldly “shed the barnacles of the past” and launched a salvation strategy, leaping into the Office of the Future with word processing and electronic office machines.132 But the leap did not go as planned, and Addressograph’s visionary savior faced an unhappy board. For three hours, he defended his leadership, citing statistics and pointing to achievements. At the end of his impassioned presentation, a board member motioned that he step down.133 Ten months later, in 1981, Addressograph posted single-year losses that wiped out nearly all of a half a century’s worth of accumulated net worth.134
You might be wondering, But wait a minute! Surely, Addressograph is the buggy-whip story all over again. The company’s mechanical duplicating machines became obsolete in the face of Xerox’s technology, and the world just passed them by.
And on one hand, you would be correct: its clinkity-clankity product lines had become obsolete, obliterated by a technology disruption. But the fundamental need for its core capability, the offset-duplicating business, had not become obsolete. Even as I write these words in 2008, nearly half a century after Xerox launched its copier line, offset printing remains the primary solution for high-volume, high-quality print jobs. Addressograph would have had to migrate out of the office environment (where Xerox would win in small-run, one-off duplicating), but it had already made successful inroads in commercial printing by the early 1970s. Unfortunately, Addressograph lurched about in fearful, frantic reaction while neglecting the offset business and never regained momentum in its core business.135 Like the climber who lets go of his brake hand, Addressograph’s panicky behavior sent the company hurtling over the cliff.
In a frenzy of inconsistency—flip-flopping from one new strategy to another, moving across the country to a new headquarters and then back across the country to yet a third headquarters (from Cleveland to Los Angeles, from Los Angeles to Chicago)—Addressograph churned through four CEOs and endured two bankruptcies in fewer than a dozen years.136 One CEO left in such a hurry that an employee described his departure as like having a brain surgeon leave in the middle of an operation.137
By the late 1990s, the ranks had dwindled from 30,000 employees to just a few hundred, while every dollar invested at the start of 1980 was now worth less than five cents. Summed up one longtime analyst of the company, “It’s been almost like a guy who contracts a fatal disease. I’ve just watched it shrivel up and die. It’s very sad.”138 Addressograph had plummeted through Stage 4 to enter the final stage, Capitulation to Irrelevance or Death.
MARKERS FOR STAGE 4
• A SERIES OF SILVER BULLETS: There is a tendency to make dramatic, big moves, such as a “game changing” acquisition or a discontinuous leap into a new strategy or an exciting innovation, in an attempt to quickly catalyze a breakthrough—and then to do it again and again, lurching about from program to program, goal to goal, strategy to strategy, in a pattern of chronic inconsistency.
• GRASPING FOR A LEADER-AS-SAVIOR: The board responds to threats and setbacks by searching for a charismatic leader and/or outside savior.
• PANIC AND HASTE: Instead of being calm, deliberate, and disciplined, people exhibit hasty, reactive behavior, bordering on panic.
• RADICAL CHANGE AND “REVOLUTION” WITH FANFARE: The language of “revolution” and “radical” change characterizes the new era: New programs! New cultures! New strategies! Leaders engage in hoopla, spending a lot of energy trying to align and “motivate” people, engaging in buzzwords and taglines.
• HYPE PRECEDES RESULTS: Instead of setting expectations low—underscoring the duration and difficulty of the turnaround—leaders hype their visions; they “sell the future” to compensate for the lack of current results, initiating a pattern of overpromising and underdelivering.
• INITIAL UPSWING FOLLOWED BY DISAPPOINTMENTS: There is an initial burst of positive results, but they do not last; dashed hope follows dashed ho
pe; the organization achieves no buildup, no cumulative momentum.
• CONFUSION AND CYNICISM: People cannot easily articulate what the organization stands for; core values have eroded to the point of irrelevance; the organization has become “just another place to work,” a place to get a paycheck; people lose faith in their ability to triumph and prevail. Instead of passionately believing in the organization’s core values and purpose, people become distrustful, regarding visions and values as little more than PR and rhetoric.
• CHRONIC RESTRUCTURING AND EROSION OF FINANCIAL STRENGTH: Each failed initiative drains resources; cash flow and financial liquidity begin to decline; the organization undergoes multiple restructurings; options narrow and strategic decisions are increasingly dictated by circumstance.
Stage 5: Capitulation to Irrelevance or Death
In researching the final stages of decline, looking at the capitulation of once-towering companies, I kept thinking about how Professor Bill Lazier began his course on small business management at the Stanford Graduate School of Business. He’d walk into class and begin cold-calling students.
“What’s the central issue in the case?” he’d push.
Students who had worked at large companies, consulting firms, and investment banks gave answers like “their strategic choices” or “identifying their value chain” or “developing a brand” or any number of other smart-sounding MBA answers.
Unsatisfied by vacuous buzzwords, Lazier would keep pressing, pacing back and forth across the classroom. “No! Think!”
Finally, some student would venture forth, “Well, I don’t know if this is what you’re looking for, but they can’t make payroll next week. The company is going to run out of cash.”