How the Mighty Fall_And Why Some Companies Never Give In

by Jim Collins

  And if you’ve already taken a fall and you do face a genuine crisis, the sooner you break the cycle of grasping for salvation the better. The path to recovery lies first and foremost in returning to sound management practices and rigorous strategic thinking. In Appendix 6, I’ve outlined three cases of great companies that fell and recovered (IBM, Nucor, and Nordstrom), and I’ve laid out their recovery through the lens of the good-to-great framework of disciplines (summarized in Appendix 7). If you seek a refresher course on management discipline, it never hurts to review the classics, including Drucker, Porter, Deming, and Peters/Waterman. Of course, you have to stop the bleeding first and make sure you don’t run out of cash, but that’s simply emergency surgery, not full recovery. The point being, however you slice it, lack of management discipline correlates with decline, and passionate adherence to management discipline correlates with recovery and ascent.

  All that said, there remains a question: what about “the perennial gale of creative destruction” as described by the famous twentieth-century economist Joseph Schumpeter, wherein technological change and visionary entrepreneurs upend and destroy the old order and create a new order, only to see their new order destroyed and replaced by an even newer order, in an endless cycle of chaos and upheaval?167 Perhaps all social institutions in our modern world face disruptive forces so fast, big, and unpredictable that every entity will fall within years or decades, without exception. Can we still stave off decline in the face of severe turbulence?

  While working on How the Mighty Fall, my colleague Morten Hansen and I have been simultaneously working on a six-year research project to study companies that grew from vulnerability to greatness in severe environments characterized by rapid and unpredictable change in contrast to others that did not prevail in the same brutally turbulent environments. Consider the following analogy: Suppose you wake up in base camp at the foot of Mount Everest and a big storm rolls through. You can hunker down in the safety of your tent and let the storm pass by. But if you wake up as a vulnerable little speck at 27,000 feet on the side of the mountain, where the storms are bigger and faster moving, the environment severe and unforgiving, and everything more uncertain and uncontrollable, then a storm just might kill you. We believe most leaders in every sector feel they are metaphorically moving higher on the mountain, into increasingly turbulent and unforgiving environments.

  This new research is enlarging our understanding of the principles and strategies needed to prevail in a turbulent world, and I’d like to preview a key conclusion here, one that pertains directly to the question of corporate decline. When the world spins out of control, when external tumult threatens to upend our best-laid plans, does our destiny remain in our own hands? Or must we accept that creative destruction reigns supreme and that success will be short and fleeting, even for the very best? Our research shows that it is possible to build a great institution that sustains exceptional performance for multiple decades, perhaps longer, even in the face of chaos, disruption, uncertainty, and violent change. In fact, our research shows that if you’ve been practicing the principles of greatness all the way along, you should get down on your knees and pray for severe turbulence, for that’s when you can pull even further ahead of those who lack your relentless intensity. But beware: if you get caught in the stages of decline during turbulent times—if you succumb to hubris, overreaching, denial, and grasping for quick fixes—your fall will be faster and more violent than in stable times. The nearly overnight demise of some of America’s largest financial companies in 2008 illustrates just how fast the mighty can fall in a highly turbulent world.

  If you’ve fallen into decline, get back to solid management disciplines—now! And if you’re still strong, be vigilant for early markers of decline. But above all, do not ever capitulate to the idea that an era of success must inevitably be followed by decline and demise brought on by forces outside your control. The matched-pair contrast method that we employ in our research (comparing successful outcomes to unsuccessful outcomes, controlling as much as possible to pick similar companies facing similar environmental conditions) yields an important insight: circumstances alone do not determine outcomes. Of course, there always remains the chance of a random catastrophe, and life offers no 100 percent guarantees; after all, you can be the healthiest, most relentless athlete of all time and still be stricken with a crippling disease or career-ending accident. But setting that aside, the main message of our work remains: we are not imprisoned by our circumstances, our setbacks, our history, our mistakes, or even staggering defeats along the way. We are freed by our choices.

  The signature of the truly great versus the merely successful is not the absence of difficulty, but the ability to come back from setbacks, even cataclysmic catastrophes, stronger than before. Great nations can decline and recover. Great companies can fall and recover. Great social institutions can fall and recover. And great individuals can fall and recover. As long as you never get entirely knocked out of the game, there remains always hope.

  We all need beacons of light as we struggle with the inevitable setbacks of life and work. For me, that light has often come from studying Winston Churchill. In the early 1930s, Churchill’s career had descended into what biographer Virginia Cowles called “a quagmire from which there seemed to be no rescue.” Entering his late fifties, fattening up, and losing hair, he’d been widely blamed for Britain’s financial dislocation in the Depression, having put Britain back on the gold standard as the Chancellor of the Exchequer. He’d broken with his party, isolating himself from the mainstream by his opposition to Indian self-rule, refusing even to meet with Gandhi. He’d been forever tagged as the architect of the World War I tragedy at Gallipoli (a botched plan to knock Turkey out of the war, and to attack Germany and Austria from the southeast), which cost 213,980 British casualties for zero gain; even though the Dardanelles Commission cleared him of blame, he remained tainted by the disaster. The 1929 stock market crash cost Churchill a considerable fortune. And on December 12, 1931, he stepped off a curb on Fifth Avenue in New York, looking to his right to check for traffic as he would in London rather than to his left as he needed to in America. Passers-by heard a sickening “thwaump!” as a car driving more than 30 miles per hour blindsided Churchill, knocking him yards down Fifth Avenue. The accident threw him into the hospital, a long recovery, and a severe depression.168

  At the end of Volume I of his series, The Last Lion, William Manchester captures Churchill’s position in 1932. Lady Astor visited with Joseph Stalin, who quizzed her on the political landscape in Britain. Astor prattled on about the powerful, the up-and-coming, naming Neville Chamberlain as the star.

  “What about Churchill?” asked Stalin.

  “Churchill?” Astor’s eyes widened. Then with a disdainful wrinkle of her nose, “Oh, he’s finished.”169

  Eight years later, on June 4, 1940, Churchill stood in front of Parliament as prime minister while Hitler’s Panzer divisions swept across France. Poland: gone. Belgium: gone. Holland: gone. Norway: gone. Denmark: gone. France: collapsing. England: reeling from the rout leading up to the evacuation from Dunkirk. Most world leaders, including many in Britain, saw no choice but to cede Europe to the Nazis. Churchill’s rivals expected Churchill to see no other alternative than a negotiated peace with Herr Hitler and his Nazi henchmen, and they hoped to capitalize on his taking the political fallout for capitulation.

  They were to be disappointed.

  Clutching his notes, for he always feared that without his carefully prepared text he would be at a loss for words, Churchill glowered out across the House of Commons and issued his famous words, “We shall never surrender, and even if, which I do not for a moment believe, this Island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on the struggle, until, in God’s good time, the New World, with all its power and might, steps forth to the rescue and the liberation of the old.”170

  No
t only would Churchill redeem himself by giving voice to Britain’s resolve to stand against the Axis powers, he would also go on to win the Nobel Prize in literature, return again as prime minister at age seventy-seven, be knighted by the Queen, and sear into Cold War lexicon the term “Iron Curtain” in his prescient warning about Soviet aggression.

  In 1941, during England’s sternest days, Churchill returned to his old school, Harrow, where he’d received embarrassingly low scores, to give a commencement address. The headmaster cast worried glances at Churchill, who had fallen asleep, slumbering through most of the ceremony. But when introduced, Churchill made his way to the podium, stared out over the assemblage of boys, and gave his commencement message, “This is the lesson: never give in, never give in, never, never, never, never—in nothing, great or small, large or petty—never give in except to convictions of honour and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.”171

  Never give in. Be willing to change tactics, but never give up your core purpose. Be willing to kill failed business ideas, even to shutter big operations you’ve been in for a long time, but never give up on the idea of building a great company. Be willing to evolve into an entirely different portfolio of activities, even to the point of zero overlap with what you do today, but never give up on the principles that define your culture. Be willing to embrace the inevitability of creative destruction, but never give up on the discipline to create your own future. Be willing to embrace loss, to endure pain, to temporarily lose freedoms, but never give up faith in the ability to prevail. Be willing to form alliances with former adversaries, to accept necessary compromise, but never—ever—give up on your core values.

  The path out of darkness begins with those exasperatingly persistent individuals who are constitutionally incapable of capitulation. It’s one thing to suffer a staggering defeat—as will likely happen to every enduring business and social enterprise at some point in its history—and entirely another to give up on the values and aspirations that make the protracted struggle worthwhile. Failure is not so much a physical state as a state of mind; success is falling down, and getting up one more time, without end.

  Appendices

  Appendix 1:

  Fallen-Company Selection Criteria

  Our research process involves selecting cases to study based on objective, set criteria. We do not decide which companies we want to study and then look to find a time frame during which their data meets a pattern. Rather, we lay out the criteria for the study-set selection before we see the data and systematically eliminate companies from consideration based on whether they meet the criteria. The following is a summary of the steps we went through to arrive at the final study set of fallen companies. (Cumulative stock-return calculations determined using data from the following source: ©200601 CRSP®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.)

  STARTING UNIVERSE

  Sixty corporations representing more than thirty industry sectors, drawn from the research database used for the Good to Great and Built to Last research efforts.

  CRITERION 1: CANDIDATES FOR BEING A GREAT COMPANY AT SOME POINT IN HISTORY

  A company qualifies as a candidate if it meets any one of the following conditions, a, b, or c:

  a) Selected as a visionary company in Built to Last or a good-to-great company in Good to Great.

  b) Selected as a comparison company in Built to Last or Good to Great, and had a fifteen-year period of cumulative stock returns that exceeded the general market by 3X at some point in the company’s history. Note that our research method involves studying companies during specific eras in history when they met particular performance criteria. Companies can achieve high performance during one era and fall during a later era (the subject of this study); similarly, companies can deliver subpar performance during one era and then make a leap to exceptional performance during a later era (the subject of the good-to-great study).

  i. Exception: if the candidate met Criterion 1b only in the final twelve months before being acquired, it should be excluded because its stock returns may have been artificially driven upward due to takeover speculation.

  ii. Exception: if the candidate attained its above-3X performance over fifteen years only as a “spike pattern” rather than a sustained run of performance, it should be excluded. The test for a “spike pattern” over any given fifteen-year period is as follows: (1) Calculate the percentage increase in cumulative returns relative to the general market over the fifteen-year cycle during which the company beat the market by more than 3X; (2) Calculate the percentage increase in cumulative returns from the start of the fifteen-year performance run to exactly ten years into the run; and (3) If the ratio of calculation 2 divided by calculation 1 is 0.20 or lower, then the cycle counts as a “spike pattern.” The table below illustrates the spike pattern calculations.

  Example Case 1 Example Case 2

  Start of 15-year, above-3X run 1.0X the market 1.0X the market

  10 years into 15-year run 1.25X the market 1.75X the market

  15 years into 15-year run 4.0X the market 3.1X the market

  Calculation 2 25 percent 75 percent

  Calculation 1 300 percent 210 percent

  Ratio of 2 divided by 1 0.08 0.36

  Conclusion Spike Pattern Not a Spike Pattern

  iii. Exception: if the candidate showed more negative years than positive years during the 3X-plus, fifteen-year performance phase, then eliminate it.

  c) For comparison companies where we do not have stock return data going back far enough to assess returns during the company’s strongest years, we can marshal overwhelming evidence that the company had attained significant success prior to the availability of CRSP data. The evidence needs to fall into three categories: (1) evidence of financial results that establish the company as one of the largest and most successful companies in its industry, (2) evidence that the company had a significant impact on the development of its industry during its greatest years, and (3) evidence that the company had maintained a strong performance and made a significant impact for at least two decades.

  Companies eliminated: Chase Manhattan, Columbia Pictures, Great Western, Howard Johnson, Kenwood, Norton, Silo, R.J. Reynolds, and Upjohn.

  CRITERION 2: CANDIDATES FOR DECLINE—FROM GREAT COMPANY TO MEDIOCRITY OR WORSE

  Take the companies that made it through Cut 1. From these, a company qualifies as a candidate if it meets either of the following conditions:

  a) Selected as a visionary company in Built to Last or a good-to-great company in Good to Great, and had a negative inflection from 1995 to 2005. A “negative inflection” in this case is defined as generating cumulative stock returns at or below 0.80X the general market from January 1, 1995, to January 1, 2005.

  b) Selected as a comparison company in Built to Last or Good to Great, and showed cumulative stock returns at or below 0.80X the general market over a ten-year period (or up to the point of being acquired or going bankrupt, if the decline lasted less than ten years) and the company failed to regain cumulative stock returns of 3X the general market over a fifteen-year period later in its history.

  Companies eliminated: 3M, Abbott Labs, American Express, Boeing, Chrysler, Citicorp, Colgate, Fannie Mae, Ford, GE, Gillette, Harris, IBM, Johnson & Johnson, Kimberly-Clark, Kroger, Marriott, Nordstrom, Pfizer, Philip Morris, Pitney Bowes, Procter & Gamble, Texas Instruments, Walgreens, Wal-Mart, Warner-Lambert, and Wells Fargo.

  CRITERION 3: OTHER EXCLUSIONS

  Exclusion for Industry Effect: if there is significant question as to whether the performance pattern was due primarily to an industry effect, then eliminate the company.

  Exclusion for Founder Effect: if the only period of ascent occurred during the reign of a single founder, and the company began a sustained fall within one year after that individual founder departed, then elimina
te the company.

  Exclusion for Pre-1950: if the company’s period of great performance ended prior to 1950, and there isn’t enough data to carefully examine its rise-and-fall period, then eliminate the company.

  Exclusion for Chronic Decline: if the company demonstrated a multidecade chronic pattern of decline prior to its upswing that would call into question whether it was a great company before its fall, then eliminate the company.

  Companies eliminated: Bethlehem Steel, Bristol-Myers Squibb, Burroughs, Eckerd, GM, Hasbro, McDonnell Douglas, Melville, Nucor, Sony, Teledyne, Walt Disney, and Westinghouse.

  FINAL STUDY SET, FALLEN CASES

  Company Era of Focus for Analysis of Decline Total Time Frame

  A&P 1950s–1970s 1859–1998

  Addressograph 1960s–1980s 1896–1998

  Ames 1980s–1990s 1958–2002

  Bank of America 1970s–1980s 1904–1998

  Circuit City 1990s–2000s 1949–2008

  HP 1990s–2000s 1937–2008

  Merck 1990s–2000s 1891–2008

  Motorola 1990s–2000s 1927–2008

  Rubbermaid 1980s–1990s 1920–1998

  Scott Paper 1960s–1990s 1879–1995

  Zenith 1960s–1980s 1923–2000

  Appendix 2:

  Success-Contrast Selection Criteria

  The cornerstone of our research methodology lies in studying contrasts between highly successful and less successful outcomes. In this analysis, we adapted the contrast methodology to pick success-contrast companies to compare with the companies that fell. Each success contrast attained and/or sustained exceptional results during the era that the corresponding fallen company had its negative inflection. Six cases already had success contrasts selected from previous research studies (A&P, Addressograph, Ames, Bank of America, Scott Paper, and Zenith). For the remaining cases, we implemented the following selection and scoring process. We identified a set of potential success-contrast candidates based on other companies that were in the same or similar businesses at the contrast-selection year.* To identify success-contrast candidates, we used SIC (Standard Industrial Classification) codes, financial analyst reports, Hoover’s and Moody’s reports, Fortune rankings, and published articles. We then created a quantitative scoring framework, built around the following six criteria.