The five stages of a company’s decline is an approach developed by Jim Collins in How the Mighty Fall.
According to the author, every company is vulnerable to decline, no matter how big and powerful it may be. Companies can often be etiolated on the inside and still look strong on the outside. The decline can come on in a subtle way, a creep towards doom difficult to notice.
Analyzing cases from several companies, Collins found that companies generally decline in five stages. He calls them:
1. Hubris Born of Success
2. Undisciplined Pursuit of More
3. Denial of Risk and Peril
4. Grasping for Salvation
5. Capitulation to Irrelevance or Death
STAGE 1 – HUBRIS BORN OF SUCCESS
Powerful, successful companies risk becoming hubristic. The first step towards decline is precisely to believe that the successes of the past are guarantees of a promising future. Large companies can become isolated as a result of success; in the inertia of accumulated momentum a company moves forward for a while, even if its leaders make bad decisions or lose focus. Stage 1 begins when people in the company become complacent, viewing success as virtually a right, and lose sight of the real, underlying factors that created their success. “When the rhetoric of success (‘We’re successful because we do these specific things’) replaces penetrating understanding and insight (‘We’re successful because we understand why we do these specific things and under what conditions they would no longer work’), decline will very likely follow.”
STAGE 2 – UNDISCIPLINED PURSUIT OF MORE
This second stage is a result of the first stage. Myopic companies, made obstinate by their own success, seek to grow at all costs, in a disorderly manner, and often forget the fundamentals that led them to the top. “The hubris of Stage 1 (‘We are so good, we can do anything!’) leads right to Stage 2, the Undisciplined Pursuit of More – more scale, more growth, more acclaim, more of whatever those in power see as ‘success.’” Stage 2 companies neglect the disciplined creativity that led them to success in the first place, jumping willy-nilly into areas where they have no competence or business being. If they become so big that they fill vacancies with anyone other than the right people, they dig their own grave. “Although complacency and resistance to change remain dangerous for any successful enterprise, overreaching better captures how the mighty fall.”
STAGE 3 – DENIAL OF RISK AND PERIL
When the signs that something is not going well start to appear, companies in decline simply ignore them, or blame the market, competition, even bad luck, instead of trying to understand the causes of the problems. Business results may still be strong enough so that troubling data can be ignored or excused, and management looks the other way, believing that the company is in a rough patch. They do not acknowledge that something fundamental could be wrong. In Stage 3, patently negative data is disregarded or explained away, any positive results are amplified, and, where possible, data are interpreted in a favorable light. “The vigorous, fact-based dialogue that characterizes high-performance teams dwindles or disappears altogether.” Stage 4 is in the offing when decision-makers become insensitive to risk, deny the consequences of risks, and ignore the possibility of failure.
STAGE 4 – GRASPING FOR SALVATION
When the crisis is perceived by everyone in the company, it looks for a “silver bullet” to save it from ruin, perhaps a magical merger, or a new president hired at an exorbitant salary. The risks from Stage 3 are actualized and come to the fore, pitching the company into a sharp decline. The critical question becomes: how does your leadership respond? Does it look for immediate salvation, or does it return to the practices that brought it greatness in the first place? Those in the first camp have fallen into Stage 4. “Common ‘saviors’ include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a ‘game-changing’ acquisition,” or any other “Hail Mary” solution. These desperate actions on occasion produce what look like encouraging results, but it is a mirage.
STAGE 5 – CAPITULATION TO IRRELEVANCE OR DEATH
Recovery is possible, but it becomes harder, the longer a company remains in Stage 4. Its financial health will have suffered greatly, important personnel will have decamped, and no credible recovery strategy will be in sight. The only solutions that remain are to be acquired or to close its doors, and the spiral downward becomes irreversible. “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.”
Is your company in one of these stages?