Saturday, November 5, 2011

How The Mighty Fall, by Jim Collins

(I'm closing my booknotes blog and reposting some of the notes.)

These are reading notes I made for myself and not to be taken either as a review or a substitute for reading Jim Collins's How The Mighty Fall.

I think it's worth reading it and reflecting upon the ideas therein. I don't think it should be used as a how-to manual without some significant further reflection -- which is also the opinion of the author, as he explains on page 36 when discussing the difference between knowing what versus knowing why.

Academic critics of Collins were very happy when some companies in Good to Great and Built to Last failed miserably. I agree with Collins that their failure is not necessarily proof that the books were wrong (since companies change and don't necessarily follow the prescriptions that were derived from their previous behavior) but rather presents an opportunity to study the decline of great firms.

Discounting some methodological issues with the research, the study is interesting and I think elucidative. According to Collins, decline comes in five phases:

Stage 1: Hubris born of success
Success is viewed as deserved while failure is attributed to bad luck (a version of the fundamental attribution bias); this leads to a sense that one is entitled to success regardless, which in turn becomes arrogance.

Distracted by new ventures and outside threats the company starts neglecting its core value proposition and it grows stale or fails to adapt.

Instead of understanding root causes (WHY) the decision-makers focus on what to do that has worked before (WHAT), possibly ignoring changing underlying environment.

This leads to a decline in learning orientation (which is a consequence also of getting big and having to hire more people).

Stage 2: Undisciplined pursuit of more
Packard's law: Companies die more often of indigestion from pursuing too many opportunities than starvation from too few opportunities to pursue. (Named after HP founder David Packard.)

Quest for growth at any cost mistakes big for great. Leads to a vicious cycle of expectations, their disconfirmation, demotivated personnel. Also propitious to undisciplined discontinuous leaps, leading to non-core businesses that detract from core value of firm.

Easy cash erodes discipline (instead of cost control, focus on revenue building; when counter-cycle hits, costs stay and revenues dwindle). Bureaucracy subverts discipline (people think of jobs rather than responsibilities). Politicking for power as the company becomes larger destroys morale.

Stage 3: Denial of risk and peril
Psychological tendency to amplify the positive and discount the negative turns decisions from "can you show that it is safe" to "can you prove that is unsafe" like with the Challenger launch decision. Wrong framing leads to:

Big bets and bold moves without empirical validation. This brings up the possibility of huge downside risk based on ambiguous data. In particular taking risks that are below the waterline thinking they are above the waterline. (It's a ship analogy: is this risk equivalent to getting a hole in the hull above or below the waterline? the first is a problem that needs to be solved for optimal operation, the second places survivability at risk.)

Team dynamics fall apart as people who see the risks are marginalized by those who focus on the positive side; the latter externalize the blame (the fundamental attribution bias again).

This is the phase when firms start making obsessive reorganization, as if the problems just described were a matter or shuffling people around on an organization chart or merging and splitting departments. This is activity masquerading as useful action, while internal politics overwhelm considerations over outside environment.

Stage 4: Grasping for salvation
The last point of stage three becomes endemic: reorganizations, restructuring and looking for leaders who are magical saviors. The company is in a panic, looking for magic solutions and silver bullets that will stem decline, typically missing the point, which is that they have no actual value proposition for the market and their internal processes are dysfunctional.

Radical change is touted as a solution (which raises the problem that everyone wants change -- the company is in decline -- but most want different types of change than each other). Organization-wide placebo effect (known as the Hawthorne effect) leads to short bursts of improvement followed by long periods of further decline

Lots of hype and hope instead of actual results, leading to confusion and cynicism when the deception becomes clear.

Stage 5: Capitulation to irrelevance or death