How The Mighty Fall by Jim Collins “Every institution is vulnerable, no matter how great. No matter how much you’ve achieved, no matter how far you've gone, no matter how much you’ve garnered, you are vulnerable to decline. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall and most do!”

“All happy families are alike; each unhappy family is unhappy in its own way” Tolstoy “Anna Karenina” What Do We Learn By Studying The Contrast Between Success and Failure There are more ways to fall than to become great

The Five Stages of Decline 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 *Hubris (also hybris) means extreme haughtiness or arrogance. Hubris often indicates a loss of touch with reality and overestimating one's own competence or capabilities, especially for people in positions of power.

Stage 1 Hubris Born of Success Stage 1 kicks in when: Companies become arrogant, regarding success as an entitlement Neglect of a primary flywheel, failing to renew it with the same creative intensity that made it great in the first place

Stage 1 Hubris Born of Success When WHAT replaces WHY “We are successful because we do these specific things” replaces “We’re successful because we understand why we do these specific things and under what conditions they would no longer work” Sam Walton: “Wal-Mart does not exist for the aggrandizement of its leaders; it exists for its customers.”

Stage 1 Hubris Born of Success  Decline in learning orientation  Leaders lose their inquisitiveness  Discounting the role of luck

Stage 1 Hubris Born of Success Confusing BIG with GREAT Overreaching explains how the once invincible self destruct Obsession with growth Ames vs. Wal-Mart Circuit City vs. Best Buy Rubbermaid; Motorola; Merck

Stage 2 UNDISIPLINED PURSUIT OF MORE  Breaking “Packard’s Law” …“Packard’s Law”:  No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company DECLINING PROPORTION OF THE RIGHT PEOPLE IN KEY SEATS  Any exceptional enterprise depends first and foremost upon having self managed and self motivated people  The wrong people see themselves as having a job, while the right people see themselves as having responsibilities.  Review APPENDIX #5 “What Makes For The RIGHT PEOPLE in Key Seats?”

THREE QUESTIONS 1.What are the KEY seats on your bus? 2.What % of those seats can you say with confidence are filled with the right person? 3.What are you going to do to improve on that percentage?

Stage 2 UNDISIPLINED PURSUIT OF MORE Easy Cash Erodes Discipline Increasing price rather than increasing discipline Bureaucracy Subverts Discipline People start to think in terms of JOBS rather than RESPONCIBILITIES Problematic Succession of Power Leaders who fail the process of succession set their enterprise on a path to decline

Stage 2 UNDISIPLINED PURSUIT OF MORE PERSONAL INTEREST PLACED ABOVE ORGANIZATIONAL INTERESTS Chrysler

Stage 3 DENIAL OF RISK AND PERIL AMPLIFYING THE POSITIVE WHILE DISCOUNING THE NEGATIVE MAKING BIG BETS IN THE FACE OF MOUNTING EVIDENSE TO THE CONTRARY  Motorola (Iridium) vs. Texas Instrument TAKING RISKS BELOW THE WATER LINE Challenger's “O” rings

Stage 3 DENIAL OF RISK AND PERIL Three Important Questions To Ask When Making A Big Decision: 1.What’s the Upside, if events turn out well? 2.What’s the downside, if events go very badly? 3.Can you live with the downside? Truly?

Stage 3 DENIAL OF RISK AND PERIL What Indicators Should Be Most Closely Watched? Deterioration in gross margins Current Debt to Equity Ratios Customer Loyalty Decline of the Right People on your Bus When those in power blame other people or external factors

Stage 3 DENIAL OF RISK AND PERIL OBSESSIVE REORGANIZATION People are increasingly obsessed with internal politics rather than external conditions IMPERIOUS DETATCHMENT Executive “perks” and fancy surroundings disconnect executives from daily life

Stage 4 GRASPING FOR SALVATION The Silver Bullet Game changing acquisitions Lurching from goal to goal; strategy to strategy; INCONSISTANCY Grasping for a leader as a savior HP / Fiorina Vs. IBM / Gerstner

Stage 4 GRASPING FOR SALVATION PANIC AND DESPERATION If you want to reverse decline, be rigorous about what NOT to do. Breath Calm yourself Think Focus Aim Take one shot at a time

Stage 4 GRASPING FOR SALVATION FANFARE; HYPE; NEW PROGRAMS; NEW CULTURE; NEW STRATEGIES; SPENDING A LOT OF TIME TO MOTIVATE PEOPLE RESULT People cannot articulate what the company is all about; core values disintegrate; the organization becomes “just another place to work”; cash and resources get drained

Stage 5 CAPITULATION TO IRRELEVANCE OR DEATH You Can Be Profitable and Bankrupt Companies do not die from a lack of earning, they die because if a lack of CASH

Stage 5 CAPITULATION TO IRRELEVANCE OR DEATH The Two Versions of Stage 5 1.Giving Up The Fight 2.Denial or Hope

Stage 5 CAPITULATION TO IRRELEVANCE OR DEATH Giving Up The Fight  Scott Paper selling to Kimberly-Clark Denial or Hope  Zenith

What Do All These Companies Have In Common?  Xerox  Nucor  IBM  Texas Instrument  Pitney Bowes  Nordstrom  Disney  Boeing  HP  Merck

What Do All These Companies Have In Common? Level 5 Leaders Appeared. Mulcahy of Xerox “I am the culture!” Dick Clark of Merck “ A crisis is a terrible thing to waste” Gerstner of IBM describe getting the right people in the right seats on his bus was “…my top priority during those first weeks “

APPENDIX #s 1 and 2 talk about the selection criteria # 3 … Fanny Mae #4 … Important to read since it subverts the complacency hypothesis # 5 … A must read … Right People in Key Seats

THERE IS HOPE  # 6 View 3 companies from DECLINE TO RECOVERY step by step:  Level 5 Leaders  First Who, Then What  Confront the Brutal Facts  Hedgehog Concept  Culture of Discipline  Flywheel, NOT Doom Loop  Clock Building, Not Telling Time  Preserve The Core / Stimulate Progress 6A … IBM 6B … Nucor 6C … Nordstrom