I am a fan of Jim Collins’ books – Built to Last and Good to Great are both inspiring, and to some extent, validating texts on building a great business. Last weekend I finally got around to reading his smaller, but no less interesting book on corporate failure, named ”How the mighty fall”, from a couple of years ago. In studying failure, Collins provides some salutary lessons on how to recognise the dangerous stages of corporate decay and what some companies did to revive their fortunes.
Collins identifies 5 phases in the decline of a business.
Stage 1 – Hubris born of success – where arrogance means you disregard your core business (what Collins calls the primary flywheel) in pursuit of new ventures. Your confidence means you do not think you need to earn success in your new venture and you don’t work as diligently as you did when you kick started your flywheel. Both suffer.
Stage 2 – Undisciplined pursuit of more, characterized by undisciplined leaps into areas where the business has no passion. There also tends to be a disregard for core values and purpose. Packard’s Law comes into play – where a company is more likely to die of indigestion from too much opportunity rather than starvation from too little. This stage is marked by the absence or decline of key people in key seats in the business.
Stage 3 – Denial of risk and peril – companies in this stage may be betting the farm without realizing it. There hasn’t been a true analysis of upside and downside before committing to risk. The leadership dynamics shift from a team with strong analysis and debate to a dysfunctional bunch of individuals where people look after own interests. Blame is externalized – it is not us, it is the market, the clients or a temporary blip. This stage may also see restructuring accompanied by a heavily politicized workforce, with leadership detached.
Stage 4 – Grasping for salvation – or searching for the silver bullet, often characterized by bringing in an external ‘rock star’ CEO. Most businesses that managed to resurrect themselves out of stage 4 chose a more modest internal successor who understood the business and makes calm, deliberate and disciplined decisions. This may also be a stage marked by a large acquisition (but where 2 struggling companies don’t make good bedmates) or radical change, when a focus on the core and the values of the business would have potentially brought better results.
Stage 5 – Capitulation to Irrelevance or Death – the lifeblood of the business, cash, disappears. By stage 5, hope is pretty much lost, and few companies can survive without cash and hope.
Interestingly, you can be in one stage of decline for several years, or you can go through all five in a short period of time. By Stage 4, your prospects of survival are diminishing, but there are many businesses that have turned it around from stage 3, and even some from stage 4.
The lessons for our business are many. Certainly, success can never be taken for granted, and success comes with fanatical dedication to your primary flywheel. Many of the businesses that got into trouble bet the farm on a business outside their flywheel. That doesn’t mean you can’t, or shouldn’t, consider new business opportunities. Indeed, as your business grows, you need to consider ‘crafting opportunities’ from your market position. But these considerations should be accompanied by a thorough analysis of the upside and downside of the new opportunity. If you are betting the farm, don’t go there.
While we have been going over 13 years as a business we have never made an acquisition, and Collins’ book provides some comfort for us. We are trying to build a unique business around our purpose and values; if you dilute those values in an acquisition, or buy a business that does not share your values, it seems you are asking for trouble.
Collins also poses three questions you need to ask when considering a new opportunity:
- Do they ignite passion and fit with the company’s core values?
- Can we be the best at these new activities?
- Will these activities help drive the organizations economic engine? Is it cash positive, and what resources are required to drive it?
To that, I would add an additional test for our business – is this new activity good for existing customers?
For us in the insurance claim management space there are a myriad of allied businesses that we can consider as we gather scale. These include adjusting and investigation, debt recovery, legal services, insurance audit and consulting, workers compensation services ….some of which would fail the tests above, or pose a conflict to existing business. Some others, like insurance broking, don’t fit at all with our flywheel, even though we have competitors who try their hand at claims and broking.
So as a business, when we consider new opportunities, we want to make sure we keep Jim Collins’ test for success in mind, as his book proves you can be in a tailspin or be taking an unacceptable risk without properly recognizing it. Some times the line between success and failure can be a fine one.