The signature of the truly great against the merely successful is not the absence of difficulty. It's the ability to come back from setbacks, even cataclysmic catastrophes, stronger than before.
Jim Collins is the author of the massively sold “Built to Last” and “Good to Great” management books on the foundations of successful companies.
His current book – "How the Mighty Fail: And Why Some Companies Never Give In” – has just been released and explores the journey that companies take down the road of broken dreams as they slide into oblivion and terminal decline.
Honestly Lay Bare diverts from its usual approach this week to reproduce extracts from an article by Collins in the May 14th edition of Business Week as it goes the very mandate that we as risk professionals task ourselves with.
And given the fact that this post is coming out one day after the bankruptcy of General Motors, we have attached at the bottom of Collins' piece an article from Tuesday's Wall Street Journal.
General Motors demise is the real time manifestation of Collins' observations.
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I've come to see institutional decline like a disease: harder to detect but easier to cure in the early stages; easier to detect but harder to cure in the later stages. An institution can look strong on the outside but already be sick on the inside, dangerously on the cusp of a precipitous fall.
We had a substantial amount of data collected from prior research studies, consisting of more than 6,000 years of combined corporate history. From this data set, we identified a set of once-great companies that fell and constructed a set of "success contrasts" that had risen in the same industries during the era when our primary study companies declined. Our principal effort focused on a two-part question: What happened leading up to the point at which decline became visible, and what did the company do once it began to fall?
Our comparative and historical analysis yielded a descriptive model of how the mighty fall that consists of five stages that proceed in sequence. And here's the really scary part: You do not visibly fall until Stage 4! Companies can be well into Stage 3 decline and still look and feel great, yet be right on the cusp of a huge fall. Decline can sneak up on you, and—seemingly all of a sudden—you're in big trouble.
Even so, I ultimately see this as a work of well-founded hope.
With a road map to decline in hand, institutions heading downhill might be able to apply the brakes early and reverse course. We've found companies that recovered—in some cases, coming back even stronger—after having crashed down into the depths of Stage 4. Our research indicates that organizational decline is largely self-inflicted, and recovery largely within our own control. So long as you never fall all the way to Stage 5, you can rebuild.
STAGE 1: HUBRIS BORN OF SUCCESS
Great enterprises can become insulated by success; accumulated momentum can carry an enterprise forward for a while, even if its leaders make poor decisions or lose discipline.
Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place.
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. Luck and chance play a role in many successful outcomes, and those who fail to acknowledge the role luck may have played in their success—and thereby overestimate their own merit and capabilities—have succumbed to hubris.
The best leaders we've studied never presume they've reached ultimate understanding of all the factors that brought them success.
For one thing, they retain a somewhat irrational fear that perhaps their success stems in large part from fortuitous circumstance.
Suppose you discount your own success ("We might have been just really lucky/were in the right place at the right time/have been living off momentum/have been operating without serious competition") and thereby worry incessantly about how to make yourself stronger and better-positioned for the day your good luck runs out.
What's the downside if you're wrong? Minimal: If you're wrong, you'll just be that much stronger by virtue of your disciplined approach.
But suppose instead you succumb to hubris and attribute success to your own superior qualities ("We deserve success because we're so good/so smart/so innovative/so amazing").
What's the downside if you're wrong? Significant. You just might find yourself surprised and unprepared when you wake up to discover your vulnerabilities too late.
STAGE 2: UNDISCIPLINED PURSUIT OF MORE
Hubris from Stage 1 ("We're so great, 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."
Companies in Stage 2 stray from the disciplined creativity that led them to greatness in the first place, making undisciplined leaps into areas where they cannot be great or growing faster than they can achieve with excellence—or both. When an organization grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall. Although complacency and resistance to change remain dangers to any successful enterprise, overreaching better captures how the mighty fall.
Discontinuous leaps into areas in which you have no burning passion is undisciplined.
Taking action inconsistent with your core values is undisciplined.
Investing heavily in new arenas where you cannot attain distinctive capability, better than your competitors, is undisciplined.
Launching headlong into activities that do not fit with your economic or resource engine is undisciplined.
Addiction to scale is undisciplined.
To neglect your core business while you leap after exciting new adventures is undisciplined.
To use the organization primarily as a vehicle to increase your own personal success—more wealth, more fame, more power—at the expense of its long-term success is undisciplined.
To compromise your values or lose sight of your core purpose in pursuit of growth and expansion is undisciplined.
STAGE 3: DENIAL OF RISK AND PERIL
As companies move into Stage 3, internal warning signs begin to mount, yet external results remain strong enough to "explain away" disturbing data or to suggest that the difficulties are "temporary" or "cyclic" or "not that bad," and "nothing is fundamentally wrong."
In Stage 3, leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data.
Those in power start to blame external factors for setbacks rather than accept responsibility.
The vigorous, fact-based dialogue that characterizes high-performance teams dwindles or disappears altogether. When those in power begin to imperil the enterprise by taking outsize risks and acting in a way that denies the consequences of those risks, they are headed straight for Stage 4.
STAGE 4: GRASPING FOR SALVATION
The cumulative peril and/or risks gone bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all.
The critical question is: How does its leadership respond?
By lurching for a quick salvation or by getting back to the disciplines that brought about greatness in the first place? Those who grasp for salvation 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 number of other silver-bullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.
When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct and our fear can prompt lurching—reactive behavior absolutely contrary to survival.
The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise.
Of course, their leaders can later claim: "But look at everything we did. We changed everything. We tried everything we could think of. We fired every shot we had, and we still fell. You can't blame us for not trying."
They fail to see that leaders atop companies in the late stages of decline need to get back to a calm, clear-headed, and focused approach.
If you want to reverse decline, be rigorous about what not to do.
STAGE 5: CAPITULATION TO IRRELEVANCE OR DEATH
The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward.
In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future.
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.
The point of the struggle is not just to survive, but to build an enterprise that makes such a distinctive impact on the world it touches (and does so with such superior performance) that it would leave a gaping hole—a hole that could not be easily filled by any other institution—if it ceased to exist.
To accomplish this requires leaders who retain faith that they can find a way to prevail in pursuit of a cause larger than mere survival (and larger than themselves) while also maintaining the stoic will needed to take whatever actions must be taken, however excruciating, for the sake of that cause.
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June 2, 2009 - The Wall Street Journal
A Saga of Decline and Denial
DETROIT -- The beginning of the end for General Motors Corp. as an independent company was marked by a denial.
Rick Wagoner, then GM's chief executive, stepped up to a podium in a Dallas hotel July 10 to address an audience of Texas business leaders, and outlined his view: The struggling car maker might have to sell its Hummer brand, but the rest of the company was safe. And as for Wall Street speculation of a bankruptcy filing, no way.
Reports speculating about bankruptcy, he said, "don't help anything and are completely inaccurate."
But over the course of the next 10 months, nothing could stem the company's slide. Mr. Wagoner was eventually forced out. By Monday morning the bankruptcy papers had been filed and the U.S. government was poised to own a majority stake in the company.
It was quite a drop.
Once, General Motors was Microsoft and Apple and Toyota all rolled into one.
GM set the standard of how a company should be run, how utilitarian products could be made cool and how they should be sold. It helped win a world war, drive American prosperity and reinvigorate business-school curricula.
"Nobody else could cover the whole range of the marketplace like GM, not Ford, not Chrysler," said Gerald Meyers, a former chief executive of American Motors Corp. and now a professor of business management at the University of Michigan.
In the end, though, GM was a victim of its own success -- its path to bankruptcy paved with the very management, marketing and labor practices that made it the world's largest and most profitable company for much of the 20th century. Strategies that had once been deemed innovative "became a millstone on the whole company," said Mr. Meyers.
Building a Giant
Founded in 1908 by William C. "Billy" Durant, a high-school dropout who had risen to president of the Buick Motor Co., GM was initially set up as a holding company to acquire other auto makers. It soon took over Oldsmobile, Cadillac and Oakland, which would later change its name to Pontiac, and eventually Chevrolet.
Under the leadership of Alfred P. Sloan, a Massachusetts Institute of Technology-trained engineer who ran the company in the 1920s, the company pioneered a strategy for organizing its various divisions in a way that would fuel its growth for decades.
The idea was to use the brands to offer a "a car for every purse and purpose," as Mr. Sloan described it. Chevrolet made affordable cars. Pontiac and Oldsmobile were progressively more upscale. Buick was a true premium brand and Cadillac the pinnacle of luxury. Together they formed a "ladder of success," allowing customers to move up as their station in life improved, without having to leave the GM family.
Surpassing Ford
In 1932, a focused GM moved past its older rival, Ford Motor Co., to become the world's largest car maker -- a title it would hold for 77 years. By the late 1950s, GM alone had 50% of the U.S. auto market.
GM wasn't just immensely profitable. It was cool, too. The company's hot models, such as the Corvette and Camaro, had the same cachet as the iPhone curries among today's younger generations, and inspired pop songs like "GTO" and "409." As the Beach Boys crooned: "She's real fine, my 409."
For a time, GM dominated so much of the American auto market that the government questioned whether it should use antitrust laws to break up the company -- the same kinds of issues that plagued Microsoft Corp.
In the 1970s, trouble started. Japanese auto makers were gaining market share with well-made small cars, helped by two spikes in oil prices.
Blurred Identities
GM's strategy of offering a multiplicity of brands started to fray. To cut costs, GM began stocking its makes with nearly identical cars. That blurred the differences between brands and made it hard for consumers to tell a Chevy from a Pontiac or a Buick.
To confront the rising threat from foreign auto makers, GM in 1985 created an entirely new brand, Saturn, at a cost of several billion dollars. It was set up as a separate car company whose mission was to win back customers who had defected to foreign makes.
By the mid-1990s, GM had added two more brands -- Saab, a niche auto maker based in Sweden, and Hummer, maker of hulking military vehicles. With so many nameplates to manage, and rising competition from the likes of Toyota and Honda Motor Co., GM struggled to develop enough new models for all of its brands. While spending heavily on new models to pump up Oldsmobile, GM let Saturn languish, and its sales shriveled.
In 2000, Rick Wagoner was named CEO. He took the reins intending to reinvent the company. In one of his first moves, he decided it was futile to keep Oldsmobile. It proved costly, as GM had to compensate dealers who lost Olds franchises. Analysts estimated the tab at $2 billion.
To preserve GM's market share, Mr. Wagoner set out to revive Saturn and GM's other smaller brands. As part of that mission, he hired Robert Lutz, a former Chrysler CEO and renowned car guru, to develop a new generation of cars. Billions of dollars were allocated to the cause. The smaller brands -- Buick, Pontiac, Saturn -- would get first dibs ahead of GM's biggest and strongest brand, Chevrolet.
A string of flashy new models conceived under Mr. Lutz showed up in the weaker brands. Pontiac and Saturn each got a roadster, the Buick LaCrosse, Pontiac G6 and Saturn Aura midsize sedans arrived while Chevrolet had to wait for a new Malibu.
At the beginning of 2005, GM's business began unraveling. Years of heavy sales incentives had gutted its profit margins, and the company warned a significant loss was likely that year.
By March, there were signs that some people inside GM might be having doubts about the brand strategy. At a conference of financial analysts in New York, Mr. Lutz described Buick and Pontiac as "damaged brands" that had suffered as a result of too little investment in new models.
Fall of an American Icon
President Obama is expected to defend General Motors' bankruptcy plan and the massive bailout. The reorganization plan will call for a huge infusion of U.S. tax dollars, but the White House hopes the company will survive. Video courtesy of Fox News.
GM ended up reporting a loss of $8.65 billion for 2005. In 2006, Mr. Wagoner faced off in a boardroom battle with billionaire Kirk Kerkorian and his adviser, Jerome B. York, who had publicly called on GM to eliminate some brands and for a time had a seat on GM's board. Mr. Wagoner eventually prevailed, and by the end of 2006 Mr. Kerkorian sold his stake and Mr. York left the board.
GM's smaller brands, meanwhile, weren't gaining enough critical mass to generate returns. Between 2003 and 2007, Saturn, Saab and Hummer together averaged annual pretax losses of $1.1 billion a year.
In February 2008, at a gathering of auto dealers in San Francisco, Mr. Wagoner said that any specific talk about killing brands was "not a thoughtful discussion."
The GM board wasn't so sure. By the spring, with gas prices soaring to $4 a gallon, sales of GM's Hummer SUVs were in free fall. The board was also concerned about the shadow Hummer cast on GM's image among consumers, people familiar with the matter said. Toyota was increasingly seen as the auto industry's technology leader because of its Prius hybrid. Hummer made GM seem like the gas-guzzler company.
In early June Mr. Wagoner announced GM was considering a sale of the brand.
Around that time, Mr. Lutz sat down for lunch with Mr. Wagoner. Spiking gas prices and the global meltdown of mortgage-backed securities were creating visions of empty dealerships loaded with unsold inventory. Over sandwiches in the Ren Center, as GM's headquarters is known, Mr. Lutz told his boss, "Rick, I don't like the way this smells. My gut tells me the economy is set up for a real collapse."
Bankruptcy Speculation
Years of massive losses had left GM ill-prepared for a major economic shock. At the time it had about $21 billion in cash, but it was burning a billion or more each month.
On Wall Street, speculation about GM's fate intensified. Merrill Lynch issued a report in early July headlined, "GM Bankruptcy Not Impossible."
The cost-cutting effort remained incomplete as the Fourth of July approached. Just before the holiday, GM's top 20 or so executives gathered at Mr. Wagoner's estate in Birmingham, Mich., for a barbecue. It was an annual event for the CEO and meant as a social gathering where no formal business was to be discussed. Even though GM's fortunes were worsening, the usual rules held, people familiar with the matter said.
About a week later, a decision against cutting brands had been made. Although Hummer was under review for a possible sale, "We don't have to eliminate any more brands," Mr. Wagoner said to a group of Texas businesspeople.
Wall Street wasn't convinced. Later that day, GM stock closed at $9.69, it's lowest point in 54 years.
About two weeks later, GM reported a $15.5 billion loss for the second quarter and a plan to slash $10 billion in expenses and borrow several billion more. Ominously the company only said it had enough cash to last until the end of the year.
Deal Talks With Chrysler
A possible deal with Chrysler LLC seemed like it might achieve the savings GM needed. In early August, Frederick "Fritz" Henderson met to discuss potential synergies.
After the collapse of Lehman Bros. in September, auto sales plunged further. GM's talks with Chrysler were in full swing. The two companies estimated they could save up to $37.8 billion over a six-year period. When news of the talks leaked out, many in the industry were confounded. GM already had too many brands, the thinking went. What would it do with Chrysler, Dodge and Jeep if it merged with Chrysler?
By November, however, the GM board was growing increasingly concerned about the auto maker's deteriorating finances, and the talks with Chrysler were halted. Just before Thanksgiving, Mr. Wagoner and the CEOs of Chrysler and Ford asked Congress for billions of dollars in loans. The GM CEO told Congress a bankruptcy filing was unthinkable. Customers wouldn't buy from a bankrupt auto maker and the company would collapse, he said.
The reaction was harsh. Lawmakers slammed the CEOs for flying corporate jets to Washington, grilled them on how exactly they'd use taxpayer money, and pushed them to cut their own salaries to $1 a year.
On the first day of December, they returned for a second appeal, this time with more detailed turnaround plans. Mr. Wagoner acknowledged GM would run out of money by the end of the year. But he also continued to assert that bankruptcy could not be an option.
On one point he had changed his view. As part of GM's turnaround plan, the company would cut some of its brands. Saab, like Hummer, would be sold, Pontiac's model line would be trimmed to one or two cars. GM would look into options for Saturn.
Turnaround Plans
Five days before Christmas the Bush Treasury Department provided bailout loans to GM and Chrysler and told them to come back in February with tougher turnaround plans. When the plans arrived on Feb. 17, the Obama Treasury Department was getting its auto task force into place.
Over the next few weeks, the task-force members ramped up on the auto industry and studied GM's turnaround strategy. The more it learned, however, the more concerned members became about GM's future profits and market share, people familiar with the matter said.
On March 27, GM officials traveled to Washington to discuss the matter. In a one-on-one meeting, Steven Rattner, the Wall Street financier who is heading the task force, told Mr. Wagoner GM's latest turnaround plan "doesn't cut it," and informed Mr. Wagoner the government wanted him to resign, a person familiar with the matter said.
Mr. Henderson, the COO, was named the new CEO, and readily acknowledged bankruptcy was probable. Over the next several weeks, task-force members pushed GM to go "faster and deeper" in its restructuring -- and to look at shedding more brands. Eventually, Mr. Henderson agreed to close down Pontiac all together, but dug in his heels to keep Buick and GMC.
On Monday GM filed papers for Chapter 11 in New York.
