How The Mighty Fall

A Book Review by Jack Doueck – February 2014

I read a great book this week:
“How the mighty fall and why some companies never give in” by Jim Collins – bestselling author of “Good to Great” and “buillt to last”.
This is a book about companies featured in his previous books who fell and fell hard.

Fannie Mae is one of them. In September of 2007 their stock price was at $57. In September of 2008 the Federal Government took them over (similar to a bankruptcy). A month later their stock price hit $0.93 a share (-98%).

“Indeed, nearly every major financial institution got mauled in the housing-bubble, subprime-mortgage mess of 2008… Vikram Pandit, CEO of Citigroup appeared on Charlie Rose in November of 2008: “How many times have you seen AAA bonds go to zero?… I’m not so sure anybody… Anybody… ran a stress test of the kind of environment that we’re living through today.” (Page 145)

In this book Collins and his team studied Ames and contrasted it with Walmart. They studied A&P and contrasted it with successful Kroger. They studied Addressograph and contrasted it with successful Pitney Bowes. They told the story of Circuit City and showed how Best Buy ate their lunch. They detailed the fall of HP and contrasted it with IBM’s fall and then their comeback. They clarified how Motorola fell and Texas Instruments – on their way to destruction, stayed alive and thrived. They studied failed companies as diverse as Bank of America, Scott Paper and Zenite – and contrasted them with Wells Fargo, Kimberly-Clark and Motorola (and its amazing comeback from near defeat).

They conclude that there are 5 stages to destruction:
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.

Is it true that all companies that fall do so because they stop innovating, because the management team becomes complacent and lazy?
Not really, says Collins’ research.
“… Catastrophic decline can be brought about by driven, intense, hard-working, and creative people. It’s hard to argue that the primary cause of the Wall Street meltdowns of 2008 lay in a lack of drive or ambition; if anything, people went too far – too much risk, too much leverage, too much financial innovation, too much aggressive opportunism, too much growth.”

Here are some quotes from the book:
“The signature of the truly great versus the merely successful is not the absence of difficulty, but the ability to come back from setbacks, even cataclysmic catastrophes, stronger than before. Great nations can decline and recover. Great companies can fall and recover. Great social institutions can fall and recover. And great individuals can fall and recover. As long as you never get entirely knocked out of the game, there remains always hope.” (Pg 120).

“Never give in. Be willing to change tactics, but never give up your core purpose. Be willing to kill failed business ideas… But never give up on the idea of building a great company. Be willing to evolve into an entirely different portfolio of activities, even to the point of zero overlap with what you do today, but never give up on the principles that define your culture. … Never give up on the discipline to create your own future. Be willing to embrace loss, to endure pain, to temporarily lose freedoms, but never give up faith in the ability to prevail…”.

“The path out of darkness begins with those exasperatingly persistent individuals who are constitutionally incapable of capitulation. It’s one thing to suffer a staggering defeat – as will likely happen to every enduring business and social enterprise at some point in its history – and entirely another to give up on the values and aspirations that make the protracted struggle worthwhile. Failure is not so much a physical state as a state of mind; success is falling down, and getting up one more time, without end. (Page 123).

Another quote:
In his description of teams or companies on the way down, Collins says that the “team conducts ‘autopsies with blame’ seeking culprits rather than wisdom. Team members often fail to deliver exceptional results, and blame other people or outside factors for setbacks, mistakes, and failures.
It is quite the opposite for teams who make comebacks: “the team conducts ‘autopsies without blame’ mining wisdom from painful experiences. Each team member delivers exceptional results, yet in the event of a setback, each accepts full responsibility and learns from mistakes.”

Clearly, a culture where people learn from mistakes without looking to blame anyone is one key to overcoming adversity.

Collins also talks about Winston Churchill, who was widely blamed for Britain’s financial dislocation in the Depression and many other tragedies including Gallipoli – a failed plan during WWI which cost Britain 213,980 lives.

On 12/12/31, after losing his life’s savings in the Depression, he stepped off a curb on Fifth Ave in NY, looked the wrong way and was hit by a car. After a long recovery, he became depressed. Yet Churchill overcame incredible adversity and made an amazing comeback – becoming Prime Minister again at age 77, leading Britain against Nazi Germany in WWII, and going on to win the Nobel Prize in literature and become knighted by the Queen.

In 1941 he gave the commencement address at his old school “Harrow”. “This is the lesson:” he said. “Never give in, never give in, never, never, never, never – in nothing, great or small, large or petty – never give in except to convictions of honor and good sense. Never yield to force; never yield to the apparently overwhelming might of the enemy.”
(Page 123)

A good example of how a company overcame adversity, and made a comeback is IBM:
Collins talks about IBM in Appendix 6.A.
A $1,000 investment in IBM in 1926 would have been worth $5 million by 1972. IBM was the dominant force in computing, and its stock beat the general stock market by more than 70-fold.
Then came the fall.
From 1991-1993 IBM lost more than $15 billion and its stock plummeted.
Lou Gerstner came in as the new CEO and turned the company around, setting its course as a great company again, and retired 10 years later.

Here is a way to look at what Gerstner did:

1. Face into it with Faith:
In the words of Collins: “[you have to] retain unwavering faith that you can and will prevail in the end, regardless of the difficulties, and AT THE SAME TIME have the discipline to confront the most brutal facts of your current reality, whatever they might be.
Gerstner faced into the problems. He didn’t deny the harsh realities. He confronted the fact that IBM was failing, losing market share, had a bloated cost structure, had lost so many important customers etc. He talked to customers and realized OS/2 was a failure and Windows had won. He faced into the fact that if he didn’t cut at least $7 billion in costs, IBM wouldn’t make it. He faced into the reality that IBM’s competition was more threatening than any it had ever faced before.
Yet he also had the faith that he can turn things around and he surrounded himself with executives who would support that conviction.

2. No blaming:
Gerstner didn’t try to scapegoat anyone. His system was simple: if it isn’t working, and IBM can’t compete at it – close it or sell it. He sold the Federal Systems division and never came out publicly against any executive or department.

3. Learn the Lessons:
Gerstner interviewed customers, division heads, etc – and tried to piece together the lessons that brought IBM to the brink of irrelevance. He learned what customers really wanted: a way to integrate all the diverse and disparate pieces of information technology that existed in their organizations. They needed a company to be singly focused on THEM – not on any brand or product. They needed IBM to become a services company – from being a hardware manufacturer! Gerstner learned that the culture at IBM was one of entitlement – not responsibility. So he set out to change it. No executive would receive stock options unless they concurrently bought IBM stock with their own cash. He learned that IBM was a huge bureaucracy – so he set out to turn it into a mean, lean, fighting machine. In fact, he wrote a book entitled “Who Says Elephants Can’t Dance?” and dedicated it to “the thousands of IBMers who never gave up on their company, their colleagues, and themselves. They are the real heroes of the reinvention of IBM.”

4. Appreciate!:
Gerstner knew that IBM had the teams and the resources to reinvent itself – and he appreciated the strengths of those teams and those resources. He knew hw could dramatically cut the cost of processing power of its mainframes and set out to do so (he lowered it by 96% over the next 7 years). He appreciated the people who ran the business – and kept them to a high standard. He never accepted mediocrity. “You’re IBM, damn it!” Was one of his slogans. In other words: “we can do this!!”. He knew that they had a lot of problems, but he also appreciated its strengths.

5. GIVE:
Gerstner set out to put the customer back on top.
He talked about an “obsessive passion for the customer – who would sit on top of IBM’s universe”. Everything stemmed from his focus on the Giving to the IBM customer exactly what he needed and wanted: a systems integration business – regardless of the fact that IBM was exactly the opposite for the previous 70 years, a company focused on its own brand name and products! For Gerstner, success would be solving customers’ real problems, not selling for computers. It was a 180 degree turnaround and was very difficult to achieve in the culture he stepped into.

6. Strategize and Execute:
In Collins’ words: “Greatness come about by a series of good decisions consistent with a simple, coherent concept… Understand three intersecting circles: what you can be the best in the world at, what you are deeply passionate about, and what best drives your economic or resource engine.” (Page 181)
Gerstner’s goal/passion was to build the largest, most influential information technology services enterprise in the world – betting heavily that networked computing would replace distributed computing.
He launched IBM’s e-business. He reengineered almost all aspects of IBM’s business processes and removed more than $14 billion in inefficiencies from 1993 to 2002. His strategy was singly focused on the customers – giving those loyal customers exactly what they asked for and what they really needed – a world class tech services organization.