Vantage Book Club: How the Mighty Fall

The latest book to be digested by the Vantage Performance Book Club has been Jim Collins’ How the Mighty Fall.

In previous books, Collins has identified factors which contribute to the building and sustaining of great companies. By way of contrast, How the Mighty Fall examines the other side of the coin and seeks to unearth traits and behaviours that can result in the decline and failure of companies – even once-great companies.

Collins’ assertion is that any institution, no matter how great, is vulnerable to decline. The key question that he sets out to answer is whether decline can be avoided, or if it is an inevitable consequence of time. With this goal in mind, Collins and his research colleagues evaluated numerous household-name companies in an attempt to identify distinct stages of decline, how to differentiate between such stages, and to determine actions that can lead to a reversal of decline.

Collins’ analysis led he and his team to identify five stages which characterize the life cycle of companies, as depicted in the chart below:

Source: Jim Collins – How the Mighty Fall

The third Stage – Denial of Risk and Peril – particularly resonated with the Vantage Performance team. All too often we encounter businesses whose owners, boards or management teams have been slow to realise and acknowledge their situation, and who as a consequence find themselves teetering on the brink of Stage 5 and hoping to find a silver bullet or magic wand solution. Collins notes that the onset of Stage 3 is not always flagged by a visible event or decision, but more typically is the result of a gradual accumulation of warning signs.

So what indicators should a business track to alert management to the onset of creeping decline? Interestingly, Collins’ research revealed that all the companies that he and his team analysed exhibited negative trends in at least one customary financial early warning metric (deterioration of gross margins, current ratio and debt-to-equity ratio), and yet the management teams at the time showed few signs if any of taking the threat seriously or reacting to the gathering storm clouds. What caused these teams to ignore the warning signs of decline? Collins suggests that behaviour and team dynamics play a critical role, and in the table below he differentiates between characteristics of successful teams and those in decline.

Which characteristics resonate most in your business?

Source: Jim Collins – How the Mighty Fall

Collins concludes that decline is largely self-inflicted, and that avoidance of decline and getting back on the path to recovery is heavily dependent on appropriate actions being taken by leaders in a timely manner.

This is a sentiment which is echoed by the team here at Vantage Performance!

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