What are the effects of poor leadership? What’s “bad growth” in business?
According to How the Mighty Fall by Jim Collins, a successful company could become obsessed with growth in all the wrong ways, which he calls overreaching. This is mainly caused by leaders who believe that bigger is always better, but don’t necessarily pay attention to the finer details.
Keep reading to learn more about the effects of poor leadership on successful businesses.
Overreaching in Business
The effects of poor leadership can drastically impact a company. Rather than pursuing steady, controlled growth in crucial areas like performance and people, a company may fall into the trap of thinking that “bigger is better” and look for ways to grow exponentially and rapidly—even if it means veering away from the company’s core purpose or chasing after growth it can’t sustain.
(Shortform note: In The Voltage Effect, economics professor John A. List discusses the four red flags that indicate a company may be overreaching, or attempting to scale beyond what’s realistic or prudent: the lack of a scalable audience, dependence on talented individuals or complex systems, unintended consequences of exponential growth (such as lower productivity), and increasing unit costs leading to reduced profits.)
Collins cites Ames Department Stores as an example of an overreaching company. Ames had seen impressive growth over three decades as a small-town retailer. In a bid to break into the urban market and increase the company to twice its size, Ames acquired Zayre, another department store chain. However, Zayre’s business model and strategies didn’t align with Ames’s, and Ames quickly tried to pivot, moving away from the formula that had helped it succeed. The move led to the company’s downfall: Ames went out of business in 2002.
(Shortform note: There were other factors beyond its acquisition of Zayre that led to Ames’s closure: the earlier acquisition of Hills Department Stores, the expansion of Wal-Mart and Target, and its drastic reduction in prices to attract customers. In December 2022, rumors were circulating that Ames would be reopening in 2023. However, as of June 2023, fact-checking website Snopes has deemed this news “unproven.”)
Key Driver: The Wrong Kind of Leader
What often drives a company’s pursuit of unsustainable growth is having the wrong leaders in place. Collins argues that while building a great company is a team effort, one wrong person in power can plunge a company into decline.
Having the wrong leader can stem from a succession problem, says Collins: A strong leader who helped propel the company forward may leave without having trained a replacement, or they may entrust the company to an incapable successor. The board of directors may also lock horns when deciding on the next leader, resulting in a leadership vacuum.
(Shortform note: In Built to Last, Collins writes that visionary companies—those that have endured for generations—ensure that they have a leadership continuity loop so they don’t risk having a damaging power struggle or a leadership vacuum. These companies’ leaders come up with a succession plan and have a list of strong internal candidates whom they train. Whoever takes over then puts their own succession plan in place.)
Collins contends that having the wrong people—those who aren’t aligned with the company’s culture and who aren’t self-motivated and responsible—sets off a vicious cycle within the company: Because people who aren’t a good fit aren’t intrinsically motivated to act in the best interest of the company, the company might try to exert greater control over them by putting tedious processes and protocols in place. As a result, talented people in key positions, dismayed by the red tape, decide to leave. The company then fills those roles with less talented people, leading to more red tape and more good people exiting the company. Soon, a middling team making poor decisions is running the show.
(Shortform note: One company that recognizes the importance of having good people in key positions is Netflix. In No Rules Rules, Netflix CEO Reed Hastings writes that an agile company needs innovators and high performers who push each other to produce quality work. Thus, Netflix has strategies in place to retain its top-tier talent pool: The company pays top-of-market salaries, gives raises that reflect employees’ market value, and offers employees larger base salaries instead of rewarding them with performance bonuses.)
