PDF Summary:How the Mighty Fall, by Jim Collins

How do formidable companies lose their footing and fall into irrelevance—or even cease to exist? And how can other companies avoid the same fate? Jim Collins seeks to answer these questions in How the Mighty Fall. Backed by years of research into once-mighty companies, Collins contends there are five phases leading to a company’s downfall: overconfidence, overreaching, ignoring the signs, overcorrecting, and surrendering.

While the book is a warning to companies that have grown complacent, it also gives hope to those in the throes of decline. Collins says that by staying vigilant of the threat of failure, you can rechart your course, keep pushing forward, and ensure your company’s survival.

In this guide, we’ll discuss the five phases that lead to a company’s decline. We’ll then break down Collins’s advice for resuscitating a faltering company. As the book was published in 2009, we’ll also include updates on the companies he mentions, as well as connecting his ideas to concepts in his other books and examining the perspectives of other experts.

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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.)

Phase 3: Ignoring—or Misreading—the Signs

The third phase of a company’s downfall is when it disregards signs of decline and makes reckless decisions with potentially disastrous consequences.

Companies generally don’t collapse overnight. Collins writes that there are warning signs when a company is deteriorating, such as fewer customers and lower profits. However, instead of facing problems head-on and pinpointing internal causes of decline, leaders might respond by blaming outside factors like an economic slump, or by choosing to interpret inconclusive data with an overly optimistic eye.

(Shortform note: While Collins says you shouldn’t blame outside factors for any failure, it’s still important to keep an eye out for potential external disruptions to the business. In Only the Paranoid Survive, former Intel CEO Andrew Grove says that potential sources of disruption are competitors, government policies, consumers, suppliers, and adjacent businesses. Grove writes that rather than interpreting changes in these areas optimistically, you should gain a more realistic view by listening closely to a wide range of perspectives, including those of employees who are on the ground.)

Turning a blind eye to the subtle markers of trouble, a company’s leaders might then take big risks—ones that could have catastrophic consequences for the company if they don’t pay off. Collins again cites the example of Motorola, which started developing Iridium, a satellite phone, before cellular phones exploded onto the scene. The arrival of the cellphone should have given Motorola pause. The evidence was clear: Cellphones were sleeker, cheaper, and offered better coverage than satellite phones. But the company chose to believe that there was still a need for satellite phones and went full speed ahead, funneling $2 billion into the project. In the end, the all-or-nothing bet didn’t pay off, and Motorola filed for bankruptcy.

(Shortform note: It’s estimated that Motorola actually spent $5 billion on the Iridium project. Some analysts go into more detail about the Iridium’s—and ultimately, Motorola’s—failure, saying that the company fell victim to a version of the sunk cost fallacy: sticking with a doomed venture because they had already invested too much in it. Additionally, there was a failure in leadership: Not only did the CEO refuse to back down on the project, but the board was also made up of people who had a stake in Iridium, which meant that they couldn’t make decisions objectively.)

Aside from careless risk-taking, a company in denial might also undergo reorganization—sometimes multiple times—favoring cosmetic changes that don’t address the real issues over substantive action. (Shortform note: Collins’s skeptical view of reorganizations may stem from the fact that these changes are typically unsuccessful. A McKinsey survey found that more than 80% of company reorganizations fall short of their intended outcome, 60% lead to reduced performance, and 10% have adverse effects on the company.)

For example, Collins writes that Scott Paper Company, once the leader in the toilet paper market, restructured three times in four years as a response to Procter & Gamble (P&G) gaining ground with its own brand of toilet paper. (Shortform note: Other analysts say that Scott Paper’s restructurings were more complex than a knee-jerk reaction to the P&G threat. Instead, they were likely a response to a combination of factors, including numerous new competitors, an oversaturated tissue paper market, and Scott Paper’s expansion to Europe, Latin America, and Asia.)

Phase 4: Overcorrecting

Whereas leaders can brush off problems or look at data through rose-colored glasses in the third phase, they eventually have to face reality when the situation gets noticeably worse. This is the fourth phase, writes Collins: Leaders can no longer deny that the company is in trouble, and they scramble for a quick way to stop the decline. Collins explains that this reaction is borne out of instinct—we make desperate moves when we’re fighting to survive.

(Shortform note: In the business world, we’re supposed to react rationally instead of emotionally, but evolutionary psychologists explain that we’re hardwired to react with emotions first. To keep from being caught off-guard and reacting in desperation in the context of a failing company, consider developing an infinite mindset. In The Infinite Game, Simon Sinek writes that those with an infinite mindset view business as constantly evolving, with known and unknown players and changeable rules. This means you should be prepared to pivot on a fundamental, existential level in anticipation of disruptive change.)

Collins writes that in this phase, companies pin their hopes on a savior. This may come in the form of an outsider who’s brought in to fix things or an overhaul of the company’s approach to business.

New People

The company might hire consultants or, with much fanfare, bring in a maverick chief executive from the outside, with the hope that new blood will bring fresh ideas to reinvigorate the company. However, Collins argues that hiring an outsider rarely works out. (Shortform note: In Built to Last, Collins explains why hiring outsider CEOs rarely works: The new CEO typically lacks a true understanding of the company’s core values and purpose and thus may steer the company in a damaging direction. For example, when Charles Pearce took over Colgate, he was obsessed with expansion and ignored the company’s philosophy of dealing fairly with retailers. This soured the company’s relationship with retailers, and Colgate’s average profits dropped by more than half.)

New Strategy

Another quick fix that a company might attempt is changing its strategy. It might go through another round of restructuring, implement a culture makeover, launch a buzzy new product, or make a hasty acquisition. If all else fails, a company might pin its hopes on a buyout. (Shortform note: Part of the reason implementing a new strategy often fails to save the company is that employees resist the change. This resistance may come from a change in “personal compacts,” or the explicit and implied agreements between the company and its employees. When a company doesn’t explain how a new strategy will affect employees’ tasks and career trajectory, employees may not deliver the results that the company expects from them.)

Often, a company’s dubious rescuer is a combination of people and strategy. Collins gives the example of Hewlett-Packard (HP), which went through a rough patch in the late ’90s. To turn things around, the company tapped Carly Fiorina to be its CEO. Collins characterizes Fiorina as a media darling who made sweeping changes to the company, including coming up with a bold new vision for HP, restructuring, and making a major acquisition. After HP performed poorly during her six-year tenure, Fiorina was fired.

(Shortform note: Some analysts characterize Fiorina as being all vision and no execution—she touted HP’s new vision while delegating the work of bringing it to fruition to a weak senior team. She had a dazzling presence, but she didn’t make an effort to connect with people, and her leadership style didn’t jive with HP’s culture. Professors from top business schools thought her performance was so poor that they included her in a list of the worst American CEOs of all time. After her exit from HP, Fiorina explored other areas outside of the executive suite: She published an autobiography, served as a business commentator for Fox News, and campaigned for the 2016 Republican presidential nomination.)

Phase 5: Giving Up

Collins writes that drastic moves in the fourth phase can lead to improvements in the company’s performance, but any positive change is usually short-lived. Instead, the dramatic changes that the company implements often result in confusion and strained finances: As a company pivots its vision and strategy, employees no longer know what the company stands for. More significantly, as the company pours resources into initiatives that are likely to fail, it further weakens its financial position. Thus begins the fifth phase: giving up, either because the leaders believe it’s the best option or because the company has run out of resources to keep going.

(Shortform note: In Great by Choice, Collins analyzes companies that were able to survive and even thrive through tough times. He writes that such companies protected themselves by building cash reserves, having up to 10 times the ratio of cash to assets compared to other companies. While some might argue that having idle cash isn’t a good use of resources, Collins writes that having significant cash reserves can serve as a shock absorber in the midst of disruptive events, increasing a company’s chances of survival.)

When to Give Up

Collins argues that a company should keep fighting and find any means to get back on the long road to recovery. But he also writes that there is one situation when a company should surrender: when its existence no longer serves a purpose. (Shortform note: To determine whether your company is still serving its purpose, you should have a clear idea of what that purpose is. The company’s purpose should be something that brings value to everyone, from customers (fulfilling a human need) to employees (giving them an outlet for their passion), shareholders, and communities.)

How to Turn Things Around

Collins contends that if a company still has a worthy goal and the potential to make a meaningful impact, it should commit to putting in the time and effort required to recover and rise. Collins emphasizes that reversing decline isn’t about looking for a miracle cure (such as a savior CEO or a revolutionary new product) but about playing a long, steady game.

(Shortform note: In Great by Choice, Collins writes that successful companies focus on consistent performance, in good times and bad. He calls this the 20 Mile March, which comes from the concept of reaching a destination by traveling 20 miles a day, no more, no less—no matter what. In contrast, companies that fail often go all out in good times by pursuing massive growth, which leaves them vulnerable in bad times.)

Here, we outline what Collins prescribes for a floundering company: putting the right people in place, sticking to what your company does best, and being disciplined.

Put the Right People in Place

As we earlier discussed, having the wrong people can plunge a company into decline. But what qualities make the “right” people?

First, key people should be a good cultural fit. Collins argues that companies should only hire people whose values are already aligned with those of the company. Trying to fit people into a mold leads to decisions that don’t fit in with the company’s core purpose. In contrast, those who already believe in the company’s mission are more likely to be passionate about their role, which fuels them to keep going through difficult times.

How Successful Companies Ensure a Good Culture Fit

Collins goes deeper into the importance of culture fit in Built to Last. He writes that enduringly successful companies stand the test of time because they only hire those who are compatible with—and thus preserve—their core ideals. He says these companies have cult-like characteristics: They have a tough screening process, indoctrinate new employees by immersing them in the core ideology (through orientation seminars that highlight the company’s history, values, and traditions, for example), and even encourage employees to socialize among themselves and not with outsiders.

Collins emphasizes that ensuring a good culture fit doesn’t mean a lack of diversity—color, gender, and size don’t matter as long as an employee is compatible with the company’s core philosophy. He argues that this practice isn’t meant to turn employees into unthinking robots; instead it enables the company to empower the employees to act on their own. By being sure that its employees are aligned with the company’s core philosophy, the company can trust the employees to work autonomously.

Second, Collins writes that key people should be responsible. They should know what their role is, be committed to doing it to the best of their ability with minimal supervision, and take accountability when things go wrong. (Shortform note: How can you tell if a candidate for a key role is responsible and accountable? In Rework, Jason Fried and David Heinemeier Hansson write that you should look for someone who’s managed their own projects or run their own companies. This is a good sign that they’re proactive and don’t need someone to hold their hand.)

Stick to What You Do Best

As we discussed earlier, one of the key drivers of decline is when a company ignores its flywheel—the core business that made the company successful in the first place. Collins says that you should keep pushing that flywheel as long as you’re passionate about it and it can still serve its purpose. This doesn’t mean that you shouldn’t innovate—just that any innovation should remain within the area you’re already good at.

(Shortform note: The key driver of the flywheel is what Collins calls your “Hedgehog Concept,” a major idea in his book Good to Great. He describes the Hedgehog Concept as a deep understanding of where you can play, win, and make a profit. It’s best to decide on this with a council of five to 12 members from different job levels who understand the company’s mission and can engage in a respectful, regular exchange of ideas.)

Be Disciplined

Collins stresses the importance of adhering to time-tested management principles as soon as you realize your company is in a state of decline. He recommends reviewing the work of experts like Peter F. Drucker and Michael Porter to brush up on the foundations of management.

(Shortform note: Collins doesn’t go into great detail about management principles, instead citing authors who’ve written classic books on the subject. Peter F. Drucker is the author of many management books, including The Effective Executive, where he writes that managing yourself leads to individual and organizational success. This entails managing your time, focusing on just a few key tasks, making a unique contribution, maximizing your strengths, and making sound decisions. Michael Porter is a Harvard Business School professor who wrote Competitive Strategy, which covers advice for increasing a company’s profit potential, anticipating competitors’ strategies, and outperforming competitors.)

One proven management principle that Collins emphasizes is calmly and rationally evaluating business decisions. He writes that you should carefully weigh risks and only bet on something if it isn’t big enough to sink the company if things don’t work out. This means not going all-in on an idea that may turn things around quickly while exposing the company to catastrophic risks.

(Shortform note: In Great by Choice, Collins goes into more detail about how enduring companies safeguard against risk. One method is the “bullets before cannonballs” approach, wherein a company fires “bullets” first, testing to see where they land. These bullets can come in the form of a new product, service, technology, process, or acquisition, as long as they have three characteristics: They don’t cost much, they don’t expose the company to much risk, and they don’t disrupt the company. Once a company has gathered convincing data from its bullets, it concentrates its firepower into a calibrated cannonball and launches that in the direction where bullets have shown the greatest potential.)

Collins says that strong companies should be disciplined as well. This means staying the course and keeping an eye out for the warning signs of deterioration: The earlier you recognize that the company is in trouble, the sooner you can get back on course.

Are Discipline and Vigilance All a Company Needs to Survive?

In Great by Choice, Collins similarly posits that successful companies have: 1) fanatic discipline, which means adhering consistently to their values, long-term goals, standards, and methods, and 2) productive paranoia, which means considering every kind of nightmare scenario so they can prepare for the worst.

However, some argue that there are some scenarios you simply can’t foresee. Nassim Nicholas Taleb calls these “Black Swans”—extremely unpredictable events that have massive impacts on society. In The Black Swan, he cites the fall of the Berlin Wall, the creation of the Internet, and the 2008 financial crisis as examples of these events. He offers some advice for dealing with uncertainty, including preparing for the widest range of contingencies rather than predicting specific events. He explains that even though we can’t predict Black Swans, we can predict their effects, and thus safeguard against those.

Similar to Taleb, the authors of Lead From the Future write that no one can predict the future. Thus, they suggest future-proofing your business through visionary planning—changing your focus from short-term concerns to the future you want to see five to 10 years from now. This process encourages you to think outside your company’s established processes and approaches and to reinvent your business, whether in whole or in part.

Finally, in addition to discipline, vigilance, and planning, your company should build up its resilience. Some experts say that for an enterprise to be resilient, it should have backup systems, diverse employees with varied ways of thinking, a segmented structure so that the failure of one segment won’t cause the entire organization to crumble, and alignment of its goals with those of wider-ranging systems (such as the economy and society).