Financial Data
Updated 18 Oct 2019


Why great companies fail

There is no such thing as ‘too big to fail’. Even the biggest, wealthiest and fastest-growing organisations can fail if they don’t heed the warning signs and avoid the pitfalls that lead to self-destruction. 


GG Van Rooyen, 04 October 2016  Share  0 comments  Print


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Mention the author Jim Collins and most business people will probably think of the book Good to Great. Published in 2001, the booked looked at several companies that managed to make the leap from good to great.

A description of the book on the publisher’s website described it in the following way: “This book addresses a single question: Can a good company become a great company, and if so, how? Based on a five-year research project comparing companies that made the leap to those that did not, Good to Great shows that greatness is not primarily a function of circumstance, but largely a matter of conscious choice, and discipline. 

It was a seminal piece of work that is still quoted today, but as time marched on, many of the ‘great’ companies that Collins had lauded started to show some cracks. Electronics retail chain Circuit City, for example, went under and mortgage lender Fannie Mae was taken over by the US government when the mortgage bubble burst in the late 2000s. Clearly, they couldn’t have been as great they appeared.

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TAKE NOTE

“The signature of the truly great versus 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, Author


Trying to make sense of how these companies had managed to go from great to gone in record time, Collins wrote a follow-up book in 2009, titled How the Mighty Fall. In it, the author identifies five stages of decline that solid companies tend to go through on the way to total failure. These stages are: 

Stage 1: Hubris 

The problem with incredible success is that it can cause you to stop worrying and assume that nothing can go wrong. 

“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,” says Collins. 

Stage 2: Undisciplined growth

Another common phenomenon that Collins identified is a ravenous and unrestrained pursuit of growth.

“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,” says Collins.

Denial -business -rescue

Stage 3: Denial

“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’,” says Collins. 

When the money is rolling in, it can be easy to ignore the warning signs. Denying that something is wrong, though, is a sure way to fail. 

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Stage 4: Search for salvation 

Problems can only be ignored for so long. Eventually, they have to be addressed. But many companies wait too long – until very little can be done. Or, as is often the case, they become so desperate that they make hasty and counterproductive decisions. 

“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 behaviour absolutely contrary to survival,” says Collins.  

Stage 5: 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,” says Collins.


KEY TAKEAWAY

Being at the head of a fast-growing company is a good thing, of course, but it comes with risks. With quick growth comes added challenges and added complexity. If not managed correctly, growth can lead to failure.

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GG Van Rooyen


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