From Built to Last to Good to Great and now to Why the Mighty Fall (HarperCollins), Jim Collins has established himself as the leading management thinker of our time. The former Stanford University Business School professor turned mega-selling author and avid rock climber is the driven researcher and thinker whom many leading companies look to for advice on how to grow, how to improve their performance and how to go from merely good to great. He spoke to Ivey Business Journal from his research laboratory in Boulder, Colorado.
Ivey Business Journal: Why did you write How the Mighty Fall?
Jim Collins: I was interested in why some companies decline, even some of the great companies we wrote about in Good to Great. We’d actually been researching the subject of why companies fail for several years. It’s important to point out that we were doing this well before the failure of the Wall Street firms just over a year ago. In fact, the book is not about the capital markets at all. It’s about giving readers some very revealing and pointed research on how and why decline occurs, and what lessons leaders can learn that will help them avoid the fate of those that did fall.
IBJ: What’s the main reason then that a company declines?
JC: First of all, I would point out that decline can be avoided. We found that there are five stages in a company’s decline, and that as long as you don’t fall all the way to the fifth stage, you can avoid falling into the abyss. If you detect decline early enough it can be avoided. Institutional decline is like a staged disease. It’s harder to detect but easier to cure in the early stages, and easier to detect but harder to cure in the later stages. A company can look good on the outside but already be sick on the inside.
IBJ: Describe the five stages of decline?
JC: Stage One is what we call Hubris Born of Success. Successful companies can become very insulated by their success. People start coasting and saying things like “We’re successful because we do these specific things.” They forget that they became successful because they understood why they do these specific things and under what conditions they would no longer work. That sort of understanding and insight get replaced by the rhetoric of success. This is the beginning of decline. Stage Two, what we call Undisciplined Pursuit of More, is basically a continuation of Stage One. Companies forget about what made them successful in the first place and make undisciplined leaps into areas where they can’t be great. Leaders want more scale, more growth, more acclaim. Essentially they’re overreaching. In Denial of Risk and Peril, Stage Three, leaders start to discount negative data and begin to blame external factors for setbacks rather than accept responsibility. They start to take huge risks and act in a way that denies the consequences of those risks. This kind of behaviour leads straight to Stage Four, Grasping for Salvation, in which the leader, already in trouble, opts for a bold but untested strategy or a blockbuster product launch to pull his or her company out of the freefall. These may work at first but neither strategy will pull the company up for good. The final stage of decline, Stage Five, is Capitulation to Irrelevance or Death. Financial strength and the company’s spirit have been so eroded that leaders abandon all hope. A great icon has become irrelevant. It can take as long as ten years for a company to decline but it can also take less than a year.
IBJ: How does a company that’s in decline pull itself up?
JC: The most important thing a leader and a company can do is to return to sound management practices and rigorous strategic thinking. In Why the Mighty Fall, I describe how such practices and thinking led three great companies – IBM, Nucor and Nordstrom – to recovery. The underlying truth is that a lack of management discipline correlates with decline. Passionate adherence to management discipline correlates with recovery and ascent.
IBJ: Moving away from the book, you’ve recently been saying that volatility is here to stay. Why do you say that?
JC: Those of us who grew up between 1950 and 2000 grew up in a world defined by two, and then one, superpowers. When you think about it, we grew up in a period of really remarkable prosperity, the ’50s, the ’60s. We stumbled a bit in the ’70s, but then you had this almost unblemished run, really extraordinary run, from the early ’80s, after the early ’80s recession, to 2000. So you had a period of stability brought about by the presence of two monolithic superpowers, then one, combined with a period of extraordinary prosperity. If we look back at history, that’s more aberrant than normal. There are few times in human history when you have that degree of inherent-seeming stability. I think it was a very dangerous world, a little bit like living in San Francisco, right? There’s an earthquake fault that could go at any time, but so long as it doesn’t, the weather’s pretty nice. And I think that that’s kind of the world we grew up in. But now the world has many more centres of power, many more global competitors, both economically as well as politically and militarily and so forth. Of course we’ve all been woken up to the fact that it’s a world that’s less in control than perhaps we had previously felt. And I think that the likelihood is that we will return — this is my own view and no one can predict the future — but the likelihood is that we’ll return to the historical norm of higher degrees of uncertainty and higher degrees of instability. So the likelihood is that we’ll have prosperity. We know how to create that and there’s no reason to believe we will fail to create prosperity. But the idea of prosperity and stability prevailing at the same time is probably less likely. So in that sense, I think it’s more likely that we will live in a much more uncertain and tumultuous time than those years of prosperity and stability.
IBJ: You mean in the geopolitical as well as in an economic context?
JC: In all dimensions. I guess in a sense the point for me is that the historical norm is one of uncertainty, instability and of course, increasing prosperity, certainly in most stages of human evolution.
IBJ: What makes a merely good leader great today, especially in a time of turbulence?
JC: We’ve actually been studying that and the next piece of work to come out, probably in a few years, will look explicitly at the question of why some leaders are able to transition from a position of vulnerability to build something great in a world spinning out of control…how they end up in ultimate control, having more control of their own destiny and what separates the leaders who build enterprises that do that. There’s certainly nothing in our prior research that’s negated by this research. In other words, they’re the leaders who are long-term ambitious for their companies first and foremost, more than for themselves. That still holds, even in this kind of environment. But what gets added to it is the need for a kind of productive paranoia, and the recognition that you have to be constantly vigilant and fearful of the things that might get you. And you don’t know what they are. I guess I would describe it as being vigilantly prepared for what you cannot ever possibly predict. And recognizing that if the world is going to throw a lot of stuff at you, you have to prepare ahead of time for the things that are going to hit you and you don’t know what they are going to be. That involves a whole series of decisions that you made before you get hit. Are you conservative financially? Do you have slack and buffers in your system? Do you not grow too fast in good times? So that when you’re hit with a really tumultuous time, you’ve got a little slack in the system to take advantage of it rather than having to feel like, “Oops, we went too far and we need to retrench.” The interesting thing is that it’s what you do during the really positive times that will allow you to do particularly well in the difficult times, however those difficult times manifest themselves. And that’s the kind of paranoia I’m talking about.
IBJ: What do you do during the positive times?
JC: For example, take a company like Southwest Airlines. One thing that is very interesting is that Southwest has grown up in an environment characterized by tumult. Yet every time the airline industry would go through one of its great retrenchings or difficult periods, Southwest would historically gain position, gain share and make it stronger. And you have to ask the question, “Why?” And the reason is because during the times when it would be in a more positive environment, not a recession, not a war, not post-911, Southwest was very deliberate and disciplined, so it only opened as many cities as it could. It preserved its model and preserved its culture and made sure it had a really strong balance sheet. It was always, always fearful about what could happen. And then when those times would come, they were in a much stronger position and they could take advantage of other people’s weaknesses.
IBJ: I’ve read that you favour using the Socratic Method for getting to the bottom of things, asking a lot of questions. What is the value of asking questions?
JC: That is a great question. I think that I’ve puzzled a lot on this and I think part of it is that it’s very hard to filter a noisy and complicated and changing world. One of the things that became very clear to me in How the Mighty Fall was that the companies that fell kind of ceased to continually dig to try to understand the sources of their success and recognize that success is constantly a journey. You’re always trying to better understand the sources of your success and the things that could imperil you. If you actually think that you have all those answers, you stop asking the questions. Well, what happens if, in fact, you were wrong about part of it? And then things start to go awry because you’ve lost that inquisitiveness, the will to try to truly understand. You may, in fact, put the accelerator on the wrong variables because you were wrong about why you were successful in the first place. And so I think the sense of a relentless curiosity and a relentless quest to understand – even if you think you understand, and never really believe you fully understand – reflects the way that certain leaders navigated a world that was very foggy. There’s that classic phrase, I think it was Clausewitz, the concept of the “fog of war.” If things are unfolding, it’s easy, in retrospect, to say it’s clear. But it’s not clear at the moment. That’s the thing that’s so hard, to understand things at the moment. Well, if you have really great people around you to begin with and you ask them the right questions, you’re probably more likely to at least have reasonably good answers than if you just assert the statement. Obviously you can get a genius but even geniuses can cease to be a genius, right? And it’s sort of an empirical observation about the Socratic nature of many of the best people that we’ve studied. They’re great with questions. The funny thing is, when they didn’t know the answer, they usually knew the right question to ask.
IBJ: You recently wrote the Foreword for the revised edition of a Peter Drucker book, Management. In pointing to Drucker’s penchant for asking broad, sweeping questions you say that he rejected the notion that management is a science. You write that, in the words of the late John Gardner (Common Cause) “He (Drucker) never succumbed to the trend in modern academia to answer questions of increasing irrelevance with increasing precision.”What do you mean?
JC: My original undergraduate orientation was applied mathematics. In fact last evening, the last thing I did to “relax” before I went to bed was to do a problem. I was trying to basically do a Bayesian analysis with something where you get information and then how the probabilities change and how much, and prove that by a base theorem, and going back to a binomial coefficient and binomial distribution. And so Joanne, my wife, came down this morning and there were three pieces of paper with all these equations, as I’m still struggling to get to the probability of the 97 percent in this analysis. I love probability problems and it’s often what I do for fun. Some people do crosswords, I do math problems and I do probability problems. It’s relaxing for me. When I met John Gardner, he said it’s great that you have a quantitative background and that you have a quantitative orientation. But remember, the greatest questions usually cannot be narrowed to a purely quantitative answer, and if you limit your questions to only those that can be answered with increasing precision, they are often going to be less relevant questions. That’s why I look to Drucker. There are times that you can’t be so specific. You have to have the audacity to ask the larger question and that’s what Drucker really did. He asked very big questions and the biggest question of all that he spent his whole life on is, “What does it take to make society — not companies — more productive and more humane at the same time?” That’s a huge question. That’s a question for nations, it’s a question for tribal cultures, it’s a question for companies, it’s a question for economies. That was the kind of question that Drucker had the audacity to ask.
IBJ: Moving to Asia, what can North American managers learn from Asian companies?
JC: I’ll give you two answers to that question, both of them short. The first is, in terms of what might be different over there, I don’t know from the standpoint of not having done rigorous research on it. My answer is that I really don’t know. I do know that we have a lot of students who find the ideas useful. Now that’s not necessarily the same as doing a study on Japanese or Chinese companies. The second answer to your question is that I think you can learn something from all these places. I’m reminded of the story that I actually put in How the Mighty Fall. It’s an extremely important story, the one about the Brazilians visiting Sam Walton, to learn about discount retailing. He flips the whole thing around and then later he actually travels to Brazil. He’s on his hands and knees measuring the widths of aisles and stuff. He gets thrown in jail because he’s wandering around. His friends went and got him out. It was just a misunderstanding, but still, he was on his hands and knees behind cash registers measuring things. He was trying to learn everything he could from the Brazilians that might be helpful. I think if you asked Sam Walton, “Do you think there’s something you can learn from anyone anywhere in the world?” his answer would be, “How many questions do I get?”
IBJ: In your writing, you discuss how important it is to have “the right people on the bus.” What do you mean and why is it important?
JC: I think that if I stand back and look across 20 years of doing these matched pair studies, there are two decades of doing this kind of work and about 7,000 years of combined corporate history through the different lenses of the databases that we looked at. As I zoom out from all of that, I say, “What has made the biggest impression on me in terms of an approach to any kind of organized performance, an approach to life that you just see it across, no matter what lens you put on, you see it?” It’s this idea of the primacy of “Who” over “What.” We see it in the research that we’re doing on tumultuous environments. Because if you can’t predict what the world is going to do, you can’t possibly predict the “What.” Then, your ultimate hedge against the “What” is to have the right people who can deal with whatever the world is going to throw at you. That is the great hedge against uncertainty. And when you think about it, the great leaders were ones who really did focus first on getting people in place and then figure out what to do. It’s what Lou Gerstner did at IBM. He built his team first and then forced everyone to think in a very disciplined way. Then they acted from there. And that’s the case almost no matter what lens I look through. It’s not this thing of taking care of your people or a team. It’s the work first. First it’s “Who?”, then everything else. And when I really think about that, it is also a life approach. Life is people, and your experiences with people, the people you fill your minutes and days and hours with. If your hours are filled with people who really aren’t the right people to have in your life, it’s really hard to have a great life. It’s almost interesting to look at my own life. Almost every major mistake I’ve made has had, at its roots, a “Who” mistake that I’ve made. I think that we find that in almost every lens.
IBJ: Coming back to the book, you discuss what happens when the “What” replaces the “Why.” Elaborate please?
JC: Think about it this way. You have a great enterprise that has a very strong set of values that’s married to a very insightful strategy. That is then translated into a set of disciplined decisions, mechanisms, cultural practices and a variety of other things that really bring the strategy to life so that you can make good on it. And when you look at that chain, the great danger comes when you become dogmatic about what’s at the lower level of that chain, when you become dogmatic about the practices, when you become dogmatic about the specific strategies, about the fact that we’re successful because we do these things. The folks who originally came up with those things never really had any particular allegiance to those specific things. They had an allegiance to the understanding that led to doing those specific things. So if you sat down with them, let’s just take an example. If you took something like … we’ll go back to Southwest Airlines. The 10-minute turn (in which aircraft are emptied and moved away from the gate in ten minutes), if all it becomes is we’re successful because we do the 10-minute turn, then that would be dogmatic. But Putnam and Kelleher (Southwest’s President and CEO) had it. They understood the real “Why” behind the 10-minute and then the later 20-minute turn. They understood the link between the practice and the mechanism. “We understand why we do it. We do it because it gives us a day-to-day, actually hour-to-hour, mechanism of discipline that keeps us focused.” That’s number one. Number two, it’s tied directly to cash flow and all businesses are about cash flow. But airplanes don’t bring in cash if they’re sitting on tarmacs. It goes all the way back to earlier in their history. They didn’t have enough money for a fourth airplane, so they had to basically fill their schedule with only three when they would really have liked to have had four. The only way to do that was to turn the planes quicker than they would otherwise have done. And so they can go back and say the reason this is important, just think about what turns the engine that we have, the economic engine that we have. We can explain why we do the 20-minute or the 10-minute turns. There’s a chain, there’s a linkage, it ties into everything we do. The moment it becomes so dogmatic that we just do “these things”, then that’s when you become enormously imperilled because you become fixed to the specifics. And just to zoom way out to a very big picture, Drucker was fond of talking about the [founding] of the United States of America. It’s always been an interest of mine, as well as one of the observations he made, that ours was one of the first forms of government that didn’t depend on a strong single leader. It had the Constitution. But the brilliance of the Constitution was the amendment mechanism. And it was the recognition that you needed this sacred document that had the mechanism in it. It was very concrete, but it had imbedded in it this mechanism to evolve, so that as you encountered new conditions, you could carefully evolve through the amendment mechanism and still have a living, breathing document. Well, if you just become dogmatic and said that we’re going to keep the Constitution the way it was in 1787, because somehow that’s sacred, rather than that it’s the principles that are sacred, well you know what would happen. Well it’s that same idea, when you are focusing on why do we do these things, why do we do these things? In most cases, the answers are that we should keep doing them because they still make sense and we can tell you why.
IBJ: What are the most telling indicators that a company is in decline even though it’s a market leader?
JC: The number one indicator that I would track is the percentage of key seats that are filled with either competent people or the right people. If that percentage is in decline, you may well be a market leader with tremendous growth potential. But you may also be in Stage Four.
IBJ: If you’re in Stage Four, on the edge of the abyss, what does a leader do to pull the company back and up?
JC: It’s interesting and I didn’t write this in the text strongly because I didn’t want it to sound wrong, I didn’t want it to sound like this is an advertisement for Good to Great. What do I really believe based on having looked at the pattern of what Gerstner did, or Ann Mulcahy (Xerox). First of all, I believe that, based on the evidence, great to good to bad to great is not that much different of a process than good to great. And that you still see the emergence of the basic pattern of the disciplined people who are engaged in disciplined thought, take disciplined action. They get the right people first, they confront the brutal facts, they rethink, “Where can we truly be the best and distinctive with great passion, how do we build a culture of discipline around it, how do we rebuild step by step the flywheel (Good to Great) and how do we do that in a way that is really married to the values that made us great, that we had great allegiance to in the first place?” And I think that that basic chain still very much applies. It’s still an inflection, but it’s just a steeper inflection. Instead of an inflection of flat to rising, it’s decline to rising, once you’ve solved the bleeding. The only real difference is that you may have to do some fairly dramatic things at the start to stop the bleeding. I just got an e-mail from somebody who said, “Our company was in decline, I was the CEO, and I recognize now, in retrospect, that we were grasping for salvation. It was finally when I just said, ‘We need to really go back to our fundamental disciplines, we need to pull out our (Michael) Porter and see what the real sources of our competitive advantage are, what are the places where we have actual power in this market? How do we bring that power to bear? What are the ways that we slice that out?’” So, you start taking pages from Drucker and you start taking pages from these really fundamental, disciplined approaches to things. Those are largely the answers, the idea that what you have to do is come out and do something utterly dramatic and transformational. And though you end up with something that is transformed, the process is very pedestrian. And that’s what I think is so striking about the Gerstner story. What he did was so pedestrian.
IBJ: Do you think that American business can regain its ascendancy?
JC: I have very high confidence. I’m a student of history as you know. The past does not predict the future, but this country, both its business community and our culture, has been tested so many times in the past. I mean you go back, I was just rereading Lincoln’s second address to Congress in 1862 and it’s unimaginable, the degree of strain and tear in the country then. Then of course, you go through the 1930s and then having to shift from complete isolationism to the arsenal of democracy in the Second World War. You look at our challenges even coming out of the early days of the republic. We have this really remarkable ability to stumble our way forward, and there’s nothing that would lead me to believe that we do not have that ability any more. I deeply believe we do. And the two things I would point to that I think ultimately end up fuelling the economy, but it’s bigger than the economy, is that we are first of all a nation of immigrants. If you think about it, what is the ultimate entrepreneurial act? The ultimate entrepreneurial act is like what my family did. They originally came from Ireland. They woke up one day and said we don’t even like potatoes and we don’t know what’s over there in America but we’re going. And you leave everything behind and you start over and you create a life from nothing. Italians and Latin Americans and Asians and people from all over the world have continued to come here and do that. You just get this stock of people who are the folks who would leave and start over and that’s a perpetual self-renewing resource if you will.
IBJ: The willingness to start over?
JC: To create a whole new life and then you infuse that into creating companies and to creating value and so forth. The second thing is this young generation of people that’s coming up. At one point on my visit to West Point earlier this year, the Chief of Staff of the Army said that this is the most inspired and inspiring generation to come to West Point since 1945. And I look at this young generation and I look at leaders like Wendy Kopp (Teach for America) and I look at some of the people building companies. I don’t know what’s going to happen to the largest companies in America, but this young generation is very inspired. I find them very inspiring. I find them wanting to create movements. I find them wanting to create entire systems that work. I see people like Wendy Kopp wanting to tackle the biggest problems in our society, doing it through an enterprise. I see people wanting to start companies that do things. Yes, we stumble forward. It’s what we do but we always have a young generation and an immigrant generation that comes in and creates stuff and makes stuff happen. Do I have any gloom at all, long-term gloom, meaning the next 100 or 50 years, about America, and its strength? I think we’re going to be severely tested. But we’re good when we’re tested. That’s when we’re really, really good. I grew up in an era where we weren’t particularly tested. But even so, I think, “Boy, we know how to do well when we’re tested.”