One of the best books on this subject is "How The Mighty Fall" by Jim Collins. As Collins notes:
Decline can be avoided.
Decline can be detected.
Decline can be reversed.
He also points out that "Great companies can stumble, badly and recover."
One of the key parts of Collins' book is outline the Five Stages of Decline:
Five
Stages of Decline
·
The first line of Tolstoy’s novel Anna Karenina. It reads, “All happy
families are alike; each unhappy family is unhappy in its own way.”
·
Stage 1:
Hubris Born of Success
o
Great Enterprises can become insulated by
success; accumulated momentum can carry an enterprise forward, for a while,
even if its leaders make poor decisions or lose discipline. 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. When the rhetoric of success (“We’re successful because we do
these specific things”) replaces penetrating understanding and insight (“We’re
successful because we understand why
we do these specific things and under what conditions they would no longer
work”), decline will very likely follow. Luck and chance play a role in many
successful outcomes, and those who fail to acknowledge the role luck may have
played in their success—and thereby overestimate their own merit and
capabilities—have succumbed to hubris.
·
Stage 2:
Undisciplined Pursuit of More
o
Hubris from Stage 1 (We’re so great, we can do anything!”) leads right to Stage 2, the
Undisciplined Pursuit of More—more scale, more growth, more acclaim, more of
whatever those in power see as “success.” 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. When an organization grows
beyond its ability to fill its key seats with the right people, it has set
itself up for a fall. Although complacency and resistance to change remain
dangers to any successful enterprise, overreaching
better captures how the might fall.
·
Stage 3:
Denial of Risk and Peril
o
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 the difficulties are “temporary” or
“cyclic” or “not that bad,” and “nothing is fundamentally wrong.” In Stage 3,
leaders discount negative data, amplify positive data, and put a positive spin
on ambiguous data. Those in power start to blame external factors for setback
rather than accept responsibility. The vigorous, fact-based dialogue that
characterizes high-performance teams dwindles or disappears altogether.
·
Stage 4:
Grasping for Salvation
o
The cumulative peril and/or risks-gone-bad of Stage
3 assert themselves, throwing the enterprise into a sharp decline visible to
all. The critical question is, how does its leadership respond? By lurching for
a quick salvation or by getting back to disciplines that brought about
greatness in the first place? Those who grasp for salvation have fallen into
Stage 4. Common “saviors” include a charismatic visionary leader, a bold but
untested strategy, a radical transformation, a dramatic cultural revolution, a
hoped-for blockbuster product, a “game-changing” acquisition, or any number of
other silver-bullet solutions. Initial results from taking dramatic action may
appear positive, but they do not last.
·
Stage 5:
Capitulation to Irrelevance or Death
o
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. In some cases, their leaders just sell
out; in other cases, the institution atrophies into utter insignificance; and
in the most extreme cases, the enterprise simply dies outright.
·
It is possible to skip a stage, although our
research suggests that companies are likely to move through them in sequence.
