BSML’s Summary of Principles from:


By Jim Collins


From the BSML Business Wisdom Series


Jim Collins describes himself as a student of companies. He is the author of the best sellers Good to Great and Built to Last and serves as a teacher to leaders throughout the corporate and social sectors.

The aim of this book was to :

“offer a research-grounded perspective of how decline can happen, even to those that appear invincible, so that leaders might have a better chance of avoiding their tragic fate.”

Our intention in compiling this summary is to share the wisdom of this great researcher with our clients and prospective clients, to encourage them to read the full work, and to help them use its principles to improve management practices and business performance.

Please feel free to share this document with your colleagues and business partners, who have an interest in the topic.

Nick Bentley, Managing Director, BSML


  1. Context and key question
  2. Basis of research
  3. Findings-The 5 stages of decline model
  4. Principles of decline
    1. Hubris born of success
    2. Undisciplined pursuit of more
    3. Denial of risk and peril
    4. Grasping for salvation
    5. Capitulation to irrelevance or death
  5. Is there a way out?
  6. Afterword

1.1 Context

  • How the Mighty Fall was written after Built to Last (which looked at 18 of America’s “visionary” companies) and Good to Great (which looked at how 11 companies transitioned sustainably from good to great)
  • How the Mighty Fall was completed in 2009, coincidentally shortly after the 2008 Crash, when:

    – Bear Stearns fell from number 157 on the Fortune 500 and was bought out by JP Morgan Chase;

    – Lehman Brothers collapsed into bankruptcy after 158 years of success;

    – Fannie Mae and Freddie Mac succumbed to government conservatorship;

    – Merrill Lynch capitulated to a takeover bid;

    – Washington Mutual tottered on the edge of becoming the largest commercial bank failure in history; and

    – The US Government embarked on the most extensive takeover of private assets in more than seven decades, in a frenetic effort to stave off another Great Depression.


  • The origins of the work dated back to 3 years earlier, triggered by :

“curiosity as to how some once great companies in history, including enterprises researched in Built to Last and Good to Great, had fallen”

1.2 Key question

Every institution is vulnerable, no matter how great. No matter how much is achieved, no matter how far you’ve gone, no matter how much power you have garnered, you are vulnerable to decline. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall and most eventually do.

The key question is…


2.1 Basis of research – building a theory from the ground up

  • Base 60 major US corporations from the Built to Last and Good to Great studies
  • 70 years of data; 6,000 years of combined corporate history, categorised by a range of dimensions, including :

Financial ratios and patterns, vision and strategy, organization, culture, leadership, technology, markets, environment and competitive landscape


  • 11 fallen cases met rigorous rise and fall criteria (to results at or below 0.8 times the general market over 10 years, or to take-over or bankruptcy)

   – Visionary companies in Built to Last or good to great companies in Good to Great; or

   – Comparison companies in either book, which had 15 year cumulative stock returns over 3 times the general market over those years; or

   – Other older great companies based on earlier data; and

   – Exclusions – results were not due to industry or founder effects, pre 1950 or chronic decline over many years


  • These were contrasted with a control comparison set of successful companies :

In the same business, of comparable size, comparable age, with comparable stock returns over the prior 10 years before the fall, substantially outperformed the fallen company for the next 10 years and had a strong corporate reputation over those 10 years.


2.2 The fallen companies

2.1 The contrast companies

2.2 Case study - Bank of America

  • Amadeo Peter Giannini founded, what became Bank of America in 1904, just before the San Francisco earthquake of 1906.
  • After the quake, he lent to the little guy, when the little guy needed it most. The little guy never forgot.
  • His bank grew little by little, loan by loan, deposit by deposit, until in 1945 it was the largest commercial bank in the world.
  • By 1980 Harvard Business Review said :

“ Bank of America is perhaps best known for its size – it is the world’s largest bank, with nearly 1,100 branches, operations in more than 100 countries and total assets of about $100bn…an equally notable achievement is its quality of management”

  • Within 8 years, Bank of America :

    – Posted some of the biggest losses in US banking history, depressed the US dollar and the stock market, and was subject to a takeover bid from a rival bank

    – Underperformed the stock market by 80% and cut its dividend for the first time in 53 years

    – Sold its corporate headquarters and saw the last Giannini resign from the Board in disgust

    – Ousted its CEO and brought a former CEO temporarily back out of retirement

    – Became characterised by the press as “the incredible shrinking bank” and “better stewards went down on the Titanic”

  • What happened to Bank of America and a host of other US corporate icons?

3.1 Research findings summary

I have come to see institutional decline like a staged disease :

– harder to detect, but easier to cure, in the early stages;

– easier to detect, but harder to cure, in the later stages.

An institution can look strong on the outside, but already be sick on the inside, dangerously on the cusp of a precipitous fall.

3.2 What happened at Bank of America?

  • In 1980 Bank of America’s 25 directors huddled behind closed doors to pick their new CEO, much like the cardinals pick a Pope
  • Did they pick an over 50 faceless banker’s banker, who couldn’t change with the times, couldn’t lead with vision, manage change, make bold moves and seek new businesses and markets?
  • No. They hired a 41 year old, tall, articulate, handsome leader (Samuel Armacost) who told Wall Street the bank needed a “good kick in the fanny”.
  • Within 7 months he bought Charles Schwab in an aggressive takeover, engineered the nations largest interstate banking acquisition, invested $100m in ATMs, ripped apart outmoded traditions, closed branches, ended lifetime employment, and instituted more incentive compensation.
  • He also invested in high profile change consultants, prestige executive car leasing, made the transformation a religious “born again” experience, and proudly stated that “no other financial institution has had this much change”.
  • This apart, Bank of America was poised for a big fall. It was afflicted by an unseen and staged disease of decline , had gone through stages 1,2 and 3 and was about to move to stage 4.

3.3 The 5 Stages of Decline – concept model

4.1.1 Stage 1 Symptoms – Hubris born of success

  • Success entitlement and arrogance – success is viewed as deserved, rather than fortuitous, fleeting or hard earned; people believe success will continue irrespective of what the organisation decides to do or not do
  • Neglect of primary flywheel – distracted by extraneous adventures, threats and opportunities, leaders fail to renew the primary business with the same creative intensity that made the company great
  • What replaces why – the rhetoric of success (we are great because we do these things) replaces understanding and insight (we are great because we understand why we do these specific things and under what conditions they would no longer work)
  • Decline in learning orientation – leaders lose the inquisitiveness, creative paranoia and religious zeal of the founders to be better
  • Discounting the role of luck – presuming success is due entirely to the superior qualities of the enterprise and its leadership. Being unprepared for chaos and uncertainty
  • Loss of fanaticism about core values, purpose and culture
  • Not fostering a productive tension between continuity and change

4.1.2 Motorola

  • Under Robert Galvin, Motorola was known for :

    – An ongoing process of self-renewal

    – Adherence to core values

    – Willingness to experiment

    – Management continuity

    – Pioneering six sigma quality improvement; and

    – Technology “roadmaps” to anticipate opportunities 10 years into the future

  • In 1989 Motorola was considered one of the most visionary companies in the world, by a survey of 165 top CEOs
  • In the decade to 1995, revenue had grown from $5bn to $27bn
  • By 1999, their market share in cell phones dropped from 50% to 17% on the back of :

    – A cultural shift from humility to arrogance,

    – Betting the farm on analogue, rather than digital technology and the Iridium satellite service

    – Resistance by distributers to strong-arm tactics, based on its market leadership position

  • By 2003, employee numbers dropped to 87,000 (from 147,000) in 2 years
  • In the decade to 2005, stock market returns lagged the market by 50%

4.1.3 Circuit City

  • Circuit City made the leap from good to great in the early 1970s under the inspired leadership of Alan Wurzel, based on :

    – A professional electronics superstore concept, replicated across America one store at a time

    – Sustained, consistent effort in the same direction for many years – like a giant fly wheel building momentum until it reached breakthrough

    – Results that beat the general stock market by 18.2 times between 1982 and 1987

  • Filed for bankruptcy in 2008 after :

    – Under investing in the primary business to keep it fresh

    – Thinking itself infallible and diverting investment to new adventures

    – Failure befalling these new adventures, and siphoning away large amounts of profit, resources, energy and creativity

    – Failing to act against aggressive new competitors to protect the primary business

    – Returning back to the core business too late

4.2.1 Stage 2 Symptoms - Undisciplined pursuit of more

  • Over-reaching – self-destructive ambition, rather than lethargy and complacency
  • Unsustainable quest for growth, confusing big with great – success creates pressure for more growth, setting up a vicious cycle of expectations; this strains people, the culture and systems to breaking point; deteriorating tactical excellence
  • Undisciplined discontinuous leaps – dramatic moves which run counter to passion, core values, ability to be the best in the world, the organisation’s economic engine (hedgehog concept in Good to Great)
  • Declining proportion of people in key seats – losing the right people or not enough right people available to sustain growth
  • Easy cash erodes cost discipline – extravagance and complacency
  • Bureaucracy subverts discipline – rules take the place of freedom and a culture of self discipline; jobs take the place of responsibilities
  • Problematic succession of power – failure to transition successfully. The wrong leader can bring a company down
  • Personal interests placed above organizational interests – people in power take the spoils of success for themselves, rather than investing for decades into the future

4.2.2 Stage 2 - Undisciplined pursuit of more

  • In only 1 out of 11 cases (A&P) was there evidence of complacency
  • 3 out of 11 cases (A&P, Scott Paper and Zenith) showed evidence of lack of innovation during the early stages of decline
  • Motorola increased its patents from 613 to 1,016 between 1991and 1995
  • Merck patented 1,933 new compounds between 1996 and 2002
  • HP launched its “Invent” campaign in 1999, nearly doubling its patent applications in 2 years
  • The Wall Street meltdown of 2008 was not a result of lack of drive or ambition. It was a result of too much risk, too much leverage, too much financial innovation, too much aggressive opportunism, too much growth.

4.2.3 Rubbermaid

  • In the early 1990s, Rubbermaid aimed to introduce a new product every day, 365 days per year and a new category every 12 to 18 months.

  • “Our vision is to grow” proclaimed their CEO in 1994 “Growth will come from doing lots of new stuff, all at the same time” – new markets, new acquisitions, new geographies, new technologies, new joint ventures and above all hundreds of new product innovations each year

  • Soon afterwards, Fortune called Rubbermaid “America’s most admired company… more innovative than 3M, Apple and Intel”

  • Its passion for growth and innovation eroded its tactical excellence, cash position, cost control and ability to fill orders

  • In 1995 it restructured shedding 6,000 product variations, 9 plants and 1,170 jobs and made its biggest ever acquisition

  • Then it restructured again in 1997

  • Having choked on 1,000 new product introductions in 3 years, Rubbermaid raced through the 5 stages of decline between 1994 and 1998, finally selling out to Newell Corporation on 21 October 1998.

4.2.4 Merck

  • In 1950 George Merck II set up his business for a noble purpose :

To preserve and improve human life, whilst never forgetting that medicine is for people. It is not for profits. The profits follow, and if we remember that, they will never fail to appear.

  • He viewed expanding and increasing scale, not as the end goal, but as a residual result
  • By 1995 Merck’s CEO Ray Gilmartin had re-defined its No 1 business objective as “being a top tier growth company”. By 2000 Merck was “totally focused on growth”, based on a new blockbuster drug Vioxx, which was needed to replace drugs with impending loss of patent protection worth $5bn per annum in sales
  • Vioxx sales reached $2.5bn in 2002 and passed 100m prescriptions by 2004.
  • Then in September 2004, safety concerns appeared and Gilmartin took Vioxx off the market within a week. In the next 6 weeks Merck’s stock dropped from $45 to $26.
  • As of January 2014 it stands at just under $50.

4.2.5 Ames

  • Ames began in 1958 with the idea of bringing discount retailing to rural and small town areas, offering everyday low prices for everything
  • Its visionary leader created :

    – An ethos of partnership with his people

    – Sophisticated information systems

    – A performance driven culture, using weekly store scorecards

    – The ability to compete head to head with its primary competitor Kmart

  • Between 1970 and 1985 its stock grew by more than 6,000%
  • In 1988 Ames bought Zayre department stores, with the self proclaimed aim of “doubling the size of the company in a single year”. The decision :

    – Was made out of bravado, rather than penetrating insight and understanding

    – Undermined Ames’ core values, culture and economic engine

    – Changed the business model from everyday low prices to loss-leader promotions

  • Ames revenue doubled between 1986 to 1989, From 1986 to 1992, its cumulative stock returns fell 96%. It filed for bankruptcy and closed in 2002.
  • Wal-Mart followed Ames’ original business model, one store at a time, and by 2008 was No1 on the Fortune 500.

4.3.1 Stage 3 Symptoms – Denial of risk and peril

  • Amplify the positive, discount the negative – negative data or warning signals are ignored, whilst leaders focus on external praise and hoopla
  • Gradually declining KPIs – gross margins, customer engagement and loyalty, inventory turns, current ratio, debt to equity
  • Big bets and bold goals without empirical evidence – Leaders set audacious goals and/or make big bets, not supported by accumulated experience or facts
  • Incurring huge downside risk on ambiguous data – high risk action is taken based on ambiguous data, which if wrong can have catastrophic consequences and can blow a hole “below the waterline” taking the ship down
  • Erosion of healthy team dynamics – marked decline in dialogue and debate, shift to consensus or dictatorial decision making, from full debate and unified commitment to acquiescence and responsibility denial or avoidance
  • Externalising blame – non-acceptance of responsibility for setbacks and failures
  • Obsessive re-organisation – deck chair moving rather than confronting the facts
  • Imperious detachment – those in power become detached from daily realities and go into their shells

4.3.3 Stage 3 – Denial of risk and peril

4.4.1 Stage 4 Symptoms – Grasping for salvation

  • A series of silver bullets – dramatic, big moves, game changing acquisitions, discontinuous leaps into a new strategy, exciting innovation, chronic inconsistency in an attempt to find a quick beak-through
  • Grasping for a leader as saviour – board appoints a charismatic leader and/or outside saviour as response to setbacks
  • Panic and haste – hasty, reactive behaviour, instead of being calm, deliberate and disciplined
  • Radical change and “revolution” fanfare – new programs, cultures, strategies, buzzwords and taglines to “motivate” people
  • Hype preceded results – selling the future with hoopla, rather than enduring discipline and performance
  • Initial upswing followed by disappointments – dashed hopes and failure to maintain momentum
  • Confusion and cynicism – purpose and core values eroded to the point of irrelevance, now seen as PR rhetoric; lost trust from instability and inconsistency
  • Chronic restructuring and erosion of financial strength – each failed initiative drains resources, cashflow and energy. Multiple restructurings, narrowed options, decisions dictated by outside circumstances

4.4.2 Hewlett Packard

  • When Bill Hewlett and Dave Packard set up their company in 1937, their founding concept was “who” not “what”. They planned to design, manufacture and sell products in the electrical engineering fields. The question of what to manufacture was postponed …as they focused on building a great organisation, full of great people. They became some of Silicon Valley’s first billionaires, but kept a modest lifestyle. They were most proud of the company’s core values (technical contribution, respect for the individual and responsibility to communities) , which underpinned the “HP Way” and became a benchmark for how companies are managed to this day.
  • From 1992 to 1998 HPs CEO Lew Platt had delivered 5 times stock market returns and quintupled its profits, but was struggling to sustain growth, compared to internet start-ups like Amazon and Yahoo!. So he stepped down.
  • In 1999, the HP Board appointed the “No1 Most Powerful Woman in Business”, celebrity CEO and business rock star, Carly Fiorina from Lucent Technologies. On

         the first day after her appointment, she had mapped out her priorities, crafted a               vision for HP as an internet company and in 2002 delivered a $24bn merger with             Compaq lauded as the “best and fastest way to increase value”, “immediately                   double profits” and “transform our industry”. Her vision was to “re-invent HP”                     under  the slogan “Invent”, and she developed the “cult of Carly” and “change                     warriors”. In 2002, she delivered HP’s first loss in 45 years, followed by a stock                 decline from $65 to $11, and was fired in February 2005

4.4.3 IBM, the contrast company to HP

  • Louis V Gerstner was brought in to lead IBM in its dark days of 1993. He took a very different approach to Fiorina, saying “the last thing IBM needs is a new vision”. His priorities were the right people in key seats, regaining profitability, increasing cash flow, doing massive amounts of quantitative analysis and above all, getting the customer back at the centre of everything IBM.
  • At the end of his first 100 days the stock price had declines 6% and one critical analyst said “he’s done nothing”. His response was “I don’t sense a crisis. I have a sense of urgency that never changes, whether we are doing well or poorly” .
  • Gerstner steadily increased profitability, with return on sales growing from 5% in his first year to 9% during 2002, his final year.
  • He was the only outside CEO in the 11 Good to Great companies designated a “Level 5 leader”. He was rigorous about what not to do, and took a snipers approach …breathe, calm yourself, think, focus, aim… then take one shot at a time.

4.4.4 Addressograph

  • Addressograph was a leader in office addressing and duplicating machines, following an original patent by Joseph Smith Duncan in 1896.
  • Between 1945 and 1960 every $10,000 invested in it turned into $500k.
  • In 1965 Xerox introduced the 2400 copier, which was a direct threat to its duplicating products, which sent Addressograph into a spin. It released 23 new products in 3 years of which 16 failed. Worse its administration systems collapsed, losing track of $70m in late, unpaid and untraceable customer orders.
  • In the early 1970s after mounting losses, the board appointed a visionary CEO from outside. This “aggressive go-getter” threw the company into “re- invention”, complete “psychological transformation” and “corporate revolution” designed to “shed the barnacles of the past”, by leaping into word processing and the Office of the Future. This adventure failed despite the need for the core offset duplicating business still being valid today
  • By 1981 it had wiped nearly 50 years of accumulated net worth away and went from strategy to strategy, through 4 CEOs, 3 headquarters, 2 bankruptcies and from 30,000 employees to a few hundred. By the late 1990s every dollar held in 1980 was worth 5c

4.5.1 Stage 5 – Capitulation to irrelevance or death – 2 options

4.5.2 Zenith Radio Corporation

  • Zenith Radio Corporation was founded by Eugene McDonald in 1923 and rose to prominence as a portable radio pioneer and later TV manufacturer. Its heyday was between 1950 and 1965, when every dollar invested increased by more than 100 times and generated returns more than 10 times the market. Zenith’s motto was “the quality goes in before the name goes on”.
  • Zenith’s problems started when it arrogantly ignored the Japanese electronics threat, whilst massively increasing its manufacturing, doubled its debt/equity ratio and struggled with multiple attempts at succession after McDonald’s death in 1958. This culminated in an outsider CEO from Ford, shortly before the decline. Blame was externalised (Japanese trade practices, US economy, labour unrest, oil shocks), rather than confronting their lack of competitiveness. With excess capacity, prices were lowered in an attempt to buy market share and debt increased, whilst profitability declined.
  • In the late1970s Zenith declared “if we have any plan at all, it’s that we’ll take a shot at everything”, including VCRs, video cameras, home security and personal computers, driving debt up and cash out. They went through 5 CEOs in 10 years and finally filed for bankruptcy in 2005

5.1 Is there a way out?

5.2 Recovery and renewal – Xerox, Nucor, Nordstrom – back to great

6 Afterword

  • There are further case studies in the book, at a greater level of detail, and well worth a read.
  • Jim Collins acknowledged that his framework was not the definitive framework for corporate decline

“Companies can clearly fail from factors like fraud, catastrophic bad luck, scandal and so forth”

  • Uncertainty, chaos and chance are explored in Great by Choice
  • The final page draws on Winston Churchill, with a twist :

Never give in. Be willing to change tactics…kill failed business ideas…shutter big operations, you’ve been in for a long time…evolve into an entirely different portfolio…embrace …creative destruction…but never give up on the discipline to create your own future…embrace loss… endure pain…temporarily lose freedoms…be willing to form alliances with former adversaries…accept necessary compromise, but never-ever-give up on your core values.

  • Failure is not so much a physical state, as a state of mind
  • Success is falling down, and getting up one more time, without end

6 Afterword

  • There are further case studies in the book, at a greater level of detail, and well worth a read.
  • Jim Collins acknowledged that his framework was not the definitive framework for corporate decline

“Companies can clearly fail from factors like fraud, catastrophic bad luck, scandal and so forth”

  • Uncertainty, chaos and chance are explored in Great by Choice
  • The final page draws on Winston Churchill, with a twist :

Never give in. Be willing to change tactics…kill failed business ideas…shutter big operations, you’ve been in for a long time…evolve into an entirely different portfolio…embrace …creative destruction…but never give up on the discipline to create your own future…embrace loss… endure pain…temporarily lose freedoms…be willing to form alliances with former adversaries…accept necessary compromise, but never-ever-give up on your core values.

  • Failure is not so much a physical state, as a state of mind
  • Success is falling down, and getting up one more time, without end


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