The Illusion of Invincibility. Paul Williams

Heraclitus of Ephesus pointed out that “there is nothing more constant than change.” In the Bible, Joseph warns the Pharaoh that seven years of famine will follow seven years of plenty (Moses 1:41). The Middle Ages produced images of the goddess Fortuna spinning the wheel of fortune—relentlessly and without any emotion. There is a clear common message. The fate of whoever happens to be at the top can quickly change. Nothing will stop Fortuna from spinning them around and down, but of course there is always a chance they will end up back at the top again.

      The idea that success is fickle is probably as old as mankind. For businesses, this means that not only stunning successes are always possible, but also catastrophic collapses. And while “disruptive technology” may be a fashionable buzzword today, this idea was already the basis of Joseph Schumpeter’s theory of “creative destruction” formulated more than seventy years ago. This asserted that the driving force of capitalism was innovation; new and better processes and technology continually challenge the established order, and the ground rules for production are constantly changing. From this perspective, the mechanical loom and the steam engine can be seen as agents of “disruption,” only to be rendered obsolete by innovation’s next throw of the dice.

      Those who want to stay ahead of the game must keep changing and constantly adapt in order to remain relevant and survive. We all know examples of businesses that missed the boat and let progress pass them by. Some carried on producing typewriters even as the personal computer came to dominate. Others produced flashlights, even though every smartphone now includes a flashlight function. On top of external factors, homegrown mistakes can send a business into decline, as we saw at DaimlerChrysler, GE, and VW. As early as 2004, Gilbert Probst and Sebastian Raisch at the University of Geneva were asking themselves if there could be such a thing as a “logic of decline.” They analyzed the hundred biggest corporate crises of the previous five years in the United States and Europe, looking at the fifty biggest insolvencies and fifty companies whose market capitalization had collapsed by a minimum of 40 percent in the same period.

      Probst and Raisch identified four characteristics of consistent and sustainable business success:

      •Performance-driven business culture

      •Strong growth

      •Willingness to embrace constant change

      •Strong (“visionary”) leadership

      Interestingly, 70 percent of the businesses that failed actually displayed all of these characteristics—but to excess! These organizations suffered badly from over-rapid growth, hasty change processes, excessively powerful and stubborn CEOs, and an “exaggerated performance culture.”

      Performance Culture

      An extreme performance culture—one with high salaries and bonuses, for example—fosters rivalry, along with a mercenary attitude. Employees attracted by such a culture are quick to leave the sinking ship if the business suffers a downturn in fortune, thereby accelerating its decline.

      Growth

      Rapid growth frequently results from too many acquisitions in too short a time period. This not only creates obstacles for business integration, but frequently overburdens the acquirer with high debt, which in turn becomes a problem during periods of lower turnover. Good examples of this are the US conglomerates Tyco and ABB. When change is not properly managed, the result is disorientation at all levels. At ABB, following sixty takeovers and countless restructurings and changes of direction, there were moments when employees were no longer certain what the business was actually there for. The final nail in the coffin is having a top management that fails to recognize the scale of the problems because past success has made them self-satisfied, dazzled by their own brilliance, and oblivious to the dangers they are facing. The business burns out, sinks into insolvency (for example, Enron, which grew 2000 percent between 1997 and 2001), or is weighed down by mountainous debt (as seen at British Telecom, Deutsche Telekom, and France Telecom). Probst and Raisch talk about “burnout syndrome.” More recent examples of this would include Porsche AG—which was assimilated into the VW group after a failed takeover attempt left it badly exposed—the ever-changing history of Infineon, and the demise of Valeant, which we analyze in Chapter 6.

      Change

      The collapse of successful businesses is not always determined by fate, external events, or disruptive technologies, but is frequently the result of a string of poor management decisions which, taken together—according to Probst and Raisch—form the basis of the “Logic of Decline.” So far, so bad. Unfortunately, it’s not the case that all a business needs to do to stay on a solid footing is to take its foot off the accelerator. The other 30 percent of businesses failed due to their inertia and weak, indecisive management. A phenomenon referred to as “Premature Aging” is when turnover stagnates, innovations are ignored, board members block reforms, and an overly benevolent business culture prevents essential personnel reductions from taking place. Examples that come to mind include Eastern Airlines, Kodak, Xerox, and Motorola.

      Ideally, a business should continuously seek the right balance, looking for healthy growth and steady change, supported by proactive change management, which requires its employees to adjust and adapt without overstretching them.

      Leadership

      Except in periods of serious crisis, autocratic leadership is counterproductive. Successful organizations rely on mutual exchange and good governance all the way up to the top. This fosters a “defensible culture of trust” in which good performance is rewarded and poor performance is sanctioned, without turning the organization into an eat-or-be-eaten shark-infested pool. All this requires a reflective and level-headed top management which acts consistently and decisively.

      And yet, as convincing as these factors appear with the benefit of hindsight, introducing them into the day-to-day running of a business is highly challenging. Who can say with any degree of certainty whether we are enjoying a period of healthy growth, rather than starting to overheat? Or whether the business culture still supports an acceptable degree of competitive spirit, rather than promoting mercenary attitudes?

      Moreover, there is that fundamental dilemma which the management visionary Jim Collins highlighted in his essay “How the Mighty Fall” about businesses ruined by their own success-induced complacency. A business (or its leadership) must start to change course before its problems are clear for all to see. This must happen in a period when everything still appears to be running smoothly. “Amazon is not too big to fail,” Jeff Bezos said recently. “In fact, I predict one day Amazon will fail. Amazon will go bankrupt. But our job is to delay it as long as possible. If you look at large companies, their lifespans tend to be thirty-plus years, not a hundred-plus years.”

      Probst and Raisch concede that it is psychologically challenging to “change a strategy that, at least superficially, appears to be successful.” But it is not, apparently, impossible, as Bezos’s remarks above prove, assuming he turns these observations into actions to prevent the failure he refers to. It certainly takes an enormous amount of humility, combined perhaps with a healthy fear of failure, to make such a statement when heading up one of the most successful companies ever seen on this planet. Indeed, the Amazon boss’s insights would have been useful guidance for the Incas, who might then have slowed down their rapid expansion earlier, before increasing resistance had made their empire too expansive to govern.

      Collins’s analysis of the factors that lead to the downfall of large corporations significantly ties in with the work of his colleagues in Geneva. Based on his analysis of a combined six thousand years of company history, he highlights the key reasons for companies’ decline: managers taking success for granted, greed for more power, higher revenue, greater size, and the denial of risks and threats. Once problems can no longer be ignored, frantic rescue attempts ensue, followed shortly by complete capitulation. But Collins, too, is making his observations with the benefit of hindsight. In reality, the burning question is this: How do we, the executives responsible for the day-to-day management of our businesses, recognize the early warning signals? How can we counter the logic of decline in the early stages? How do we raise our level of awareness; how do we gain deeper insights beyond the day-to-day business? The following chapters address these and other questions. At the end of each chapter,