By: Jim Collins

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Companies, just like civilizations, rise and fall. Jim Collins wrote the preface to this book sitting on a United flight overlooking the Manhattan skyline as the world economy crashed in 2008. He marvelled at how Bear Stearns went from #158 on the Fortune 500 to gone over the course of weekend.

He had just completed his look into how (and why) some of the greatest companies in history - including some of the companies included in Good To Great and Built To Last - had fallen.

This book is a look into how this decline happens in 5 distinct stages, and how we can avoid a similar fate by taking active steps to rise again.

We'll work through each of the 4 stages of decline (step 5 is death, so there's no coming back from that), look at the markers for each stage so you can figure out where you are today, and look at concrete advice to climbing your way back out.

Let's get started.

Stage 1: Hubris Born of Success.

Success masks a lot of problems, and is often the start of the decline. When companies find a lot of success quickly, they lose sight of the underlying factors that caused their success in the first place.

When organizations start telling themselves that they are successful because they are doing specific things and stop searching for understanding and insight into their business, decline usually follows.

That's because luck and chance often play a big role in many successful outcomes, and leaders often underestimate that. Instead, they overestimate their capabilities, and succumb to hubris.

The Markers For Stage 1

Success, Entitlement and Arrogance: Success is viewed as deserved rather than lucky or hard earned in the face of daunting odds. People believing that they will continue to be successful no matter what the company decides to do (or not do).

Neglect of a Primary Flywheel: Companies begin paying attention to extraneous opportunities and threats. This causes them to neglect their primary "flywheel", which prevents them from applying the same creative intensity to it that made it great in the first place.

"What" Replaces "Why": The rhetoric of success replaces understanding and insight.

Decline In Learning Orientation: Leaders lose their learning orientation that caused them to be successful in the first place. Truly great leaders and organizations never stop learning.

Discounting the Role of Luck: Most success is far more complex than people understand, causing them to think that whatever they did caused the outcome. Great leaders understand that luck is part of their journey.

Stage 2: Undisciplined Pursuit of More

The jump from Stage 1 to Stage 2 is almost seamless. In this stage, leaders start mindlessly doing more and more of what they wrongly attribute to their success. They do this in pursuit of scale, growth, acclaim, and whatever the leaders define as "success."

Companies in this stage get away from the disciplined creativity to led them to greatness, and start exploring areas where they cannot be "great".

In addition to that, the organization grows beyond its ability to fill its key seats with the right people.

While complacency is a potential ingredient for decline, Collin's research shows it is more likely to be overreaching that does them in.

The Markers for Stage 2:

Unsustained Quest for Growth, Confusing Big with Great: Success usually creates pressure for more growth, which puts a lot of pressure on the people and the company systems. This typically leads to an inability to deliver tactical excellence.

Undisciplined Discontinuous Leaps: The company makes moves that fail to: (a) ignite the passion and fit with the company's core values, (b) deliver a product/service they can be best in the world at, or (c) drive the company's economic engine.

Declining Proportion of Right People in Key Seats: There begins to be less and less of the right people in the right seats, because they are either losing the right people or they are not able to hire the right people fast enough to keep up with growth.

Easy Cash Erodes Cost Discipline: The company increases prices in response to increasing costs, rather than focussing on increasing discipline.

Bureaucracy Subverts Discipline: When the company starts making an unnecessary amount of bureaucratic rules because it doesn't trust its people to make disciplined decisions, people start thinking in terms of "jobs" rather than fulfilling their responsibilities.

Problematic Succession of Power: The company suffers from poor succession planning which causes transition problems. Usually this is caused by a failure to groom leaders from within or by choosing the successors poorly.

Personal Interests Placed Above Organizational Interests: Leaders give themselves more money and privileges instead of investing in the future of the company.

Stage 3: Denial of Risk and Peril.

When companies move into Stage 3, the internal warning signs are beginning to become clear. However, the external results are still strong, and the leaders are able to use that fact to explain away those warnings as temporary or as part of a cycle.

We start to see clear distinctions between teams that are "on the way up" and those that are "on the way down." In each of the following statements, which sounds more like your company?

• On the way down, people shield the people in power from bad news, fearing criticism for brining them up. On the way up, people bring up unpleasant facts, knowing they won't be criticized.

• On the way down, people communicate strong opinions without data or strong arguments. On the way up, people bring data and strong arguments to the table.

• On the way down, team leaders make a lot of statements and don't ask a lot of questions. They also avoid critical input from team members. On the way up, team leaders employ a Socratic style, and challenge their people for penetrating insight.

• On the way down, team members agree to a decision but don't do what needs to be done to make it successful, and sometimes actively undermine it. On the way up, team members get behind a decision and execute to the best of their ability, even if they disagreed with it.

• On the way down, team members seek as much credit as possible for themselves, but people don't like them or trust them. On the way up, team members share credit for success, and people like and trust each other.

• On the way down, people argue to look smart instead of arguing to find the best answers. On the way up, people debate for the sake of the outcome, not for personal standing within the group.

• On the way down, people conduct autopsies to place blame. On the way up, people conduct autopsies to learn from experience.

• On the way down, people fail to deliver results and place blame elsewhere. On the way up, people deliver results and, when they don't, accept 100% responsibility for their failures.

The Markers for Stage 3

Amplify the Positive, Discount the Negative: There is a tendency to explain away negative data rather than deal with it.

Big Bets and Bold Goals without Empirical Validation: Leaders set huge goals that aren't based on experience, or that fly in the face of the facts.

Incurring Huge Downside Risk Based On Ambiguous Data: In situations where the risk of making a mistake is disastrous, leaders take on the positive view without clear data.

Erosion of Healthy Team Dynamics: There is less and less quality dialogue and debate. Instead, dictatorial management takes over.

Externalizing Blame: Leaders point to external factors for any failures.

Obsessive Reorganizations: The organization chronically reorganizes, causing people to be preoccupied with internal politics (kind of like cleaning house as a distraction to dealing with an issue)

Imperious Detachment: Leaders become detached, and focus more on symbols and perks than dealing with the business.

Stage 4: Grasping for Salvation.

This stage is the final opportunity to turn things around. The unadvised risks taken in Stage 3 are taking their toll, and companies in Stage 4 either search for quick salvation, or start getting back to the disciplines that brought them to greatness in the first place.

There is also a lot of confusion and cynicism around what the company stands for. The core values and purpose no longer have any real meaning, and people show up to get a paycheck.

There are behaviors that perpetuate Stage 4, and there are behaviors that can reverse the downward spiral. Let's look at them.

Perpetuate: Move forward with more unproven strategies with a lot of hype and hope. Reverse: create strategic changes based on empirical evidence and analysis instead of bold and untested leaps.

Perpetuate: Do a big acquisition based on unproven synergies hoping to transform the company with one move. Reverse: Only consider acquisitions that amplify proven strengths. Understand that two struggling companies don't make one large successful company.

Perpetuate: React to threats with desperate moves, draining cash and further eroding financial strength. Reverse: Think and act after getting the facts with calm determination. Never make moves that threaten the long-term health of the company.

Perpetuate: Start a program of radical change that abandons core strengths. Reverse: Regain clarity about the core of the company, and only make changes that enhance strengths and eliminate weaknesses.

Perpetuate: Mask poor results by selling a brighter future. Reversal: Focus on performance, with tangible results pointing the way for a new direction.

Perpetuate: Destroy momentum with chronic restructuring. Reverse: Create momentum with a series of good and well-executed decisions that build on themselves.

Perpetuate: Find a visionary outsider who will come in and save the company. Reverse: Find a disciplined and proven executive, from inside if possible.

Stage 5: Capitulation to Irrelevance or Death.

Stage 5 is where all hope is lost. Sometimes the company limps along, slowly continuing its slide into irrelevance, sometimes it gets sold for parts, and other times it simply just dies.

That's all we need to say about this stage.

Is There a Way Out?

Failure, Collins suggests, is not so much a physical state as a state of mind. Success, on the other hand, is falling down, and getting up one more time, without end.

The way back out of the hole that companies in decline have built is to get back to the sound management practices and rigorous thinking that made them great in the first place.

It won't come as a surprise to you that the principles he suggests are the principles found in his previous books - Good To Great and Built To Last. You can see our summaries of those books for a full review of the principles, but for a refresher, here they are again in brief.

Stage 1: Disciplined People

Level 5 Leadership: Level 5 leaders are ambitious, but for the organization and not themselves. They have the resolve to do whatever it takes to make that ambition a reality, have a paradoxical blend of personal humility and professional will.

First Who, Then What: The people who build great companies get the right people on the bus, the wrong people off the bus, and put the right people in the key seats before they figure out where to go.

Stage 2: Disciplined Thought

Confront The Brutal Facts - The Stockdale Paradox: Keep unwavering faith that you can and will finally succeed, regardless of the difficulties. At the same time, have the discipline to confront the most brutal facts of current reality.

The Hedgehog Concept: There are three intersecting circles, including (a) what you can be best in the world at, (b) what you are deeply passionate about, and (c) what best drives your economic engine (usually "profit per X"). Great companies make decisions consistent with those three things.

Stage 3: Disciplined Action

Culture of Discipline: The combination of disciplined people who engage in disciplined thought and take disciplined action.

The Flywheel: There is no single defining action or killer innovation. Instead, the process is like pushing a giant flywheel, slowly building momentum turn by turn.

Stage 4: Building Greatness To Last

Clock Building, Not Time Telling: Great companies succeed through multiple generations of leaders, and build mechanisms to create progress that doesn't depend on any particular set of people.

Preserve The Core/Stimulate Progress: They have a timeless set of core values and purpose. On the other hand, they continuously adapt their operating strategies and cultural practices to a changing world.