A Book on Comebacks of Fallen Organizations Inspires but Misses the Mark

Over the past 10 to 15 years, many nonprofit organizations have embraced (though often with strong encouragement from grant makers and board members) the application of management practices and market principles from the world of business. In some instances, adopting those ideas has increased effectiveness and efficiency. Yet in others, the experience has been akin to trying to fit a square peg into a round hole.

Clearly some of the more successful applications were included in the author Jim Collins’s books Built to Last and Good to Great. Thus it would not be surprising if many nonprofit leaders were to rush out and buy his latest, How the Mighty Fall.

But, unfortunately, they would be disappointed.

How the Mighty Fall is an ambitious book about the rise, fall, and rise of a parade of well-known corporate titans, including IBM, Motorola, and Wal-Mart. Its accounts of the vicissitudes of these companies are detailed and well written. Mr. Collins’s analysis highlights strategic and organizational missteps that are as bewildering as the recoveries are inspiring. As a compendium of tales of heroic ascents, tragic falls, and mythic redemptions, it is well worth reading.

However, as a source of new insights about leadership and management or as the basis for useful advice, the book falls short for business and nonprofit audiences alike.

First, the book’s research methods are flawed, casting suspicion on its conclusions about the causes of failure as well as its advice about how to avoid and recover from decline. Second, even as a source of ideas or theory about decline from greatness, the book’s “insights” are unoriginal.

The book suffers from the In Search of Excellence problem. That book, written by Tom Peters, was a business best seller in the 1980s that began a stream of works that include Mr. Collins’s own previous books. Essentially, the problem is that the analysis does not really account for all the factors driving the performance of the companies included the study.

While How the Mighty Fall does use comparison companies, these data are of limited value because the performance changes occur during different time periods and involve different industries and strategic choices.

This renders suspect many of the book’s key conclusions, including the author’s five-stage model of decline:

• Hubris born of success;
• Undisciplined pursuit of more;
• Denial of risk and peril;
• Grasping for salvation; and
• Capitulation to irrelevance or death.

This critique holds despite the author’s disclaimer that he cannot identify “definitive causal relationship[s]” between companies’ behavior and their ultimate fate “with 100 percent certainty.” The assertions highlighted on the book’s jacket that “decline can be avoided … [and] reversed” belie that caveat by implying the model can be used to predict and control corporate performance.

To the extent that How the Mighty Fall is intended to provide practical advice, we need to believe that its conclusions are right. But many of the book’s accounts of the demise of great organizations are facile.

Consider for example Mr. Collins’s attempt to attribute the failure of Fannie Mae and Freddie Mac to “hubris,” “undisciplined pursuit of more,” and “denial of risk and peril.”

He writes, “So perhaps Fannie Mae just got hammered down by an industry catastrophe; maybe its failure had nothing to do with its self-management. That said, we did find evidence of the first three stages of decline.”

Citing this as evidence, in the context of the precipitous deterioration of the entire financial-services industry, requires a feat of mental gymnastics worthy of the Olympics — especially in light of the fact that the collapse was unanticipated by executives, regulators, policy makers, and professional economists. First, no reasonable person would argue that management “had nothing to do with” the company’s failure. Second, given the subjectivity involved in diagnosing the stages of decline, I suspect one could find evidence of the symptoms in any company — fallen, mighty, or mediocre.

The irony of the fact that the very same companies that were held up as exemplars in Mr. Collins’s earlier works are now the basis for cautionary tales about decline makes one wonder if there really is any such thing as a “great” company. It seems simpler and more sensible to see “good” and “great” as phases in the life of a company. Some causes of performance are internal to the company and others are external. But in many cases, it takes years for them to produce changes in the observable measures of performance. Hence, detecting and demonstrating any relationship between corporate characteristics and performance is extremely difficult.

Interestingly, the dubious status of greatness as an enduring organizational characteristic is even truer for nonprofit organizations because of the elusive and subjective nature of performance in the social sector.

Given the complexity of identifying and measuring the drivers of success, two things become apparent.

First, the vicissitudes of a business’s or charity’s performance are inevitable, period. The real question is whether leaders can do anything to increase the likelihood that their organization will spend more time in a phase of “greatness.” I believe they can, but that is not captured by Mr. Collins’s simplistic prescriptions such as, “Be willing to embrace loss, to endure pain, to temporarily lose freedoms, but never give up faith in your ability to prevail.”

This brings me to my second criticism of the book. Many of Mr. Collins’s findings and insights about the roles of inertia, complacency, and overreaching in the decline of successful companies are unoriginal. For instance, Danny Miller documented many of these dynamics almost 20 years ago in a much more rigorous and compelling book, The Icarus Paradox: How Exceptional Companies Bring About Their Own Downfall. Similarly, in an entirely different context, the Yale historian Paul Kennedy’s account of the decline of nation-states in The Rise and Fall of the Great Powers offers a wealth of profound insight. Both of these books would be more helpful resources for nonprofit leaders, not because they are specific to the nonprofit world but because their basic ideas and insights are both more robust and universal.

Some valuable lessons are to be found in the stories and analysis presented in How the Mighty Fall. However, they are not the ones Mr. Collins emphasizes.

For example, in writing about Stage 2 of his model of organizational decline, the “undisciplined pursuit of more,” Mr. Collins suggests that lack of discipline combined with gluttony (an appetite for growth) leads to “overreaching” and engaging in ill-conceived and very risky activities precipitating the erosion of excellence. I would counter with a more useful interpretation: that a key determinant of financial performance (profitability for companies, or prosperity for nonprofit organizations) is what is known in the field of strategy as “competitive advantage.” When organizations expand into markets, industries, or activities that are outside their scope, they need to think long and hard about whether their competitive advantage transfers to this new domain.

Similarly, take Mr. Collins’s diagnosis of the dynamics of Stage 3 of organizational decline: denial of risk and peril. This is the fear and defensiveness that leads organizations to “explain away,” discount, or ignore indications of problems and deteriorating performance. The reality is that a large body of research tells us that the tendency to attribute negative performance to external factors (rather than our own actions) is a hard-wired and pervasive psychological response.

Moreover, external factors often do drive organizational success and failure. Sorting out what we can control from what we can’t is a fundamental management challenge — and doing it effectively requires both a robust theory of performance and high-quality data.

And these ideas and lessons are just as relevant to nonprofit groups as to businesses. All organizations compete and have to survive in markets of one form or another. Nonprofit groups can be great or excellent at one point and decline and even die at a later point. (Of course, so can businesses, a valuable point that Mr. Collins rightly underscores in eschewing the push for nonprofit groups to be more businesslike in his “Good to Great and the Social Sectors”).

However, two differences affect these dynamics in the nonprofit arena. First, in the world of business, the nature of performance is generally clear: to create financial value in the form of profits for owners.

As we all know, the nature of performance in the world of nonprofit organizations — which have broad social missions — is elusive, multidimensional, and often contested.

There are no objective performance criteria or clear market-based signals of value. A 2005 review by McKinsey & Company published in the Stanford Social Innovation Review found that even evaluation tools like Charity Navigator and GuideStar have only added to the controversy about measuring the performance of nonprofit organizations. As a result, even the first step in applying Mr. Collins’s framework, determining whether a given organization is “good,” “great,” or “mighty,” is likely to elicit contentious debate.

A second issue in applying How the Mighty Fall to nonprofit organizations has to do with a major difference between the capital markets for corporations and the social-capital markets. An essential feature of the former is what is called the “market for corporate control.” This is essentially the mechanism that allows investors to discipline companies by buying them or their assets (think acquisitions, leveraged buyouts, and hostile takeovers).

Because charities don’t have equity or owners in the same ways that businesses do, it is much more unlikely that a poorly performing organization will fail, especially if it is large enough to have assets in reserve to help it weather hard times.

For all its overreaching and methodological limitations, How the Mighty Fall does have some redeeming value. It offers sobering lessons in humility as well as some anecdotes about the fall of corporate icons to use as retorts to board members and donors from the for-profit world who admonish them to be more “businesslike.” But these could be gleaned from scanning the title in an airport bookstore. For real insight and depth of understanding of the dynamics of organizational decline, nonprofit leaders and business executives alike will find the work of Danny Miller or Paul Kennedy a more worthwhile investment.

James A. Phills Jr. is director of Stanford University’s Center for Social Innovation and professor of organizational behavior at the Stanford Business School. He is also academic editor of the Stanford Social Innovation Review and the author of Integrating Mission and Strategy for Nonprofit Organizations.