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Decline can be avoided. Decline can be detected. Decline can be reversed.

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Amidst the desolate landscape of fallen great companies, Jim Collins began to wonder: How do the mighty fall? Can decline be detected early and avoided? How far can a company fall before the path toward doom becomes inevitable and unshakable? How can companies reverse course?

In How the Mighty Fall, Collins confronts these questions, offer- ing leaders the well-founded hope that they can learn how to stave off decline and, if they find themselves falling, reverse their course. Collins' research project- more than four years in duration-uncovered five step-wise stages of decline,

Stage L Hubris Born of Success Stage 2, Undisciplined Pursuit of More Stage 3, Denial of Risk and Peril Stage 4, Grasping for Salvation Stage 5, Capitulation to Irrelevance or Death

By understanding these stages of decline, leaders can substan- tially reduce their chances of falling all the way to the bottom.

Great companies can stumble, badly, and recover.

Every institution, no matter how great, is 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. But, as Collins' research emphasizes, some companies do indeed recover- in some cases, coming back even stronger-even after having crashed into the depths of Stage 4.

(continued on back flap)

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Decline, it turns out, is largely self-inflicted, and the path to recovery lies largely within our own hands. We are not imprisoned by our circumstances, our history, or even our staggering defeats along the way. As long as we never get entirely knocked out of the game, hope always remains. The mighty can fall, but they can often rise again.

JIM CO L LIN S is a student of companies- great ones, good ones, weak ones, failed ones- from young start-ups to ven- erable sesquicentenarians. The author of the national bestseller Good to Great and coauthor of Built to Last, he serves as a teacher to leaders throughout the corporate and social sectors. His work has been featured in Fortune, BusinessWeek, The Economist, USA Today, and Harvard Business Review. You can find more information about Jim and his work at his e-teaching site, www.jimcollins.com.

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CONTENTS

Acknowledgments

Preface

The Silent Creep of Impending Doom

ix

xiii

Five Stages of Decline 13

Stage 1: Hubris Born of Success 27

Stage 2: Undisciplined Pursuit of More 45

Stage 3: Denial of Risk and Peril 65

Stage 4: Grasping for Salvation 83

Stage 5: Capitulation to Irrelevance or Death 103

Well-Founded Hope 113

Appendices and Notes 125

Index 213

ACKNOWLEDGMENTS

lowe a debt of gratitude to many people for their hand in help-

ing this work come to life.

I thank my ChimpWorks home team for their role in this

project and for their ongoing effort to keep the system running:

Susan Barlow Toll for her extensive fact checking and citations,

Michael Lane for his superb editing and conceptual contribu-

tions, Taffee Hightower for her happy binders and management

of the critical-reader process, Judi Dunckley for her making

sure everything balances (and keeping us all very afraid), Vicki

Mosur Osgood for her years of service turning the ChimpWorks

flywheel, and Kathy Worland-Turner for her cheerful effective-

ness serving as my right arm so that I can focus on creative work

and teaching.

I thank members of my research team for their contribu-

tions to this project: Robyn Bitner for her analyses and fact

checking, Kyle Blackmer for his work on Merck, Brad Caldwell

for his work on HP and IBM, Lauren Cuje for her work on Nord-

x ACKNOWLEDGMENTS

strom, Terrence Cummings for his many projects and his con-

tribution to the study-set selection, Todd Driver for his work on

financial analyses and IBM and his fact checking, Ryan Hall for

his study-set selection analyses and collection of key data, Lori-

lee Linfield for her work on Best Buy and Circuit City and

her fact checking, Catherine Patterson for her analyses, Mat-

thew Unangst for his study-set selection analyses and work on

Xerox, and Nathaniel (Natty) Zola for ongoing analysis and

criticism.

I thank my editor, Deborah Knox, for her hundreds of hours

of dedicated work to challenge, edit, fact check, polish, and im-

prove the manuscript through dozens of iterations, and for her

extensive examination into Merck and Fannie Mae.

I thank my critical readers, whose intelligent critiques helped

sharpen the concepts and writing immeasurably. Thank you to

Bill Achtmeyer, Jerry Belle, Ed Betof, Ann S. Bowers, William P.

Buchanan, Scott Cederberg, Dr. Alan G. Chute, Ken Coleman,

Alan J. Dabbiere, Brian Deevy, Jeff Donnelly, Salvatore D. Faz- zolari, Andrew Feiler, Claudio Fernandez-Araoz, Christopher

Forman, Dick Frost, Denis Godcharles, Wayne H. Gross, Eric

Hagen, Pamela Hemann, Liz Heron, John B. Hess, Frank High-

tower, Phil Hodgkinson, Kimberley Hollingsworth Taylor,

John A. Johnson, Alan Khazei, Betina Koski, Kevin McGarvey,

Thomas W. Morris, Tom Nelson, Michael Prouting, Bobby Rao,

Gloria A. Regalbuto Bentley, PhD, Jim Reid, Neville Richard-

son, Kevin Rumon, Kim Sanchez Rael, Dirk Schlimm, Roy

Spence, Frank Sullivan, Kevin Taweel, Jean Taylor, Tom Tier-

ney, Alan Webber, Jim Weddle, and Walter Wong. I thank Frank

Sullivan also for suggesting the title How the Mighty Fall.

ACKNOWLEDGMENTS xi

I thank Betty Grebe and Carol Krismann at the University of

Colorado William M. White Business Library for their able and

enthusiastic assistance, helping all my research assistants with

their death marches. I thank the Center for Research in Securi-

ties Pricing (CRSP) at the University of Chicago for its quality

data and excellent service. I thank Dennis Bale and Lori Draw-

baugh for their professionalism and for the roving office that

allows me to keep doing creative work while in transit.

I thank Frances Hesselbein and Dick Cavanagh for the invita-

tion to speak at West Point that inspired me to dive deeply into

this topic. I thank Breck England for coming up with the term

"well-founded hope" as a way to describe our research findings.

I thank Bob Buford for his continued insistence that I pursue

questions that ignite my curiosity and for his belief that less is

more. I thank Alan Wurtzel and David Maxwell for their helpful

perspectives on the stages framework, and for their continued

friendship and belief in our work.

I thank Peter Ginsberg for his years of support, challenge,

and professionalism, and for his extraordinary ability to come

up with publishing ideas that have never been tried before-and

to make them work. I thank Hollis Heimbouch for her editorial

instincts, her advocacy, and her willingness to join me in an

adventure.

I thank Janet Brockett for her design genius and friendship.

I thank Caryn Marooney for her extraordinary wisdom and

creative perspective.

I thank my friend and research colleague Morten T. Hansen,

who continues to inspire and challenge me by providing critical

feedback and helpful guidance.

xii ACKNOWLEDGMENTS

thank my Personal Band of Brothers for their ongoing

support and inspiration, and my # 1 brother, Michael Collins.

Finally, and always, I thankJoanne Ernst, my life partner and

best friend, for inspiring me, for being my most severe critic,

and for her unyielding belief in me. After twenty-nine years,

which I consider to be a nice start to an enduring marriage, I still

feel lucky every single day.

PREFACE

I feel a bit like a snake that swallowed two watermelons at the same time. I'd started this project to write only an article, a di-

version to engage my pen while completing the research for my

next full-sized book on what it takes to endure and prevail when

the world around you spins out of control (based on a six-year

research project with my colleague Morten Hansen). But the

question of how the mighty fall defied the constrictions of an

article and evolved into this small book. I'd considered setting

this piece aside until we'd finished the turbulence book, but

then the mighty began to fall, like giant dominoes crashing

around us.

As I write this preface, on September 25, 2008, I'm looking

out at the Manhattan skyline from a United Airlines Airbus,

marveling at the cataclysmic events. Bear Stearns fell from #156

on the Fortune 500 to gone, bought out by JPMorgan Chase in a

desperation deal engineered over a weekend. Lehman Brothers

collapsed into bankruptcy after 158 years of growth and success.

xiv PREFACE

Fannie Mae and Freddie Mac, crippled, succumbed to govern-

ment conservatorship. Merrill Lynch, the symbol of bullish

America, capitulated to a takeover bid. Washington Mutual tot-

tered on the edge of becoming the largest commercial bank fail-

ure in history. The U.S. 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.

To be clear, this piece is not about the 2008 financial panic on

Wall Street, nor does it have anything to say about how to fix the

broken mechanisms of the capital markets. The origins of this

work date back to more than three years earlier, when I became

curious about why some of the greatest companies in history,

including some once-great enterprises we'd researched for Built

to Last and Good to Great, had fallen. The aim of this piece is

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.

This work is also not about gloating over the demise of once-

mighty enterprises that fell, but about seeing what we can learn

and apply to our own situation. By understanding the five stages

of decline discussed in these pages, leaders can substantially

reduce the chances of falling all the way to the bottom, tum-

bling from iconic to irrelevant. Decline can be avoided. The

seeds of decline can be detected early. And as long as you don't

fall all the way to the fifth stage, decline can be reversed. The

mighty can fall, but they can often rise again.

Jim Collins

Boulder, Colorado

THE SILENT CREEP OF IMPENDING DOOM

·1 n the autumn of 2004, I received a phone call from Frances Hesselbein, founding president of the Leader to Leader Insti-

tute. "The Conference Board and the Leader to Leader Institute

would like you to come to West Point to lead a discussion with

some great students," she said.

'~nd who will be the students?" I asked, envisioning perhaps

a group of cadets.

"Twelve U.S. Army generals, twelve CEOs, and twelve social

sector leaders," explained Frances. "They'll be sitting in groups

of six, two from each sector-military, business, social-and

they'll really want to dialogue about the topic."

"And what's the topic?"

"Oh, it's a good one. I think you'll really like it." She paused.

"America."

America? I wondered, What could I possibly teach this es-

teemed group about America? Then I remembered what one of

my mentors, Bill Lazier, told me about effective teaching: don't

2 JIM COLLINS

try to come up with the right answers; focus on coming up with

good questions.

I pondered and puzzled and finally settled upon, Is America

renewing its greatness, or is America dangerously on the cusp of

falling from great to good?

While I intended the question to be simply rhetorical (I be-

lieve that America carries a responsibility to continuously renew

itself, and it has met that responsibility throughout its history),

the West Point gathering nonetheless erupted into an intense

debate. Half argued that America stood as strong as ever, while

the other half contended that America teetered on the edge of

decline. History shows, repeatedly, that the mighty can fall.

The Egyptian Old Kingdom, the Minoans of Crete, the Chou

Dynasty, the Hittite Empire, the Mayan Civilization-all fell.!

Athens fell. Rome fell. Even Britain, which stood a century

before as a global superpower, saw its position erode. Is that

America's fate? Or will America always find a way to meet

Lincoln's challenge to be the last best hope of Earth?

At a break, the chief executive of one of America's most suc-

cessful companies pulled me aside. "I find our discussion fasci-

nating, but I've been thinking about your question in the context

of my company all morning," he mused. "We've had tremen-

dous success in recent years, and I worry about that. And so,

what I want to know is, How would you know?"

"What do you mean?" I asked.

"When you are at the top of the world, the most powerful

nation on Earth, the most successful company in your industry,

the best player in your game, your very power and success might

cover up the fact that you're already on the path to decline. So,

how would you know?"

HOW THE MIGHTY FALL 3

The question-How would you knowr-captured my imagi-

nation and became part of the inspiration for this piece. At our

research laboratory in Boulder, Colorado, we'd already been dis-

cussing the possibility of a project on corporate decline, spurred

in part by the fact that some of the great companies we'd pro-

filed in the books Good to Great and Built to Last had subsequently

lost their positions of excellence. On one level, this fact didn't

cause much angst; just because a company falls doesn't invali-

date what we can learn by studying that company when it was at

its historical best. (See the sidebar for an explanation.) But on

another level, I found myself becoming increasingly curious:

How do the mighty fall? If some of the greatest companies in his-

tory can collapse from iconic to irrelevant, what might we learn

by studying their demise, and how can others avoid their fate?

I returned from West Point inspired to turn idle curiosity

into an active quest. Might it be possible to detect decline early

and reverse course, or even better, might we be able to practice

preventive medicine? I began to think of decline as analogous

to a disease, perhaps like cancer, that can grow on the inside

while you still look strong and healthy on the outside. It's not a

perfect analogy; as we'll see later, organizational decline, unlike

cancer, is largely self-inflicted. Still, the disease analogy might

be helpful. Allow me to share a personal story to illustrate.

On a cloudless August day in 2002, my wife,Joanne, and I set

out to run the long uphill haul to Electric Pass, outside Aspen,

Colorado, which starts at an altitude of about 9,800 feet and ends

above 13,000 feet. At about 11,000 feet, I capitulated to the thin

air and slowed to a walk, while Joanne continued her uphill

assault. As I emerged from tree line, where thin air limits vege-

tation to scruffy shrubs and hardy mountain flowers, I spotted

4 JIM COLLINS

WHY THE FALL OF PREVIOUSLY GREAT COMPANIES ODES NOT NEGATE PRIOR RESEARCH

The principles we uncovered in prior research do not depend

upon the current strength or struggles of the specific companies

we studied. Think of it this way, if we studied healthy people in

contrast to unhealthy people, and we derived health-enhancing

pnnciples such as sound sleep, balanced diet, and moderate

exercise, would it undermine these principles If some of our pre-

viously healthy subjects started sleeping badly, eating poorly,

and not exercising? Clearly, sleep, diet, and exercise would still

hold up as principles of health.

Or consider this second analogy, suppose we studied the

UCLA basketball dynasty of the 1960s and 1970s, which won

ten NCAA championships in twelve years under coach John

Wooden' Also suppose that we compared Wooden's UCLA

Bruins to a team at a similar school that failed to become a great

dynasty during the exact same era, and that we repeated this

matched-pair analysis across a range of sports teams to develop

a framework of principles correlated with building a dynasty. If

the UCLA basketball team were to later veer from the principles

exemplified by Wooden and fail to deliver championship results

on par with those achieved during the Wooden dynasty, would

this fact negate the distinguishing principles of performance ex-

emplified by the Bruins under Wooden?

Similarly, the principles in Good to Great were derived pri-

manly from studying specific periods in history when the good-

to-great companies showed a substantial transformation into an

era of superior performance thaI lasled fifteen years. The re-

search did nol attempt to predict which companies would remain

great after Iheir fifteen-year run. Indeed, as this work shows,

even the mightiest of companies can self-destruct.

HOW THE MIGHTY FALL 5

her far ahead in a bright-red sweatshirt, running from switch-

back to switchback toward the summit ridge. Two months later,

she received a diagnosis that would lead to two mastectomies. I

realized, in retrospect, that at the very moment she looked like

the picture of health pounding her way up Electric Pass, she

must have already been carrying the carcinoma. That image of

Joanne, looking healthy yet already sick, stuck in my mind and

gave me a metaphor.

I've 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.

We'll turn shortly to the research that bore this idea out, but

first let's delve into a terrifying case, the rise and fall of one of

the most storied companies in American business history.

ON THE CUSP, AND UNAWARE

At 5:12 a.m. on April 18, 1906, Amadeo Peter Giannini felt an

odd sensation, then a violent one, a slight, almost imperceptible

shift in his surroundings coupled with a distant rumble like far-

away thunder or a train! Pause. One second. Two seconds.

Then-bang!-his house in San Mateo, California, began to

pitch and shake, to, fro, up, and down. Seventeen miles north in

6 JIM COLLINS

San Francisco, the ground liquefied underneath hundreds of

buildings, while heaving spasms under more solid ground cata-

pulted stones and facades into the streets. Walls collapsed. Gas

mains exploded. Fires erupted.

Determined to find out what had happened to his fledgling

company, the Bank of Italy, Giannini endured a six-hour odys-

sey, navigating his way into the city by train and then by foot

while people streamed in the opposite direction, fleeing the con-

flagration. Fires swept toward his offices, and Giannini had to

rescue all the imperiled cash sitting in the bank. But criminals

roamed through the rubble, prompting the mayor to issue a

terse proclamation: "Officers have been authorized by me to

KILL any and all persons found engaged in Looting or in the

Commission of Any Other Crime." With the help of two em-

ployees, Giannini hid the cash under crates of oranges on two

commandeered produce wagons and made a nighttime journey

back to San Mateo, where he hid the money in his fireplace.

Giannini returned to San Francisco the next morning and found

himself at odds with other bankers who wanted to impose up

to a six-month moratorium on lending. His response: putting a

plank across two barrels right in the middle of a busy pier and

opening for business the very next day. "We are going to rebuild

San Francisco," he proclaimed.4

Giannini lent to the little guy when the little guy needed it

most. In return, the little guy made deposits at Giannini's bank.

As San Francisco moved from chaos to order, from order to

growth, from growth to prosperity, Giannini lent more to the

little guy, and the little guy banked even more with Giannini.

The bank gained momentum, little guy by little guy, loan by

loan, deposit by deposit, branch by branch, across California,

HOW THE MIGHTY FALL 7

renaming itself Bank of America along the way. In October 1945,

it became the largest commercial bank in the world, overtaking

the venerable Chase National Bank.5 (Note of clarification:

in 1998, NationsBank acquired Bank of America and took

the name; the Bank of America described here is a different

company than NationsBank.)

Over the next three decades, Bank of America gained a repu-

tation as one of the best managed corporations in America.6 An

article in the January 1980 issue of Harvard Business Review

opened with a simple summary: "The Bank of America is per-

haps 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 $100 billion. In the opinion of many

close observers, an equally notable achievement is its quality of

management ... " 7

Were anyone to have predicted in 1980 that in just eight years

Bank of America would not only fall from its acclaimed position

as one of the most successful companies in the world, but would

also post some of the biggest losses in U.S. banking history,

rattle the financial markets to the point of briefly depressing the

U.S. dollar, watch its cumulative stock performance fall more

than 80 percent behind the general stock market, face a serious

takeover threat from a rival California bank, cut its dividend for

the first time in fifty-three years, sell off its corporate headquar-

ters to help meet capital requirements, see the last Giannini

family board member resign in outrage, oust its CEO, bring a

former CEO out of retirement to save the company, and endure

a barrage of critical articles in the business press with titles like

"The Incredible Shrinking Bank" and "Better Stewards (Corpo-

rate and Otherwise) Went Down on the Titanic"-were anyone

8 JIM COLLINS

to have even suggested this outcome-he or she would have

been viewed as a pessimistic outlier. Yet that's exactly what hap-

pened to Bank of America. 8

If a company as powerful and well positioned as Bank of

America in the late 1970s can fall so far, so hard, so quickly, then

any company can fall. If companies like Motorola and Circuit

City-icons that had once served as paragons of excellence-

can succumb to the downward forces of gravity, then no one is

immune. If companies like Zenith and A&P, once the unques-

tioned champions in their fields, can plummet from great to

irrelevant, then we should be wary about our own success.

Every institution is vulnerable, no matter how great. No mat-

ter how much you've achieved, no matter how far you've gone,

no matter how much power you've garnered, you are vulner-

able to decline. There is no law of nature that the most power-

ful will inevitably remain at the top. Anyone can fall and most

eventually do.

I can imagine people reading this and thinking, "Oh my

goodness-we've got to change! We've got to do something

bold, innovative, and visionary! We've got to get going and not

let this happen to us!"

Not sofast!

In December 1980, Bank of America surprised the world with

its new CEO pick. Forbes magazine described the process as

"rather like choosing a new pope," the twenty-six directors hud-

dled behind closed doors like cardinals in conclave" You might

HOW THE MIGHTY FALL 9

Bank of America Net Income 1972-1987 (in $ Millions)

The World's Largest Bank, Yet on the Cusp of Admired for Its Management Catastrophic Decline

600

400

200

0 1972 1976 1980 1987

- 200

- 400

- 600

- 800

think that Bank of America ultimately fell because they ended

up crowning a fifty-something gentleman, a faceless bureau-

crat and banker's banker who couldn't change with the times,

couldn't lead with vision, couldn't make bold moves, couldn't

seek new businesses and new markets.

But in fact, the board picked a vigorous, forty-one-year-old,

tall, articulate, and handsome leader who told the Wall Street

Journal that he believed the bank needed a "good kick in the

fanny." Seven months after taking office, Samuel Armacost

bought discount brokerage Charles Schwab, an aggressive move

that pushed the edges of the Glass-Steagall Act and energized

Bank of America with not only a new business, but also a cadre

of irreverent entrepreneurs. Then he engineered the largest in-

terstate banking acquisition to date in the nation's history,

10 JIM COLLINS

buying Seattle-based Seafirst Corp. He launched a $100 million

crash program to blast past competitors in ATMs, allowing the

bank to leap from being a laggard to boasting the largest net-

work of ATMs in California. "We no longer have the luxury of

sitting back to learn from others' mistakes before we decide on

what we will do," he admonished his managers. "Let others

learn from us." Here, finally, Bank of America had a leader.lO

Armacost ripped apart outmoded traditions, closed branches,

and ended lifetime employment. He instituted more incentive

compensation. "We're trying to drive a wedge between our top

performers and our nonperformers," noted one executive about

the new culture. l1 He allowed Schwab's leaders to continue their

practice ofleasing BMWs, Porsches, and even a Jaguar, irritating

traditional bankers limited to more traditional Fords, Buicks,

and Chevrolets.lZ He hired a high-profile change consultant and

shepherded people through a transformation process that Busi-

ness Week likened to a religious conversion (describing the bank

as "born again") and that the Wall Street Journal depicted as "its

own version of Mao's Cultural Revolution." 13 Proclaimed Arma-

cost, "No other financial institution has had this much change." 14

And yet, despite all this leadership, all this change, all this bold

action, Bank of America fell from its net income peak of more

than $600 million into a decline that culminated from 1985 to

1987 with some of the largest losses up to that point in banking

history.

To be fair to Mr. Armacost, Bank of America was already

poised for a downward turn before he became CEO.* My point

* For an excellent account, see Gary Hector's well-written and authoritative book, Breaking the Bank: The Decline of Bank America.

HOW THE MIGHTY FALL 11

is not to malign Armacost, but to show how Bank of America

took a spectacular fall despite his revolutionary fervor. Clearly,

the solution to decline lies not in the simple bromide "Change or

Die"; Bank of America changed a lot, and nearly killed itself in

the process. We need a more nuanced understanding of how de-

cline happens, which brings us to the five stages of decline that

we uncovered in our research project.

FIVE STAGES OF DECLINE

I n one sense, my research colleagues and I have been studying failure and mediocrity for years, as our research methodology

relies upon contrast, studying those that became great in con-

trast to those that did not and asking, "What's different?" But

the primary focus of our quest had been on building greatness,

an inherently bright and cheery topic. After my West Point ex-

perience, I wanted to turn the question around, curious to un-

derstand the decline and fall of once-great companies. I joked

with my colleagues, "We're turning to the dark side."

TH E RESEARCH PROCESS

We had a substantial amount of data collected from prior re-

search studies, consisting of more than six thousand years of

combined corporate history-boxes and binders of historical

documents, and spreadsheets of financial information going

back more than seventy years, along with substantial research

14 JIM COLLINS

chronologies and financial analyses. We expected that a rigor-

ous screening of this data would yield a set of robust cases of

companies that rose to greatness and then subsequently fell. We

began with sixty major corporations from the good-to-great

and built-to-last research archives, and systematically identified

eleven cases that met rigorous rise-and-fall criteria at some point

in their history: A&P, Addressograph, Ames Department Stores,

Bank of America (before it was acquired by NationsBank), Cir-

cuit City, Hewlett-Packard (HP), Merck, Motorola, Rubbermaid,

Scott Paper, and Zenith. (In Appendix 1, I've outlined the selec-

tion process.) We updated our research data archives and then

examined the history of each fallen company across a range of

dimensions, such as financial ratios and patterns, vision and

strategy, organization, culture, leadership, technology, markets,

environment, and competitive landscape. Our principal effort

focused on the two-part question, What happened leading up

to the point at which decline became visible and what did the

company do once it began to fall?

Before we delve into the five-stage framework we derived

from this analysis, allow me to make a few important research

notes.

Companies in Recovery: Some of the companies in our analysis

may have regained their footing by the time you read this. Merck

and HP, for instance, appeared to have reversed their steep de-

clines as we were working on this piece; whether they sustain

their recovery remains to be seen, but both show improved re-

sults at the time of this writing. This brings me to an important

sub-theme of this work to which we will return: just as great

companies can topple, some rise again. It's important to under-

stand that the point of our research is not to proclaim which

HOW THE MIGHTY FALL 15

companies are great today, or which companies will become

great, remain great, or fall from greatness in the future. We study

historical eras of performance to understand the underlying

dynamics that correlate with building greatness (or losing it).

Fannie Mae and Other Financial Meltdowns of 2008: When we

selected the study set of fallen companies in 2005, Fannie Mae

and other financial institutions in our original database had not

yet fallen far enough to qualify for this analysis. It would lack

rigor to tack any of these companies onto our study as an after-

thought, but at the same time, it would lack common sense to

ignore the fact that some well-known financial companies (and

in particular, Fannie Mae, which had been a good-to-great com-

pany) have succumbed to one of the most spectacular financial

meltdowns in history. Instead of throwing these companies into

the research study at the last minute because they happened to

be in the news, I've included a brief commentary about Fannie

Mae in Appendix 3.

Success Comparison Set: All our research studies involve a con-

trol comparison set. The critical question is not "What do suc-

cesses share in common?" or "What do failures share in

common?" The critical question is "What do we learn by study-

ing the contrast between success and failure?" For this analysis,

we constructed a set of "success contrasts" that had risen in the

same industries during the era when our primary study compa-

nies declined. (See Appendix 2 for comparison-company selec-

tion methodology.) For an illustration, consider the chart "A

Study of Contrasts" below. In the early 1970s, the two compa-

nies in this chart, Ames Department Stores and Wal-Mart (a

contrast we'll discuss in a few pages), stood as almost identical

twins. They had the same business model. They had similar rev-

16 JIM COLLINS

enues and profits. They both achieved tremendous growth.

Both had strong entrepreneurial leaders at the helm. And as you

can see in the chart, both achieved exceptional investor returns

far in excess of the general stock market for more than a decade,

the two curves tracking each other very closely. But then the

curves diverge completely, one company plummeting while the

other continues to rise. Why did one fall, while the other did

not? This single contrast illustrates our comparison method.

Correlations, Not Causes: The variables we identify in our re-

search are correlated with the performance patterns we study,

but we cannot claim a definitive causal relationship. If we could

30

25

20

15

10

o

A Study of Contrasts Why Does One Company FaiL .. Wa l-Mart

And the Other Does Not?

f ~ " i ... While the " Other Climbs 0

" .. '" S '" Two Companies Achieve Great Results ~ with the Same Business Model ~

~ u 0 0

'"

Ames

1974 1977 1980 1983 1986 1989 1992 Source fOf all stock returns c~lcu lat ions in this work: C200601 CRSpe, Center for Research in Security Prices. Graduate School of Business, The UOIversity of Chicago. Used with permission. All rights reserved . www.crsp.Chicagobooth.edu

HOW THE MIGHTY FALL 17

conduct double-blind, prospective, randomized, placebo-

controlled trials, we would be able to create a predictive model

of corporate performance. But such experiments simply do not

exist in the real world of management, and therefore it's impos-

sible to claim cause and effect with lOO-percent certainty. That

said, our contrast method does give us greater confidence in our

findings than if we studied only success, or only failure.

Strength of Historical Analysis: We employ a historical method,

studying each company from its founding up to the end point of

our investigation, focusing on specific eras of performance. We

gather a range of historical materials, such as financial and

annual reports, major articles published on the company, books,

academic case studies, analyst reports, and industry reference

materials. This is important because drawing solely upon

backward-looking commentary or retrospective interviews

increases the chances of fallacious conclusions. Using a well-

known success story to illustrate, if we relied on only retrospec-

tive commentary about Southwest Airlines after it had become

successful, those materials would be colored by the authors'

knowledge of Southwest's success and would therefore be biased

by that knowledge. For example, some retrospective accounts

attribute Southwest's success to pioneering a unique and inno-

vative airline model (in part, because the authors believe the

winners must be the innovators); but in fact, a careful reading of

historical documents shows that Southwest largely copied its

model from Pacific Southwest Airlines in the late 1960s. If we

were to rely on only retrospective accounts, we would be led

astray about why Southwest became a great company.

We therefore derive our frameworks primarily from evidence

from the actual time of the events, before the outcome is known, and

18 JIM COLLIN S

we read through the evidence in chronological order, moving

forward through time. Documents published at each point in

time are written without foreknowledge of the company's even-

tual success or failure, and thereby avoid the bias of knowing the

outcome. So, for instance, the materials we have on Zenith that

were published in the early 1960s, when Zenith sat on top of its

world, give us perspective on Zenith at that time, uncolored by

the fact that Zenith would eventually fall. Interviews playa min-

imal part in our research method, and in this study (where people

might have a strong need for self-justification), we conducted no

interviews with current or recent members of management. Not

that historical information is perfect-corporations can selec-

tively exclude unhappy information from their annual reports,

for example, and journalists may write with a preconceived point

of view. Nor am I entirely immune from having some retrospec-

tive bias of my own, as I always know the success or failure of the

company I'm studying, and I cannot erase that from my brain.

But even with these limitations, our comparative historical

method helps us see more clearly the factors correlated with the

rise and fall of great companies.

This process of looking at historical evidence created at the

time, before a company falls, yields one of the most important

points to come from this work: it turns out that a company

can indeed look like the picture of health on the outside yet al-

ready be in decline, dangerously on the cusp of a huge fall , just

like Bank of America in 1980. And that's what makes the pro-

cess of decline so terrifying; it can sneak up on you, and then-

seemingly all of a sudden-you're in big trouble.

HOW THE MIGHTY FALL 19

This raises a fascinating set of questions: Are there clearly

distinguishable stages of decline? If so, can you spot decline

early? Are there telltale markers? Can you reverse decline, and if

so, how? Is there a point of no return?

THE RESULTS: A FIVE-STAGE FRAMEWORK

Surrounded by research papers at our dining room table one

day, clicking away on my laptop while trying to make sense of

the chronologies of decline, I commented to my wife, Joanne, "I

find this much harder to get my head around than studying how

companies become great." No matter how I assembled and reas-

sembled conceptual frameworks to capture the process of de-

cline, I'd find counterexamples and different permutations of

the pattern.

Joanne suggested I look at the first line of Tolstoy's novel

Anna Karenina. It reads, "All happy families are alike; each un-

happy family is unhappy in its own way." In finishing this piece,

I kept coming back to the Anna Karenina quote. Having studied

both sides of the coin, how companies become great and how

companies fall, I've concluded that there are more ways to

fall than to become great. Assembling a data-driven frame-

work of decline proved harder than constructing a data-driven

framework of ascent.

Even so, a staged framework of how the mighty fall did

emerge from the data. It's not the definitive framework of corpo-

rate decline-companies clearly can fall without following this

framework exactly (from factors like fraud, catastrophic bad

luck, scandal, and so forth)-but it is an accurate description of

20 JIM COLLINS

the cases we studied for this effort, with one slight exception

(A&P had a different type of Stage 2). In the spirit of statistics

professor George E. P. Box, who once wrote, "All models are

wrong; some models are useful," this framework is helpful for

understanding, at least in part, how great companies can fall."

Equally important, I believe it can be useful to leaders who seek

to prevent, detect, or reverse decline.

The model consists of five stages that proceed in sequence.

Let me summarize the five stages here and then provide a more

detailed description of each stage in the following pages.

STAGE 1: HUBRIS BORN OF SUCCESS. Great enterprises can become insu-

lated by success; accumulated momentum can carry an enter-

Stage 1 Hubris Born of Success

Five Stages of Decline

Stage 2 Undisciplined

Pursuit of More I

Stage 3 Denial of Risk

and Peril

Stage 4 Graspi n~ for

Salvation

Stage 5 Capitulation to Irrelevance or

Death

HOW THE MIGHTY FALL 21

prise forward, for a while, even ifits leaders make poor decisions

or lose discipline. Stage 1 kicks in when people become arro-

gant, 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 un-

derstanding and insight ("We're successful because we under-

stand why we do these specific things and under what conditions

they would no longer work"), decline will very likely follow.

Luck and chance playa 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. Hubris from Stage 1 ("We're

so great, we can do anything!") leads right into Stage 2, the Un-

disciplined Pursuit of More-more scale, more growth, more

acclaim, more of whatever those in power see as "success." Com-

panies 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 organiza-

tion 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 enter-

prise, overreaching better captures how the mighty fall.

STAGE 3: DENIAL OF RISK AND PERIL. 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

22 JIM COLLINS

suggest that 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 setbacks rather than accept responsibil-

ity. The vigorous, fact-based dialogue that characterizes high-

performance teams dwindles or disappears altogether. When

those in power begin to imperil the enterprise by taking out-

sized risks and acting in a way that denies the consequences of

those risks, they are headed straight for Stage 4.

STAGE 4: GRASPING FOR SALVATION. 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 the 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. 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

HOW THE MIGHTY FALL 23

out; in other cases, the institution atrophies into utter insignifi-

cance; 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.

Some companies move quickly through the stages, while others

languish for years, or even decades. Zenith, for example, took

three decades to move through all five stages, whereas Rubber-

maid fell from the end of Stage 2 all the way to Stage 5 in just

five years. (The collapse of financial companies like Bear Stearns

and Lehman Brothers that happened just as we were finishing

up this work highlights the terrifying speed at which some com-

panies fall.) An institution can stay in one stage for a long time,

but then pass quickly through another stage; Ames, for instance,

spent less than two years in Stage 3 but more than a decade in

Stage 4 before capitulating to Stage 5. The stages can also over-

lap, the remnants of earlier stages playing an enabling role

during later stages. Hubris, for example, can easily coincide with

Undisciplined Pursuit of More, or even with Denial of Risk and

Peril ("There can't be anything fundamentally wrong with us-

we're great!"). The following diagram shows how the stages

can overlap.

IS THERE A WAY OUT?

When I sent a first draft of this piece to critical readers, many

commented that they found our turn to the dark side grim, even

a bit depressing. And you might have the same experience as

24

Stage 1 Hubris Born of

Success

JI M COL LINS

Five Stages of Decline

Stage 2 Undisciplined Pursui t

of More

l Stage 3 Deni al of Risk and Peri l Stage 4

Graspin~ for Sa lva tion

Stage 5 Capitulat ion to

Irrelevance or Death

you read through the five stages of decline, absorbing story upon

story of once-great companies that precipitated their own

demise. It's a bit like studying train wrecks-interesting, in a

morbid sort of way, but not inspiring. So, before you embark on

this dark journey, allow me to provide two points of context.

First, we do ourselves a disservice by studying only suc-

cess. We learn more by examining why a great company fell

into mediocrity (or worse) and comparing it to a company that

sustained its success than we do by merely studying a successful

enterprise. Furthermore, one of the keys to sustained perfor-

mance lies in understanding how greatness can be lost. Better to

HOW THE MIGHTY FALL 25

learn from how others fell than to repeat their mistakes out of

ignorance.

Second, I ultimately see this as a work of well-founded hope.

For one thing, with a roadmap of decline in hand, institu-

tions heading downhill might be able to apply the brakes early

and revers!'; course. For another, we've found companies that

recovered-in some cases, coming back even stronger-after

having crashed down into the depths of Stage 4. Companies like

Nucor, Nordstrom, Disney, and IBM fell into the gloom at some

point in their histories yet came back.

Great companies can stumble, badly, and recover. While you

can't come back from Stage 5, you can tumble into the grim

depths of Stage 4 and climb out. Most companies eventually fall ,

and we cannot deny this fact. Yet our research indicates that

organizational decline is largely self-inflicted, and recovery

largely within our own control.

All companies go through ups and downs, and many show

signs of Stage 1 or 2, or even Stage 3 or 4, at some point in their

histories. Yet Stage 1 does not inevitably lead to Stage 5. The

evidence simply does not support the notion that all companies

must inevitably succumb to demise and disintegration, at least

not within a lOO-year time frame. Otherwise, how could you

explain companies with ten to fifteen decades of achievement,

companies like Procter & Gamble (P&G), 3M, and Johnson

& Johnson? Just because you may have made mistakes and

fallen into the stages of decline does not seal your fate. So long

26 JIM COLLINS

as you never fall all the way to Stage 5, you can rebuild a great

enterprise worthy oflasting.

As you read the following pages, you might wonder, But

what should we do if we find ourselves falling? It turns out that

much of the answer lies in adhering to highly disciplined man-

agement practices, and we'll return to the question of recovery

at the end of this piece. But for now, we need to descend into the

darkness to better understand why the mighty fall, so that we

might avoid their fate.

STAGE 1: HUBRIS BORN OF SUCCESS

Slap 1 Hubris Born of Success

Slage 3 Denial of Risk

and Peril

Slage 4 Graspin~ for

Salvation

Slage 5 Capitulation to Irrelevance or

Death

In December 1983, the last U.S.-made Motorola car radio rolled off the manufacturing line and into Chairman Robert Galvin's

hands as a reminder. Not as a sentimental memento, but as a

tangible admonition to continue to develop newer technologies

in an ongoing process of creative self-renewal. Motorola's his-

tory taught Galvin that it's far better to create your own future,

28 JIM COLLINS

repeatedly, than to wait for external forces to dictate your

choices.16 When the fledgling Galvin Manufacturing Corpora-

tion's first business, battery eliminators for radios, became obso-

lete, Paul Galvin (Robert's father) faced severe financial distress

in 1929. In response, he experimented with car radios, changed

the name of the company to Motorola, and started making a

profit. But this near-death experience shaped Motorola's found-

ing culture, instilling a belief that past accomplishment guaran-

tees nothing about future success and an almost obsessive need

for self-initiated progress and improvement. When Jerry Porras

and I surveyed a representative sample of 165 CEOs in 1989, they

selected Motorola as one of the most visionary companies in the

world, and we included Motorola in our Built to Last research

study. Amongst the eighteen visionary companies we studied

at that time, Motorola received some of the highest scores on

dimensions such as adherence to core values, willingness to

experiment, management continuity, and mechanisms of self-

improvement. We noted how Motorola pioneered Six Sigma

quality programs and embraced "technology road maps" to

anticipate opportunities ten years into the future.

By the mid-1990s, however, Motorola's magnificent run of

success, which culminated in having grown from $5 billion to

$27 billion in annual revenues in just a decade, contributed to a

cultural shift from humility to arrogance. In 1995, Motorola ex-

ecutives felt great pride in their soon-to-be-released StarTAC cell

phone; the then-smallest cell phone in the world, with its sleek

clamshell design, was the first of its kind. There was just one

problem: the StarTAC used analog technology just as wireless

carriers began to demand digital. And how did Motorola re-

HOW THE MIGHTY FALL 29

spond? According to Roger O. Crockett, who closely covered

the company for Business Week, one of Motorola's senior leaders

dismissed the digital threat: "Forty-three million analog cus-

tomers can't be wrong." 17 Then Motorola tried to strong-arm

carrier companies like Bell Atlantic. If you want the hot StarT AC,

explained the Motorola people, you'll need to agree to our rules:

a high percentage (along the lines of 75 percent) of all your

phones must be Motorola; and you must promote our phones

with stand-alone displays. Bell Atlantic, irritated by this "you

must" attitude, blasted back that no manufacturer would dictate

how much of their product to distribute. "Do you mean to tell

me that [if we don't agree to the program] you don't want to sell

the StarTAC in Manhattan?" a Bell Atlantic leader reportedly

challenged the Motorola executives. Motorola's arrogance gave

competitors an opening, and Motorola fell from being the #1

cell phone maker in the world, at one point garnering nearly 50

percent market share, to having only 17 percent share by 1999.18

Motorola's fall from greatness began with Stage 1, Hubris Born

of Success.

ARROGANT NEGLECT

Dating back to ancient Greece, the concept of hubris is defined

as excessive pride that brings down a hero, or alternatively (to

paraphrase classics professor J. Rufus Fears), outrageous arro- gance that inflicts suffering upon the innocent.19 Motorola began

2001 with 147,000 employees; by the end of 2003, the number

dropped to 88,000-nearly 60,000 jobs gone.20 As Motorola de-

30 JIM COLLIN S

scended through the stages of decline, shareholders also suf-

fered as stock returns fell more than 50 percent behind the

market from 1995 to 2005.21

We will encounter multiple forms of hubris in our journey through

the stages of decline. We will see hubris in undisciplined leaps

into areas where a company cannot become the best. We will

see hubris in a company's pursuit of growth beyond what it can

deliver with excellence. We will see hubris in bold, risky deci-

sions that fly in the face of conflicting or negative evidence. We

will see hubris in denying even the possibility that the enterprise

could be at risk, imperiled by external threats or internal erosion.

And we will encounter one of the most insidious forms of hubris:

arrogant neglect.

In October 1995, Forbes magazine ran a laudatory story about

Circuit City's CEO. Under his leadership, Circuit City had grown

more than 20 percent per year, multiplying the size of the com-

pany nearly ten times in a decade. How to keep the growth

going? After all, as Forbes commented, in the end every market

becomes mature, and this energetic CEO had "no intention of

sitting around and waiting for his business to be overwhelmed

by the competition." 22 And so Circuit City sought The Next Big

Thing. The company had already piloted CarMax, a visionary

application of the company's superstore expertise to the used

car business. Circuit City also became enamored with an adven-

ture called Divx. Using a special DVD player, customers would

be able to "rent" a DVD for as long as they liked before playing

HOW THE MIGHTY FALL 31

it, using an encryption system to unlock the DVD for viewing.

The advantage: not having to return a DVD to the video store

before having had a chance to watch it. 23

In late 1998, the Wall Street Transcript interviewed Circuit

City's CEO. There came a telling moment when the interviewer

asked what investors should worry about at Circuit City. "[In-

vestors] can be fairly relaxed about our ability to run the busi-

ness well," he replied. Then he felt compelled to add, "I think

there has been some investor sentiment ... that our CarMax en-

deavor and our Divx endeavor is taking attention away from our

Circuit City business. I'd refer ... [to] our 44 percent earnings

growth in the Circuit City business in the first half of the year."

He concluded, "This is a company that's in great shape." 24

Yet Circuit City plummeted through all five stages of decline.

Profit margins eroded and return on equity atrophied from

nearly 20 percent in the mid-1990s to single digits, leading to the

company's first loss in more than a quarter of a century. And on

November 10, 2008, Circuit City announced that it had filed for

bankruptcy.

Circuit City originally made the leap from good to great, a

process that began to gain momentum in the early 1970s, under

the inspired leadership of Alan Wurtzel. As with most climbs to

greatness, it involved sustained, cumulative effort, like turning

a giant, heavy flywheel: each push builds upon previous work,

compounding the investment of effort-days, weeks, months,

and years of work-generating momentum, from one turn to

ten, from ten to a hundred, from a hundred to a thousand, from

a thousand to a million. Once an organization gets one flywheel

going, it might create a second or third flywheel. But to remain

successful in any given area of activity, you have to keep push-

32 JIM COLLINS

ing with as much intensity as when you first began building that

flywheel, exactly what Circuit City did not do. Circuit City in

decline exemplifies a cycle of arrogant neglect that goes like

this:

1. You build a successful flywheel.

2. You succumb to the notion that new opportunities will

sustain your success better than your primary flywheel,

either because you face an impending threat or because

you find other opportunities more exciting (or perhaps

you're just bored).

3. You divert your creative attention to new adventures

and fail to improve your primary flywheel as if your

life depended on it.

4. The new ventures fail outright, siphon off your

best creative energy, or take longer to succeed than

expected.

5. You turn your creative attention back to your pri-

mary flywheel only to find it wobbling and losing

momentum.

A core business that meets a fundamental human need-

and one at which you've become best in the world-rarely be-

comes obsolete. In this analysis of decline, only one company,

Zenith, fell largely because it stayed focused on its core business

too long and failed to confront its impending demise. Further-

more, in 60 percent of our matched-pairs, the success-contrast

company paid greater attention to improving and evolving its

core business than the fallen company during the relevant era of

comparison.

HOW THE MIGHTY FALL 33

My point here is not that you should never evolve into new

arenas or that Circuit City made a mistake by investing in

CarMax or Divx. Creating CarMax required an impressive leap

of imagination; Circuit City invented an entirely new business

concept, doing for used cars what it had done for consumer

electronics (bringing a professional chain-store approach to an

industry that had previously been unprofessional and frag-

mented).25 Indeed, Circuit City would have done well to keep

CarMax rather than sell it. And with Divx, while the idea ulti-

mately failed in the marketplace, it can be viewed as a relatively

small experiment that just didn't work in the end, a positive ex-

ample of the Built to Last principle "Try a Lot of Stuff and Keep

What Works." The real lesson is that Circuit City left itself ex-

posed by not revitalizing its electronics superstores with as

much passion and intensity as when it first began building that

business two decades earlier. The great irony is that one of its

biggest opportunities for continued growth and success lay in its

core business, and the proof rests in two words: Best Buy.

In 1981, a tornado touched down in Roseville, Minnesota,

blasting to pieces the showroom of the local Sound of Music

store. Customers hurled themselves away from the windows as

shards of glass and splintered wood flew about in the gale. Luck-

ily, the storeroom remained largely undamaged, leaving founder

Richard Schulze with boxes of stereos and TVs, but no store-

front. A resourceful entrepreneur, he decided to throw a "Tor-

nado Sale" in the parking lot. He spent his entire marketing

budget on a local ad blitz that created a two-mile traffic jam as

droves of customers converged on the lot. Schulze realized

that he'd stumbled upon a great concept: advertise like crazy,

have lots of name-brand stuff to sell in a no-frills setting (albeit a

34 JIM COLLINS

step up from a parking lot), and offer low prices. Based on his

discovery, he invested all his money into creating a consumer

electronics superstore that he dubbed Best Buy. 26

From 1982 to 1988, Best Buy opened forty superstores (what

it called its Concept I stores) in the Midwest. In 1989, after sys-

tematically asking customers what would make for a better ex-

perience, Best Buy created its Concept II store model, which

replaced a commission-driven sales culture with a consultative

help-the-customer-find-the-best-answer culture.27 In 1995, Best

Buy created Concept III superstores chock-full of snazzy ways to

learn about products-touchscreen information kiosks, simu-

lated car interiors for checking out sound systems, CD listening

posts to sample music, "fun & games" areas for testing video

games-and then in 1999 moved on to Concept IV stores, de-

signed to help customers navigate the confusing myriad of new

electronics products flooding the market. Then it evolved yet

again in 2002, and in 2003 added Geek Squads to help customers

baffled by technology. 28

We found little evidence that Circuit City senior leaders took

seriously the threat from Best Buy until the late 1990s. Yet if

Circuit City had invested as much creative energy into making

its superstore business a superior alternative to Best Buy and had

captured half of Best Buy's growth from 1997 (when the compa-

nies had the same revenues) to 2006, Circuit City would have

grown to nearly twice the revenues it actually achieved dur-

ing that period.29 But instead, Best Buy eclipsed Circuit City by

more than 2.5 times, in both revenues and profit per employee.

Every dollar invested in Best Buy in 1995 and held to 2006

outperformed a dollar invested in Circuit City by four times. 30

HOW THE MIGHTY FALL

To disrespect the potential remaining in your primary flywheel-

or worse, to neglect that flywheel out of boredom while you turn

your attention to The Next Big Thing in the arrogant belief that its

success will continue almost automatically-is hubris. And even

if you face the impending demise of a core business, that's still

no excuse to let it just run on autopilot. Exit definitively or renew

obsessively, but do not ever neglect a primary flywheel.

35

If you're struggling with the tension between continuing

your commitment to what made you successful and living in

fear about what comes next, ask yourself two questions:

1. Does your primary flywheel face inevitable demise

within the next five to ten years due to forces outside

your control-will it become impossible for it to remain

best in the world with a robust economic engine?

2. Have you lost passion for your primary flywheel?

If you answer no to both these questions, then continue to push

your primary flywheel with as much imagination and fanatical

intensity as you did when you first began. (Of course, you also

need to continually experiment with new ideas, both as a mech-

anism to stimulate progress and as a hedge against an uncertain

future.)

This does not mean static, unimaginative replication. Quite

the opposite: it means never-ending creative renewal, just as

Best Buy moved from Concept I to Concept II to Concept III and

36 JIM COLLINS

beyond. It's like being an artist. Picasso didn't renew himself by

abandoning painting and sculpture to become a novelist or a

banker; he painted his entire life yet progressed through distinct

creative phases-from his Blue Period to cubism to surrealism-

within his primary activity. Beethoven didn't "reinvent" himself

by abandoning music for poetry or painting; he remained first

and foremost a composer. But neither did he just write the Third

Symphony nine times.

CONFUSING WHAT AND WHY

Like an artist who pursues both enduring excellence and shock-

ing creativity, great companies foster a productive tension be-

tween continuity and change. On the one hand, they adhere to

the principles that produced success in the first place, yet on the

other hand, they continually evolve, modifying their approach

with creative improvements and intelligent adaptation. Best

Buy understood this idea better than Circuit City, when it kept

morphing its superstores yet did so in a manner consistent with

the primary insight that produced success in the first place

(customers really like having lots of name-brand stuffin an easy-

to-navigate, low-price, and friendly environment). When insti-

tutions fail to distinguish between current practices and the

enduring principles of their success, and mistakenly fossilize

around their practices, they've set themselves up for decline.

When George Hartford lay on his deathbed in 1957, he sum-

moned his longtime loyal aide, Ralph Burger, and pleaded as his

dying wish, "Take care of the organization." 31 The Hartford

HOW THE MIGHTY FALL 37

brothers (Mr. John and Mr. George) dedicated their lives to

building the Great Atlantic & Pacific Tea Company (A&P) after

taking it over from their father. Burger, himself nearly seventy

years old, spent decades as a chief confidant and pursued his

solemn oath to preserve and protect the Hartford legacy with

fundamentalist zeal. He clothed himself in the authority of the

Hartford brothers, and not just figuratively; according to Wil-

liam Walsh's account The Rise and Decline of The Great Atlantic &

Pacific Tea Company, Burger took to wearing Mr. John's actual

clothes, saying, "John would not have wanted those famous grey

suits to go to waste." 32 Insulated by A&P's comfortable position

as the largest retailing organization in the world, Burger be-

lieved that "taking care of the organization" meant preserving

its specific practices and methods; as late as 1973, Mr. John's

office remained exactly as it had been two decades earlier, right

down to the same coat hangers hanging in the same place in the

closet.33

During the Burger era, A&P's arrogant stance that "we will

continue to keep things just the way they are and we will

continue to be successful because-well, we're A&P!" left it vul-

nerable to new store formats developed by companies like

Kroger. Burger failed to ask the fundamental question, Why was

A&P successful in the first place? Not the specific practices and

strategies that worked in the past, but the fundamental reasons

for success. It retained its aging Depression-generation custom-

ers but became utterly irrelevant to a new generation. As one

industry observer quipped, "Like the undertaker, A&P could

have said every time a hearse went by, 'There goes another customer.' "34

38 JIM COLLINS

The point here is not as simple as "they failed because they

didn't change." As we'll see in the later stages of decline, com-

panies that change constantly but without any consistent ratio-

nale will collapse just as surely as those that change not at all.

There's nothing inherently wrong with adhering to specific prac-

tices and strategies (indeed, we see tremendous consistency

over time in great companies), but only if you comprehend the

underlying why behind those practices, and thereby see when to

keep them and when to change them.

Now you might be wondering, "How do you know if you're

right about the underlying causes of your success?" The best

leaders we've studied never presume that they've reached ulti-

mate understanding of all the factors that brought them success.

For one thing, they retain a somewhat irrational fear that per-

haps their success stems in large part from luck or fortuitous

circumstance. Compare the downside oftwo approaches:

APPROACH 1: Suppose you discount your own success eWe might

have been just really lucky or were in the right place at the right

time or have been living off momentum or have been operating

without serious competition") and thereby worry incessantly

about how to make yourself stronger and better positioned

for the day your good luck runs out. What's the downside if

you're wrong? Minimal; if you're wrong, you'Ujust be that much

stronger by virtue of your disciplined approach.

APPROACH 2: Suppose you attribute success to your own superior

qualities eWe deserve success because we're so good, so smart,

HOW THE MIGHTY FALL 39

so innovative, so amazing"). What's the downside if you're

wrong? Significant; if you're wrong, you just might find yourself

surprised and unprepared when you wake up to discover your

vulnerabilities too late.

Like inquisitive scientists, the best corporate leaders we've

researched remain students of their work, relentlessly asking

questions-why, why, why?-and have an incurable compul-

sion to vacuum the brains of people they meet. To be a knowing

person ("I already know everything about why this works, and

let me tell you") differs fundamentally from being a learning

person. The "knowing people" can set compani~s on the path to

decline in two ways. First, they can become dogmatic about

their specific practices ("We know we're successful because we

do these specific things, and we see no reason to question them")

as we saw with A&P. Second, they can overreach, moving into

sectors or growing to a scale at which the original success fac-

tors no longer apply ("We've been so successful that we can

really go for the big bet, the huge growth, the gigantic leap to

exciting new adventures"), as we'll see in the following contrast

between two companies, one that became the largest company

in America and the other, its competitor, that died.

In the late 1950s, a small, unknown company had a Very Big

Idea: "to bring discount retailing to rural and small town

areas." 35 It became one of the first companies to bet its future on

this concept, and it built a substantial early lead by adopting

everyday low prices for everything, not just specific lure-the-

customer items.36 Its visionary leader created an ethos of part-

nership with his people, engineered sophisticated information

systems, and cultivated a performance-driven culture, with

40 JIM COLLINS

store managers reviewing weekly scorecards at 5 a.m. every

Monday morning. Not only did the company decimate Main

Street stores in small towns, but it also learned how to beat

its primary competitor, Kmart, in head-to-head competition.37

Every dollar invested in its stock at the start of 1970 and held

through 1985 grew more than six thousand percent.38

So, now, what is the company?

If you answered Wal-Mart, good guess. But wrong.

The answer is Ames Department Stores.

Ames began in 1958 with the same idea that eventually made

Wal-Mart famous and did so four years before Sam Walton

opened his first Wal-Mart store.39 Over the next two decades,

both companies built seemingly unstoppable momentum, Wal-

Mart growing in the mid-South and Ames in the Northeast.

From 1973 to 1986, Ames's and Wal-Mart's stock performances

roughly tracked each other, with both companies generating

returns over nine times the market.40

So where is Ames at the time of this writing, in 2008?

Dead. Gone. Never to be heard from again. Wal-Mart is alive

and well, #1 on the Fortune 500 with $379 billion in annual

revenues.

What happened? What distinguished Wal-Mart from Ames?

A big part of the answer lies in Walton's deep humility and

learning orientation. In the late 1980s, a group of Brazilian in-

vestors bought a discount retail chain in South America. After

purchasing the company, they figured they'd better learn more

about discount retailing, so they sent off letters to about ten

CEOs of American retailing companies, asking for a meeting

to learn about how to run the new company better. All the

HOW THE MIGHTY FALL 41

CEOs either declined or neglected to respond, except one: Sam

Walton.41

When the Brazilians deplaned at Bentonville, Arkansas, a

kindly, white-haired gentleman approached them, inquiring,

"Can I help you?"

"Yes, we're looking for Sam Walton."

"That's me," said the man. He led them to his pickup truck,

and the Brazilians piled in alongside Sam's dog, 01' Roy.

Over the next few days, Walton barraged the Brazilians with

question after question about their country, retailing in Latin

America, and so on, often while standing at the kitchen sink

washing and drying dishes after dinner. Finally, the Brazilians

realized, Walton-the founder of what may well become the

world's first trillion-dollar-per-year corporation-sought first

and foremost to learn from them, not the other way around.

Wal-Mart's success worried Walton. He fretted over how to

instill his sense of purpose and humble inquisitiveness into the

company beyond his own lifetime, as Wal-Mart grew to hun-

dreds of billions of dollars of annual revenue. Part of his answer

for how to stave off hubris came in handing the company to an

equally inquisitive, self-deprecating CEO, the quiet and low-

profile David Glass. Most people outside retailing do not recog-

nize the name David Glass, which is exactly how Glass would

want it. He learned from Walton that Wal-Mart does not exist

for the aggrandizement of its leaders; it exists for its customers.

Glass fervently believed in Wal-Mart's core purpose (to enable

people of average means to buy more of the same things previ-

ously available only to wealthier people) and in the need to stay

true to that purpose. And like Walton, he relentlessly sought

42 JIM COLLINS

better ways for Wal-Mart to pursue its purpose. He kept hiring

great people, building the culture, and expanding into new

arenas (from groceries to electronics) while adhering to the

principles that made Wal-Mart great in the first place.

Quite a contrast to Ames. Whereas Walton engineered a

smooth transition of power to a homegrown insider who deeply

understood the drivers of Wal-Mart's success and exemplified

the cultural DNA right down to his tippy toes, Ames's CEO

Herb Gilman brought in an outsider as his successor, a visionary

leader who boldly redefined the company.42 While Wal-Mart

maintained its near-religious fanaticism about its core values,

purpose, and culture, Ames did the opposite in its quest for

quick growth, catapulting itself right into Stage 2, Undisciplined

Pursuit of More, to which we will turn next.

HOW THE MIGHTY FALL

MARKERS FOR STAGE 1

At the end of each of the first four stages, I'll summarize the

stage with a series of markers. Not every marker shows up in

every case of decline, and the presence of a marker does not

necessarily mean that you have a disease, but it does indicate

an increased possibility that you're in that stage of decline. You

can use these markers as a self-diagnostic checklist. Some

of the markers listed have little or no text dedicated to them in

the preceding pages, for the simple reason that they're highly

self-explanatory.

• SUCCESS ENTITLEMENT, ARROGANCE: Success is viewed as

"deserved," rather than fortuitous, fleeting, or even hard earned

in the face of daunting odds; people begin to believe that suc-

cess will continue almost no matter what the organization

decides to do, or not to do.

• NEGLECT OF A PRIMARY FLYWHEEL: Distracted by extraneous

threats, adventures, and opportunities, leaders neglect a

primary flywheel, failing to renew it with the same creative

intensity that made it great in the first place.

• "WHAT" REPLACES "WHY": The rhetoric of success ("We're

successful because we do these specific things") replaces un-

derstanding and insight ("We're successful because we under-

stand whywe do these specific things and under what conditions

they would no longer work").

• DECLINE IN LEARNING ORIENTATION: Leaders lose the inquisi-

tiveness and learning orientation that mark those truly great

individuals who, no matter how successful they become, main-

tain a learning curve as steep as when they first began their

careers.

43

44 JIM COLLINS

• DISCOUNTING THE ROLE OF LUCK: Instead of acknowledging

that luck and fortuitous events might have played a helpful role,

people begin to presume that success is due entirely to the

superior qualities of the enterprise and its leadership.

Stage 1 Hubris Born of Success

STAGE 2: UNDISCIPLINED

PURSUIT OF MORE

Stage 3 Denial of Risk

and Peril

Stage 4 Grasping for

Salvation

Stage 5 Capitulation to Irrelevance or

Death

In 1988, Ames bought Zayre department stores, with self-

proclaimed expectations to more than double the size of the

company in a single year." You cannot do a 0.2 or a 0.5 or a 0.7

acquisition. The decision is binary. You either do the acquisition

or you don't , one or zero, no in between. And if that acquisition

turns out to be a mistake, you cannot undo the decision. Big

46 JIM COLLINS

mergers or acquisitions that do not fit with your core values

or that undermine your culture or that run counter to that at

which you've proven to be best in the world or that defy eco-

nomic logic-big acquisitions taken out of bravado rather than

penetrating insight and understanding-can bring you down.

In Ames's case, the Zayre acquisition destroyed the momen-

tum built over three decades. While Wal-Mart continued to

focus first on rural and small town areas before making an evo-

lutionary migration into more urban settings, the Zayre acquisi-

tion revolutionized Ames, making it a significant urban player

overnight. And while Wal-Mart remained obsessed with offer-

ing everyday low prices on all brands all the time, Ames dra-

matically changed its strategy with Zayre, which relied on

special loss-leader promotions. Ames more than doubled its rev-

enues from 1986 to 1989, but much of its growth simply did not

fit with the strategic insight that produced Ames's greatness in

the first place. From 1986 through 1992, Ames's cumulative

stock returns fell 98 percent as the company plunged into bank-

ruptcy.44 Ames emerged from bankruptcy, but never regained

momentum and liquidated in 2002.45 Meanwhile, Wal-Mart con-

tinued its relentless march across the United States-step by

step, store by store, region by region-until it reached the North-

east and killed Ames with the very same business model that

Ames pioneered in the first place.46

OVERREACHING, NOT COMPLACENCY

We anticipated that most companies fall from greatness because

they become complacent-they fail to stimulate innovation,

HOW THE MIGHTY FALL 47

they fail to initiate bold action, they fail to ignite change, they

just become lazy-and watch the world pass them by. It's a plau-

sible theory, with a problem: it doesn't square with our data.

Certainly, any enterprise that becomes complacent and refuses

to change or innovate will eventually fall. But, and this is the

surprising point, the companies in our analysis showed little

evidence of complacency when they fell. Overreaching much

better explains how the once-invincible self-destruct.

Only one case showed strong evidence of complacency: A&P.

(A&P followed a pattern of Hubris -+ Complacency -+ Denial-+

Grasping for Salvation.) In every other case, we found tremen-

dous energy-stimulated by ambition, creativity, aggression

and! or fear-in Stage 2. (See Appendix 4.A for an evidence

table.) We even found substantial innovation during this stage,

which eliminated the hypothesis that the fall of a great company

is necessarily preceded by a decline in innovation. In only three

of eleven cases did we find significant evidence that the com-

pany failed to innovate during the early stages of decline (A&P,

Scott Paper, and Zenith). Motorola increased its number of pat-

ents from 613 to 1,016 from 1991 to 1995, and stated about its

patent productivity, "We rank No.3 in the United States."47

Merck patented 1,933 new compounds from 1996 to 2002 (the

best performance in the industry, 400 ahead of second place) yet

was already in the stages of decline.48 In 1999, HP launched its

"Invent" campaign and nearly doubled patent applications in

two years, just as it spiraled into Stage 4 decline.49

And then there's the terrifying demise of Rubber maid. In the

early 1990s, two Rubbermaid executives visited the antiquities

section of the British Museum. The ancient Egyptians "used a

lot of kitchen utensils, some of which were very nice," said one

48 JIM COLLINS

of the executives in a Fortune magazine feature, designs so nice

that he came away from the museum with eleven ideas for new

products. "The Egyptians had some really neat ideas for food

storage," echoed the other. "They had clever little levers that

made it easy to take the lids off wooden vessels." 50

Eleven ideas from one visit to the British Museum might

sound like a lot, but not when you consider that Rubbermaid

aimed to introduce at least one new product per day, seven days

a week, 365 days per year, while entering a new product cate-

gory every twelve to eighteen months.51 "Our vision is to grow,"

proclaimed Rubbermaid's CEO in a 1994 statement that ()ut-

lined goals for "leap growth." Growth would come from doing

lots of new stuff, all at the same time-new markets, new acqui-

sitions, new geographies, new technologies, new joint ventures,

and above all, hundreds of new product innovations per year.

"Exhibit A in the case for innovation," wrote Fortune about Rub-

bermaid's climb to become the #1 "Most Admired Company"

in America, more innovative than 3M, more innovative than

Apple, more innovative than IntePZ

Choking on nearly one thousand new products introduced in

three years, hammered on one side by raw materials costs that

nearly doubled in eighteen months, and pressed on the other

side by its ambitious growth targets, Rubbermaid began to fray

at the edges, failing at basic mechanics like controlling costs and

filling orders on time.53 From 1994 to 1998, Rubbermaid raced

through the stages of decline so rapidly that it should terrify

anyone who has enjoyed a burst of success. In the fourth quarter

of 1995, Rubbermaid reported its first loss in decades. The com-

pany eliminated nearly six thousand product variations, closed

HOW THE MIGHTY FALL 49

nine plants, and wiped out 1,170 jobs. It also made one of the

largest acquisitions in its history, recast incentive compensation,

and initiated a radical marketing bet on the Internet as "a renais-

sance tool." 54 Yet Rubbermaid continued to sputter, embarked

on a second major restructuring in a little over two years, and

on October 21, 1998, sold out to Newell Corporation, forfeit-

ing forever the chance to come back as a great company.55

As Rubbermaid realized too late, innovation can fuel growth,

but frenetic innovation-growth that erodes consistent tactical

excellence-can just as easily send a company cascading through

the stages of decline.

This provokes a question: Why do we instinctively point to

complacency and lack of innovation as a dominant pattern of

decline, despite evidence to the contrary? I can offer two an-

swers. First, those who build great companies have drive and

passion and intensity and an incurable itch for progress some-

where in their DNA to begin with; if we studied companies that

never excelled, those that fell from so-so to bad, we might see a

different pattern. Second, perhaps people want to attribute the

fall of others to a character flaw they don't see in themselves

rather than face the frightening possibility that they might be

just as vulnerable. "They fell because they became lazy and self-

satisfied, but since I work incredibly hard and I'm willing to

change and innovate and lead with passion, well, then I don't

have that character flaw. I'm immune. It can't happen to me!"

But of course, catastrophic decline can be brought about

by driven, intense, hard-working, and creative people. It's hard

to argue that the primary cause of the Wall Street meltdowns

of 2008 lay in a lack of drive or ambition; if anything, people

50 JIM COLLINS

went too far-too much risk, too much leverage, too much

financial innovation, too much aggressive opportunism, too

much growth.

OBSESSED WITH GROWTH

In his 1995 annual letter to shareholders, Merck's chairman and

CEO Ray Gilmartin delineated the company's #1 business ob-

jective: being a top-tier "growth company. Not profitability, not

breakthrough drugs, not scientific excellence, not research-

driven R&D, not productivity (although Gilmartin did highlight

these as essential elements of Merck's strategy), but one overrid-

ing business objective: growth. Merck's drive for growth re-

mained remarkably consistent for the next seven years. The

opening line of the chairman's letter in the 2000 annual report

stated simply, "As a company, Merck is totally focused on

growth."

Merck's public commitments to achieve audacious growth

seemed odd, given the facts. Five Merck drugs with annual rev-

enues of nearly $5 billion would lose their U.S. patent protection

in the early 2000S.56 Generic copycat drugs, an increasing force

in the pharmaceutical industry, would curtail Merck's pricing

power, wiping out billions in profitable sales. Moreover, Gilmar-

tin faced a significantly larger revenue base upon which to

achieve growth than his predecessor, Roy Vagelos. It's one thing

to develop enough new drugs to deliver growth on a base of ap-

proximately $5 billion, as Vagelos did in the late 1980s, but en-

tirely another to develop enough new drugs to fuel the same or

faster growth on a base of more than $25 billion, as Gilmartin

HOW THE MIGHTY FALL 51

faced in the late 1990s. And for a company like Merck that relied

primarily upon scientific discovery, growth would be increas-

ingly difficult to attain; according to a Harvard Business School

case study, the probabilities of any new molecule creating a prof-

itable return were about 1 in 15,000.57

"But if Gilmartin is worried," wrote Business Week in 1998,

"he doesn't show it." 58 And why would Merck feel so confident

about its prospects? The second paragraph of the chairman's

message in the 1998 annual report reveals part of the answer:

Vioxx.59 In 1999, Merck received FDA approval and launched

Vioxx, touting it as a potentially huge blockbuster, emblazoning

the front cover of its annual report with "Vioxx: Our biggest,

fastest and best launch ever." 60

In March 2000, preliminary results of a study of more than

eight thousand rheumatoid arthritis patients demonstrated

Vioxx's powerful advantage: a painkiller with fewer gastrointes-

tinal side effects than the painkiller naproxen. But the study also

raised troubling, albeit inconclusive, questions about Vioxx's

safety, indicating that those taking naproxen had lower rates of

"cardiovascular thrombotic events" (in lay terms, heart attacks

and strokes) than the Vioxx group.61 Since the study was de-

signed without a placebo-taking control group, the results could

be interpreted a number of ways: naproxen lowers cardiovascu-

lar risk, Vioxx increases cardiovascular risk, or some combina-

tion of the two. Naproxen, like aspirin, has what scientists call

"cardioprotective" effects, and Merck concluded that the differ-

ence in the frequency of cardiovascular events was "most likely

due to the effects of naproxen." 62

By 2002, Vioxx sales had climbed to $2.5 billion, and by 2004

it had generated more than one hundred million prescriptions in

52 JIM COLLINS

the United States, including one for Gilmartin's wife.63 Mean-

while, outside critics continued to raise questions about Vioxx.64

Merck countered with interim findings from studies involving

twenty-eight thousand patients that did not show higher rates of

cardiovascular risk for those taking Vioxx.65

Then in mid-September 2004, the safety monitors for the

Vioxx study of colon-polyp prevention received Federal Express

deliveries containing alarming data. According to Brooke Mas-

ters and Marc Kaufman, who covered the story for the Washing-

ton Post, the safety-monitor team pored over the data for several

days and couldn't escape a frightening conclusion, later summa-

rized in Merck's annual report: "there was an increased relative

risk for confirmed cardiovascular events, such as heart attack

and stroke, beginning after 18 months of treatment in the pa-

tients taking Vioxx compared to those taking placebo." 66 The

study's steering committee halted the trials, sending shock

waves throughout Merck.67 "It was totally out of the blue," Gil-

martin told the Boston Globe when he learned of the steering

committee's conclusion. "I was stunned." 68 To his credit, Gil-

martin made a decision, clear and unequivocal; on September

30, within a week of when he learned of the new data, Merck

voluntarily removed Vioxx from the market. Merck's stock

dropped from $45 to $33, chopping off more than $25 billion

in market capitalization in one day, and shareholders lost

another $15 billion as its stock dropped below $26 in early

November-$40 billion in market valuation gone in six weeks.69

The final perspective on Vioxx-of the courts, of the market-

place, of investors, of the medical and scientific community, of

the general public-continues to evolve as I write these words.

My point here is not to argue that Merck leaders were villains

HOW THE MIGHTY FALL 53

seeking profits at the expense of patient lives or, conversely, that

they were heroes who courageously removed a hugely profit-

able product without anyone requiring that they do so. Nor is

my point that Merck made a mistake by pursuing a blockbuster;

Merck has pursued blockbusters for decades, often with great

success and benefit to patients. My point, rather, is that Merck

committed itself to attaining such huge growth that Vioxx had

to be a blockbuster, which, in turn , positioned the company for

a gigantic fall ifVioxx failed to live up to its promise.

If Merck had underpromised and overdelivered as a consistent

practice, we might not be writing about Merck's spectacular

tumble. But that's the problem; hubris can lead to making brash

commitments for more and more and more. And then one day,

just when you've elevated expectations too far, you fall . Hard.

Merck's quest for growth subtly diluted the power of Merck's

purpose-driven philosophy that made the company great in the

first place. In 1950, George Merck II articulated a visionary busi-

ness purpose: "We try never to forget that medicine is for the

people. It is not for the profits. The profits follow, and if we have

remembered that, they have never failed to appear." 70 It's not

that Merck abandoned this core purpose (indeed, Gilmartin

drew inspiration from it when he removed Vioxx from the

market), so much as it appears to have been relegated to more

of a background role, a constraint on growth rather than the

company's fundamental driving force.

54 JIM COLLINS

All three companies from Built to Last that fell in this

analysis-Merck, Motorola, and HP-pursued outsized growth

to their detriment. Their founders had built their companies

upon noble purposes far beyond just making money. George

Merck II passionately sought to preserve and improve human

life. Paul Galvin obsessed over the idea of continuous renewal

through unleashing human creativity. Bill Hewlett and David

Packard believed that HP existed to make technical contribu-

tions, with profit serving as only a means and measure of achiev-

ing that purpose. George Merck II, Paul Galvin, Bill Hewlett,

and David Packard-they viewed expanding and increasing

scale not as the end goal, but as a residual result, an inevitable

outcome, of pursuing their core purpose. Later generations

forgot this lesson. Indeed, they inverted it.

Public corporations face incessant pressure from the capital

markets to grow as fast as possible, and we cannot deny this fact.

But even so, we've found in all our research that those who re-

sisted the pressures to succumb to unsustainable short-term

growth delivered better long-term results by Wall Street's own

definition of success, namely cumulative returns to investors.

Those who built the great companies in our research distin-

guished between share value and share price, between sharehold-

ers and shareflippers, and recognized that their responsibility lay

in building shareholder value, not in maximizing shareflipper

price. The greatest leaders do seek growth-growth in perfor-

mance, growth in distinctive impact, growth in creativity,

growth in people-but they do not succumb to growth that un-

dermines long-term value. And they certainly do not confuse

growth with excellence. Big does not equal great, and great does

not equal big.

HOW THE MIGHTY FALL 55

BREAKING PACKARD'S LAW

To be clear, the problems of Stage 2 stem not from growth per

se, but from the undisciplined pursuit of more. While the Merck

story highlights the perils of growth obsession, we can see Stage

2 behavior in any number of other forms. Discontinuous leaps

into arenas for which you have no burning passion is undisci-

plined. Taking action inconsistent with your core values is un-

disciplined. Investing heavily in new arenas where you cannot

attain distinctive capability, better than your competitors, is un-

disciplined. Launching headlong into activities that do not fit

with your economic or resource engine is undisciplined. Addic-

tion to scale is undisciplined. To neglect your core business

while you leap after exciting new adventures is undisciplined.

To use the organization primarily as a vehicle to increase your

own personal success-more wealth, more fame, more power-

at the expense of its long-term success is undisciplined. To com-

promise your values or lose sight of your core purpose in pursuit

of growth and expansion is undisciplined.

One of the most damaging manifestations of Stage 2 comes

in breaking "Packard's Law." (We named this law after David

Packard, cofounder of HP, inspired by his insight that a great

company is more likely to die of indigestion from too much op-

portunity than starvation from too little.71 Ironically, as we'll

see when we get to Stage 4, HP itselflater broke Packard's Law.)

Packard's Law states that no company can consistently grow

revenues faster than its ability to get enough of the right people

to implement that growth and still become a great company.

Though we have discussed Packard's Law in our previous work,

as we looked through the lens of decline we gained a more pro-

56 JIM COLLINS

found understanding: if a great company consistently grows

revenues faster than its ability to get enough of the right people

to implement that growth, it will not simply stagnate; it will

fall.

Any exceptional enterprise depends first and foremost upon

having self-managed and self-motivated people-the #1 ingre- dient for a culture of discipline. While you might think that

such a culture would be characterized by rules, rigidity, and bu-

reaucracy, I'm suggesting quite the opposite. If you have the

right people, who accept responsibility, you don't need to have a

lot of senseless rules and mindless bureaucracy in the first place!

(For a brief discussion of the right people for key seats, see

Appendix 5.)

But a Stage 2 company can fall into a vicious spiral. You break

Packard's Law and begin to fill key seats with the wrong people;

to compensate for the wrong people's inadequacies, you insti-

tute bureaucratic procedures; this, in turn, drives away the right

people (because they chafe under the bureaucracy or cannot tol-

erate working with less competent people or both); this then

invites more bureaucracy to compensate for having more of the

wrong people, which then drives away more of the right people;

and a culture of bureaucratic mediocrity gradually replaces a

culture of disciplined excellence. When bureaucratic rules erode

an ethic of freedom and responsibility within a framework of

core values and demanding standards, you've become infected

with the disease of mediocrity.

HOW THE MIGHTY FALL

If I were to pick one marker above all others to use as a warning

sign, it would be a declining proportion of key seats filled with

the right people. Twenty-four hours a day, 365 days a year, you

should be able to answer the following questions: What are the

key seats in your organization? What percentage of those seats

can you say with confidence are filled with the right people?

What are your plans for increasing that percentage? What are

your backup plans in the event that a right person leaves a key

seat?

57

One notable distinction between wrong people and right

people is that the former see themselves as having "jobs," while

the latter see themselves as having responsibilities. Every person

in a key seat should be able to respond to the question "What do

you do?" not with a job title, but with a statement of personal

responsibility. 'Tm the one person ultimately responsible for x

and y. When I look to the left, to the right, in front, in back, there is no one ultimately responsible but me. And I accept that

responsibility." When executive teams visit our research labo-

ratory, I sometimes begin by challenging them to introduce

themselves not by using their titles, but by articulating their re-

sponsibilities. Some find this to be easy, but those who have lost

(or not yet built) a culture of discipline find this question to be

terribly difficult.

As Bank of America rose to greatness, the responsibility for

sound loan decisions lay squarely on the shoulders ofloan man-

agers distributed across California; the loan manager in Modesto

or Stockton or Anaheim had nowhere to look but in the mirror

58 JIM COLLINS

to assign responsibility for the quality of his or her loan portfo-

lio. As Bank of America began to fall, however, a complex layer-

ing of about one hundred loan committees and as many as

fifteen required signatures subverted the concept of responsibil-

ity. Who is the one person responsible for a loan decision? IfI've

put the loan request through a dozen committees and obtained

fifteen signatures, then it can't possibly be my fault if it turns out

to be a bad loan. Someone else-the system!-is responsible.

Mediocre loan officers could hide behind the bureaucracy, while

self-disciplined officers found themselves increasingly frustrated

by a system designed to compensate for incompetent colleagues.

"One of the great tragedies of this company," commented a

Bank of America executive at the time, "is that it lost a lot of

good young people because we weren't a meritocracy." 72

Throughout our research studies, we found that dramatic

leaps in performance came when an executive team of excep-

tiona 1 leaders coalesced and made a series of outstanding, su-

premely well-executed decisions. Whether a company sustains

exceptional performance depends first and foremost on whether

it continues to have the right people in power, which brings us

to the last point in this stage.

PROBLEMATIC SUCCESSION OF POWER

On March 15, 44 BC, Gaius Julius Caesar bled to death in

Pompeii's Theatre of Rome, punctured by twenty-three stab

wounds. In his will, Caesar had adopted and named as his heir

his grandnephew, Octavian. Only eighteen years old at the time,

Octavian first appeared to be a marginal player compared to

HOW THE MIGHTY FALL 59

Caesar's longtime allies Mark Antony and Cleopatra (the mother

of Caesar's biological son), and of little threat to Caesar's ene-

mies. But Octavian proved a shrewd student of power, assem-

bling legions of Julius Caesar's loyal soldiers into a private army

and demolishing Caesar's enemies in 42 BC before facing off

against Antony and Cleopatra. Meanwhile, Octavian legiti-

mized his power in the eyes of the Senate, deftly refusing honors

that might have appeared contrary to Roman tradition and

accepting only powers-often with feigned protestations-

granted by the Senate. Step by step over the course of two

decades, Octavian transformed himself into the first emperor of

Rome, known to history as Augustus. He ruled the Empire for

more than four decades.

In his wonderful course "Emperors of Rome," Professor Gar-

rett G. Fagan shows Augustus to be one of the most effective

statesmen in history. He unified Rome, eliminating the civil

wars that had ripped apart the Republic.73 He redesigned the

system of government, brought peace, expanded the Empire,

and increased prosperity. He avoided ostentation, living in a

relatively modest house, and displayed a peculiar genius for po-

litical maneuvering, achieving objectives largely by making

"suggestions" rather than invoking formal legal or military

power.

But Augustus failed to solve a chronic problem that signifi-

cantly hurt the Empire over the subsequent centuries: succes-

sion. After Augustus, Rome ping-ponged between competent

leaders and despotic, even semi-deranged, titans like Caligula

and Nero. And while the fall of the Roman Empire cannot be

explained entirely by problematic successions of power, Augus-

tus failed to create effective mechanisms that would produce

60 JIM CO LL INS

an effective transfer of power to generations of outstanding

leadership.

Leaders who fail the process of succession set their enterprises

on a path to decline. Sometimes they wait too long; sometimes

they never address the question at all ; sometimes they have bad

luck and their chosen successor leaves or dies; sometimes they

deliberately set their successor up for failure ; and sometimes

they just flat out pick badly. But however and whenever it hap-

pens, one of the most significant indicators of decline is the real-

location of power into the hands of leaders who fail to comprehend

and/or lack the will to do what must be done-and equally, what

must not be done-to sustain greatness.

In all but one case in our analysis of decline (the one excep-

tion being Circuit City), we observed signs of a problematic

succession of power by the end of Stage 2. We observed each

of the following modes of turmoil in at least one of the fallen

companies:

• A domineering leader fails to develop strong successors

(or drives strong successors away) and thereby creates a

leadership vacuum when he or she steps away.

• An able executive dies or departs unexpectedly, with

no strong replacement to step smoothly into the role.

• Strong successor candidates turn down the opportunity

to become CEO.

HOW THE MIGHTY FALL

• Strong successor candidates unexpectedly leave the

company.

• The board of directors is acrimoniously divided on the

designation of a leader, creating an adversarial "we"

and "they" dynamic at the top.

• Leaders stay in power as long as they can and then pass

the company to leaders who are late in their careers

and assume a caretaker role.

• Monarchy-style family dynamics favor family mem-

bers over non-family members, regardless of who

would be the best leader.

• The board brings in a leader from the outside who

doesn't fit the core values, and the leader is ejected by

the culture like a virus.

• The company chronically fails at getting CEO selection

right.

61

From what we've seen in this study, Stage 2 overreaching

tends to increase after a legendary leader steps away. Perhaps

those who assume power next feel extra pressure to be bold,

visionary, and aggressive, to live up to the implicit expectations

of their predecessor or the irrational expectations of Wall Street,

which accentuates Stage 2. Or perhaps legendary leaders pick

successors less capable in a subconscious (or maybe even con-

scious) strategy to increase their own status by comparison. But

whatever the underlying dynamic, when companies engage in

Stage 2 overreaching and bungle the transfer of power, they tend

to hurtle downward toward Stage 3 and beyond.

Over the years of conducting my research, I've been a leader-

62 JIM COLLINS

ship skeptic, influenced by the evidence that complex organiza-

tions achieve greatness through the efforts of more than one

exceptional individual. The best leaders we've studied had a pe-

culiar genius for seeing themselves as not all that important,

recognizing the need to build an executive team and to craft a

culture based on core values that do not depend upon a single

heroic leader. But in cases of decline, we find a more pronounced

role for the powerful individual, and not for the better. So, even

though I remain a leadership skeptic, the evidence leads me to

this sobering conclusion: while no leader can single-handedly

build an enduring great company, the wrong leader vested with

power can almost single-handedly bring a company down.

Choose well.

HOW THE MIGHTY FALL

MARKERS FOR STAGE 2

• 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 the breaking point; unable to deliver consistent

tactical excel lence, the institution frays at the edges.

• UNOISCIPLINED DISCONTINUOUS LEAPS: The enterprise makes

dramatic moves that fail at least one of the following three tests:

l. Do they ignite passion and fit with the company's core values?

2. Can the organization be the best in the world at these activi-

ties or in these arenas? 3. Will these activities help drive the

organization's economic or resource engine?

• DECLINING PROPORTION OF RIGHT PEOPLE IN KEY SEATS: There

is a declining proportion of right people in key seats, because of

losing the right people and/or growing beyond the organization's

abi lity to get enough people to execute on that growth with

excellence (e.g., breaking Packard's Law).

• EASY CASH ERODES COST DISCIPLINE: The organization re-

sponds to increasing costs by increasing prices and revenues

rather than increasing discipline.

• BUREAUCRACY SUBVERTS DISCIPLINE: A system of bureau-

cratic rules subverts the ethic of freedom and responsibility that

marks a culture of discipline; people increasingly think in terms

of "jobs" rather than responsibilities.

• PROBLEMATIC SUCCESSION OF POWER: The organization expe-

riences leadership-transition difficulties, be they in the form of

poor succession planning, failure to groom excellent leaders

63

64 JIM COLLINS

from within, political turmoil, bad luck, or an unwise selection of

successors.

• PERSONAL INTERESTS PLACED ABOVE ORGANIZATIONAL INTER-

ESTS: People in power allocate more for themselves or their

constituents-more money, more privileges, more fame, more

of the spoils of success-seeking to capitalize as much as

possible in the short term, rather than investing primarily in

building for greatness decades into the future.

STAGE 3: DENIAL OF RISK AND PERIL

Stage 1 Hubris Born of Success

Stage 2 Undisciplined

Pursuit of More

Stage 3 Denial of Risk

and Peril

Stage 4 Grasping for

Salvation

Stage 5 Capitulation to Irrelevance or

Death

In 1985, a Motorola engineer vacationed in the Bahamas. His wife tried to keep in touch with her clients via cell phone (which

had only recently been offered to consumers for the first time)

but found herself stymied. This sparked an idea: why not create

a grid of satellites that could ensure a crisp phone connection

from any point on Earth? You may remember reading how New

66 JIM COLLINS

Zealand mountaineer Rob Hall died on Mount Everest in 1996

and how he bade farewell to his wife thousands of miles away as

his life ebbed away in the cold at 28,000 feet. His parting words-

"Sleep well, my sweetheart. Please don't worry too much"-

riveted the world's attention. Without a satellite phone link,

Hall would not have been able to have that last conversation

with his life partner. Motorola envisioned making this type of

anywhere-on-Earth connection available to people everywhere

with its bold venture called Iridium.74

Motorola's second-generation chief executive Robert Galvin

had assiduously avoided big discontinuous leaps, favoring in-

stead a series of well-planned, empirically tested evolutionary

steps in which new little things turned into new big things that

replaced old big things, in a continuous cycle of renewal. Galvin

saw Iridium as a small experiment that, if successful, could turn

into a Very Big Thing. In the late 1980s, he allocated seed capital

to prototype a low-orbiting satellite system. In 1991, Motorola

spun out the Iridium project into a separate company, with Mo-

torola as the largest shareholder, and continued to fund concept

development. By 1996, Motorola had invested $537 million in

the venture and had guaranteed $750 million in loan capacity on

Iridium's behalf, the combined amount exceeding Motorola's

entire profit for 1996.75

In their superb analysis "Learning from Corporate Mistakes:

The Rise and Fall of Iridium," Sydney Finkelstein and Shade H.

Sanford demonstrate that the pivotal moment for Iridium came

in 1996, not at its inception in the 1980s.76 In the technology-

development stage prior to 1996, Iridium could have been sus-

pended with relatively little loss. After that, it entered the launch

HOW THE MIGHTY FALL 67

phase. To go forward would require a greater investment than

had been spent for all the development up to that point; after all,

you can't launch sixty-six satellites as a cheap experiment.

But by 1996, years after Galvin had retired (and years after

he'd allocated seed capital), the case for Iridium had become

much less compelling. Traditional cellular service now blan-

keted much of the globe, erasing much ofIridium's unique value.

If the Motorola scientist's wife had tried to call her clients from

vacation in 1996, odds are she would have found a good cell con-

nection. Furthermore, the Iridium phones had significant disad-

vantages. A handset nearly the size of a brick that worked only

outside (where you can get a direct ping to a satellite) proved less

useful than a traditional cell phone. How many people would

lug a brick halfway around the world, only to take the elevator

to street level to make an expensive phone call, or ask a cab

driver to stop in order to step onto a street corner to check in

with the office? Iridium handsets cost $3,000, with calls running

at $3 to $7 per minute, while cell phone charges continued to

drop. Sure, people in remote places could benefit from Iridium,

but remote places lacked the one thing Iridium needed: custom-

ers. There just aren't that many people who need to call home

from the South Pole or the top of Mount Everest.77

When the Motorola engineer came up with the idea for

Iridium in 1985, few people envisioned cellular service's nearly

ubiquitous coverage. But by 1996, empirical evidence weighed

against making the big launch. Meanwhile, Motorola had multi-

plied revenues fivefold, from $5 billion to $27 billion, fueled by

its Stage 2-like commitment to double in size every five years (a

goal put in place after Robert Galvin retired).78 Motorola hoped

68 JIM COLLINS

for a big hit with Iridium, and its 1997 annual report boasted,

"With the development of the IRIDIUM® global personal com-

munications system, Motorola has created a new industry." 79

And so, despite the mounting negative evidence, Iridium

launched, and in 1998 went live for customers. The very next

year Iridium filed for bankruptcy, defaulting on $1.5 billion in

loans. 8o Motorola's 1999 proxy report recorded more than $2 bil-

lion in charges related to the Iridium program, which helped

accelerate Motorola's plummet toward Stage 4. 81

MAKING BIG BETS IN THE FACE OF

MOUNTING EVIDENCE TO THE CONTRARY

As companies move into Stage 3, we begin to see the cumula-

tive effects of the previous stages. Stage 1 hubris leads to Stage 2

overreaching, which sets the company up for Stage 3, Denial

of Risk and Peril. This describes what happened with Iridium.

In contrast, let's look at Texas Instruments (TI) and its grad-

ual evolution to become the Intel of digital-signal processing,

or DSP.

In the late 1970s, TI engineers came up with a great idea to

help children learn to spell: an electronic toy that "spoke" words

and then asked kids to type the word on a keypad. This was the

genesis of Speak & Spell, the first consumer product to use DSP

technology. (DSP chips enable analog chunks of data, such as

voice, music, and video, to be crunched and reassembled like

digital bits.) In 1979, TI made a tiny bet of $150,000 (less than

one hundredth of one percent of 1979 revenues) to further inves-

tigate DSP, and by 1986, TI had garnered $6 million in revenues

HOW THE MIGHTY FALL 69

from DSP chips-hardly enough to justify a bet-the-company

move, but enough evidence to support their continued explora-

tion ofDSP. TI customers found new uses for DSP (e.g., modems,

speech translation, and communications), and TI set up sepa-

rate DSP business units.82 Then in 1993, TI scored a contract to

create DSP chips for Nokia's digital cell phones, and by 1997, it

had DSP chips in more than twenty-two million phones.

And that's when TI set the audacious goal to become the Intel

of DSP. "When somebody says DSP," said CEO Tom Engibous,

"I want them to think of TI, just like they think of Intel when

they say microprocessors." 83 In a bold stroke, he sold both TI's

defense and memory-chip businesses, having the guts to shrink

the company to increase its focus on DSP. By 2004, TI had half

of the $ 8 billion rapidly growing DSP market. 84

Note that TI dared its big leap only after diligently turning

the DSP flywheel for fifteen years. It didn't bet big in 1978, when

it had the Speak & Spell. It didn't bet big in 1982, when it first put

DSP on a single chip. It didn't bet big in 1986, when it had only

$6 million in DSP revenues. Engibous set a big, hairy goal, to be

sure, but not one born of hubris or denial of risk. Drawing upon

two decades of growing empirical evidence, he set the goal

based on a firm foundation of proven success.

70 JIM COLLINS

The point is not that Motorola erred in its early development of

Iridium or that TI had greater prescience in developing DSP. If

you always knew ahead of time which new ideas would work for

sure, you would invest in only those. But you don't. That's why

great companies experiment with a lot of little things that might

not pan out in the end. At the start of Iridium and DSP, both

Motorola and TI wisely invested in small-scale experimentation

and development, but TI, unlike Motorola, bet big only once it

had the weight of accumulated empirical evidence on its side.

Audacious goals stimulate progress, but big bets without em-

pirical validation, or that fly in the face of mounting evidence,

can bring companies down, unless they're blessed with unusual

luck. And luck is not a reliable strategy.

Now you might be thinking, "OK, so just don't ignore the

evidence-just don't launch an Iridium when the data is so

clear-and we'll avoid Stage 3." But life doesn't always present

the facts with stark clarity; the situation can be confusing, noisy.

unclear, open to interpretation. And in fact. the greatest danger

comes not in ignoring clear and unassailable facts, but in misin-

terpreting ambiguous data in situations when you face severe or

catastrophic consequences if the ambiguity resolves itself in a

way that's not in your favor. To illustrate. I'm going to digress to

review the tale of a famous tragedy.

HOW THE MIGHTY FALL 71

TAKING RISKS BELOW THE WATERLINE

On the afternoon of January 27, 1986, a NASA manager con-

tacted engineers at Morton Thiokol, a subcontractor that pro-

vided rocket motors to NASA. The forecast for the Kennedy

Space Center in Florida, where the space shuttle Challenger sat in

preparation for a scheduled launch the next day, called for tem-

peratures in the twenties during early morning hours of the

28th, with the launch-time temperature expected to remain

below 30 degrees F. The NASA manager asked the Morton

Thiokol engineers to consider the effect of cold weather on the

solid-rocket motors, and the engineers quickly assembled to dis-

cuss a specific component called an O-ring. When rocket fuel

ignites, the rubber-like O-rings seal joints-like putty in a

crack-against searing hot gases that, if uncontained, could

cause a catastrophic exploSion.

The lowest launch temperature in all twenty-four previous

shuttle launches had been 53 degrees, more than twenty degrees

above the forecast for the next day's scheduled launch, and the

engineers had no conclusive data about what would happen to

the O-rings at 25 or 30 degrees. They did have some data to sug-

gest that colder temperatures harden O-rings, thereby increas-

ing the time they'd take to seal. (Think of a frozen rubber band

in your freezer contrasted with that same rubber band at room

temperature and how it becomes much less malleable.) The en-

gineers discussed their initial concerns and scheduled a telecon-

ference with thirty-four people from NASA and Morton Thiokol

for 8:15 p.m. Eastern. 85

The teleconference began with nearly an hour of discussion,

leading up to Morton Thiokol's engineering conclusion that it

72 JIM COLLINS

could not recommend launch below 53 degrees. NASA engi-

neers pointed out that the data were conflicting and inconclu-

sive. Yes, the data clearly showed O-ring damage on launches

below 60 degrees, but the data also showed O-ring damage on a

75-degree launch. "They did have a lot of conflicting data in

there," reflected a NASA engineer. "I can't emphasize that

enough." Adding further confusion, Morton Thiokol hadn't

challenged on previous flights that had projected launch tem-

peratures below 53 degrees (none close to the twenties, to be

sure, but lower than the now-stated 53-degree mark), which ap-

peared inconsistent with their current recommendations. And

even if the first O-ring were to fail, a redundant second O-ring

was supposed to seal into place.

In her authoritative book The Challenger Launch Decision,

sociologist Diane Vaughan demolishes the myth that NASA

managers ignored unassailable data and launched a mission ab-

solutely known to be unsafe. In fact, the conversations on the

evening before launch reflected the confusion and shifting views

of the participants. At one point, a NASA manager blurted, "My

God, Thiokol, when do you want me to launch, next April?"

But at another point on the same evening, NASA managers ex-

pressed reservations about the launch; a lead NASA engineer

pleaded with his people not to let him make a mistake and

stated, "I will not agree to launch against the contractor's rec-

ommendation." The deliberations lasted for nearly three hours.

If the data had been clear, would they have needed a three-hour

discussion? Data analyst extraordinaire Edward Tufte shows in

his book Visual Explanations that if the engineers had plotted the

data points in a compelling graphic, they might have seen a clear

trend line: every launch below 66 degrees showed evidence of

HOW THE MIGHTY FALL 73

O-ring damage. But no one laid out the data in a clear and con-

vincing visual manner, and the trend toward increased danger

in colder temperatures remained obscured throughout the late-

night teleconference debate. Summing up, the O-Ring Task

Force chair noted, "We just didn't have enough conclusive data

to convince anyone."

Convince anyone of what exactly? That's the crux of the

matter. Somehow, in all the dialogue, the decision frame had

turned 180 degrees. Instead of framing the question, "Can you

prove that it's safe to launch?"-as had traditionally guided

launch decisions-the frame inverted to "Can you prove that it's

unsafe to launch?" If they hadn't made that all-important shift or

if the data had been absolutely definitive, Challenger very likely

would have remained on the launch pad until later in the day.

After all, the downside of a disaster so totally dwarfed the down-

side of waiting a few hours that it would be difficult to argue for

running such an unbalanced risk. If you're a NASA manager

concerned about your career, why would you push for a decision

to launch if you saw a very high likelihood it would end in catas-

trophe? No rational person would do that. But the data were

highly ambiguous and the decision criteria had changed. Unable

to prove beyond a reasonable doubt that it was unsafe to launch,

Morton Thiokol reversed its stance and voted to launch, faxing

its confirmation to NASA shortly before midnight. At 11:38 the

next morning, in 36-degree temperatures, an O-ring failed upon

ignition, and 73 seconds later, Challenger exploded into a fireball.

All seven crew members perished as remnants of Challenger fell

nine miles into the ocean.

The Challenger story highlights a key lesson. When facing ir-

reversible decisions that have significant, negative consequences

74 JIM COLLINS

if they go awry-what we might call "launch decisions" -the

case for launch should require a preponderance of empirical

evidence that it's safe to do so. Had the burden of proof rested on

the side of safety ("If we cannot prove beyond a reasonable doubt

that it's safe to launch, we delay") rather than the other way

around, Challenger might have been spared its tragedy.

Bill Gore, founder ofW. L. Gore & Associates, articulated a

helpful concept for decision making and risk taking, what he

called the "waterline" principle. Think of being on a ship, and

imagine that any decision gone bad will blow a hole in the side

of the ship. If you blow a hole above the waterline (where the

ship won't take on water and possibly sink), you can patch the

hole, learn from the experience, and sail on. But if you blow a

hole below the waterline, you can find yourself facing gushers of

water pouring in, pulling you toward the ocean floor.86 And if

it's a big enough hole, you might go down really fast, just like

some of the financial-company catastrophes in 2008.

To be clear, great enterprises do make big bets, but they avoid

big bets that could blow holes below the waterline. When

making risky bets and decisions in the face of ambiguous or

conflicting data, ask three questions:

1. What's the upside, if events turn out well?

2. What's the downside, if events go very badly?

3. Can you live with the downside? Truly?

Suppose you are on the side of a cliff with a potential storm

bearing down, but you don't know for sure how bad the storm

will be or whether it will involve dangerous lightning. You have

to decide: do we go up, or do we go down? Two climbers in EI-

HOW THE MIGHTY FALL 75

dorado Canyon, Colorado, faced this scenario on a famous climb

called the Naked Edge. A Colorado summer storm roiled in the

distance, and they had to decide whether to continue with their

planned outing for the day. Now think of the three questions.

What's the upside if the storm passes by uneventfully? They

complete their planned ascent for the day. What's the downside

if the storm turns into a full-fledged fusillade oflightning while

they're sitting high on the exposed summit pitch? They can die.

They chose to continue. They anchored into the top of the cliff,

perched right out on the top of an exposed pinnacle, just as the

storm rushed into the canyon. The ropes popped and buzzed

with building electricity. Then-bang!-a lightning bolt hit the

top climber, melting his metal gear and killing him instantly. 87

Of course, probabilities play a role in this thinking. If the

probability of events going terribly awry is, for all practical pur-

poses, zero, or ifit is small but stable, that leads to different deci-

sions than if the probability is high, increasing, unstable, or

highly ambiguous. (Otherwise, we would never get on a com-

mercial airliner, never mind climb the Naked Edge or EI Capi-

tan.) The climbers on the Naked Edge saw increasing probability

of a bad storm in an asymmetric-risk scenario (minimal upside

with catastrophic downside) yet went ahead anyway.

The 2008 financial crisis underscores how mismanaging

these questions can destroy companies. As the housing market

bubble grew, so did the probability of a real estate crash. What's

the upside of increasing leverage dramatically (in some cases 30

to 1, or more) and increasing exposure to mortgage-backed se-

curities? More profit, if the weather remains clear and calm.

What's the downside if the entire housing market crashes and

we enter one of the most perilous credit crises in history? Mer-

76 JIM COLLINS

rill Lynch sells out its independence to Bank of America. Fannie

Mae gets taken over by the government. Bear Stearns flails and

then disappears in a takeover. And Lehman Brothers fails out-

right, sending the financial markets into a liquidity crisis that

sends the economy spiraling downward.

A CULTURE OF DENIAL

Of course, not every case of decline involves big launch deci-

sions like Iridium, or lethal decisions like going for the summit

on a dangerous rock climb. Companies can also gradually weaken, and as they move deeper into Stage 3, they begin to ac-

cumulate warning signs. They might see a decline in customer

engagement, an erosion of inventory turns, a subtle decline in

margins, a loss in pricing power, or any number of other indica-

tors of growing mediocrity. What indicators should you most

closely track? For businesses, our analysis suggests that any

deterioration in gross margins, current ratio, or debt-to-equity

ratio indicates an impending storm. Our financial analyses re-

vealed that all eleven fallen companies showed a negative trend

in at least one of these three variables as they moved toward

Stage 4, yet we found little evidence of significant management

concern and certainly not the productive paranoia they should

have had about these trends. Customer loyalty and stakeholder

engagement also deserve attention. And as we discussed in

Stage 2, take heed of any decline in the proportion of right

people in key seats.

As companies hurtle deeper into Stage 3, the inner workings

of the leadership team can veer away from the behaviors we

HOW THE MIGHTY FALL 77

found on teams that built great companies. In the table

"Leadership-Team Dynamics," I've contrasted the leadership

dynamics of companies on the way down with companies on

the way up.

LEADERSHIP-TEAM DYNAMICS: ON THE WAY DOWN VERSUS ON THE WAY UP

Teams on the Way Down Teams on the Way Up

People shield those in power from People bring forth unpleasant

grim facts, fearful of penalty and facts-"Come here, look, man, this

criticism for shining light on the is ug/y"-to be discussed; leaders harsh realities. never criticize those who bring forth

harsh realities.

People assert strong opinions with- People bring data, evidence, logiC,

out providing data, evidence, or a and solid arguments to the discus-

solid argument. sion.

The team leader has a very low The team leader employs a Socratic

questions-to-statements ratio, avoid- style, using a high questions-to-

ing critical input and/or allowing statements ratio, challenging people,

sloppy reasoning and unsupported and pushing for penetrating insight.

opinions.

Tearn members acquiesce to a deci- Team members unify behind a

sion yet do not unify to make the decision once made and work to

decision successful, or worse, un- ma ke the decision succeed, even if

dermine the decision after the fact. they vigorously disagreed with the

decision.

Team members seek as much credit Each team member credits other

as possible for themselves yet people for success yet enjoys the

do not enjoy the confidence and confidence and admiration of his or

admiration of their peers. her peers.

Team members argue to look smart Team members argue and debate,

or to improve their own interests not to improve their personal posi-

rather than argue to find the best tion, but to find the best answers to

answers to support the overall support the overall cause.

cause.

78 JIM COLLINS

The team conducts "autopsies with The team conducts "autopsies with- blame," seeking culprits rather than out blame," mining wisdom from

wisdom. painful experiences.

Team members often fail to deliver Each team member delivers excep- exceptional results, and blame tional results, yet in the event of a other people or outside factors for setback, each accepts full responsi-

setbacks, mistakes, and failures. bility and learns from mistakes.

One common behavior oflate Stage 3 (and that often carries

well into Stage 4) is when those in power blame other people or

external factors-or otherwise explain away the data-rather

than confront the frightening reality that the enterprise may be

in serious trouble. As IBM began its historic fall in the late 1980s

and early 1990s, it faced the onslaught of distributed computing

that threatened its mainframe business. An executive who re-

ported these disturbing trends to IBM senior leadership found

himself chastised, a powerful IBM leader brushing his report

aside with a dismissive sweep of the hand: "There must be some-

thing wrong with your data." The young executive knew then

IBM would fall. "Doing a start-up seemed less risky than work-

ing in a climate of denial," he later quipped about his decision to

leave IBM to become an entrepreneur. IBM reorganized and re-

engineered, but it didn't successfully address the perilous ero-

sion of its position until it had fallen so far that it would be

likened in 1992 to a dinosaur, soon to be extinct. In his historic

turnaround ofIBM (which we will discuss in subsequent pages),

Louis V. Gerstner,jr. confronted the harsh reality ofIBM's short-

comings head-on, challenging his team early in his tenure, "One

hundred and twenty-five thousand IBMers are gone ... Who

did it to them? Was it an act of God? These guys came in and beat US."88

HOW THE MIGHTY FALL 79

In this analysis, we found evidence of externalizing blame

during the era of decline in seven of eleven cases. When Zenith

hit a hard patch in the mid-1970s, its CEO pointed out the

window to a range of factors: "Who could have predicted the

Arabs could have gotten together on any subject? Who could

have foreseen Watergate? The great inflation we had? ... Then

we were hit by a strike." 89 Zenith also began to blame "unfair"

Japanese competition for eroding profits and declining market

share. Even if the Japanese did compete unfairly (although the

Justice Department did not act in response to Zenith's pleas for

help), Zenith's response to the Japanese resembled that of the

American auto industry in the same era, a failure to confront

head-on the fact that the Japanese had learned how to lower

costs and increase quality. Shortly thereafter, Zenith fell into Stage 4.

One final manifestation of denial deserves special attention:

obsessive reorganization. By 1961, Scott Paper had built the most

successful paper-based consumer products franchise in the

world, with commanding positions in all manner of products,

including napkins, towels, and tissue. Then P&G entered Scott's

territory for the first time, while other companies like Kimberly-

Clark and Georgia Pacific perSistently encroached on Scott's

markets. P&G launched Bounty paper towels on the high end,

while private label brands encircled Scott from below. From

1960 to 1971, Scott's share of the paper-based consumer business

fell from nearly half the market to a third.90 Then in 1971, P&G

went national with its Charmin toilet tissue-a direct assault on

one of Scott's most important product lines.

And how did Scott respond?

By reorganizing.91

80 JIM COLLIN S

Scott restructured marketing and research, moving boxes

around on the organizational chart, but failed to mount a

vigorous response to Charmin for five years,,2 Five years! Scott

continued to restructure through the 1980s, at one point reorga-

nizing three times in four years.93 With eroding market share in

nearly every category, Scott Paper fell into Stage 4.94

Reorganizations and restructurings can create a false sense that

you're actually doing something productive. Companies are in

the process of reorganizing themselves all the time; that's the

nature of institutional evolution. But when you begin to respond

to data and warning signs with reorganization as a primary strat-

egy, you may well be in denial. It's a bit like responding to a

severe heart condition or a cancer diagnosis by rearranging your

living room.

There is no organizational utopia. All organizational struc-

tures have trade-offs, and every type of organization has ineffi-

ciencies. We have no evidence from our research that anyone

structure is ideal in all situations, and no form of reorganization

can make risk and peril melt away.

HOW THE MIGHTY FALL

MARKERS FOR STAGE 3

• AMPLIFY THE POSITIVE, DISCOUNT THE NEGATIVE: There is a

tendency to discount or explain away negative data rather than

presume that something is wrong with the company; leaders

highlight and amplify external praise and publicity.

• BIG BETS AND BOLO GOALS WITHOUT EMPIRICAL VALIDATION:

Leaders set audacious goals and/or make big bets that aren't

based on accumulated experience, or worse, that fly in the face

of the facts.

• INCURRING HUGE DOWNSIDE RISK BASED ON AMBIGUOUS DATA:

When faced with ambiguous data and decisions that have a po-

tentially severe or catastrophic downside, leaders take a positive

view of the data and run the risk of blowing a hole "below the

waterline."

• EROSION OF HEALTHY TEAM DYNAMICS: There is a marked

decline in the quality and amount of dialogue and debate; there

is a shift toward either consensus or dictatorial management

rather than a process of argument and disagreement followed

by unified commitment to execute decisions.

• EXTERNALIZING BLAME: Rather than accept full responsibility

for setbacks and failures, leaders point to external factors or

other people to affix blame.

• OBSESSIVE REORGANIZATIONS: Rather than confront the

brutal realities, the enterprise chronically reorganizes; people

are increasingly preoccupied with internal politics rather than

external conditions.

81

82 JIM COLLINS

• IMPERIOUS DETACHMENT: Those in power become more im-

perious and detached; symbols and perks of executive-class

status amplify detachment; plush new office buildings may

disconnect executives from daily life.

STAGE 4: GRASPING FOR SALVATION

Stage 1 Hubris Born of Success

Stage 2 Undisciplined

Pursuit of More

Stage 3 Denial of Risk

and Peril

5",4 Graspins for

Salvation

Stage 5 Capitulation to Irrelevance or

Death

From 1992 through 1998, HP's CEO Lew Platt led his company to quintuple profits and multiply cumulative stock returns by

more than five times, a performance that would make Platt #11

on a ranking of wealth creators over a twenty-five-year period

according to Chief Executive magazine. Yet by early 1999, Platt

would be regarded by many-investors, analysts, the business

84 JIM COLLINS

media-as struggling, perhaps even failing, as HP tried to get its

bearings in the new Internet economy.95

While I do not share the assessment of Platt as a failure, he

did make one misstep that set HP and himself up for a fall: trying

to grow an increasingly large company at an unsustainable rate.

It had taken HP more than half a century to reach $15 billion in

annual revenues; under Platt, it took only four years to break

$30 billion and only three additional years to surpass $45 billion.

Unable to sustain its torrid growth rate, HP hit a wall in 1998

and disappointed Wall Street for five quarters. If Platt had left

some growth on the table, thereby making it easier to maintain

a smooth growth trajectory, HP might have soared right through

the late 1990s as a success story. Instead, Platt was out of a job.96

In January 1999, HP's board of directors gathered at the

Garden Court Hotel in Palo Alto, California. Two well-written

chronicles of this era, Backfire by Peter Burrows and Perfect

Enough by George Anders, describe the meeting as a pivotal

moment. HP employees had watched first with befuddlement

then amazement then fear as the Great Internet Bubble of the

late 1990s distorted the laws of economics. By 1999, Internet

companies like Amazon and Yahoo! had zoomed from zero to

more than $15 billion in market capitalization in five years-a

feat that'd taken HP more than ten times as long.97

Whereas Platt, with his thick glasses, penchant for driv-

ing plain-vanilla Ford Taurus cars, and humble eat-in-the-Iunch-

room-with-employees demeanor, might have been ideal for an

earlier era, HP's stalling growth and languishing stock price

(relative to the skyrocketing technology sector) lent credence to

a growing worry that HP needed an entirely new type ofleader.

And so the fifty-seven-year-old Platt suggested that perhaps he

HOW THE MIGHTY FALL 85

should step aside early and give the keys to the next generation.

The board accepted his resignation and launched a search for

HP's next CEO.98

On July 19, 1999, HP announced Platt's replacement, Carly

Fiorina from Lucent Technologies. In 1998, Fortune had named

this "supersaleswoman" the #1 "Most Powerful Woman in

Business," beating out Oprah Winfrey for the top spot.99 The an-

nouncement that staid, old HP had hired the most powerful,

glamorous, exciting, magnetic, superstar female executive in

the world ignited a frenzy that stunned even Fiorina. Not only

did Forbes, Fortune, and Business Week want a slice of the story,

but so did Big Media like The Oprah Wilifrey Show, Diane Sawyer,

Glamour, and Vogue. To Fiorina's credit, she did not accept all the

invitations, turning down some of the most high-profile ones.lOO

Still, the calls poured in and HP found itself with a celebrity

CEO, a business rock star who could charm and dazzle and

whose very presence created a media onslaught. Within forty-

eight hours of becoming CEO, Fiorina attracted attention at

prominent outlets like the Wall Street Journal, CNBC, the Wash-

ington Post, and the New York Times. Within two weeks, Business

Week featured her in a cover story.lOl

Quite a contrast to Louis V. Gerstner, Jr., the CEO brought in

to lead IBM (HP's success contrast in this analysis) during its

dark days in 1993. When USA Today offered to publicize a "daily

progress chart" as Gerstner moved through his first 100 days,

he replied, "No, thank you. We're going dark for a bit while we

assess the task at hand." 102 Instead of going to headquarters on

his first day, he chose to visit an international managers' meet-

ing. But Gerstner didn't have an IBM security bcrdge yet, and he

found himself stranded and forlorn outside a locked, imposing

86 JIM COLLINS

office building. "There I was, the new CEO, knocking helplessly

on the door, hoping to draw someone's attention to let me in,"

Gerstner wrote in his wonderful book Who Says Elephants Can't

Dance? "After a while a cleaning woman arrived, checked me

out rather skeptically, then opened the door-I suspect more to

stop my pounding on the door than from any sense on her part

that I belonged on the inside rather than the outside of the build-

ing. I wandered around and eventually found the conference

room where the meeting was just about to begin." 103

Shortly into her tenure, Fiorina starred in a television com-

mercial, standing in front of the fabled Palo Alto garage where

Hewlett and Packard started their company in the late 1930s.

"The company of Bill Hewlett and Dave Packard is being rein-

vented," she beautifully articulated. "The original start-up will

act like one again. Watch!" 104 In conjunction with an army of

fellow "change warriors," Fiorina led a dramatic and inspiring

transformation, motivating the troops with her soaring mes-

sage.105 She set grand, sweeping strategies, unifying HP's brand

under the slogan "Invent," creating marketing sizzle, and galva-

nizing HP people to move at Net Speed. Forbes ran a cover story

titled "The Cult of Carly," the opening page of the article blaring

in a font size that filled nearly half a page, "All Carly, All the

Time," and quoting Fiorina later in the article that·"Leadership

is a performance." 106 Fiorina gave a rousing speech to a packed

gathering ofHP faithful, "We owe you a very clear vision of the

future ... and that's what we intend to give you." 107

Gerstner took a very different approach, stating at his first

public discussion about IBM, "The last thing IBM needs right

now is a vision." By this, Gerstner did not mean that IBM

shouldn't ever have a vision, but that his first priorities lay in

HOW THE MIGHTY FALL 87

more basic activities: making sure he had the right people in key

seats ("my top priority during those first few weeks"), regaining

profitability, increasing cash flow, and above all, putting the cus-

tomer back at the center of everything IBM did. lOS Gerstner took

a pedestrian approach, building on existing strengths and work-

ing with "massive amounts of quantitative analysis." 109 He took

nearly three months to thoroughly understand IBM's situation.

"It would not be believable that after 30 days somebody could

layout a timetable for changing a company of this size," Gerst-

ner told Fortune editor David Kirkpatrick. "Besides, I really do

want to disabuse your readers of the concept that there's go-

ing to be this grand plan that's going to emerge from the new

management at some point. It isn't going to happen."

At the end of Gerstner's first 100 days, USA Today ran a cover

story highlighting the fact that IBM stock had declined 6 percent

since he became CEO, in large part because, in the words of one

critical analyst, "He's done nothing." Another summed up,

"Clearly, he is not a miracle worker." When asked about the

sense of crisis at IBM, Gerstner responded tersely, "I don't have

a sense of crisis. I have a sense of urgency that never changes,

whether we're doing well or we're doing poorly ... But by no

means do I think this company is in crisis." 110

Gerstner's self-imposed discipline to get the right people in

place first, then proceed to understand IBM's situation, and only

then to settle upon a vision and strategy contrasted with Fiorina's

approach. In a Business Week interview conducted within one

day of HP's announcement of her as CEO, Fiorina mapped out

her priorities, withJob One being to craft a vision for HP as an

Internet company that could stitch together a vast range of prod-

uctS.l1l "I had come into HP with a beliefthat we were running

88 JIM COLLINS

out of time," Fiorina later wrote in her memoir, Tough Choices.

"I was in a hurry ... " 112 Gerstner and Fiorina also contrasted

with each other where it most matters: results. Gerstner steadily

increased profitability; Fiorina did not. IBM's return on sales

grew smoothly during Gerstner's tenure, starting at 5 percent

during his first full year and reaching 9 percent during his final

full year at Big Blue. In contrast, HP's return on sales showed a

much more erratic pattern, starting at 7 percent during Fiorina's

first full year, turning negative in 2002 with HP's first annual

loss in its 45-year history as a public company (due in large part

to restructuring and other charges related to a major acquisi-

tion), and ending at 4 percent during her last full year at HP.

Fiorina's tenure came to an end on February 7, 2005, when

the HP board met in special session at the Chicago airport.

Asked to leave the meeting after a short presentation, Fiorina

waited in her hotel room for three hours before being called

back to the conference room. "When I opened the door and re-

alized all but two Board members had already left," she later

wrote, "I knew I had been fired." 113

SEARCHING FOR A SILVER BULLET

That Fiorina's tenure at HP ended in disappointment cannot be

blamed entirely on her. In fact, Fiorina was exactly what the

board appears to have wanted: a charismatic, visionary leader

who would bring the magnetic star power and passion for

change needed to revolutionize the company. By that standard,

Fiorina can be judged a success, indeed, the perfect choice. The

descent into Stage 4 didn't begin with HP's slow response to the

HOW THE MIGHTY FALL 89

dot-com bubble or its falling below Wall Street expectations, but

in how the board reacted to falling behind.

Stage 4 begins when an organization reacts to a downturn by

lurching for a silver bullet. This can take a wide range of possi-

ble forms, such as betting big on an unproven technology, pin-

ning hopes on an untested strategy, relying upon the success of

a splashy new product, seeking a "game changing" acquisition,

gambling on an image makeover, hiring consultants who prom-

ise salvation, seeking a savior CEO, expounding the rhetoric of

"revolution," or in its very late stages, grasping for a financial

rescue or buyout. The key point is that they go for a quick, big

solution or bold stroke to jump-start a recovery, rather than

embark on the more pedestrian, arduous process of rebuild-

ing long-term momentum. The HP board, for instance, contin-

ued to exemplify Stage 4 behavior in how it argued for the

controversial $24 billion merger with Compaq Computer Cor-

poration in 2002, with dramatic, we-can-change-everything-

with-one-big-sweeping-action rhetoric: the "best and fastest

way to increase the value" ... "in one move, we dramatically

improve" ... "we immediately double" ... "enable us to quickly

address" ... "in a single strategic move" ... "will allow HP to

accelerate" ... "will transform our industry" ... and so on.114

The table below contrasts the behaviors that exemplify and per-

petuate Stage 4 with the behaviors that can help reverse the

downward spiral.

90 JIM COLLINS

Behaviors That Exemplify Behaviors That Can Help Reverse and Perpetuate Stage 4 the Downward Spiral of Stage 4

Pin hopes on unproven strategies- Formulate strategic changes based discontinuous leaps into new on empirical evidence, and exten- technologies, new markets, new sive strategic and quantitative businesses-often with much hype analysis, rather than make bold, and fanfare. untested leaps.

Seek a big, "game changing" acqui- Understand that combining two sition (often based on hoped-for, but struggling companies never makes as yet unproven, "synergies" ) to one great company; only consider transform the company in a single strategic acquisitions that amplify stroke. proven strengths.

Make panicky, desperate moves in Get the facts, think, and then act (or

reaction to threats that can imperil not) with calm determination; never

the company even more, draining take actions that will imperil the cash and further eroding financial company long-term. strength.

Embark on a program of radical Gain clarity about what is core and change, a revolution, to transform or should be held firm, and what needs upend nearly every aspect of the to change, building upon proven company, jeopardizing or abandon- strengths and eliminating weak- ing core strengths. nesses.

Sell people on the promises of a Focus on performance, letting tan-

brighter future to compensate for gible results provide the strongest poor results. case for a new direction.

Destroy momentum with chronic Create momentum with a series restructuring and/or a series of of good decisions, supremely well inconsistent big decisions. executed, that build one upon

another.

Search for a leader-as-savior, with Search for a disciplined executive,

a bias for selecting a visionary with a bias for selecting a proven

from the outside who'll ride in and performer from the inside. galvanize the company.

HOW THE MIGHTY FALL 91

Every company in this study that fell into the late stages of

decline grasped for at least one silver bullet. (See Appendix 4.B

for an evidence table.) For example, Circuit City replaced its re-

tiring homegrown CEO with an executive from Best Buy who

had been with Circuit City just eighteen months. Then Circuit

City fired more than 3,000 of its highest-paid, more-experienced

store employees. Within two years, Circuit City hired Goldman

Sachs, pinning hopes on a buyout, only to see a bid from Block-

buster evaporate. 115 Shortly thereafter, Circuit City filed for

bankruptcy. Or consider Scott Paper, which vested hope in ex-

pensive strategy consultants and fomented a cultural transfor-

mation that Fortune described as "get religion or get shown the

door." 116 Ames hired CEOs, jettisoned CEOs, and hired new

CEOs, at one point churning through three management teams

in thirty-three months-lurching from strategy to strategy, pro-

gram to program, looking for a fundamental transformation. ll7

Shaken out of its torpor by fierce new competitors, A&P con-

verted more than four thousand stores to a format called WEO

(short for "Where Economy Originates"), driving down prices

to regain market share in a desperation move described by one

industry observer as "a Kamikaze dive." The move proved cata-

strophic to profitability. A&P abandoned the strategy and hired

a charismatic savior from the outside who produced a brief

return to profitability, only to resign when A&P collapsed yet

again into a string oflosses.118

92 JIM COLLINS

Stage 4 grasping can produce a brief improvement, but the re-

sults do not last. Dashed hope follows dashed hope follows

dashed hope yet again. Companies stuck in Stage 4 try all sorts

of new programs, new fads, new strategies, new visions, new

cultures, new values, new breakthroughs, new acquisitions, and

new saviors. And when one silver bullet fails, they search for

another and then yet another. The signature of mediocrity is not

an unwillingness to change. The signature of mediocrity is

chronic inconsistency.

You might be thinking, "Perhaps grasping for salvation is the

rational answer for companies in trouble; dying companies must

do desperate things because they're dying." But companies don't

generally find themselves on the verge of death at the start of

Stage 4. The companies we studied had taken a tumble at the

start of Stage 4, to be sure, but not a lethal one. Indeed, by suc-

cumbing to Stage 4 behavior, they worsened their position, in-

creasing the likelihood that they would become a dying company

forced into taking desperate action.

Compare Motorola and TI, two great companies that stum-

bled; one fell through Stage 4 while the other did not. In 1998,

Motorola lost money for the first time in more than fifty years.

Top executives sealed themselves offin a conference room, writ-

ing ideas on a whiteboard, searching for a breakthrough. They

decided upon a path of radical change, what Business Week la-

beled "Shock Therapy." 119 Motorola bought General Instruments

Corporation for $17 billion, an amount comparable to Motoro-

HOW THE MIGHTY FALL 93

la's entire stockholders' equity.!2O It jumped headlong into the

Internet and broadband frenzy just before the bubble burst with

a strategy called "Intelligence Everywhere." At first, these moves

seemed to work, as Motorola's cumulative value to investors

more than tripled in two years. lZl Then the Internet and broad-

band bubbles burst, and Motorola acknowledged in its own 2001

annual report, "Like others, we inopportunely chased the dot-

com and telecom boom in 2000." The company had built up

manufacturing capacity and a global cost structure to support a

$45 billion revenue company going into 2001, but 2001 revenues

crashed to $30 billion, and Motorola posted a series oflosses.122

In late 2003, the board selected an outside leader for the first

time in the company's history, hiring high-profile Ed Zander

from Sun Microsystems; he stepped down four years later,

hounded by dissident shareholders.123

TI, the success contrast to Motorola, took a completely dif-

ferent approach. TI had been one of the star technology compa-

nies of the mid-twentieth century, but it fell from greatness in

the 1970s and early 1980s, when it diverged into money-losing

consumer businesses such as digital watches and home comput-

ers. The board turned to Jerry Junkins in 1985. Unassuming and

determined-described by one journalist as "sort of a Texan

Jimmy Stewart"-Junkins stepped qUietly into the CEO role

after working at the company for more than a quarter of a cen-

tury.124 He led the first phase ofTI's return to greatness by ignit-

ing vigorous dialogue and debate, and channeling its efforts into

businesses in which it had a chance to become best, a process

that ultimately led to the tremendous success of DSP chips that

we discussed in Stage 3.125

94 JIM COLLINS

The leaders at TI understood that rebuilding greatness requires

a series of intelligent, well-executed actions that add up one on

top of another. Some decisions are bigger than others, but even

the biggest decisions account for only a small fraction of the total

outcome that makes a great company. Most "overnight success"

stories are about twenty years in the making.

On May 29, 1996, Junkins died from heart failure while on a

business trip to Europe. The unexpected death of a beloved CEO

could throw a company into turmoil, but Tom Engibous, then

head of TI's semiconductor division, had been well prepared

to assume chief-executive responsibility. With two decades of

up-through-the-ranks experience at TI, Engibous became TI's

second unassuming, self-deflecting, intensely driven CEO in a

row. "Hopefully, this story will focus on TI and not too much

on me," he'd admonish those who sought to profile his manage-

ment style. The company's success "won't be due to his charis-

matic leadership," wrote Elisa Williams in a Forbes article.

"Engibous has a personality that's about as nondescript as the

midwestern plains he grew up on." '2. At the end of his tenure, Engibous engineered a smooth transition to yet another home-

grown leader, Richard Templeton, who'd worked his entire

twenty-four years deep inside TI. I27 At the very time that Mo-

torola was falling from good to worse, TI's quiet, determined

leaders orchestrated an almost textbook transition, and achieved

stock performance five times greater than Motorola's and nearly

equal to Intel's from 1995 to 2005.' 28

Our research across multiple studies (Good to Great, Built to

HOW THE MIGHTY FALL 95

Last, How the Mighty Fall, and our ongoing research into what it

takes to prevail in turbulent environments) shows a distinct

negative correlation between building great companies and

going outside for a CEO. Eight of the eleven fallen companies in

this analysis went for an outside CEO during their era of de-

cline, whereas only one of the success contrasts went outside

during the eras of comparison. Now you might be thinking,

"But wouldn't companies in trouble need to go outside?" Per-

haps, but keep in mind, in this analysis of decline, performance

generally worsened under saviors from the outside. And in our

previous research, over 90 percent of the CEOs that led compa-

nies from good to great came from inside; meanwhile, over

two-thirds of the comparison companies in that study hired a

CEO from the outside yet failed to make a comparable leap.

How then do we make sense of the IBM case? After all, while

IBM brought Gerstner in from ~R Nabisco, the company none-

theless rebounded. (For a summary ofIBM's comeback, see Ap-

pendix 6.A.) Clearly, an outsider can succeed in turning around

a company and resetting it on the path to greatness. So, what's

the difference between this case and the others? Part of the

answer lies in the fact that Gerstner returned to the intense, me-

thodical, and consistent approach that produces greatness in the

first place. Gerstner understood that whether you're brought in

from the outside or come from the inside, you have to halt the

cycle of grasping and cease jumping from one false salvation to

another, from silver bullet to silver bullet, from dashed hope to

new hope, only to have hopes dashed yet again. When an orga-

nization in trouble goes for an outsider, it usually has a tenor of

"Help! We need a radical, revolutionary change agent to come

in and change everything-and fast!" If the leader buys into this,

96 JIM COLLINS

he or she is likely to perpetuate Stage 4, not reverse it. The re-

markable thing about Gerstner is that he did not accept that

frame, a powerful lesson for all leaders, whether coming from

within or without.

PANIC AND DESPERATION

When I was fourteen years old, I found myself utterly terrified

looking down a lOo-foot sheer overhanging rock face while

learning to rappel as part of a rock-climbing course. The anchor

gear unexpectedly shifted, and I instinctively lurched to grab

the lip of the overhang and let go of my rappel brake hand (the

hand you keep on the rope to control your descent). By reacting

in fear and trying to "save myself," 1'd actually increased the

danger. Fortunately, my instructor caught me on a backup safety

rope, but an important life lesson has stuck with me ever since.

When we find ourselves in trouble, when we find ourselves on

the cusp of falling, our survival instinct-and our fear-can

evoke lurching, reactive behavior absolutely contrary to survival.

The very moment when we need to take calm, deliberate action,

we run the risk of doing the exact opposite and bringing about

the very outcomes we most fear.

In looking at companies in decline, I'm struck by this lesson

again: by grasping about in fearful , frantic reaction, late Stage 4

companies accelerate their own demise. Of course, their leaders

HOW THE MIGHTY FALL 97

can later claim, "But look at everything we did. We changed

everything. We tried everything we could think of. We fired

every shot we had and we still fell. You can't blame us for not

trying." They fail to see that, just like Gerstner at IBM, leaders

atop companies in the late stages of decline need to get back to a

calm, clear-headed, and focused approach. If you want to re-

verse decline, be rigorous about what not to do. In the early

1990s, I invited a former Marine turned entrepreneur to guest-

lecture in my course on creativity at the Stanford Graduate

School of Business. He'd done multiple tours of jungle combat

in the Vietnam War. When asked what lessons, if any, carried

over to his civilian life as an entrepreneur, he thought about it

for a moment and then responded, "When you have just a few

people, and there is enemy all around you, the best thing is to

say, 'You take this section from here to here, and you take this

section from here to here, and do not fire on automatic. Take one

shot at a time.' "

Breathe. Calm yourself. Think. Focus. Aim. Take one shot

at a time. Otherwise, you can find yourself in some version of

the calamity that befell Addressograph Corporation, the once-

leader in office addressing and duplicating machines. Every

$10,000 invested in Addressograph at the start of 1945 and held

through 1960 generated half a million dollars.129 In 1965, how-

ever, Xerox introduced the 2400 copier, a direct threat to Ad-

dressograph's duplicating products. Panicking, Addressograph

launched a crash program, releasing twenty-three new products

in three years. It lost track of billing and accounts receivable,

creating $ 70 million in late, unpaid, and untraceable customer

orders strewn about, scrawled on scraps of paper and backs of

envelopes. Sixteen of the twenty-three new products failed.130

98 JIM COLLINS

When profitability declined through the early 1970s and cul-

minated in losses, the board grasped for a visionary CEO from

the outside. An aggressive "go-getter," the new leader threw the

company into a traumatic reinvention, a complete psychological

transformation, a corporate revolution. In his view, Addresso-

graph "was like a boat going in circles in a lake that was going

dry," a situation requiring "massive change in as short a period

as possible." 131 He boldly "shed the barnacles of the past" and

launched a salvation strategy, leaping into the Office of the

Future with word processing and electronic office machines.132

But the leap did not go as planned, and Addressograph's vision-

ary savior faced an unhappy board. For three hours, he defended

his leadership, citing statistics and pointing to achievements. At

the end of his impassioned presentation, a board member mo-

tioned that he step down.133 Ten months later, in 1981, Addres-

sograph posted single-year losses that wiped out nearly all of a

half a century's worth of accumulated net worth.134

You might be wondering, But wait a minute! Surely, Addres-

sograph is the buggy-whip story all over again. The company's

mechanical duplicating machines became obsolete in the face of

Xerox's technology, and the world just passed them by.

And on one hand, you would be correct: its clinkity-clankity

product lines had become obsolete, obliterated by a technology

disruption. But the fundamental need for its core capability, the

offset-duplicating business, had not become obsolete. Even as I

write these words in 2008, nearly half a century after Xerox

launched its copier line, offset printing remains the primary so-

lution for high-volume, high-quality print jobs. Addressograph

would have had to migrate out of the office environment (where

Xerox would win in small-run, one-off duplicating), but it had

HOW THE MIGHTY FALL 99

already made successful inroads in commercial printing by the

early 1970s. Unfortunately, Addressograph lurched about in

fearful, frantic reaction while neglecting the offset business and

never regained momentum in its core business.135 Like the

climber who lets go of his brake hand, Addressograph's panicky

behavior sent the company hurtling over the cliff.

In a frenzy of inconsistency-flip-flopping from one new

strategy to another, moving across the country to a new head-

quarters and then back across the country to yet a third head-

quarters (from Cleveland to Los Angeles, from Los Angeles to

Chicago)-Addressograph churned through four CEOs and en-

dured two bankruptcies in fewer than a dozen years.136 One

CEO left in such a hurry that an employee described his depar-

ture as like having a brain surgeon leave in the middle of an

operation.137

By the late 1990s, the ranks had dwindled from 30,000 em-

ployees to just a few hundred, while every dollar invested at the

start of 1980 was now worth less than five cents. Summed up

one longtime analyst of the company, "It's been almost like a

guy who contracts a fatal disease. I've just watched it shrivel up

and die. It's very sad." 138 Addressograph had plummeted through

Stage 4 to enter the final stage, Capitulation to Irrelevance or

Death.

100 JIM COLLINS

MARKERS FOR STAGE 4

• A SERIES OF SILVER BULLETS: There is a tendency to make

dramatic, big moves, such as a "game changing" acquisition or a discontinuous leap into a new strategy or an exciting innova-

tion, in an attempt to quickly catalyze a breakthrough-and

then to do it again and again, lurching about from program to

program, goal to goal, strategy to strategy, in a pattern of chronic

inconsistency.

• GRASPING FOR A LEAOER·AS·SAVIOR: The board responds to

threats and setbacks by searching for a charismatic leader and/

or outside savior.

• PANIC ANO HASTE: Instead of being calm, deliberate, and dis-

ciplined, people exhibit hasty, reactive behavior, bordering on

panic.

• RAOICAL CHANGE ANO "REVOLUTION" WITH FANFARE: The lan-

guage of "revolution" and "radical" change characterizes the

new era: New programs' New cultures! New strategies! Leaders

engage in hoopla, spending a lot of energy trying to align and

"motivate" people, engaging in buzzwords and taglines.

• HYPE PRECEOES RESULTS: Instead of setting expectations

low-underscoring the duration and difficulty of the turn-

around-leaders hype their visions; they "sell the future" to

compensate for the lack of current results, initiating a pattern of

overpromising and underdelivering.

• INITIAL UPSWING FOLLOWEO BY OISAPPOINTMENTS: There is an

initial burst of positive results, but they do not last; dashed hope

follows dashed hope; the organization achieves no buildup, no

cumulative momentum.

HOW THE MIGHTY FALL

• CONFUSION ANO CYNICISM: People cannot easily articulate

what the organization stands for; core values have eroded to the

point of irrelevance; the organization has become "just another

place to work," a place to get a paycheck; people lose faith in

their ability to triumph and prevail. Instead of passionately be-

lieving in the organization's core values and purpose, people

become distrustful, regarding visions and values as little more

than PR and rhetoric.

• CHRONIC RESTRUCTURING ANO EROSION OF FINANCIAL

STRENGTH: Each failed initiative drains resources; cash flow and

financial liquidity begin to decline; the organization undergoes

multiple restructurings; options narrow and strategic decisions

are increasingly dictated by circumstance.

101

STAGE 5 : CAPITULATION TO

IRRELEVANCE OR DEATH

Stage 1 Hubris Born of Success

Stage 2

Stage 3 Denial of Risk

and Peril

Stage 4 Grasping for

Salvation

SbillS capitulation to Irrelevance 01

Death

I n researching the final stages of decline, looking at the capitu- lation of once-towering companies, I kept thinking about how

Professor Bill Lazier began his course on small business man-

agement at the Stanford Graduate School of Business. He'd walk

into class and begin cold-calling students.

104 JIM COLLINS

"What's the central issue in the case?" he'd push.

Students who had worked at large companies, consulting

firms, and investment banks gave answers like "their strategic

choices" or "identifying their value chain" or "developing a

brand" or any number of other smart-sounding MBA answers.

Unsatisfied by vacuous buzzwords, Lazier would keep press-

ing, pacing back and forth across the classroom. "No! Think!"

Finally, some student would venture forth, "Well, I don't

know if this is what you're looking for, but they can't make

payroll next week. The company is going to run out of cash."

Lazier would stop his pacing, walk over to the blank chalk-

board, and write in giant letters (and I mean giant, at least

two-feet high) one word: CASH.

"Never forget," Lazier would say. "You pay your bills with

cash. You can be profitable and bankrupt."

You can be profitable and bankrupt. The idea had never occurred

to most students who'd worked in big companies. In the entre-

preneurial phase, leaders struggle just to get enough cash to

become self-sustaining, but as an organization becomes big and

successful, cash consciousness atrophies. Leaders in successful

companies worry more about earnings. But organizations do

not die from lack of earnings. They die from lack of cash.

While editing this piece in late 2008, I'm looking at a stun-

ning news story: General Motors, the monumental symbol of

American Corporate Power, is seeking salvation from the gov-

ernment, standing on the verge oflate Stage 4 as it runs short on

cash. Even for a company that had once been the largest corpo-

ration in the world, Lazier's lesson can hit full force: you pay

your bills with cash.

HOW THE MIGHTY FALL

As institutions hurtle toward Stage 5, they spiral downward, in-

creasingly out of control. Each cycle-grasping followed by dis-

appointment followed by more grasping-erodes resources.

Cash tightens. Hope fades. Options narrow.

105

We found two basic versions of Stage 5. In the first version,

those in power come to believe that capitulation offers a better

overall outcome than continuing to fight. In the second version,

those in power continue the struggle, but they run out of op-

tions, and the enterprise either dies outright or shrinks into

utter irrelevance compared to its previous grandeur. Let's look

at two companies, one that chose to give up the fight and sell

out, and the other that fought on, only to go bankrupt.

GIVING UP THE FIGHT

By the late 1980s, Scott Paper had fallen so far behind P&G and

Kimberly-Clark that it had little choice but to take on huge debt

to reinvest in a series oflast-gasp efforts to catch up. Its debt-to-

equity ratio jumped to average 175 percent from 1985 to 1994.

Capital constraints led to chronic restructuring and cost cut-

ting: $167 million in 1990, $249 million in 1991, and another

$490 million in early 1994. Scott's debt rating fell to just one step

above junk bonds.l3O And that's when the board brought in

RamboAl.

When analyst Kathryn McAuley heard the news that Al

106 JIM COLLINS

Dunlap had been named CEO of Scott Paper in 1994, she did

some quick research on his track record. "I said to myself: 'Well,

the board sold the company: "140 Dunlap became infamous for

his nickname, "Rambo in Pinstripes," an image reinforced when

he posed for a photograph sporting black paint under his eyes,

bandoliers, and two very real-looking mock automatic weapons,

while also garbed in a white dress shirt and a lion-emblazoned

necktie.141 Dunlap slashed more than 11,000 jobs, including 71

percent of upper management. Profits rebounded as cost cutting

flowed directly to the bottom line, and Dunlap capitalized on

the moment to sell the once-proud Scott Paper to archrival

Kimberly-Clark.

It would be easy to focus on how corporate Rambo Al Dunlap

made eight figures for less than two years' effort and how he

justified his pay by writing, 'Tm a superstar in my field, much

like MichaelJordan in basketball and Bruce Springsteen in rock

'n' roll. My pay should be compared to superstars in other fields,

not to the average CEO." 142 But Dunlap, for all his pugnacious

bravado, was simply the mechanism of Scott Paper's capitula-

tion, not its cause. Had Scott Paper not fallen through Stages 1,

2, 3, and 4-and had Scott Paper not lost control of its financial

freedom-Dunlap would have never been brought in to burn

the village in order to save it.

HOW THE MIGHT Y FALL

No company we studied was destined to fall all the way to Stage

5, and each company could have made different decisions ear-

lier in the journey to reverse its downward slide. But by the time

a company has moved through Stages 1, 2, 3, and 4, those in

power can become exhausted and dispirited, and eventually

abandon hope. And when you abandon hope, you should begin

preparing for the end.

10 7

But hope alone is not enough; you need enough resources to

continue the fight. If you lose the ability to make strategic

choices, forced into short-term survival decisions that cripple

the enterprise, then the odds of full recovery become in-

creasingly remote. That's exactly what we see in the long,

tragic demise of one of America's great success stories, Zenith

Corporation.

RUNNING OUT OF OPTIONS

Zenith's rise to greatness dates back to the first half of the twen-

tieth century, when eccentric mastermind Eugene McDonald

led Zenith to dominant positions in radio and television. InJune

1945, Fortune ran a big spread titled "Commander McDonald of

Zenith" and featured a full-page photo of McDonald posing

with artifacts from his world-traveling adventures: a marine

clock, guns, Eskimo relics, and even a stuffed penguin that used

to be his pet. The article showcased McDonald fishing in the

108 JIM COLLINS

Caribbean, navigating his yacht in a dashing sea cap given to

him by a European count, paddling a kayak with Eskimos, hunt-

ing pirate treasure in the Pacific, examining ancient bones from

a dig, preparing to pilot a glider, working his Mexican gold mine,

and reading National Geographic aloud to his children. 143 Vision-

ary and frenetic, McDonald applied his genius to business, pio-

neering portable home radios and moving Zenith into television

during the industry's early days.

Zenith entered Stage 1, Hubris Born of Success, late in the

McDonald era. Zenith became the #1 manufacturer of black-

and-white televisions, and every dollar invested in Zenith at the

start of 1950 and held through 1965 increased in value more than

one hundred times, generating cumulative returns more than

ten times the market. When Japanese televisions began to gain

market traction, Zenith arrogantly ignored the Japanese threat.

In Zenith's view, the Japanese (the Japanese, for goodness' sake,

with their cheap products) could not possibly pose a serious

threat to the Great American Quality Brand, captured in the

tagline "Zenith-The Quality Goes In Before The Name Goes On." 144

Zenith moved through Stage 2, Undisciplined Pursuit of

More, in the late 1960s and early 1970s. After achieving its goal

to surpass RCA as the # 1 maker of color television sets, Zenith

invested in a massive increase in manufacturing capacity that

doubled its debt-to-equity ratio to 100 percent. Zenith also expe-

rienced a problematic succession of power. Commander Mc-

Donald left the company in the hands of a septuagenarian CEO,

with Zenith's counsel Joseph Wright as president. Wright even-

tually moved into the CEO role, but when his chosen successor

HOW THE MIGHTY FALL 109

died, Wright faced limited succession options. Zenith brought

in an outsider from Ford, who eventually became chairman.145

Zenith moved into Stage 3, Denial of Risk and Peril, exter-

nalizing blame (pointing out the window to Japanese trade prac-

tices, the struggling U.S. economy, labor unrest, oil shocks, and

so forth) rather than confronting its own lack of competitive-

ness. Saddled with excess capacity, Zenith lowered prices in a

battle for market share and took on more debt, both of which

drove its profitability ratios down to levels not seen in thirty

years.146

Zenith fell into Stage 4, Grasping for Salvation, in the late

1970s, when it leapt at a slew of opportunities all at the same

time. "If we have any plan at all, it's that we'll take a shot at ev-

erything," explained a Zenith senior leader to Business Week.

Zenith jumped into VCRs, videodiscs, telephones that linked

through televisions, home-security video cameras, cable TV de-

coders, and personal computers. To fund all these moves, Zenith

drove its debt-to-equity ratio to 140 percent.147

But this unhappy saga does not end there. Amazingly, given

its scattershot grasping for salvation, Zenith stumbled by luck

upon a new opportunity that nearly made the company great

again, the newly formed Data Systems unit headed by the ener-

geticJerry Pearlman. Brilliant and articulate, a cum laude grad-

uate from Princeton who'd finished in the top 2 percent of his

class at Harvard Business School, Pearlman had been called a

"corporate visionary" by Business Week.148 Pearlman became

CEO and led Zenith to become the #2 maker ofIBM-compatible

personal computers, and in a stroke of prescient genius, staked

out a leading position for Zenith in the emerging laptop market.

110 JIM COLLINS

From 1980 to 1989, the Data Systems Division increased its rev-

enues thirtyfold, generating more than 50 percent of Zenith's

total revenues and nearly all of Zenith's profits. Zenith could

have become Dell or Compaq.149

But Zenith still had the television business, and after all those

years of denial and grasping for salvation, Zenith's financial con-

dition had deteriorated; cash on hand had dropped to less than

5 percent of current liabilities. Pearlman tried to sell the televi-

sion business but didn't get the price he wanted. A few years

earlier, before it ran out of cash, Zenith might have had the op-

portunity to close down the television business, channel all its

remaining resources into the Data Systems Division, and turn

itself into one of the great computer companies. Instead, ex-

hausted, harried by angry shareholders, and burdened by

Zenith's half a billion dollars of debt and shrinking cash re-

serves, Pearlman found himself running out of options. On Sep-

tember 29, 1989, Pearlman met Bull Corporation CEO Francis

Lorentz at a Paris restaurant to consummate the sale of Zenith's

computer business to Bull. Lorentz later commented that Pearl-

man simply looked "relieved." To his credit, Pearlman tried to

rebuild Zenith after selling the computer flywheel, but the tele-

vision business just kept dragging Zenith down, generating year

upon year oflosses, and in 1995, Pearlman stepped down.15o

You might think that companies fall all the way to the bot-

tom because their leaders make just-plain-stupid decisions. But

through Zenith's story, we see how even some of the smartest

and most capable leaders can find themselves unable to control

their company's destiny if the accumulated impact of Stages 1

through 4 destroys their cash position. After Pearlman, Zenith

churned through five CEOs in ten years, fell into bankruptcy,

HOW THE MIGHTY FALL 1 11

and reemerged with less than 400 employees, 98 percent fewer

than the 36,000 employed in 1988. It had fallen from one of the

greatest success stories of American business history at mid-

century into just a shadow of its former sel£151

DENIAL OR HOPE

Not all companies deserve to last. Perhaps society is better off

getting rid of organizations that have fallen from great to terri-

ble rather than continuing to let them inflict their massive inad-

equacies on their stakeholders. Institutional self-perpetuation

holds no legitimate place in a world of scarce resources; institu-

tional mediocrity should be terminated, or transformed into ex-

cellence.

When should a company continue to fight, and when does

refusal to capitulate become just another form of denial? Per-

haps the Scott Paper board made a wise decision to surrender

the company's independence rather than watch it die a slow,

painful death or atrophy into irrelevance. And perhaps Zenith

would have been better off had it capitulated earlier to a willing

buyer, before mounting debt forced its hand. If you cannot mar-

shal a compelling answer to the question, "What would be lost,

and how would the world be worse off, if we ceased to exist?"

then perhaps capitulation is the wise path. But if you have a clear

and inspired purpose built upon solid core values, then the noble

course may be to fight on, to reverse decline, and to try to re-

kindle greatness.

The point of the struggle is not just to survive, but to build an

enterprise that makes such a distinctive impact on the world it

112 JIM COLLI NS

touches, and does so with such superior performance, that it

would leave a gaping hole-a hole that could not be easily filled

by any other institution-if it ceased to exist. To accomplish this

requires leaders who retain faith that they can find a way to pre-

vail in pursuit of a cause larger than mere survival (and larger

than themselves), while also maintaining the stoic will needed

to take whatever actions must be taken, however excruciating,

for the sake of that cause. This is the very type of leader who

finds a path out of the darkness and gives us well-founded hope.

And it is to that type ofleadership that we now turn.

Stage 1 Hubris Born of Success

WELL-FOUNDED HOPE

/ Recovery

Stage 2 Undisciplined

Pursuit of More

and Renewal

When Anne Mulcahy became chief executive of Xerox in 2001, she inherited a company mired in Stage 4. Digesting a $273

million los~ , Xerox stock had dropped 92 percent in less than

two years, wiping out more than $38 billion in shareholder

value. With Xerox's debt-to-equity ratio exceeding 900 percent,

Moody's rated its bonds as junk. The Securities and Exchange

114 JIM COLLINS

Commission had launched an investigation into Xerox's books,

which precluded Xerox from registering any securities and lim-

ited its fundraising options. With $19 billion in debt and only

$100 million in cash, Mulcahy described the situation as "terri-

fying." Prior to Mulcahy's appointment, Xerox had strived to

reinvent itself for the Digital Age, hiring superstar Richard

Thoman from IBM (where he'd been a valued member of Gerst-

ner's team) to succeed CEO Paul Allaire, who remained chair-

man. "We were looking for a change agent," Allaire said of the

decision to go outside. But Thoman lasted only thirteen months

as CEO.152

In May 2000, Mulcahy had finished packing for a business

trip to Tokyo when Allaire asked her to come to his office right

away. "Here's the deal," said Allaire. "Rick's [Thoman] out. I'm

coming back in as CEO, and I want you to be president and COO

of Xerox, and a year later, if things are right, you'll be CEO." 153

Mulcahy had never planned or expected to become CEO, de-

scribing her ascension as a total surprise.154 "The board probably

sat back and said, 'What choice do we have?' So I can't say it

was a roaring endorsement," Mulcahy later told writer Kevin

Maney. "It probably was a little bit of a last resort." 155 The con-

summate insider, she'd worked nearly a quarter of a century at

Xerox in sales and human resources, never drawing outside at-

tention; Mulcahy didn't even appear in Fortune magazine's "50

Most Powerful Women in Business" ranking the year before

becoming president.156

Mulcahy could have perpetuated a Stage 4 doom loop by set-

ting forth to utterly smash the culture and revolutionize the

company overnight. But instead, she retorted to those who said

she would need to kill the culture to save the company, "I am the

HOW THE MIGHTY FALL 115

culture. If I can't figure out how to bring the culture with me,

I'm the wrong person for the job." 157 For Mulcahy, it was all

about Xerox, not about her. When Newsweek called her, Mulcahy

declined to be interviewed about her management style.158

In fact, we found only four feature articles about Mulcahy dur-

ing her first three years as CEO, a surprisingly small number,

given how few women become CEO of storied Fortune 500

companies.159

Some observers questioned whether this insider, this un-

known team player who had Xerox DNA baked into her chro-

mosomes, would have the ferocious will needed to save the

company.160 They needn't have worried. Their first clue might

have come in reading her favorite book, Caroline Alexander's

The Endurance, which chronicles how, against all odds, adven-

turer Ernest Shackleton rescued his men after their ship splin-

tered into thousands of pieces as Antarctic ice crushed in around

it in 1916. Accompanied by five crew members, Shackleton navi-

gated 800 miles of violent seas in a 22-foot lifeboat to find help

for the remaining survivors.161 Drawing inspiration from Shack-

leton, Mulcahy didn't take a weekend off for two years.162 She

shut down a number of businesses, including the inkjet-printer

unit that she'd championed earlier in her career, and cut $2.5

billion out of Xerox's cost structure. Not that she found these

decisions easy-HI don't think I want them to get easy," she later

reflected-but they were necessary to stave off utter catastro-

phe.163 During its darkest days, Xerox faced the very real threat

of bankruptcy, yet Mulcahy rebuffed with steely silence her ad-

visors' repeated suggestions that she consider Chapter 11. She

also held fast against a torrent of advice from outsiders to cut

R&D to save the company, noting that a return to greatness de-

116 JIM COLLINS

pended on both tough cost cutting and long-term investment,

and act'-1ally increased R&D as a percentage of sales during the

darkest days. "For me, this was all about having a company that

people could retire from, having a company that their kids could

come and work at, having a company that actually would have

pride some day in terms of its accomplishments." 164

For 2000 and 2001, Xerox posted a total of nearly $367 million

in losses. By 2006, Xerox posted profits in excess of$l billion and

sported a much stronger balance sheet. And in 2008, ChiefExecu-

tive magazine selected Mulcahy as chief executive of the year. At

the time of this writing in 2008, Xerox's transition had been

going strong for seven years-no guarantee, of course, that

Xerox will continue to climb, but an impressive recovery from the early 2000S.165

Xerox. Nucor. IBM. Texas Instruments. Pitney Bowes. Nord-

strom. Disney. Boeing. HP. Merck. What do these companies

have in common? Everyone took at least one tremendous fall at

some point in its history and recovered. Sometimes the tumble

came early, when they were small and vulnerable, and some-

times the tumble came when they were large, established en-

terprises. But in every case, leaders emerged who broke the

trajectory of decline and simply refused to give up on the idea of

not only survival, but of ultimate triumph despite the most ex-

treme odds. And like Mulcahy, these leaders used decline as a

catalyst. As Dick Clark, the quiet, longtime head of Merck man-

ufacturing who became CEO after Gilmartin, put it, "A crisis is

a terrible thing to waste." 166

HOW THE MIGHTY FALL

If we discovered that organizational decline is a function first and

foremost of forces out of our control-and if we discovered that

those who fall will inevitably keep falling to their doom-we could

rightly indulge in despair. But that is not our conclusion from this

analysis, not if you catch decline in Stages I, 2, or 3. And in

some cases, you might even be able to reverse course once in

Stage 4, as long as you still have enough resources to get out of

the cycle of grasping and rebuild one step at a time.

117

If you have not yet fallen, beware the temptation to proclaim

a crisis when none exists. Recall the Gerstner philosophy: the

right leaders feel a sense of urgency in good times and bad,

whether facing threat or opportunity, no matter what. They're

obsessed, afflicted with a creative compulsion and inner drive

for progress-burning hot coals in the stomach-that remain

constant whether facing threat or not. To manufacture a crisis

when none exists, to shriek that we're all standing on a "burning

platform" soon to collapse in a spectacular conflagration, cre-

ates cynicism. The right people will drive improvement, whether

standing on a burning platform or not, and they never take well

to manipulation.

And if you've already taken a fall and you do face a genuine

crisis, the sooner you break the cycle of grasping for salvation

the better. The path to recovery lies first and foremost in return-

ing to sound management practices and rigorous strategic think-

ing. In Appendix 6, I've outlined three cases of great companies

that fell and recovered (IBM, Nucor, and Nordstrom), and I've

laid out their recovery through the lens of the good-to-great

118 JIM COLLINS

framework of disciplines (summarized in Appendix 7). If you

seek a refresher course on management discipline, it never hurts

to review the classics, including Drucker, Porter, Deming, and

Peters !Waterman. Of course, you have to stop the bleeding first

and make sure you don't run out of cash, but that's simply emer-

gency surgery, not full recovery. The point being, however you

slice it, lack of management discipline correlates with decline,

and passionate adherence to management discipline correlates

with recovery and ascent.

All that said, there remains a question: what about "the pe-

rennial gale of creative destruction" as described by the famous

twentieth-century economist Joseph Schumpeter, wherein tech-

nological change and visionary entrepreneurs upend and de-

stroy the old order and create a new order, only to see their new

order destroyed and replaced by an even newer order, in an end-

less cycle of chaos and upheaval?167 Perhaps all social institutions

in our modern world face disruptive forces so fast, big, and un-

predictable that every entity will fall within years or decades,

without exception. Can we still stave off decline in the face of

severe turbulence?

While working on How the Mighty Fall, my colleague Morten

Hansen and I have been simultaneously working on a six-year

research project to study companies that grew from vulnerabil-

ity to greatness in severe environments characterized by rapid

and unpredictable change in contrast to others that did not

prevail in the same brutally turbulent environments. Consider the

following analogy: Suppose you wake up in base camp at the

foot of Mount Everest and a big storm rolls through. You can

hunker down in the safety of your tent and let the storm pass

by. But if you wake up as a vulnerable little speck at 27,000 feet

HOW THE MIGHTY FALL 119

on the side of the mountain, where the storms are bigger

and faster moving, the environment severe and unforgiving,

and everything more uncertain and uncontrollable, then a storm

just might kill you. We believe most leaders in every sector feel

they are metaphorically moving higher on the mountain, into

increasingly turbulent and unforgiving environments.

This new research is enlarging our understanding of the

principles and strategies needed to prevail in a turbulent world,

and r d like to preview a key conclusion here, one that pertains directly to the question of corporate decline. When the world

spins out of control, when external tumult threatens to upend

our best-laid plans, does our destiny remain in our own hands?

Or must we accept that creative destruction reigns supreme and

that success will be short and fleeting, even for the very best?

Our research shows that it is possible to build a great institution

that sustains exceptional performance for multiple decades, per-

haps longer, even in the face of chaos, disruption, uncertainty,

and violent change. In fact, our research shows that if you've

been practicing the principles of greatness all the way along, you

should get down on your knees and pray for severe turbulence, for

that's when you can pull even further ahead of those who lack

your relentless intensity. But beware: if you get caught in the

stages of decline during turbulent times-if you succumb to

hubris, overreaching, denial, and grasping for quick fixes-your

fall will be faster and more violent than in stable times. The

nearly overnight demise of some of America's largest financial

companies in 2008 illustrates just how fast the mighty can fall in

a highly turbulent world.

If you've fallen into decline, get back to solid management

disciplines-now! And if you're still strong, be vigilant for early

120 JIM CO LLIN S

markers of decline. But above all, do not ever capitulate to the

idea that an era of success must inevitably be followed by decline

and demise brought on by forces outside your control. The

matched-pair contrast method that we employ in our research

(comparing successful outcomes to unsuccessful outcomes, con-

trolling as much as possible to pick similar companies facing

similar environmental conditions) yields an important insight:

circumstances alone do not determine outcomes. Of course,

there always remains the chance of a random catastrophe, and

life offers no lOO-percent guarantees; after all, you can be the

healthiest, most relentless athlete of all time and still be stricken

with a crippling disease or career-ending accident. But setting

that aside, the main message of our work remains : we are not

imprisoned by our circumstances, our setbacks, our history, our

mistakes, or even staggering defeats along the way. We are freed

by our choices.

The signature of the truly great versus the merely successful is

not the absence of difficulty, but the ability to come back from

setbacks, even cataclysmic catastrophes, stronger than before.

Great nations can decline and recover. Great companies can fall

and recover. Great social institutions can fall and recover. And

great individuals can fall and recover. As long as you never get

entirely knocked out of the game, there remains always hope.

We all need beacons of light as we struggle with the inevita-

ble setbacks of life and work. For me, that light has often come

from studying Winston Churchill. In the early 1930s, Churchill's

HOW THE MIGHTY FALL 121

career had descended into what biographer Virginia Cowles

called "a quagmire from which there seemed to be no rescue."

Entering his late fifties, fattening up, and losing hair, he'd been

widely blamed for Britain's financial dislocation in the Depres-

sion, having put Britain back on the gold standard as the chan-

cellor of the Exchequer. He'd broken with his party, isolating

himself from the mainstream by his opposition to Indian self-

rule, refusing even to meet with Gandhi. He'd been forever

tagged as the architect of the World War I tragedy at Gallipoli (a

botched plan to knock Turkey out of the war, and to attack Ger-

many and Austria from the southeast), which cost 213,980 British

casualties for zero gain; even though the Dardanelles Commis-

sion cleared him of blame, he remained tainted by the disaster.

The 1929 stock market crash cost Churchill a considerable for-

tune. And on December 12, 1931, he stepped off a curb on Fifth

Avenue in New York, looking to his right to check for traffic as he

would in London rather than to his left as he needed to in Amer-

ica. Passers-by heard a sickening "thwaump!" as a car driving

more than 30 miles per hour blindsided Churchill, knocking

him yards down Fifth Avenue. The accident threw him into the

hospital, a long recovery, and a severe depression. 168

At the end of Volume I of his series, The Last Lion, William

Manchester captures Churchill's position in 1932. Lady Astor

visited with Joseph Stalin, who quizzed her on the political land-

scape in Britain. Astor prattled on about the powerful, the

up-and-coming, naming Neville Chamberlain as the star.

"What about Churchill?" asked Stalin.

"Churchill?" Astor's eyes widened. Then with a disdainful

wrinkle of her nose, "Oh, he's finished." 169

Eight years later, onJune 4, 1940, Churchill stood in front of

122 JIM COLLINS

Parliament as prime minister while Hitler's Panzer divisions

swept across France. Poland: gone. Belgium: gone. Holland:

gone. Norway: gone. Denmark: gone. France: collapsing. En-

gland: reeling from the rout leading up to the evacuation from

Dunkirk. Most world leaders, including many in Britain, saw no

choice but to cede Europe to the Nazis. Churchill's rivals ex-

pected Churchill to see no other alternative than a negotiated

peace with Herr Hitler and his Nazi henchmen, and they hoped

to capitalize on his taking the political fallout for capitulation.

They were to be disappointed.

Clutching his notes, for he always feared that without his

carefully prepared text he would be at a loss for words, Churchill

glowered out across the House of Commons and issued his

famous words, "We shall never surrender, and even if, which I

do not for a moment believe, this Island or a large part of it were

subjugated and starving, then our Empire beyond the seas,

armed and guarded by the British Fleet, would carryon the

struggle, until, in God's good time, the New World, with all its

power and might, steps forth to the rescue and the liberation of

the old." 170

Not only would Churchill redeem himself by giving voice to

Britain's resolve to stand against the Axis powers, he would

also go on to win the Nobel Prize in literature, return again as

prime minister at age seventy-seven, be knighted by the Queen,

and sear into Cold War lexicon the term "Iron Curtain" in his

prescient warning about Soviet aggression.

In 1941, during England's sternest days, Churchill returned to

his old school Harrow, where he'd received embarrassingly low

scores, to give a commencement address. The headmaster cast

worried glances at Churchill, who had fallen asleep, slumbering

HOW THE MIGHTY FALL 123

through most of the ceremony. But when introduced, Churchill

made his way to the podium, stared out over the assemblage of

boys, and gave his commencement message, "This is the lesson:

never give in, never give in, never, never, never, never-in noth-

ing, great or small, large or petty-never give in except to con-

victions of honour and good sense. Never yield to force; never

yield to the apparently overwhelming might of the enemy." 171

Never give in. Be willing to change tactics, but never give up

your core purpose. Be willing to kill failed business ideas, even

to shutter big operations you've been in for a long time, but

never give up on the idea of building a great company. Be will-

ing to evolve into an entirely different portfolio of activities,

even to the point of zero overlap with what you do today, but

never give up on the principles that define your culture. Be will-

ing to embrace the inevitability of creative destruction, but

never give up on the discipline to create your own future. Be

willing to embrace loss, to endure pain, to temporarily lose free-

doms, but never give up faith in the ability to prevail. Be willing

to form alliances with former adversaries, to accept necessary

compromise, but never-ever-give up on your core values.

The path out of darkness begins with those exasperatingly

persistent individuals who are constitutionally incapable of ca-

pitulation. It's one thing to suffer a staggering defeat-as will

likely happen to every enduring business and social enterprise

at some point in its history-and entirely another to give up on

the values and aspirations that make the protracted struggle

worthwhile. 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.

Appendices

APPENDIX 1: FALLEN-COMPANY SELECTION CRITERIA

Our research process involves selecting cases to study based

on objective, preset criteria. We do not decide which companies

we "want" to study and then look to find a time frame during

which their data meets a pattern. Rather, we layout the criteria

for the study-set selection before we see the data and systemati-

cally eliminate companies from consideration based on whether

they meet the criteria. The following is a summary of the steps

we went through to arrive at the final study set of fallen compa-

nies. (Cumulative stock-return calculations determined using

data from the following source: ©200601 CRSP®, Center for Re-

search in Security Prices. Graduate School of Business, The Uni-

versity of Chicago. Used with permission. All rights reserved.

www.crsp.chicagobooth.edu.)

128 APPENDIX 1

STARTING UNIVERSE

Sixty corporations representing more than thirty industry sec-

tors, drawn from the research database used for the Good to Great

and Built to Last research efforts.

3M A&P Abbott Labs Addressograph

American Ames Bank of Bethlehem Steel Express America

Boeing Bristol-Myers Burroughs Chase Squibb Manhattan

Chrysler Circuit City Citicorp Colgate

Columbia Eckerd Fannie Mae Ford Pictures

GE Gillette GM Great Western

Harris Hasbro Hewlett- Howard Johnson Packard (HP)

IBM Johnson & Kenwood Kimberly-Clark Johnson

Kroger Marriott McDonnell Melville Douglas

Merck Motorola Nordstrom Norton

Nucor Pfizer Philip Morris Pitney Bowes

Procter & R.J. Reynolds Rubbermaid Scott Paper Gamble

Silo Sony Teledyne Texas Instruments

Upjohn Walgreens Wal-Mart Walt Disney

Warner- Wells Fargo Westinghouse Zenith Lambert

APPENDIX 1 129

CRITERION 1: CANDIDATES FOR BEING

A GREAT COMPANY AT SOME POINT IN HISTORY

A company qualifies as a candidate if it meets anyone of the fol-

lowing conditions, a, b, or c:

a} Selected as a visionary company in Built to Last or a good-to-

great company in Good to Great.

b) Selected as a comparison company in Built to Last or Good to

Great, and had a fifteen-year period of cumulative stock re-

turns that exceeded the general market by 3X at some point

in the company's history. Note that our research method in-

volves studying companies during specific eras in history

when they met particular performance criteria. Companies

can achieve high performance during one era and fall during

a later era (the subject of this study); similarly, companies

can deliver sub-par performance during one era and then

make a leap to exceptional performance during a later era

(the subject of the good-to-great study).

i. Exception: if the candidate met Criterion Ib only in the

final twelve months before being acquired, it should

be excluded because its stock returns may have been

artificially driven upward due to takeover speculation.

ii. Exception: if the candidate attained its above-3X perfor-

mance over fifteen years only as a "spike pattern" rather

than a sustained run of performance, it should be ex-

cluded. The test for a "spike pattern" over any given

fifteen-year period is as follows: (1) Calculate the per-

centage increase in cumulative returns relative to the

general market over the fifteen-year cycle during which

130 APPENDIX 1

the company beat the market by more than 3X; (2) Cal-

culate the percentage increase in cumulative returns

from the start of the fifteen-year performance run to ex-

actly ten years into the run; and (3) If the ratio of calcu-

lation 2 divided by calculation 1 is 0.20 or lower, then

the cycle counts as a "spike pattern." The table below

illustrates the spike pattern calculations.

Example Case 1 Example Case 2

Start of 15-year, 1.0X the market I.OX the market above-3X run

10 years into 1.25X the market l.75X the market 15-year run

15 years into 4.0X the market 3.lX the market 15-year run

Calculation 2 25 percent 75 percent

Calculation 1 300 percent 210 percent

Ratio of 2 divided 0.08 0.36 by 1

Conclusion Spike Pattern Not a Spike Pattern

iii. Exception: if the candidate showed more negative years

than positive years during the 3X-plus, fifteen-year

performance phase, then eliminate it.

e) For comparison companies where we do not have stock

return data going back far enough to assess returns during

the company's strongest years, we can marshal overwhelm-

ing evidence that the company had attained significant suc-

cess prior to the availability of CRSP data. The evidence needs

to fall into three categories: (1) evidence of financial results

APPENDIX 1 131

that establish the company as one of the largest and most suc-

cessful companies in its industry, (2) evidence that the com-

pany had a significant impact on the development of its

industry during its greatest years, and (3) evidence that the

company had maintained a strong performance and made a

significant impact for at least two decades.

Companies eliminated: Chase Manhattan, Columbia Pictures,

Great Western, Howard Johnson, Kenwood, Norton, Silo, R.J.

Reynolds, and Upjohn.

CRITERION 2: CANDIDATES FOR DECLlNE-

FROM GREAT COMPANY TO MEDIOCRITY OR WORSE

Take the companies that made it through Cut 1. From these,

a company qualifies as a candidate if it meets either of the

following conditions:

a) Selected as a visionary company in Built to Last or a good-to-

great company in Good to Great, and had a negative inflection

from 1995 to 2005. A "negative inflection" in this case is de-

fined as generating cumulative stock returns at or below

0.80X the general market from January 1, 1995, to January 1,

2005.

b) Selected as a comparison company in Built to Last or Good to

Great, and showed cumulative stock returns at or below 0.80X

the general market over a ten-year period (or up to the point

of being acquired or going bankrupt, if the decline lasted less

132 APPENDIX 1

than ten years) and the company failed to regain cumulative

stock returns of 3X the general market over a fifteen-year

period later in its history.

Companies eliminated: 3M, Abbott Labs, American Express,

Boeing, Chrysler, Citicorp, Colgate, Fannie Mae, Ford, GE, Gil-

lette, Harris, IBM,Johnson &Johnson, Kimberly-Clark, Kroger,

Marriott, Nordstrom, Pfizer, Philip Morris, Pitney Bowes,

Procter & Gamble, Texas Instruments, Walgreens, Wal-Mart,

Warner-Lambert, and Wells Fargo.

CRITERION 3: OTHER EXCLUSIONS

Exclusion for Industry Effect: if there is significant question as to

whether the performance pattern was due primarily to an in-

dustry effect, then eliminate the company.

Exclusion for Founder Effect: if the only period of ascent occurred

during the reign of a single founder, and the company began

a sustained fall within one year after that individual founder

departed, then eliminate the company.

Exclusion for Pre-1950: if the company's period of great per-

formance ended prior to 1950, and there isn't enough data to

carefully examine its rise-and-fall period, then eliminate the

company.

Exclusion for Chronic Decline: if the company demonstrated a

multi-decade chronic pattern of decline prior to its upswing that

APPENDIX 1 133

would call into question whether it was a great company before

its fall, then eliminate the company.

Companies eliminated: Bethlehem Steel, Bristol-Myers Squibb,

Burroughs, Eckerd, GM, Hasbro, McDonnell Douglas, Melville,

Nucor, Sony, Teledyne, Walt Disney, and Westinghouse.

FINAL STUDY SET, FALLEN CASES

Era of Focus for Company Analysis of Decline Total Time Frame

A&P 1950s-1970s 1859-1998

Addressograph 1960s-1980s 1896-1998

Ames 1980s-1990s 1958-2002

Bank of America 1970s-1980s 1904-1998

Circuit City 1990s-2000s 1949-2008

HP 1990s-2000s 1937-2008

Merck 1990s-2000s 1891-2008

Motorola 1990s-2000s 1927-2008

Rubbermaid 1980s-1990s 1920-1998

Scott Paper 1960s-1990s 1879-1995

Zenith 1960s-1980s 1923-2000

APPENDIX 2: SUCCESS-CONTRAST SELECTION CRITERIA

~e cornerstone of our research methodology lies in studying contrasts between highly successful and less successful outcomes.

In this analysis, we adapted the contrast methodology to pick

success-contrast companies to compare with the companies that

fell. Each success contrast attained and/or sustained exceptional

results during the era that the corresponding fallen company

had its negative inflection. Six cases already had success contrasts

selected from previous research studies (A&P, Addressograph,

Ames, Bank of America, Scott Paper, and Zenith). For the re-

maining cases, we implemented the following selection and

scoring process. We identified a set of potential success-contrast

candidates based on other companies that were in the same or

similar businesses at the contrast-selection year.* To identify

* The contrast-selection year for Circuit City, HP, Merck, and Motorola is 1995; for Rubbermaid it is 1992.

136 APPENDIX 2

success-contrast candidates, we used SIC (Standard Industrial

Classification) codes, financial analyst reports, Hoover's and

Moody's reports, Fortune rankings, and published articles. We

then created a quantitative scoring framework, built around the

following six criteria.

BUSINESS FIT: The success-contrast candidate and the fallen

company were in similar businesses at the contrast-selection

year. In each case, we developed an objective framework for the

degree of business overlap, allowing us to score each candidate

on a I-to-4 scale.

SIZE FIT: The success-contrast candidate and the fallen company

were of a comparable size at the contrast-selection year.

Score 4: if the revenue ratio is between 0.80 and 1.25

Score 3: if the revenue ratio is between 0.60 and 0.80, or

between 1.25 and 1.67

Score 2: if the revenue ratio is between 0.40 and 0.60, or

between 1.67 and 2.50

Score 1: if the revenue ratio is under 0.40 or above 2.50

AGE FIT: The success-contrast candidate and the fallen company

were of a comparable age at the contrast-selection year.

Score 4: if both the fallen company and the success-

contrast candidate were founded before 1950 or if the age

ratio is between 0.90 and 1.11

APPENDIX 2

Score 3: if the age ratio is between 0.75 and 0.90, or

between 1.11 and 1.33

Score 2: if the age ratio is between 0.50 and 0.75, or

between 1.33 and 2.00

Score 1: if the age ratio is below 0.50 or above 2.00

137

PERFORMANCE FIT: The success-contrast candidate and the fallen

company had comparable stock returns in the ten years preced-

ing the contrast-selection year.

Score 4: if there's a 0- to lO-percent difference in cumula-

tive stock returns

Score 3: if there's a 10- to 25-percent difference in cumula-

tive stock returns

Score 2: if there's a 25- to 50-percent difference in cumula-

tive stock returns

Score 1: if there's a 50-percent or greater difference in

cumulative stock returns

PERFORMANCE DIVERGENCE: The success-contrast candidate substan-

tially outperformed the fallen company from the contrast-

selection year to ten years out.

Score 4: if the ratio of cumulative stock returns of the

success-contrast candidate to the fallen company is above

3.0

138 APPENDIX 2

Score 3: if the ratio of cumulative stock returns of the

success-contrast candidate to the fallen company is

between 2.0 and 3.0

Score 2: if the ratio of cumulative stock returns of the

success-contrast candidate to the fallen company is

between 1.5 and 2.0

Score 1: if the ratio of cumulative stock returns of the

success-contrast candidate to the fallen company is

between 1.0 and 1.5

Automatically exclude the company: if the ratio of cumula-

tive stock returns of the success-contrast candidate to the

fallen company is below 1.0

GREATNESS TEST: The success-contrast candidate performed

strongly from the contrast-selection year to ten years out and

had a strong corporate reputation. Scoring starts with 4 points.

No deduction: if the ratio of its cumulative stock returns to

the general market is above 2.5

Deduct 0.5: if the ratio of its cumulative stock returns

to the general market is between 2.0 and 2.5

Deduct 1.0: if the ratio of its cumulative stock returns to

the general market is between 1.5 and 2.0

Deduct 1.5: if the ratio of its cumulative stock returns

to the general market is between 1.0 and 1.5

Deduct 2.0: if the ratio of its cumulative stock returns to

the general market is between 0.80 and 1.0

APPENDIX 2

Automatically exclude the company: if the ratio of its cumu-

lative stock returns to the general market is below 0.80

If the company's industry rank on Fortune's "Most Ad-

mired Companies" list at the contrast-selection year plus

ten years out is:

#1, no deduction

#2 or #3, deduct 0.5

#4 or below, deduct 1.0

Circuit City Success-Contrast Candidate Scoring

Best Buy 18.5

Wal-Mart 14.0

Radio Shack 11.0

HP Success-Contrast Candidate Scoring

IBM 15.5*

Texas Instruments 15.5*

Dell 13.5

Apple 11.0

Intel 10.5

Sun Microsystems 9.5

* IBM wins In the business-fit tiebreaker.

139

140 APPENDIX 2

Merck Success-Contrast Candidate Scoring

Johnson & Johnson 19.0

Pfizer 17.0

Abbott Labs 16.0

Eli Lilly 16.0

Wyeth 15.5

Schering-Plough 14.0

Motorola Success-Contrast Candidate Scoring

Texas Instruments 17.5

IBM 15.0

GE 14.5

Intel 14.5

Harris 14.0

Applied Materials 11.0

Cisco 11.0

Emerson 10.5

We were able to identify a strong success-contrast company for

each fallen company except for Rubbermaid. In the case of Rub-

bermaid, we began with twenty-six pOSSibilities. After eliminat-

ing companies for lack of business overlap, loss of independence

during the time of study, lack of publicly available performance

information due to being privately held, or poor performance,

we found no company that qualified as a viable success-contrast.

The final study set of success-contrast cases appears below. It is

interesting to note that the success contrast for one company

(Motorola in contrast to Zenith during the 1970s) became a

APPENDIX 2 141

fallen company in the 1990s. There are no guarantees oflasting

success!

Fallen Company Success Contrast

A&P Kroger

Addressograph Pitney Bowes

Ames Wal-Mart

Bank of America Wells Fargo

Circuit City Best Buy

HP IBM

Merck Johnson & Johnson

Motorola Texas Instruments

Rubbermaid None qualified

Scott Paper Kimberly-Clark

Zenith Motorola

APPENDIX 3: FANNIE MAE AND THE

FINANCIAL CRISIS OF 2008

We featured Fannie Mae in Good to Great due to its extraordi- nary performance leap in the early 1980s under David Maxwell.

Under Maxwell's leadership, Fannie Mae transformed itself

from a bureaucratic, government-chartered entity into a high-

powered capital markets enterprise, generating cumulative

stock returns substantially above the general stock market. The

thirty-year cumulative stock-return pattern used as the basis for

selecting Fannie Mae for Good to Great ran from 1969 to 1999,

and our research regarding Fannie Mae focused on those years.

Unfortunately, Fannie Mae of the 2000s exemplified just the

opposite: great to good to nearly gone. As I mentioned earlier in

the text, we didn't include Fannie Mae in the full analysis for

How the Mighty Fall for the simple reason that when we selected

our study set offallen companies in 2005, Fannie Mae (and other

financial institutions in our database) hadn't yet fallen, so they

didn't qualify for this study. Instead of throwing Fannie Mae

144 APPENDIX 3

into the research project at the last minute because it happened

to be in the news, I've decided to include a brief commentary

about it in this appendix.

In reviewing the demise of Fannie Mae and other financial insti-

tutions in 2008, I kept thinking about a scene from the movie

Titanic. In that scene, J. Bruce Ismay of the White Star Line, which owned the Titanic, turns incredulous when confronted

with the impending doom of the giant ship: "But this ship can't

sink."

"She's made of iron, sir," replies ship designer Thomas

Andrews. "I assure you, she can."

As the housing bubble burst, financial executives at major

institutions turned incredulous, seemingly unable to believe

the terrifying reality of their situation. In examining the materi-

als we assembled on the demise of Fannie Mae, we found little

evidence that the company's executives seriously considered the

possibility of failure. Yet in September 2008, Fannie Mae found

itself under government conservatorship, a legal status simi-

lar to bankruptcy.172 On October 31, Fannie Mae's stock price,

which had stood at $57 a year earlier, had essentially evaporated,

falling 98 percent to 93 cents.173

According to an article in the New York Times, Fannie Mae's

CEO later defended the company, pointing out that "almost no

one expected what was coming. It's not fair to blame us for not

predicting the unthinkable." 174 And indeed, nearly every major

financial institution got mauled in the housing-bubble, subprime-

mortgage mess of 2008, including Fannie Mae's fraternal twin,

Freddie Mac, along with institutions like Citigroup. When

Vikram Pandit, CEO of Citigroup, appeared on the Charlie Rose

APPENDIX 3 145

show in late November 2008, he made the same argument.

"How many times have you seen AAA bonds go to zero?" he

asked rhetorically, adding that risk-management models simply

didn't account for the scenarios that had actually unfolded. He

later added, 'Tm not so sure anybody ... anybody . .. ran a

stress test of the kind of environment that we're living through today." 175

So, perhaps Fannie Mae just got hammered down by an in-

dustry 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 (Stage 1: Hubris Born of Success; Stage 2:

Undisciplined Pursuit of More; and Stage 3: Denial of Risk and

Peril) at Fannie Mae in the 2000s, leading up to the 2008 crisis.

Maxwell had cultivated an ethic of willful humility while

leading Fannie Mae during the 1980s. However, by the early

2000s, Fannie Mae had acquired a reputation for arrogance,

enabled by both its extraordinary success and its sense of mis-

sionary righteousness vis-a-vis its special role in advancing the

American Dream of home ownership.176 Fannie Mae had long

prided itself on being a disciplined organization, especially in

managing risk, but it also experienced substantial pressures for

growth-from within and from Wall Street-compounded by

political pressures to help more low-income families become

homeowners.177 Its 2001 annual report stated that Fannie Mae

was on track to double operating earnings per share in the five

years ending in 2003, which implied a 15-percent annual growth

rate (compared to the 7- to lO-percent growth rate of the overall

residential mortgage market at the time).178 Fannie Mae achieved

its goal, appearing headed toward further growth and success,

and then became ensnared in an accounting storm.179

146 APPENDIX 3

In September 2004, the Office of Federal Housing Enterprise

Oversight (OFHEO) issued a report accusing Fannie Mae of

misapplying Generally Accepted Accounting Principles in an

effort to minimize earnings volatility.180 Fannie Mae eventually

resolved the crisis, but at a cost. In the words of its 2006 annual

report:

"We entered into comprehensive settlements that resolved

open matters with the OFHEO special examination, as well as

with the SEC's [Security and Exchange Commission's] related

investigation. As part of the OFHEO settlement, we agreed to

OFHEO's issuance of a consent order. In entering into this set-

tlement, we neither admitted nor denied any wrongdoing or

any asserted or implied finding or other basis for the consent

order. We also agreed to pay a $400 million civil penalty, with

$50 million payable to the U.S. Treasury and $350 million pay-

able to the SEC for distribution to certain shareholders pursuant

to the Fair Funds for Investors provision of the Sarbanes-Oxley

Act of 2002." 181

More costly than the financial penalties, Fannie Mae had lost

much of its momentum while embroiled in the investigation.

The wounded mortgage giant emerged from the accounting

settlement to find a growing housing bubble and aggressive

competition from companies like Countrywide, Lehman Broth-

ers, Bear Stearns, and others.18Z Fannie Mae increased its activity

in subprime mortgages, although not to the extent of some

other companies.183 As a Fannie Mae executive said to the New

York Times, "Everybody understood that we were now buying

loans that we would have previously rejected, and that the

models were telling us that we were charging way too little. But

our mandate was to stay relevant and to serve low-income bor-

APPENDIX 3 147

rowers. So that's what we did." 184 As the housing bubble rup-

tured, Fannie Mae posted losses of$2.2 billion in the first quarter

of2008 and $2.3 billion in the second quarter. To help stave off a

collapse of the entire U.S. financial system, the U.S. government

put Fannie Mae and Freddie Mac into conservatorship, with the

aim of restructuring them by 2010.185

Here are a few observations and lessons:

• Financial institutions have a peculiar relationship rela-

tive to Stages 3, 4, and 5. Because of the high levels of

leverage that financial enterprises often use, a relatively

small set of losses can create a potentially catastrophic

loss. Financial institutions caught in a risk-gone-bad

downward spiral can crash downward from Stage 3

right into Stage 5, sinking so fast that there remains

little time to grasp for salvation.

• Companies already in the stages of decline are ex-

tremely vulnerable to turbulence. If the financial storm

of 2008 had never happened, or if it hadn't become so

severe, perhaps Fannie Mae would have had an oppor-

tunity to reverse its own decline and return to great-

ness by its own efforts. It lost that opportunity in the

calamity of September 2008.

• I'm struck by how the stages of decline-Hubris Born

of Success, Undisciplined Pursuit of More, Denial of

Risk and Peril, Grasping for Salvation (Government,

save us!), and finally, Capitulation to Irrelevance or

Death-map fairly well not just to individual compa-

nies, but perhaps even to an entire industry, such as fi-

nancial services or the American auto industry. Even

148 APPENDIX 3

so, it is worth pointing out that companies need not be

imprisoned by their industries. Not every financial

company toppled during the 2008 crisis, and some

seized the opportunity to take advantage of weaker

competitors in the midst of the tumult.

• Finally, there's a provocative lesson: beware the hubris

that can arise in conjunction with missionary zeal. In

the Built to Last study, Jerry Porras and I found that en-

during great companies passionately adhere to a set of

timeless core values and pursue a core purpose beyond

just making money. But there is also a risk to manage:

having an almost righteous sense of one's values and

purpose ("We're the good guys") can perhaps make a

company more vulnerable to Stages 1 to 3. Fannie Mae's

missionary zeal for expanding the American Dream of

home ownership to as many Americans as possible con-

tributed, in part, to its arrogance, its pursuit of growth,

and even its increased risk profile. Whenever people

begin to confuse the nobility of their cause with the

goodness and wisdom of their actions-"We're good

people in pursuit of a noble cause, and therefore our

decisions are good and wise" -they can perhaps more

easily lead themselves astray. Bad decisions made with

good intentions are still bad decisions.

APPENDIX 4.A: EVIDENCE TABLE-SUBVERTING THE

COMPLACENCY HYPOTHESIS

Note: This table is designed to show that great companies can

fall even if engaged in energetic and ambitious activity, thereby

undermining the hypothesis that all great companies fall be-

cause they become complacent. In fact, as this table illustrates,

ten of the eleven great companies in our analysis fell despite

showing behaviors contrary to complacency.

Addressograph, Stage 2: 1956-1971 • Highly cognizant of the threat from Xerox, merged with Charles Bruning Co. to better compete. Launched the Bruning 3000, but the product failed.186

• Developed a duplicator + copier (AMCD-I), but the product never made it to market because it lacked two-sided capability, encountered produc- tion snags, and faced competition from other internal products. • Launched a crash program to develop new products, releasing twenty- three new products in three years.187

150 APPENDIX 4.A

Ames, Stage 2: 1982-1988 • Grew by making a series of significant acquisitions.

• Moved aggressively from a rural focus to a more urban fOCUS.188

• Embarked upon experimental ventures in stationery, variety, and craft

and hobby stores.

• Acquired Zayre department stores, with anticipation to more than double

the size of the company.

• Multiplied sales five times in five-year period ranging from 1983 to

1988.189

Bank of America, Stage 2: 1970-1979 • Made a huge push internationally. In the 1960s, moved from having fewer than 20 to more than 90 international branches, then from 1971 to

1977, increased assets in overseas branches and subsidiaries by more

than three times. Decentralized authority for international lending so as to

increase entrepreneurial growth in foreign markets.190

• Committed to action, CEO A. W. Clausen stated, "Our keyword must be

'action.' ... Our mistakes must be the mistakes of decision, not the worse mistakes of indecision itself." 191

• Launched a venture capital partnership for high-risk, direct investments

in small technology companies.192

• Doubled total assets from 1970 to 1974, then nearly doubled them again

from 1974 to 1979.193

• Transformed BankAmericard (which it invented) into the ubiquitous Visa

card.194

.In the late 1970s, significantly increased fixed-rate mortgages, agri- cultural lending, construction lending, and loans to high-risk countries in

Latin America and Africa.195

Circuit City, Stage 2: 1992-1997 • Made significant commitments for growth. Stated in 1996 that it aimed to more than double revenue to $15 billion by 2000. Anticipated growing

to 800 Circuit City Superstores by 2000, an 80 percent increase over

1997.196

• Multiplied revenue 2.7X (from $2.8 billion to $7.7 billion) in five-year

period from 1992 to 1997, with an average growth rate of 22 percent per

year.

APPENDIX 4.A 151

• Committed to building CarMax as an exciting new business. By 1997,

CarMax had grown from zero to $510 million in revenue. Issued $412 mil-

lion equity in 1997 to fund growth, with the goal of expanding to more than 80 CarMax stores by 2002.197

• Began development of Divx, a new home video technology that would allow for a no-return, rental-like system for home movie viewing. 198

HP, Stage 2: 1992-1997 • Multiplied revenue 2.6X (from $16.4 billion to $42.9 billion) in five-year

period from 1992 to 1997, resulting in faster average growth than that achieved in the 25-year period from 1966 to 1991.l99

• Accelerated new product development. By 1993, 70 percent of HP's

orders came from products introduced in the previous two years, up from 30 percent a decade earlier.20o

.In 1996, picked as the "Best Performing Company" in America by Forbes, edging out GE, Johnson & Johnson, and Intel. The article was titled, "Top Corporate Performance 1995: 'Boy Scouts on a Rampage.''' 201

• CEO Lew Platt waged war on complacency and built HP for innovation.

"Fear of complacency is what keeps me awake at night," he said. "You

must anticipate that whatever made you successful in the past won't in

the future." Platt believed that the best defense was preemptive self-

destruction and renewal. "It's counter to human nature, but you have to

kill your business while it is still working," he said. "My job is to maintain an environment that encourages healthy paranoia." 202

• Dominated the printer industry with an Intel-like cycle of brutalizing com-

petitors: come out with the next generation of better products just as your

competitors catch up to your current generation, devastate your competi- tors with ferocious pricing, and then repeat the cycle, fast. Applied this

model to personal computers and moved from #11 to #3 in four years. 203

• Made a significant move into e-commerce by buying Verifone.204

Advanced the concept of an "information utility" to link digital devices

with the ease of plugging appliances into a wall and moved into digital photography.205

152 APPENDIX 4.A

Merck, Stage 2: 1993-1998 -In 1993, acquired Medco Containment Services, Inc., for $6 billion (on a 1992 revenue base of $9.7 billion). Medco was acquired to control distribution in profit-hostile environmenpo6

- Established #1 business objective as being a top-tier growth company. Planned to achieve growth by investing in fundamental R&D for poten-

tial breakthrough drugs, achieving the full potential of managed pharma-

ceutical care, and preserving the profitability of the core pharmaceutical

business.207

- Maintained scientific advancement, on track to patenting more new compounds than any other pharmaceutical company.208

-Instituted significant organizational change, creating "worldwide busi-

ness strategy teams," each focused on key diseases, to drive product and

market developmenpo9

Motorola, Stage 2: 1990-1995 -Sought to double in size every five years.210 From 1990 to 1995, grew revenue from $11 billion to $27 billion. - Positioned itself strongly for trends: wireless, cellular, electronics, and globalization, with farsighted investments made in China (by 1996, had the largest stake in China of any U.S. company).211

- Took Iridium satellite-communications project into full development (spun it into separate LLC in 1991).212 - Made major bet on PowerPC microprocessor (in partnership with IBM

and Apple) to challenge Intel.213

- Demonstrated high levels of innovation, increasing its patents from 613 in 1991 to 1,016 in 1995.214

- Heralded as "The Company that Likes to Obsolete Itself." 215

- Pioneered Six Sigma quality, one of the first companies to pursue 3.4

defects per million in its products.216

- Encouraged a combative "cult of conflict" to ensure that the best

technology and market ideas won.217

Rubbermaid, Stage 2: 1980-1993 -Increased revenues more than six times and earnings nearly fifteen

times from 1980 to 1993, at one point generating forty consecutive quarters of earnings growth.218

APPENDIX 4.A 153

• Created an innovation machine. By 1991, generated more than 30 per-

cent of its revenue from products introduced in the previous five years.2!9

In 1992, introduced on average one new product every day, 365 days a year.220

·In the early 1990s, aimed to add one new market segment every 12 to 18 months. 22!

• Cultivated an intense drive for growth and self-reinvention. "We have to reinvent ourselves continuously."222 "Our major growth objective is to

double our sales, earnings, and earnings per share every five years." 223

Scott Paper, Stage 2: 1962-1970 • Instituted diversification program to fuel new growth. Bought a textbook

paper manufacturer, plastic-coating company, and company that made

teacher training kits for K-12 education. Launched a disposable-products

company, with creative ideas like disposable paper dresses and gradua-

tion gowns. Made a move into resorts and poolside/patio furniture. 224

• Adopted a brand management model, with brand managers responsible for their own products' earnings and for their own research, manufac- turing, advertising, and sales-a significant change from the previous

approach.

• At the same time, Scott did not respond aggressively to the threat

from P&G during the early 1960s (some evidence indicates that it had a "genteel" culture that lacked a fighting spirit).225

Zenith, Stage 2: 1966-1974 • Achieved ambition to become #1 in U.S. black-and-white television

market by 1959.226

• Achieved ambition to overtake RCA to become #1 in color televisions by 1972.227

• Made a big bet on the visionary idea of pay TV. Didn't succeed, largely because Zenith was nearly two decades ahead of its time. 228

• From 1970 to 1973, invested in significant capacity expansion, with

new plants in Taiwan, Hong Kong, along the Mexican border, and

elsewhere. 229

• Poured money into automating plants in the United States as way to

compete in tough global economic conditions. 23o

• Developed a reputation for being a fast follower in new technologies;

once a new approach had been proven, would aggressively adopt it.23!

154 APPENDIX 4.A

Cases Demonstrating Significant Complacency A&P, Stage 2: 1958-1963

- Became known as the "Hermit Kingdom," with a reputation for isolation

and resistance to any change. "You can't quarrel with a hundred years of

success" became a common internal refrain.232

- Forty percent of founder stock allocated to Hartford Foundation,

which demanded high dividends. From 1958 to 1962, turned record-high

profits into record-high dividends, paying out more than 90 percent in dividends.233

-Invested less in new stores than competitors. In 1962, "with 33 percent

of the volume and 36 percent of the total number of stores, expended only 18 percent of the capital investments in stores made by the top ten chains." 234

- Allowed stores to fall into disrepair. Stuck with an outdated store for-

mat, while competitors began investing in larger store formats that would eventually become superstores. 235

APPENDIX 4.B: EVIDENCE TABLE-GRASPING FOR SALVATION

A&P Falling in the early 1970s, set off an industry price war-what one industry

competitor called "a desperation effort that is throwing the industry into

chaos"-converting more than four thousand A&P stores to a new format

called WEO (short for "Where Economy Originates") and driving prices

below costs to regain market share.236 Hired a charismatic savior CEO

from the outside. Bet on a new division of "Family Mart" combination

stores, selling everything from televisions to bread, milk, and beer.

Launched new advertising and image-making campaigns. After a brief

return to profitability, fell into a string of losses, which further eroded the balance sheet. Lurched for other saviors, including an investment from a

German company and yet another outside CEO.237

Addressograph In the early 1970s, experienced significant decline in profits due to prod-

uct failures and lured an outside CEO from Honeywell with a large cash

signing bonus and stock grant who failed to reverse the decline. Turned to

another charismatic outsider who threw the company into a traumatic re- invention. Pinned hopes on a savior strategy, leaping into the Office of the

Future. (The strategy, according to an Addressograph executive just a few

156 APPENDIX 4.B

years later, was "to leapfrog from where [Addressograph] was in the mid-

1970s to maybe 15 years into the future. The leap did not go as planned."238

Ames After the Zayre acquisition, fell into bankruptcy protection. New CEO

brought in a team of hired guns to save the company. Emerged from bank-

ruptcy with yet another new CEO in place, who wrote in his first annual

report, "Prior to and during Chapter 11, Ames attempted various mer-

chandising and marketing strategies that may have confused many tradi- tional Ames customers." Within two years, brought in yet another CEO,

who began a "fundamental transformation" of the company, changing

strategy again, this time to "opportunistic purchasing and micro-marketing," deemphasizing the everyday-low-price model in favor of focusing on being

in stock and putting in place new flashy programs with taglines like "55

Gold" and "Bargains by the Bagful." In 1998, embarked on the acquisition

of Hills Department Stores, nearly doubling the size of the company over- night. Liquidated less than four years later.239

Bank of America In the mid-1980s, began to visibly tumble. Made extensive use of external culture consultants, putting almost 2,000 employees through what For- tune called "a series of corporate encounter groups." Banker Magazine reported that the "wide-ranging programme ... involves a total revision of

its philosophy, tactics, strategy and regional priorities." Launched a $5

billion program in new technology to rush into the Information Age. Cut the

dividend for the first time in more than five decades. CEO resigned and the board brought a former CEO back out of retirement to save the company;

he then brought in former Wells Fargo officers to help turn things

around.240

Circuit City FaCing declining revenue in 2002, launched a new logo and program

tagged "We're with you" with a major advertising campaign. In early 2003,

made a drastic move to eliminate commissioned sales; terminated more

than 3,000 experienced, higher-paid salespeople in favor of less-

experienced, lower-cost, hourly people. Replaced "sales counselors" with

"product specialists." Posted losses in 2003 and 2004. Launched new

branding campaign in 2004 under the tagline "Just What I Needed" and

APPENDIX 4.B 157

yet another new brand dubbed "Firedog" in 2006. Hired an executive

from Best Buy who became president in 2005 and CEO in 2006. In 2008,

considered a potential sale to salvage something for its shareholders, only to see a bid from Blockbuster evaporate. 241

HP In the late 1980s, appeared to be falling behind relative to the technology bubble and began to perform below Wall Street expectations. CEO re-

signed and the board hired a high-profile, charismatic leader from the

outside. Launched a radical cultural and strategic transformation, built

around the Internet. Then in 2001, bid to buy Compaq Computer at a

cost of approximately $24 billion, advancing its case with dramatic rhet-

oric: the "best and fastest way to increase the value" ... "in one move,

we dramatically improve" ... "enable us to quickly address" ... "we im-

mediately double" ... "in a single strategic move" ... "will allow HP to accelerate" ... "will transform our industry" ... and so on. Earnings

became erratic. In early 2005, the board fired its CEO and hired a

replacement from the outside. 242

Merck Never reached Stage 4.

Motorola Upon falling into visible decline in the late 1990s, bet on "harnessing the

power of wireless broadband and the Internet"-right at the height of the

telecom and dot-com boom. Later admitted that "like others, we inoppor-

tunely chased the dot-com and telecom boom." Aimed to recast itself

from being a hardware-oriented to a software-oriented company. Made a

$17 billion acquisition of General Instruments. Undertook radical cultural and strategic change; "Everything has been modified or changed at the

company." Bet on a new program called "Intelligence Everywhere." Began

researching a move into biotechnology. Overhauled the wireless business

three times in four years. In late 2003, hired a savior CEO from the outside who lasted fewer than four years.243

Rubbermaid In the fourth quarter of 1995, not long after appearing as the #1 "Most Admired Company" in America, reported a loss. Announced its first major

restructuring, cutting nearly six thousand product variations, closing nine

158 APPENDIX 4.B

plants, and eliminating 1,170 jobs. 244 At the same time, made one of the largest acquisitions in its history. Announced the sale of its office-products

business, reversing a strategic imperative set just a few years earlier.

Launched a radical marketing bet on the Internet as "a renaissance tool,"

yet profits dropped again, triggering a second major restructuring.

Launched the biggest new marketing campaign in its history. Recast in-

centive compensation, with stronger links to its stock price. Made another

big acquisition to quadruple European sales. Lost its independence to Newell Corporation in 1998.245

Scott Paper From 1981 to 1988, embarked on a dramatic turnaround, a revolutionary

transformation designed to shock the company out of its stupor. Instituted

more pervasive incentive pay. Put hundreds of managers through retreats

to imbue them with a new mindset, making the company "dynamically

reborn." 246 Hired strategy consultants to help reshape direction.247 Initial

results looked good, but then profits dropped. Fell into restructuring doom

loop, with $167 million in restructuring charges in 1990, followed by a

$249 million restructuring charge in 1991, followed by another $490 mil-

lion restructuring charge in early 1994, totaling nearly $1 billion. 248 Brought in a fix-it CEO from the outside who slashed jobs, cut costs, and sold the

company to arch rival Kimberly-Clark.

Zenith In 1977, posted its first loss in decades. CEO resigned. Leapt after a whole

bunch of new opportunities at the same time. "If we have any plan at all,

it's that we'll take a shot at everything," said a Zenith senior leader. Over a three-year period, moved into VCRs, videodiscs, telephones that linked through televisions, home-security video cameras, cable TV decoders,

and personal computers (via the acquisition of the computer company

Heath). To fund all these moves, doubled its debt-to-equity ratio. 249

APPENDIX 5: WHAT MAKES FOR THE

"RIGHT PEOPLE" IN KEY SEATS?

While the specifics regarding who would be the right people

for key seats vary across organizations, our research yields six

generic characteristics:

1. THE RIGHT PEOPLE FIT WITH THE COMPANY'S CORE VALUES. Great

companies build almost cult-like cultures, where those

who do not share the institution's values find them-

selves surrounded by antibodies and ejected like a

virus. People often ask, "How do we get people to

share our core values?" The answer: you don't. You

hire people who already have a predisposition to your

core values, and hang on to them.

2. THE RIGHT PEOPLE DON'T NEED TO BE TIGHTLY MANAGED. The

moment you feel the need to tightly manage someone,

you might have made a hiring mistake. If you have the

160 APPENDIX 5

right people, you don't need to spend a lot of time

"motivating" or "managing" them. They'll be produc-

tively neurotic, self-motivated and self-diSciplined, com-

pulsively driven to do the best they can because it's

simply part of their DNA.

3. THE RIGHT PEOPLE UNDERSTAND THAT THEY DO NOT HAVE "JOBS";

THEY HAVE RESPONSIBILITIES. They grasp the difference be-

tween their task list and their true responsibilities. The

right people can complete the statement, "I am the one

person ultimately responsible for . . ."

4. THE RIGHT PEOPLE FULFILL THEIR COMMITMENTS. In a culture cf

discipline, people view commitments as sacred-they

do what they say, without complaint. Equally, this

means that they take great care in saying what they

will do, careful to never overcommit or to promise

what they cannot deliver.

5. THE RIGHT PEOPLE ARE PASSIONATE ABOUT THE COMPANY AND ITS

WORK. Nothing great happens without passion, and the

right people display remarkable intensity.

6. THE RIGHT PEOPLE DISPLAY "WINDOW AND MIRROR" MATURITY.

When things go well, the right people point out the

window, giving credit to factors other than themselves;

they shine a light on other people who contributed to

the success and take little credit themselves. Yet when

things go awry, they do not blame circumstances or

other people for setbacks and failures; they point in the

mirror and say, 'Tm responSible."

1.20

APPENDIX 6.A: DECLINE AND RECOVERY CASE

IBM

IBM's Rebound Under Louis V. Gerstner, Jr. Ratio of Cumulative Stock Returns to General Market

Gerstner becomes CEO in 1993 and retires at start of 2003

0------------------------------------------------------ 1987 1989 1991 1993 1995 1997 1999 2001

Source: C200601 CRSP®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All nghts reserved.www.crsp.chicagobooth.edu

162 APPENDIX 6.A

SYNOPSIS: IBM grew to become one of the most admired and suc-

cessful corporations of the twentieth century under the leader-

ship of Thomas J. Watson, Sr., and Thomas J. Watson, Jr.; they led IBM for a total of fifty-seven years (1914-1956 for Watson Sr.

and 1956-1971 for Watson Jr.). IBM became a dominant force in

computing, making huge leaps with programs like the IBM 360

project. From 1926 to 1972, IBM beat the general stock market

by more than seventy times; a $1,000 investment in IBM in 1926

would have returned more than $5 million by 1972. In the mid-

1980s, however, IBM began a steady slide and then plummeted

in the early 1990s, posting its first losses in more than seven

decades, losing more than $15 billion from 1991 to 1993. In

1993, the board hired Lou Gerstner as CEO, who turned IBM

around and then set the foundations for IBM to become a great

company once again.250

I've outlined IBM's recovery through the lens of the good-to-

great concepts below. (For an explanation of these concepts, see

Appendix 7.)

LEVEL 5 LEADERSHIP: Gerstner came in as a savior CEO yet clearly

had the discipline to make difficult decisions (and to resist

making panicky decisions). While it is not entirely clear if

Gerstner began his IBM tenure as a Level 5 leader, he grew to

have a Level 5 passion for the company, noting at the end of his

tenure that he "fell in love with IBM." He dedicated his book,

Who Says Elephants Can't Dancer "to the thousands of IBMers

who never gave up on their company, their colleagues, and

themselves. They are the real heroes of the reinvention of

IBM." In the end, Gerstner was clearly ambitious for IBM first

and foremost, beyond himself.251

APPENDIX 6.A 163

FIRST WHO, THEN WHAT: Gerstner first focused on rebuilding his

team, describing his focus on getting the right people in key

seats as "my top priority during those first few weeks." He re-

tooled the compensation system so that he would not lose any

key people. He rebuilt the team around himself with people he

knew he could trust-a new communications executive, a new

head of corporate marketing, a new CPO, a new general man-

ager of the personal computer division-and removed execu-

tives who did not share his sense of urgency or who failed to

deliver on their responsibilities.252

CONFRONT THE BRUTAL FACTS: Gerstner believed that assessing the

brutal facts-where IBM was failing, where IBM couldn't be ex-

cellent, why IBM was losing market share, how IBM's cost struc-

ture had become bloated, what IBM's critical customers really

thought, how the competition had come to see IBM as irrele-

vant, and so forth-however hard that might be, preceded de-

veloping a vision. "If the last thing IBM needed inJuly 1993 was

a vision, the second last thing it needed was for me [Gerstner]

to stand up and say that IBM had basically everything right."

Gerstner and his team met with customers to get candid feed-

back, kicking off a transition to return IBM once again to being

an externally focused, customer-driven enterprise. They con-

fronted the fact that IBM had been milking the mainframe busi-

ness by keeping prices high and losing market share. (The

Gerstner team dramatically lowered the price per unit of main-

frame processing power by 96 percent over the next seven years.)

They confronted the fact that IBM had to cut $7 billion in costs

in order to survive. They confronted the fact that OS/2 had

failed and Windows had won. They confronted the fact that

164 APPENDIX 6.A

IBM faced competition more threatening than it had faced for most of its history. 253

HEDGEHOG CONCEPT: The cornerstone of IBM's transition rested on

one central idea: an obsessive passion for the customer would be

at the center of IBM's universe. This shift then led to a crucial

inSight-customers desperately needed someone to integrate

all the disparate pieces of information technology, individually

tailored to solve their specific problems, into a single package,

and this need would grow as technological change and the shift

to networked computing accelerated. From this came the es-

sence of IBM's hedgehog concept: IBM could be the best in the

world at technology-integration services. "The idea that all this

complicated, difficult-to-integrate, proprietary collection of

technologies was going to be purchased by customers who

would be willing to be their own general contractors made no sense."254

CULTURE OF DISCIPLINE: Gerstner exemplified the principle of turn-

ing a culture of bureaucracy into a culture of discipline, one in

which people had freedom within a framework of demanding

performance standards, values, and accountability. "'Respect

for the individual' had devolved to ... a culture of entitlement,

where 'the individual' didn't have to do anything to earn respect-he or she expected rich benefits and lifetime employ-

ment simply by virtue of having been hired." He laid out a

framework of eight principles of IBM performance, and any

business leader who failed to deliver results consistent with this

framework would no longer hold a position of significant re-

sponsibility. The Gerstner team maintained focus on the hedge-

APPENDIX 6.A 165

hog concept, noting "a good portion of our success was due to

all of the deals we didn't do." 255

FLYWHEEL, NOT DOOM LOOP: Gerstner resisted reactive moves, taking

time to rigorously analyze IBM's problems. Despite the general

view held by analysts, the press, and other experts that IBM

needed to be broken into pieces, Gerstner chose to keep the

company together. He unplugged activities that did not fit with

the hedgehog concept: stopped OS/2, stopped developing appli-

cations software, and sold the Federal Systems division. He kept

a low profile with the media, never allowing hype to precede

results; he engaged in the disciplined practice of underpromis-

ing and overdelivering. He turned away big acquisitions that did

not fit with the strategy or that would fail to deliver significant

profit. As IBM's integration-services concept gained traction, the

Gerstner team capitalized on the rise of the Internet and shift to

networked computing to launch IBM e-services.256

CLOCK BUILDING, NOT TIME TELLING: Gerstner wrote, "I came to see, in

my time at IBM, that culture isn't just one aspect of the game-

it is the game." To reinforce the idea that executives were re-

sponsible for creating value rather than simply being entitled

to wealth, executives would no longer receive stock options

unless they concurrently bought IBM stock with their own cash.

Gerstner constructed a senior leadership group capped at 300

people. There was no year-to-year tenure on the group; every

year, Gerstner reconstituted the group based on each mem-

ber's performance; only 71 of the original 300 remained in the

senior leadership group in 2002. Gerstner engaged in rigorous

succession planning for the next CEO.257

166 APPENDIX 6.A

PRESERVE THE CORE/STIMULATE PROGRESS: Gerstner unraveled the mix-

up between core values and operating practices. He overturned

hidebound traditions and stupid rules, while simultaneously

revitaliZing IBM's core values and semi-neurotic passion for

excellence and success-"You're IBM, damn it!" He set the auda-

cious goal to build the largest, most influential information

technology-services enterprise in the world, betting heavily on

the insight that networked computing would replace distributed

computing; from this, he launched e-business as IBM's "moon

shot" in the 1990s and early 2000s. The Gerstner team reengi-

neered almost all aspects of business processes, removing more

than $14 billion in inefficiencies from 1993 to 2002. 258

1.00

0.80

0.60

DAD

0.20

APPENDIX 6.B: DECLINE AND RECOVERY CASE

NUCOR

Nucor's Rebound Under Daniel R. DiMicco Ratio of Cumulative Stock Returns to General Market

DiMicco becomes CEO in 2000

0------------------------------------------------------------ 1995 1997 1999 2001 2003 2005

Source: ©200601 CRS?®, Center for Research In Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved.www.crsp.chicagobooth.edu

168 APPENDIX 6.B

SYNOPSIS: Nucor earned a position as one of the most remarkable

good-to-great cases in the last fifty years. Facing possible bank-

ruptcy in 1965, the board turned the company over to Ken Iver-

son. Under Iverson, Nucor built its first steel mills because it

could not find a reliable supplier. Nucor people discovered that

they had a knack for making steel better and cheaper than

anyone else, so they built additional mini-mills. Nucor eventu-

ally generated greater profits than any other steel company on

the Fortune 1000 list. From 1975 to 1990, its stock outperformed

the general stock market by more than five times. The corner-

stone of the company's success was its marrying a performance-

oriented culture with advanced steel-making technology, which

steadily drove down the cost per finished ton of steel. In the mid-

1990s, Nucor began to falter during a period of executive tur-

moil at the end of Iverson's career. He retired in 1996 after a

messy boardroom showdown, and his chosen CEO successor

resigned in 1999. In 2000, the board put longtime insider Daniel

DiMicco into the CEO role and Nucor regained its footing; its

stock performance once again took on a beat-the-market trajec-

tory, and Nucor proceeded to have the most profitable years in its history. 259

I've outlined Nucor's recovery through the lens of the good-

to-great concepts below. (For an explanation of these concepts,

see Appendix 7.)

LEVEL 5 LEADERSHIP: DiMicco displayed long-term dedication to

Nucor and its culture, having joined the company in 1982, eigh-

teen years before becoming CEO.260 He maintained Nucor's

egalitarian, no-c1ass-status culture, flying commercial, taking

phone calls from all employees, making more coffee when he

APPENDIX 6.B 169

poured the last cup, and operating out of a drab, cheap-looking

headquarters in a strip-mall-style, low-rise office building.

DiMicco continued to cultivate a culture in which management

was in service to employees, not the other way around.261 He

practiced giving credit to others and taking little credit for him-

self Despite the executive turmoil associated with the end of

the Iverson era, DiMicco highlighted the debt he owed to his

predecessors: "Who we are today is the culmination of the ef-

forts and the dedication of our leadership-in particular, Ken

Iverson and his team." 262

FIRST WHO, THEN WHAT: DiMicco continued the tradition of put-

ting every employee's name-all 18,000 of them in 2007-on

the cover of the annual report, reflecting the idea that Nucor's

strength was based first and foremost on having the right type

of people who fit with the Nucor culture. DiMicco and his team

retained the philosophy that it is better to hire people with the

right work ethic and character and teach them how to make steel

than to hire people who know how to make steel but lack the

Nucor work ethic and character traits. Under DiMicco, Nucor

increased attention to developing, rather than just selecting,

the right people, creating customized leadership-development

programs for each and every manager.263

CONFRONT THE BRUTAL FACTS: DiMicco and his team confronted the

rising threat of Chinese steel and paid increased attention to

the risks of facing unfair trading practices. 264 They confronted

the risks associated with volatile energy prices and created a

hedging strategy for its natural gas purchases.265 They employed

conservative financial accounting practices and maintained a

170 APPENDIX 6.B

strong balance sheet to be able to weather storms and seize

opportunities to gain market share over weaker competitors in

difficult times.266

HEDGEHOG CONCEPT: Nucor built itself on a simple concept: a pas-

sionate dedication to taking care of its customers by monoma-

niacally harnessing culture and technology to produce low-cost

steel while steadily increasing profit per ton of finished steel. 267

DiMicco and his team remained committed to this central idea

while making appropriate strategic changes (see Preserve the

Core/Stimulate Progress below). DiMicco remained relent-

lessly focused on only those selective arenas in which Nucor

could attain best-in-the-world status and superior economic re-

turns, and jettisoned businesses that failed these tests, such as its

bearing products and iron-carbide operations.268

CULTURE OF DISCIPLINE: DiMicco reinvigorated the intense culture of

productivity that defined Nucor. Instead of focusing on em-

ployee rank and status, Nucor emphasized performance; those

teams that met or exceeded productivity goals without compro-

mising safety or quality received compensation 100 to 200 per-

cent in excess of their hourly wages. Bonuses were based on

team and unit performance, which encouraged all employees to

assume full responsibility for productivity, not just for their

little piece of the puzzle. If a team produced a bad batch of steel,

its members would lose their bonuses; if that batch reached the

customer, they could lose three times that amount. The entire

system was designed to reinforce the idea that no one at Nucor

received a paycheck simply by virtue of having a "job"; rather,

each employee was responsible for contributing to the dual goals

APPENDIX 6.B 171

of producing high-quality, low-cost steel and taking care of the customer. 269

FLYWHEEL, NOT DOOM LOOP: DiMicco did the exact opposite of grasp-

ing for salvation and falling into a doom loop of chronic incon-

sistency. He understood the importance of consistency, building

cumulative momentum in the flywheel. In the wake of the tu-

multuous events of 2001 and the disruptive challenges facing

the steel industry, his letter to shareholders that year stated, "I

wrote the same thing in my letter to you last year, and I expect

you'll be reading it 12 months from now. No matter what's hap-

pening to the industry and in the world around us, we must

never lose sight of our main goal." And in 2003, after a particu-

larly turbulent time in the steel industry, he wrote, "Whatever

turn the economy takes, Nucor will remain true to the princi-

ples that have guided us through nearly four decades of uninter-

rupted profitability and growth." 270

CLOCK BUILDING, NOT TIME TELLING: The ultimate testament to the

Nucor system is the fact that the company survived its tumul-

tuous transition beyond the thirty-year tenure of its guiding

genius, Ken Iverson. DiMicco committed to reinvigorating the

Nucorculture and organization so that the company's sustained

recovery would not depend on his leadership alone.

PRESERVE THE CORE/STIMULATE PROGRESS: DiMicco explicitly embraced

the idea of holding values and principles constant, while chang-

ing practices and strategies to endlessly adapt to a changing

world: "Businesses must evolve while ensuring that core prin-

ciples are not being compromised." 271 Key mechanisms for driv-

172 APPENDIX 6.B

ing progress under DiMicco included paying greater attention

to taking care of customers, using their demands as a constant

catalyst for improvement, and creating an internal benchmark-

ing mechanism.272 DiMicco changed the longtime practice of

relying almost exclusively on internally developed mini-mill

sites and added selective acquisitions based on three disciplined

decision criteria: don't overpay, stick to businesses you know,

and ensure cultural compatibility.273 He invested in and experi-

mented with new technologies, such as creating the world's first

production installation for the direct strip-casting of carbon sheet steel. 274

l.20

l.00

0.80

0.60

0.40

0.20

0 1995

APPENDIX 6.C: DECLINE AND RECOVERY CASE

NORDSTROM

Nordstrom's Rebound Under Blake W. Nordstrom Ratio of Cumulative Stock Returns to General Market

Nordstrom becomes president in 2000

1997 1999 2001 2003 2005

Source: Cl200601 CRS?®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved.www.crsp.chicagobooth.edu

174 APPENDIX 6.C

SYNOPSIS: Known for extraordinary customer service, Nordstrom

made its reputation as one of the great retailing companies of

the twentieth century. In the 1990s, the company began a long

slide and took a dramatic downturn in 2000, with same-store

sales actually declining. From 2000 to 2006, Nordstrom strongly

recovered when fourth-generation family member Blake

Nordstrom assumed leadership and refocused on the primary

flywheel that had made the company great in the first place-

the customer-service, professional-sales flywheel-while sub-

stantially improving background systems, such as inventory controls. 275

I've outlined Nordstrom's recovery through the lens of the

good-to-great concepts below. (For an explanation of these

concepts, see Appendix 7.)

LEVEL 5 LEADERSHIP: Blake Nordstrom answered his own phone,

as had been Nordstrom family custom. He reestablished the

inverted-pyramid structure that placed executives at the bottom,

and customers and front-line salespeople at the top. He accepted

responsibility for the company's problems: "It was evident to

my cousins and me that [our fall] was our fault-not the culture's

fault, but us personally." 276

FIRST WHO, THEN WHAT: Nordstrom's transition began with signifi-

cant changes in the leadership team-including the CEO, CIO,

CFO, and president of full-line stores. The Nordstrom team

re-embraced the idea of hiring based on values and character,

not skills-"We can hire nice people and teach them to sell, but

we can't hire salespeople and teach them to be nice." They re-

turned to the rigor of having the right people in key seats. As

APPENDIX 6.C 175

one Nordstrom leader put it, "I would rather we lost lawsuits

from time to time than keep employees that are not up to our

standards. Because a weak employee will make the others

around him weak, and drag them down." 277

CONFRONT THE BRUTAL FACTS: Blake Nordstrom confronted the fact

that Nordstrom had strayed from its obsessive culture of cus-

tomer service and that it badly needed to upgrade its basic

systems, in particular through tying inventory systems to point-

of-sale systems. He put $200 million into a new perpetual-

inventory system so that Nordstrom could both reduce inventory

costs and increase the chances that a salesperson could easily

locate the exact item a customer desired.278

HEDGEHOG CONCEPT: The· Nordstrom team rediscovered the

company's core concept, that it could be the best department

store chain in the world in creating a relationship between the

salesperson and the customer. The recovery was based on a

simple, elegant idea: get back to building lasting relationships

with customers by supporting individual sales professionals

with vastly improved background systems (especially inventory

systems) and thereby improve core economics measured by

return on invested capital. They gained deeper understanding

that economic returns were driven by margin dollars divided by

average inventory. 279

CULTURE OF DISCIPLINE: The Nordstrom team returned to the pri-

mary approach that had made Nordstrom great in the first

place-getting passionate sales professionals, setting very high

performance and customer-service expectations, and giving

176 APPENDIX 6.C

them the freedom to make decisions that would best serve

the customer. They retained the Nordstrom rule book, which

specified that the only rule is to use good judgment in all situa-

tions. "Perhaps the biggest accomplishment," wrote Blake Nord-

strom in the 2003 annual report, "is that we are becoming more

disciplined as a company." 280

FLYWHEEL, NOT DOOM LOOP: Blake Nordstrom focused on "small but

meaningful steps," not big, dramatic moves. He confronted the

failure of the $40 million "Reinvent yourself" campaign: "[It]

was an attempt to do something different, and we lost Sight of

what we are. The customers obviously didn't want to reinvent

themselves and didn't want our company to reinvent ourselves."

In 2004, Blake Nordstrom wrote, "Success for our company is

not going to take a new strategy or an entirely new busi-

ness model. Instead it's taking what we already do well and

continuing to execute those strengths." 281

CLOCK BUILDING, NOT TIME TELLING: Blake Nordstrom focused on build-

ing the culture and supporting systems to enhance the culture

so that Nordstrom's recovery would not depend on the presence

of any particular leader. He rebuilt his executive team so that the

leadership of the company would not depend entirely upon him;

if he were to step away, the success of the turnaround would

likely continue. At the time of this writing, Blake Nordstrom

remains president.282

PRESERVE THE CORE/STIMULATE PROGRESS: Blake Nordstrom empha-

sized reigniting enduring Nordstrom core values (service to the

APPENDIX 6.C 177

customer above all else, a passion for improvement, entrepre-

neurial work ethic, excellence in reputation) yet made dramatic

changes in the systems and practices required to actualize those

values-new systems, shared best practices, more disciplined

buying practices.283

APPENDIX 7: GOOD-TO-GREAT FRAMEWORK-

CONCEPT SUMMARY

Note: At our website, www.jimcollins.com. we have posted

a diagnostic tool for assessing an organization through the lens

of these concepts. The diagnostic tool is free for use inside any

organization.

(The principles in Stages 1 through 3 derive from the research

for the book Good to Great by Jim Collins; the principles in Stage

4 derive from the book Built to Last by Jim Collins and Jerry I.

Porras.)

STAGE 1: DISCIPLINED PEOPLE

LEVEL 5 LEADERSHIP: Level 5 leaders are ambitious first and

foremost for the cause, the organization, the work-not

themselves-and they have the fierce resolve to do whatever

180

By Applying the Good-to-Great Framework (Inputs of Greatness)

Stage 1: DISCIPLINED PEOPLE

Level 5 Leadership

First Who, Then What

Stage 2: DISCIPLINED THOUGHT

Confront the Brutal Facts

The Hedgehog Concept

Stage 3: DISCIPLINED ACTION

Culture of Discipline

The Flywheel

Stage 4: BUILDING GREATNESS TO LAST

Clock Building, Not Time Tell ing

Preserve the Corel Stimulate Progress

APPENDIX 7

You Build the A Great Organization Foundations of -+ (Outputs of Greatness)

Delivers Superior Performance In business, performance is defined by financial returns and achievement of corporate purpose. In the social sectors, performance is defined by results and efficiency in delivering on the social mission.

Makes a Distinctive Impact The organization makes such a unique contribution to the communities it touches and does its work with such unadulterated excellence that if it were to disappear, it would leave a hole that could not be easily filled by any other institution on the planet.

Achieves Lasting Endurance The organization can deliver exceptional resu Its over a long period of time, beyond any single leader, great idea, market cycle, or well-funded program. When hit with setbacks, it bounces back even stronger than before.

APPENDIX 7 181

it takes to make good on that ambition. A Level 5 leader dis-

plays a paradoxical blend of personal humility and professional

will.

FIRST WHO, THEN WHAT: Those who build great organizations make

sure they have the right people on the bus, the wrong people off

the bus, and the right people in the key seats before they figure

out where to drive the bus. They always think first about "who"

and then about what.

STAGE 2: DISCIPLINED THOUGHT

CONFRONT THE BRUTAL FACTS-THE STOCKDALE PARADOX: Retain unwaver-

ing faith that you can and will prevail in the end, regardless of

the difficulties, and at the same time have the discipline to con-

front the most brutal facts of your current reality, whatever they

might be.

THE HEDGEHOG CONCEPT: Greatness comes about by a series of good

decisions consistent with a simple, coherent concept-a "hedge-

hog concept." The hedgehog concept is an operating model that

reflects understanding of three intersecting circles: what you

can be the best in the world at, what you are deeply passionate

about, and what best drives your economic or resource engine.

STAGE 3: DISCIPLINED ACT/ON

CULTURE OF DISCIPLINE: Disciplined people who engage in disciplined

thought and who take disciplined action-operating with free-

dom within a framework of responsibilities: this is the corner-

182 APPENDIX 7

stone of a culture that creates greatness. People do not have

jobs; they have responsibilities.

THE FLYWHEEL: There is no single defining action, no grand pro-

gram, no one killer innovation, no solitary lucky break, no mir-

acle moment. Rather, the process resembles relentlessly pushing

a giant heavy flywheel, turn upon turn, building momentum

until a point of breakthrough, and beyond.

STAGE 4: BUILDING GREATNESS TO LAST

CLOCK BUILDING, NOT TIME TELLING: Truly great organizations prosper

through multiple generations of leaders, the exact opposite of

being built around a single great leader, great idea, or specific

program. Leaders in great organizations build catalytic mecha-

nisms to stimulate progress and do not depend upon having a

charismatic personality to get things done; indeed, many have

had a "charisma bypass."

PRESERVE THE CORE/STIMULATE PROGRESS: Enduring great organiza-

tions are characterized by a fundamental duality. On the one

hand, they have a set of timeless core values and core reason

for being that remain constant over long periods of time. On

the other hand, they have a relentless drive for change and

progress-a creative compulsion that often manifests in BHAGs

(Big Hairy Audacious Goals). Great organizations keep clear the

difference between their core values (which never change) and

operating strategies and cultural practices (which endlessly

adapt to a changing world).

NOTES

1. joseph A. Tainter, The Collapse of Complex Societies (New York: Cambridge University Press, 1988),5,6,8-12, 128-152.

2. Andrew Hill and john Wooden, Be Quick-But Don't Hurry (New York: Simon & Schuster, 2001), 191.

3. United States Geological Survey, "The Great 1906 San Francisco Earth- quake," Earthquake Hazards Program, http://earthquake.usgs.gov/re gionallnca/1906/18aprillindex.php; A. W. Clausen, "Bank of America: The Largest Bank Was Once a Plank on the Waterfront," Nation's Business, january 1971, 54.

4. joseph H. Harper, "Observations of the San Francisco Earthquake" The Virtual Museum of the City of San Francisco (delivered before the Montana Society of Engineers, january 11,1908), http://www.sfmuseum.org/1906/ harper.html; E. E. Schmitz, "Proclamation by the Mayor," The Virtual Museum of the City of San Francisco (on April 18, 1906), http://www.sf museum.org/1906.2/killproc.html; Gary Hector, Breaking the Bank: The Decline of Bank America (Boston: Little, Brown & Company, 1988),25,36; A. W. Clausen, "Bank of America: The Largest Bank Was Once a Plank on the Waterfront," Nation's Business,january 1971, 54.

5. Gary Hector, Breaking the Bank: The Decline of Bank America (Boston: Little, Brown & Company, 1988),32, 50, 62.

6. "A. W. Clausen: Banking on Stability at BankAmerica," Financial World, March 15, 1978,24; "BankAmerica and Citicorp: The New Banking Forces New Strategies," Business Week,july 13, 1981, 56.

184 NOTES

7. David W. Ewing and Pamela M. Banks, "Listening and Responding to Em- ployees' Concerns: An Interview with A. W. Clausen," Harvard Business Review, January IFebruary 1980, 101.

8. G. Christian Hill, "BankAmerica Posts a Record Loss of $640 Million for Second Period," Wall Street Journal, July 17, 1986; Richard B. Schmitt, "BankAmerica Denies Rumors on Health As Speculation Briefly Depresses Dollar," Wall Street Journal, September 17, 1986; Stock returns source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu; Richard B. Schmitt, "BankAmer- ica Denies Rumors on Health As Speculation Briefly Depresses Dollar," Wall Street Journal, September 17, 1986; G. Christian Hill, "BankAmerica Cuts Quarterly Payout By 47% in Wake of 2nd-Period Loss," Wall Street Journal, August 6, 1985; Jonathan B. Levine, "Clausen May Be the Safe Choice, But Is He the Right One?" Business Week, October 27, 1986, 108; Victor F. Zonana, "BankAmerica Considers Sale of Headquarters," Wall StreetJournal, November 19, 1984; "BankAmerica Completes San Francisco Offices' Sale," Wall Street Journal, October 2, 1985; G. David Wallace and Jonathan B. Levine, "BofA Is Becoming The Incredible Shrinking Bank," Business Week, January 27, 1986, 78; Gary Hector, Breaking the Bank: The Decline of Bank America (Boston: Little, Brown & Company, 1988),219-223; "Founder's Daughter Quits BankAmerica Post," Wall StreetJournal, March 8, 1985; G. Christian Hill and Richard B. Schmitt, "Salvage Operation: Autocrat Tom Clausen Faces Formidable Task To Save BankAmerica, Wall Street Journal, October 17, 1986; Robert M. Bleiberg, "What Price BankAmerica? Better Stewards (Corporate or Otherwise) Went Down on the Titanic," Barron's, July 21,1986,9.

9. Michael Kolbenschlag, "No Time For A Gentleman," Forbes, December 22, 1980,33.

10. Victor F. Zonana and Kathryn Christensen, "Budging the Giant," Wall Street Journal, May 20, 1982; "BankAmerica Plans to Acquire Charles Schwab," Wall Street Journal, November 25, 1981; Victor F. Zonana, "The Porches and Saabs at Schwab Aggravate Some at BankAmerica," Wall StreetJournal, January 20,1983; "BankAmerica Corp.'s Takeover of Sea first Took Effect Today," Wall Street Journal, July 1, 1983,2; Victor F. Zonana, "Seafirst Holders Clear BankAmerica Bid For Largest Interstate Banking Takeover," Wall Street Journal, June 29, 1983; Gary Hector, "More than Mortgages Ails BankAmerica," Fortune, April 1, 1985, 50; "BofA's Brash Fight to Build Deposits," Business Week, January 17, 1983,98.

11. Victor F. Zonana, "Budging the Giant," Wall Street Journal, May 20, 1982, 1; Victor F. Zonana, "Stirring Giant: BankAmerica Corp., Seeking a

NOTES 185

Turnaround, Seems to Gain Ground," Wall Street Journal, January 27, 1984.

12. Victor F. Zonana, "The Porches and Saabs at Schwab Aggravate Some at BankAmerica," Wall StreetJournal,January 20,1983.

13. "BofA's Brash Fight to Build Deposits," Business Week,January 17, 1983, 98; G. Christian Hill and Mike Tharp, "Stumbling Giant: Big Quarterly Defi- cit Stuns BankAmerica, Adds Pressure on Chief," Wall Street Journal, July 18, 1985; Gary Hector, "More than Mortgages Ails BankAmerica," Fortune, April 1, 1985, 50.

14. G. Christian Hill and Mike Tharp, "Stumbling Giant: Big Quarterly Defi- cit Stuns BankAmerica, Adds Pressure on Chief," Wall Street Journal, July 18, 1985.

15. George E. P. Box, J. Stuart Hunter, and William G. Hunter, Statistics for Experimenters: Design, Innovation, and Discovery, 2nd Edition (Hoboken: John Wiley, 2005), 440.

16. Jill Bettner, "'Underpromise, Overperform,'" Forbes, January 30,1984,88; Robert W. Galvin, The Idea of Ideas (Schaumburg, IL: Motorola University Press, 1991), 165.

17. Roger O. Crockett and Peter Elstrom, "How Motorola Lost Its Way," Business Week, May 4, 1998, 140.

18. Roger O. Crockett, "A New Company Called Motorola," Business Week, April 17, 2000, 86; Rajiv Chandrasekaran, "Motorola's Next Page," Wash- ington Post, September 29, 1996; Peter Elstrom, "Motorola Goes for the Hard Cell," Business Week, September 23, 1996, 39; "Gartner Dataquest Says Worldwide Mobile Phone Sales in 2001 Declined for First Time in Industry's History," Gartner Press Release, March 11, 2002, http://www .gartner.com!5 _about! press_releases !2002_03!pr20020311a.jsp; Peter Coy and Ron Stodghill, "Is Motorola a Bit Too Patient?" Business Week, Febru- ary 5, 1996, 150.

19. J. Rufus Fears, Books That Have Made History: Books That Can Change Your Life (Chantilly, VA: The Teaching Company Limited Partnership, 2005), audiotapes oflectures by J. Rufus Fears, Part 1, Lecture 2.

20. Motorola, Inc., "Financial Highlights," 2001 Summary Annual Report (Schaumburg, IL: Motorola, Inc., 2002), 3; Motorola, Inc., "Financial High- lights," 2003 Annual Report (Schaumburg, IL: Motorola, Inc., 2004), 3.

21. Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

22. Howard Rudnitsky, "Would You Buy A Used Car From This Man?" Forbes, October 23, 1995, 52; Tim W. Ferguson, "Sofa With Your Stereo, Sir?" Forbes, July 7,1997,46.

186 NOTES

23. John R. Wells, "Circuit City Stores, Inc.: Strategic Dilemmas," Harvard Business School, case study #9-706-419 (Boston: Harvard Business School Publishing, 2005), 7; Rob Landley, "OIVX Post Mortem," Motley Fool, June 21, 1999, http://www.fool.com/portfolios / rulemaker /1999/ RuleMaker 990621.htm.

24. "Richard L. Sharp-Circuit City Stores, Inc.-CEO Interview," The Wall Street Transcript, November 2, 1998, 1.

25. Peter Spiegel, "Car Crash," Forbes, May 17, 1999, 130. 26. De'Ann Weimer, "The Houdini of Consumer Electronics," Business Week,

June 22, 1998,88; Dorothy Leonard and Brian DeLacey, "Best Buy Co. Inc. (A): An Innovator's Journey," Harvard Business School, case study #9-604- 043 (Boston: Harvard Business School Publishing, 2005).

27. John R. Wells and Travis Haglock, "Best Buy Co., Inc.: Competing on the Edge," Harvard Business School, case study #9-706-417 (Boston: Harvard Business School Publishing, 2007).

28. Best Buy Co., Inc., Fiscal 2003 Annual Report (Richfield, MN: Best Buy Co., Inc., 2003); Best Buy Co., Inc., Fiscal 2001 Annual Report (Minneapolis: Best Buy Co., Inc., 2001);John R. Wells and Travis Haglock, "Best Buy Co., Inc.: Competing on the Edge," Harvard Business School, case study #9-706-417 (Boston: Harvard Business School Publishing, 2007); Balaji Chakravarthy and V. Kasturi Rangan, "Best Buy," Harvard Business School, case study #9-598-016 (Boston: Harvard Business School Publishing, 1997); Best Buy Co., Inc., 1996 Annual Report (Minneapolis: Best Buy Co., Inc., 1996); Doro- thy Leonard and Brian DeLacey, "Best Buy Co. Inc. (A): An Innovator's Journey," Harvard Business School, case study #9-604-043 (Boston: Harvard Business School Publishing, 2005); Dale Kurschner, "Best Buy Harder," CRM, August 1997, 67; Best Buy Co., Inc., 1999 Annual Report (Minneapolis: Best Buy Co., Inc., 1999); Best Buy Co., Inc., 2003 Annual Report (Rich- field, MN: Best Buy Co., Inc., 2003); Best Buy Co., Inc., 2006 Annual Report (Richfield, MN: Best Buy Co., Inc., 2006).

29. Calculation based on 1997 and 2006 revenues of Best Buy and Circuit City, taking half of the increase in revenues Best Buy achieved from 1997 to 2006 and adding that amount to Circuit City's 2006 revenues.

30. Balaji Chakravarthy and V. Kasturi Rangan, "Best Buy," Harvard Business School, case study #9-598-016 (Boston: Harvard Business School Publish- ing, 1997); Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

31. "Pinching 500 Billion Pennies," Fortune, March 1963, 105. 32. William I. Walsh, The Rise and Decline of the Great Atlantic &- Pacific Tea

Company (Secaucus, NJ: Lyle Stuart, Inc., 1986), 78-81.

NOTES 187

33. William 1. Walsh, The Rise and Decline of the Great Atlantic & Pacific Tea Company (Secaucus, NJ: Lyle Stuart, Inc., 1986),78; Eleanor Johnson Tracy, "How A&P Got Creamed," Fortune,January 1973,103.

34. Peter Z. Grossman, "A&P: Should You Invest Along with the Germans?" Financial World, February 15, 1979, 16.

35. Ames Department Stores Inc., "Letter to Shareholders," 1987 Annual Report to Stockholders (Rocky Hill, CT: Ames Department Stores, Inc., 1988).

36. Elizabeth Rourke (updated by David E. Salamie), "Ames Department Stores, Inc." International Directory of Company Histories 30 (New York: St. James Press, 2000), 54.

37. William Mehlman, "Ames Strikes Discounting Gold in Exurban America," The Insiders' Chronicle 6, no. 46 (November 16, 1981): 1; Peter Hisey, "Herb Gilman: 'The Concept Is So Simple'," Discount Store News 27, no. 11 (May 23, 1988): 49; "Ames: Small-Town Discount Giant Trading Up, Not Away From Roots," Chain Store Age, February 1982, 25;JeffMalester, "Ames Aims at Growth by Changing Image," Retailing Home Furnishings 57 (August 22, 1983): 6; Al Heller, "Gilman's Informality Spurs Creativity, Growth at Ames," Discount Store News 24 (August 19, 1985): 1.

38. Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

39. Elizabeth Rourke (updated by David E. Salamie), "Ames Department Stores, Inc.," International Directory of Company Histories 30 (New York: St. James Press, 2000), 54; Wal-Mart Stores, Inc., "History Timeline," Wal-Mart: History, http://walmartstores.com/AboutUs/297.aspx.

40. Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

41. Personal conversation with author. 42. Steven Jacober, "Ames Redefines Itself at $2 Billion," Discount Merchandiser,

August 1988,22; Peter Hisey, "Herb Gilman: 'The Concept Is So Simple,'" Discount Store News 27, no. 11 (May 23, 1988): 49.

43. Ames Department Stores, Inc., "Letter to Shareholders," 1988 Annual Report to Stockholders (Rocky Hill, CT: Ames Department Stores, Inc., 1989); Eric N. Berg, "Ames's Rocky Retailing Marriage," New York Times, April 11, 1990.

44. Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

45. Mike Duff, "Discount Veteran Ames to Liquidate After 44 Years," DSN Retailing Today 41, no. 16 (August 26,2002): 1.

188 NOTES

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47. Motorola, Inc., 1995 Summary Annual Report (Schaumburg, 11: Motorola, Inc., 1996).

48. John Simons, "Will R&D Make Merck Hot Again?" Fortune, July 8, 2002, 89.

49. "HP Files 5,000 Patent Applications Worldwide in 2001," HP Press Release (Palo Alto: Hewlett-Packard Company), February 6, 2002.

50. Alan Farnham, "America's Most Admired Company," Fortune, February 7, 1994, 50; Marshall Loeb, "How To Grow A New Product Every Day," Fortune, November 14, 1994,269.

51. "Where Do They Get All Those Ideas?" Machine DeSign, January 26, 1995, 40; Lornet Turnbull, "Ohio-Based Rubbermaid Inc. Heeds Findings from Consumer Focus Groups," Akron Beaconjournal, February 18, 1996.

52. Wolfgang R. Schmitt, "A Growth Strategy," Executive Excellence, August 1994, 17; Tricia Welsh, "Best and Worst Corporate Reputations," Fortune, February 7,1994,58; Alan Farnham, "America's Most Admired Company," Fortune, February 7, 1994,50; Marshall Loeb, "How To Grow A New Prod- uct Every Day," Fortune, November 14, 1994,269; Lornet Turnbull, "Ohio- Based Rubbermaid Inc. Heeds Findings from Consumer Focus Groups," Akron Beaconjournal, February 18, 1996.

53. Lee Smith, "Rubbermaid Goes Thump," Fortune, October 2, 1995, 90; Geoffrey Colvin, "From the Most Admired to Just Acquired: How Rub- bermaid Managed to Fail," Fortune, November 23, 1998, 32.

54. Glen Gamboa, "Rubbermaid Corp. Is Proposing a Nice, Neat Solution," Akron Beaconjournal, October 22,1998; Glen Gamboa, "Rubbermaid Seeks Boost Through 'Solutions' Marketing," Akron Beaconjournal, July 28, 1997; Raju Narisetti, "Rubbermaid's Plan to Buy Graco Is Eclipsed by Poor Profit Forecast," Wall Street journal, September 5, 1996; "Rubbermaid Completes Acquisition," Discount Store News 35, no. 21 (November 4, 1996): 43; Clau- dia H. Deutsch, "A Giant Awakens, To Yawns: Is Rubbermaid Reacting Too Late?" New York Times, December 22, 1996; Matt Murray, "Rubber- maid Tries to Regain Lost Stature," Wall Street journal, December 6, 1995; Susan Sowa, "Restructuring May Salvage Rubbermaid," Rubber & Plastics News 25, no. 10 (December 18, 1995): 7; Lornet Turnbull, "Ohio-Based Rub- bermaid Inc. Heeds Findings from Consumer Focus Groups," Akron Beacon journal, February 18, 1996.

NOTES 189

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56. Amy Barrett and Larry Armstrong, "Merck Takes Some Growth Pills," Business Week, October 12, 1998, 78; Gardiner Harris, "Cold Turkey: How Merck Intends to Ride Out a Wave of Patent Expirations," Wall Street Journal, February 9, 2000.

57. Clark Gilbert and Ratna G. Sarkar, "Merck: Conflict and Change," Harvard Business School, case study #9-805-079 (Boston: Harvard Business School Publishing, 2005).

58. Amy Barrett and Larry Armstrong, "Merck Takes Some Growth Pills," Business Week, October 12, 1998, 78.

59. Merck & Co., Inc., Merck 1998 Annual Report (Whitehouse Station, NJ: Merck & Co., Inc., 1999),3.

60. Merck & Co., Inc., Merck 1999 Annual Report (Whitehouse Station, NJ: Merck & Co., Inc., 2000); John Simons and David Stipp, "Will Merck Survive Vioxx?" Fortune, November 1, 2004, 90.

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190 NOTES

American Medical Association 286, no. 8 (August 22, 2001): 954-959; Daniel H. Solomon, Sebastian Schneeweiss; Robert]. Glynn, et ai., "Relationship Between Selective Cyclooxygenase-2 Inhibitors and Acute Myocardial Infarction in Older Adults," Circulation 109 (April 19, 2004): 2068-2073, http:// circ.ahajournals.org/ cgil content/full/ 109 / 17/2068.

65. Peter S. Kim and Alise S. Reicin, "Rofecoxib, Merck and the FDA," New EnglandJournal of Medicine 351, no. 27 (December 30,2004): 2875-2878.

66. Merck & Co., Inc., Annual Report 2004 (Whitehouse Station, NJ: Merck & Co., Inc., 2005), 21.

67. Brooke A. Masters and Marc Kaufman, "Painful Withdrawal for Makers of Vioxx," Washington Post, October 18, 2004.

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75. Jill Bettner, '''Underpromise, Overperform,'" Forbes, January 30,1984,88; Motorola, Inc., "Note 2 to Consolidated Financial Statements," 1996 Summary Annual Report (Schaumburg, IL: Motorola, Inc., 1997).

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78. Rajiv Chandrasekaran, "Motorola's Next Page: The Cellular Giant and

NOTES 191

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79. Motorola, Inc., "Letter to Stockholders," 1997 Summary Annual Report (Schaumburg, IL: Motorola, Inc., 1998), 6.

80. Sydney Finkelstein and Shade H. Sanford, "Learning from Corporate Mis-

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81. Motorola, Inc., 1999 Proxy Statement (Schaumburg, IL: Motorola, Inc., 2000), http://media.corporate-ir.net/ media_files I iroll 90 I 90829 I proxies I mOC000324_1999_proxy.htm.

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83. Robert Ristelhueber, "Texas Tornado," Electronic Business 23, no. 12 (De- cember 1997): 35.

84. SvetianaJosifovska, "Deep in the Heart of Texas Instruments," Electronic Business 26, no. 10 (October 2000): 116; Peter Burrows and Jonathan B. Levine, "TI is Moving Up in the World," Business Week, August 2, 1993,46; Jim Bartimo, "TI Bets Most ofIts Marbles On Chips," Business Week,Janu- ary 29, 1990, 73; Kyle Pope, "Texas Instruments Places Hopes On Chip," Wall StreetJournal, March 10, 1994; Robert Ristelhueber, "Texas Tornado," Electronic Business 23, no. 12 (December 1997): 35; Caleb Pirtle III, Engineer- ing the World: Stories from the First 75 Years of Texas Instruments (Dallas:

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88. Louis V. Gerstner, Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 204.

89. "Every Dog Needs His Flea," Forbes, May 15, 1975, 131. 90. "Scott Paper: Back On Its Feet," Forbes, December 15, 1976, 69. 91. "No-Longer-So-Great Scott," Forbes, August 1, 1972,25. 92. "Scott Paper: Back On Its Feet," Forbes, December 15, 1976, 69.

192 NOTES

93. Stuart C. Gilson and Jeremy Cott, "Scott Paper Company," Harvard Busi- ness School, case study #9-296-048 (Boston: Harvard Business School Pub- lishing, 1997); Albert]. Dunlap and Bob Andelman, Mean Business: How I Save Bad Companies and Make Good Companies Great (New York: Fireside, 1997), 11.

94. "Now An Outsider Will Run Scott Paper," Business Week, April 23, 1979,39; Jean A. Briggs, "Too Little, Too Late?" Forbes, July 5,1982,88; "Scott Paper Fights Back, At Last," Business Week, February 16, 1981, 104.

95. Tom Schmitz, "How Platt Got to the Top ofHP," SanJose Mercury News, July 18, 1992; Peter Burrows, "Twists in HP's CEO Search," Business Week, June 14, 1999, 49; "HP Names Carly Fiorina President and CEO," Business Wire, July 19, 1999; Christopher Springmann, "The BestJob in the World," Across the Board, May/June, 2003; "Veterans of Value," Chief Executive, September 2002.

96. Michael Beer, Rakesh Khurana, andJames Weber, "Hewlett-Packard: Cul- ture in Changing Times," Harvard Business School, case study #9-404-087 (Boston: Harvard Business School Publishing, 2005), 15; Gregory C. Rogers, "Human Resources at Hewlett-Packard (A)," Harvard Business School, case study #9-495-051 (Boston: Harvard Business School Publish- ing, 1995), 25; Dean Takahashi, "Profits Rise 41%, But H-P Is Unhappy With Growth," San Jose Mercury News, May 18, 1995; Peter Burrows, Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ:John Wiley & Sons, 2003), 83.

97. Peter Burrows, Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ: John Wiley & Sons, 2003), 83; George Anders, Perfect Enough: Carly Fiorina and the Reinvention of Hewlett-Packard (New York: Penguin Group, 2003); Hewlett-Packard Company, 1993 Form lO-K (Palo Alto, CA: Hewlett-Packard Company, 1994).

98. Tom Schmitz, "How Platt Got to the Top of HP," San Jose Mercury News, July 18, 1992; Quentin Hardy, "All Carly All the Time," Forbes, December 13, 1999, 138.

99. Julie Creswell and Dina Bass, "Ranking the 50 Most Powerful Women: Fortune's First Annual Look at the Women Who Most Influence Corporate America," Fortune, October 12, 1998.

100. Carly Fiorina, Tough Choices: A Memoir (New York: Penguin Group, 2006), 171-172.

101. George Anders, Perfect Enough: Carly Fiorina and the Reinvention of Hewlett- Packard (New York: Penguin Group, 2003), 63; Peter Burrows and Peter Elstrom, "The Boss," Business Week, August 2, 1999, 76; Peter Burrows, Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ: John Wiley & Sons, 2003), 136-137.

NOTES 193

102. Louis V. Gerstner,Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 54.

103. Louis V. Gerstner, Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 30.

104. George Anders, "The Carly Chronicles," Fast Company, February 2003; Peter Burrows, Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ: John Wiley & Sons, 2003), 148; David Packard, The HP Way: How Bill Hewlett and I Built Our Company (New York: HarperCollins, 2005).

105. George Anders, Perfect Enough: Carly Fiorina and the Reinvention of Hewlett- Packard (New York: Penguin Group, 2003), 64-79; Peter Burrows, Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ: John Wiley & Sons, 2003), 135-156; Carly Fiorina, Tough Choices: A Memoir (New York: Penguin Group, 2006), 195.

106. Quentin Hardy, "All Carly All the Time," Forbes, December 13, 1999, 138. 107. Tom Quinlan, "Transition at the Top for HP: Platt Bows Out as CEO, Ush-

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108. Louis V. Gerstner, Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 36, 68.

109. Louis V. Gerstner, Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 223.

110. David Kirkpatrick, "Lou Gerstner's First 30 Days," Fortune, May 31, 1993, 57; Louis V. Gerstner, Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 56-57.

111. Peter Burrows, Backfire: Carly Fiorina's High-Stakes Battle for the Soul of Hewlett-Packard (Hoboken, NJ:John Wiley & Sons, 2003), 76.

112. Carly Fiorina, Tough Choices: A Memoir (New York: Penguin Group, 2006), 180.

113. Carly Fiorina, Tough Choices: A Memoir (New York: Penguin Group, 2006), 292-294,303.

114. "HP Sends Letter to Shareowners on Value of Compaq Merger," Business Wire,January 18,2002.

115. Pallavi Gogoi, "Circuit City: Due for a Change?" BusinessWeek.com, Febru- ary 29, 2008, http://www.businessweek.com/bwdaily/dnflash/content/ feb2008/d b20080229_251654.htm; Pallavi Gogoi, "Is Circuit City Up for Sale?" BusinessWeek.com, April 8, 2008, http://www.businessweek.com Ibwdaily I dnflashl content I apr20081 db2008048_602083.htm; Pallavi Gogoi, "Circuit City's Secret Service Plan," BusinessWeek.com, August 24, 2008, http://www.businessweek.com/investor I content I aug20061 pi2006 0824 _857413.htm; Circuit City Stores, Inc., Annual Report 2006 (Richmond,

194 NOTES

VA: Circuit City Stores, Inc., 2006); Circuit City Stores, Inc., Annual Report 2007 (Richmond, VA: Circuit City Stores, Inc., 2007); Circuit City Stores, Inc., Annual Report 2008 (Richmond, VA: Circuit City Stores, Inc., 2008); Louis Llovio, "No Deal for Circuit City," Times-Dispatch, July 2, 2008.

116. "Scott Paper Fights Back, At Last," Business Week, February 16, 1981, 104; Bill Saporito, "Scott Isn't Lumbering Anymore," Fortune, September 30, 1985,48.

117. Ames Department Stores, Inc., Annual Reports, for years 1992-2000 (Rocky Hill, CT: Ames Department Stores, Inc., 1993-2001); Pete Hisey, "Ames Nears Day of Reckoning," Discount Store News, August 6, 1990, 1; Jeffrey Arlen, "Fashioning the Turn Around at Ames," Discount Store News, April 18, 1994, A10; Don Kaplan, "Ames Redefines Its Niche in the Northeast," Daily News Record, October 14, 1994, 3; Dianne M. Pogoda, "Ames is Bat- tling Back," WWD, October 26, 1994, 10; Donna Boyle Schwartz, "Hang- ing Tough," HFN-The Weekly Newspaper for the Home Furnishing Network, November 20, 1995, 1; James Mammarella, "Joe Ettore: President, CEO, Ames," Discount Store News, December 4, 1995,36; Valerie Seckler, "Ames's Strategy for Survival," WWD, March 19, 1997, 20;Joyce R. Ochs, "Anatomy of a Bankruptcy," Business Credit 99, no. 9 (October 1997): 20; Jean E. Pal- mieri, "At the Magic Show, Ames' Buyers Will Be Seeking the Next Wave in Tops," Daily News Record, February 22, 1999, 18; Mike Duff, "Discount Veteran Ames to LiqUidate After 44 Years," DSN Retailing Today, August 26,2002, 1.

118. "A&P's Ploy: Cutting Prices to Turn a Profit," Business Week, May 20, 1972, 76; William I. Walsh, The Rise and Decline of the Great Atlantic & Pacific Tea Company (Secaucus, NJ: Lyle Stuart, Inc., 1986), 146; Mary Bralove, "Price War in Supermarkets Imperils Some As A&P Sets Out to Regain Market Share," Wall Street journal, July 21, 1972; "A&P's 'Price War' Bites Broadly and Deeply," Business Week, September 30, 1972, 56; Eleanor Johnson Tracy, "How A&P Got Creamed," Fortune, January 1973, 103; Mary Bral- ove, "A&P Goes Outside Ranks for First Time, Picks Scott to Assume Eventual Command," Wall Street journal, December 11, 1974; Mary Bral- ove, "New A&P Chairman Unveils 5-Year Plan to Reverse Chain's Declin- ing Fortunes," Wall Street journal, February 7, 1975; "National Tea's Loss is A&P's Gain," Business Week, October 18, 1976, 39; "A&P Puts Big Money On its Family Marts," Business Week, January 23, 1978, 50; Peter W. Bern- stein, "Jonathan Scott's Surprising Failure at A&P," Fortune, November 6, 1978, 34; Peter Z. Grossman, "A&P: Should You Invest Along With the Germans?" Financial World, February 15, 1979, 16; Gay Sands Miller, "A&P's New President Isn't Signaling Any Retrenchment Wave Despite Deficit," Wall Street journal, May 2, 1980.

NOTES 195

119. Roger O. Crockett, "A New Company Called Motorola," Business Week, April 17, 2000, 86.

120. Motorola, Inc., 1999 Summary Annual Report (Schaumburg, IL: Motorola, Inc., 2000).

121. Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

122. Motorola, Inc., 2000 Summary Annual Report (Schaumburg, IL: Motorola, Inc., 2001).

123. Barnaby Feder, "Motorola Picks an Outsider to Be Its Chief Executive," New York Times, December 17, 2003; Barnaby J. Feder, "New Chief to Take Reins as Motorola Takes on Challenge of Rivals," New York Times,January 3,2004; Laurie J. Flynn, "Motorola Replaces Chief With an Insider," New York Times, December 1, 2007.

124. Texas Instruments Inc., "Interactive Timeline," History of Innovation (Dallas: Texas Instruments, Inc., 2008), http://www.ti.com/corp/ docs/ company/history/interactivetimeline.shtml; Erick Schonfeld, "Stetsons Off to Texan Technology," Fortune, April 17, 1995, 20; Brian O'Reilly, "Texas Instruments: New Boss, Big Job," Fortune, July 8, 1985, 60; "Texas Instruments Inc.," Business and Company Resource Center (Farmington Hills, MI: The Gale Group, Inc., 2006), document number: 12501307109; Steve Lohr, "Jerry R. Junkins, 58, Dies; Headed Texas Instruments," New York Times, May 30, 1996.

125. Caleb Pirtle III, Engineering the World: Stories from the First 75 Years of Texas Instruments (Dallas: Southern Methodist University Press, 2005), 144-146; Peter Burrows and Jonathan B. Levine, "TI is Moving Up in the World," Business Week, August 2, 1993,46.

126. Karen Blumenthal, "Texas Instruments Focuses on Youth as it Names En- gibous President, CEO," Wall Street Journal, June 21, 1996; Robert Ristel- hueber, "Texas Tornado," Electronic Business 23, no. 12 (December 1997): 35; Erick Schonfeld, "Hotter than Intel," Fortune, October 11, 1999, 179; Elisa Williams, "Mixed Signals," Forbes, May 28, 2001, 80.

127. Andrew Park, "For Every Gizmo, a TI Chip," Business Week, August 16, 2004,52.

128. Source: ©200601 CRSp®, Center for Research in Security Prices. Graduate School of Business, The University of Chicago. Used with permission. All rights reserved. www.crsp.chicagobooth.edu.

129. "Office Equipment," Forbes, January 1, 1963,61. 130. "Addressograph Multigraph Had a Great Fall," Forbes, September 15, 1973,

88; "Taking On Xerox With a Fast Copier," Business Week, April 26, 1969, 78; "The Man on the Spot," Forbes,June 1, 1975,24; David Pauly and James

196 NOTES

C. Jones, "Corporations: Roy Ash's Challenge," Newsweek, December 13, 1976, 90; "Addressograph Gets the Roy Ash Treatment," Business Week, March 21, 1977,36.

131. David Pauly and James C. Jones, "Corporations: Roy Ash's Challenge," Newsweek, December 13, 1976, 90; "AM International: When Technology Was Not Enough," Business Week,January 25,1982,62.

132. "Addressograph Jumps Into Word Processing," Business Week, July 4, 1977, 19; Louis Kraar, "Roy Ash is Having Fun at Addressogrief-Multigrief," For- tune, February 27, 1978, 46; "AM International: When Technology Was Not Enough," Business Week, January 25, 1982, 62; Andrew Baxter, "AM International Rebuilds on its Old Foundations," Financial Times, March 29, 1984; Thomas C. Hayes, "Ash Forced Out of Two AM Posts," New York Times, February 24, 1981.

133. Susie Gharib Nazem and Susan Kinsley, "How Roy Ash Got Burned," Fortune, April 6, 1981, 71.

134. "AM International: When Technology Was Not Enough," Business Week, January 25, 1982,62.

135. "Addressograph Multigraph Had a Great Fall," Forbes, September 15, 1973, 88; "How AM is Pulling Itself Up Again," Business Week, June 13, 1983,37; Andrew Baxter, "AM International Rebuilds on its Old Foundations," Fi- nancial Times, March 29, 1984; "AM International: Profits Are In, High Tech's Out," Business Week,July 7,1986,77.

136. "Addressograph Gets Ash and $2.7 Million," Business Week, October 4, 1976, 31; "Up From the Ashes," Forbes, April 16, 1979, 104; Leslie Wayne, "AM International's Struggle," New York Times, June 20, 1981; "AM Files Chapter 11 Petition," New York Times, April 15, 1982; "Cleaning Up the Mess at AM International," Business Week, December 3, 1984, 165; John N. Maclean, "AM Files Again For Chapter 11," Chicago Tribune, May 18, 1993.

137. "An Aftershock Stuns AM International," Business Week, March 22, 1982, 30.

138. N. R. Kleinfield, "AM's Brightest Years Now Dim Memories," New York Times, April 15, 1982.

139. Stuart C. Gilson and Jeremy Cott, "Scott Paper Company," Harvard Busi- ness School, case study #9-296-048 (Boston: Harvard Business School Pub- lishing, 1997); Albert]. Dunlap and Bob Andelman, Mean Business: How I Save Bad Companies and Make Good Companies Great (New York: Fireside, 1997), 11.

140. John A. Byrne and Joseph Weber, "The Shredder: Did CEO Dunlap Save Scott Paper-or Just Pretty It Up?" Business Week, January 15, 1996, 56.

141. John A. Byrne, Chainsaw: The Notorious Career of Al Dunlap in the Era of Profit-at-Any-Price (New York: HarperCollins Publishers, 2003).

NOTES 197

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143. "Commander McDonald of Zenith," Fortune,June 1945, 14l. 144. Richard Hammer, "Zenith Bucks the Trend," Fortune, December 1960,

128; "Troubled Zenith Battles Stiffer Competition," Business Week, October 10, 1977, 128.

145. Richard Hammer, "Zenith Bucks the Trend," Fortune, December 1960, 128; "Sam Kaplan 'That's Our Plan:" Forbes, May 15,1968,80; "Zenith Fills the Rooms at the Top," Business Week, May 16, 1970,62; "The Big Winner," Forbes, April 1, 1974; "Every Dog Needs His Flea," Forbes, May 15, 1975, 131; "Troubled Zenith Battles Stiffer Competition," Business Week, October 10, 1977, 128; Bob Tamarkin, "Zenith's New Hope," Forbes, March 31, 1980, 32.

146. "Zenith to Jimmy Carter: Help!" Forbes, December 15,1976,43; "Troubled Zenith Battles Stiffer Competition," Business Week, October 10, 1977, 128.

147. Bob Tamarkin, "Zenith's New Hope," Forbes, March 31,1980,32; "Zenith May Lead the Way in the Video Revolution," Business Week, February 23, 1981, 94; "Zenith: The Surprise in Personal Computers," Business Week, December 12, 1983, 102; "Zenith Wants to Give the Boob Tube a Brain," Business Week, May 6, 1985, 71.

148. "Zenith's Jerry Pearlman Sure is Persistent," Business Week, October 2, 1989, 67; "Zenith: The Surprise in Personal Computers," Business Week, December 12, 1983, 102.

149. "Zenith is Doing Quite Well, Thank you-In Computers," Business Week, July 11, 1988, 80; "Zenith's Jerry Pearlman Sure is Persistent," Business Week, October 2, 1989, 67; Lois Therrien, Thane Peterson, and Geoff Lewis, "Why Jerry Pearlman Gave Up His Brainchild," Business Week, Oc- tober 16, 1989,35; "Zenith's Bright Side and Its Dark Side," Forbes, May 2, 1988, 112.

150. Lisa Kartus, "The Strange Folks Picking on Zenith," Fortune, December 19, 1988, 79; Lois Therrien, Thane Peterson, and Geoff Lewis, "Why Jerry Pearlman Gave Up His Brainchild," Business Week, October 16, 1989, 35; Robert L. Rose, "Zenith Faces Liquidity Crunch in Wake of Price Wars," Wall Street Journal, November 11, 1992; "Zenith Dials Up a New CEO," Business Week, March 13, 1995; "Getting the Picture," Crain's Chicago Business 20, no. 2 Uanuary 13, 1997): 13.

151. Lisa Kartus, "The Strange Folks Picking on Zenith," Fortune, December 19, 1988, 79; Lois Therrien, "HDTV Isn't Clearing Up Zenith's Picture," Business Week, February 25, 1991, 56; H. Garrett DeYoung, "An Improving

198 NOTES

Picture for Zenith?" Electronic Business, June 1993, 83; "'A Short Leash' at Zenith," Business Week, January 31, 1994,31; Laxmi Nakarmi, Richard A. Melcher, and Edith Updike, "Will Lucky Goldstar Reach Its Peak with Zenith?" Business Week, August 7, 1995,40; "Zenith Faces Liquidity Crunch in Wake of Price Wars," Wall StreetJournal, November 11,1992; Carl Quin- tanilla and Robert L. Rose, "Zenith Turns to a Turnaround Expert in Its Efforts to Fatten Up Bottom Line," Wall Street Journal, January 7, 1998; "Zenith Electronics Corporation: History," Hoovers, http://premium .hoovers.com / subscribe / co /history.xhtmI?ID =ffffrrjjfffhrtfkfc; Liz Brooks, "Zenith Electronics' New Focus on the Digital Sector Is Dis- cussed," Adweek Magazine's Technology Marketing 21, no. 10 (November 2001): 26; "Why Jerry Pearlman Gave Up His Brainchild," Business Week, October 16, 1989,35; "Zenith Wishes on a Lucky-Goldstar," Business Week, March 11, 1991; Carol Haber and Chad Fasca, "One Last Rescue for Zenith," Electronic News 44, no. 2206 (February 16, 1998): 53.

152. Xerox Corporation, Annual Report 2002 (Stamford, CT: Xerox Corporation, 2003); Pamela L. Moore, "She's Here to Fix the Xerox," Business Week, August 6, 2001, 47;]. P. Donlon, "The X-Factor," Chief Executive, June 2008; Anthony Bianco and Pamela L. Moore, "The Downfall: The Inside Story of the Management Fiasco at Xerox," Business Week, March 5, 2001, 82.

153. Kevin Maney, "Mulcahy Traces Steps of Xerox's Comeback," USA Today, September 21,2006.

154. Betsy Morris, "The Accidental CEO," Fortune, June 23, 2003, 58. 155. Kevin Maney, "Mulcahy Traces Steps of Xerox's Comeback," USA Today,

September 21,2006. 156. Kathleen Cholewka, "Xerox's Savior?" Sales and Marketing Management 153,

no. 4 (April 2001); Patricia Sellers and Cora Daniels, "The 50 Most Power- ful Women in American Business," Fortune, October 12, 1998, 76; Patricia Sellers, "These Women Rule: Hewlett-Pack<l;rd's New CEO and President Tops Fortune's Second Annual Ranking of the 50 Most Powerful Women in American Business," Fortune, October 25, 1999, 94.

157. Betsy Morris, "The Accidental CEO," Fortune, June 23, 2003, 58. 158. Karen Lowry Miller, "The Quiet CEOs," Newsweek, December 20,2004. 159. Jim Collins research team analysis. 160. Nanette Byrnes, "Lessons from a Baptism by Fire," Business Week, August

12, 2002, 64. 161. Pamela L. Moore, "She's Here to Fix the Xerox," Business Week, August 6,

2001,47. 162. Betsy Morris, "The Accidental CEO," Fortune, June 23, 2003, 58. 163. Nanette Byrnes, "Lessons from a Baptism by Fire," Business Week, August

12,2002,64;]' P. Donlon, "The X-Factor," Chief Executive, June 2008.

NOTES 199

164. ]. P. Donlon, "The X-Factor," Chief Executive, June 2008; Nanette Byrnes, "Lessons from a Baptism by Fire," Business Week, August 12, 2002, 64; Pamela 1. Moore, "She's Here to Fix the Xerox," Business Week, August 6, 2001,47.

165. ]. P. Donlon, "The X-Factor," Chief Executive, June 2008. 166. Dick Clark, conversation with author. 167. Joseph A. Schumpeter, Capitalism, Socialism and Democracy (New York:

Harper Torchbooks, 1962). 168. William Manchester, The Last Lion: Winston Spencer Churchill, Visions of

Glory 1874-1932 (New York: Dell Publishing, 1983), 614, 857, 860, 878-880, 883;]. Rufus Fears, Churchill (Chantilly, VA: The Teaching Company Lim- ited Partnership, 2001), audiotapes oflectures by]. Rufus Fears, Lectures 5-12.

169. William Manchester, The Last Lion: Winston Spencer Churchill, Visions of Glory 1874-1932 (New York: Dell Publishing, 1983), 883; ]. Rufus Fears, Churchill (Chantilly, VA: The Teaching Company Limited Partnership, 2001), audiotapes oflectures by]. Rufus Fears, Lectures 5-12.

170. William Manchester, The Last Lion: Winston Spencer Churchill, Visions of Glory 1874-1932 (New York: Dell Publishing, 1983), 32; The Churchill Centre, "We Shall Fight on the Beaches," Selected Speeches of Winston Churchill, http://www.winstonchurchill.org/i4a/pages/index.cfm?page id=393.

171. The Churchill Centre, "Never Give In, Never, Never, Never," Selected Speeches of Winston Churchill, http://www.winstonchurchill.org/i4a/ pages/index.cfm?pageid=423;]. Rufus Fears, Churchill (Chantilly, VA: The Teaching Company Limited Partnership, 2001), audiotapes oflectures by ]. Rufus Fears, Lectures 5-12.

17i. "How the Rescue Plan Will Work," Washington Post, September 8, 2008. 173. Fannie Mae, Investor Relations: Stock Information, http://www.fanniemae

.com / ir / resources / index.jhtml?s = Stock+ Information. 174. Charles Duhigg, "The Reckoning: Pressured to Take More Risk, Fannie

Reached Tipping Point," New York Times, October 5,2008. 175. "A Conversation with Vikrim Pandit, CEO ofCitigroup," The Charlie Rose

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176. Timothy 1. O'Brien andJennifer Lee, "A Seismic Shift Under the House of Fannie Mae," New York Times, October 3,2004; Bethany McLean, "The Fall of Fannie Mae," Fortune, January 24, 2005, 122; Annys Shin, "Report De- tails Raines's Clout at Fannie Mae," Washington Post, February 24, 2006; James R. Hagerty and Joann S. Lublin, "Mudd Plans Fannie Makeover," Wall Street Journal, December 24,2004; Stephen Labaton and Eric Dash,

200 NOTES

"Loan Buyer Accounting Is Faulted," Washington Post, February 24, 2006; Terence O'Hara, "The Fannie Mae Report," Washington Post, February 24, 2006; Eric Dash and Michael]. de la Merced, "Regulators Denounce Fannie Mae," New York Times, May 24, 2006.

177. Fannie Mae, "Letter to Shareholders," 2001 Annual Report (Washington, DC: Fannie Mae, 2002), 2; Annys Shin,"Examining Fannie Mae; How a Former Chief Helped Shape the Company's Culture," Washington Post, May 24, 2006; Russell Roberts, "How Government Stoked the Mania," Wall StreetJournal, October 3,2008.

178. Fannie Mae, 2001 Annual Report (Washington, DC: Fannie Mae, 2002), 9, 49; Janice Revell, "Fannie Mae Is Plenty Safe," Fortune, May 27, 2002, 77; Patrick Barta, "Loan Stars: Why Calls Are Rising to Clip Fannie Mae's, Freddie Mac's Wings," Wall StreetJournal, July 14, 2000.

179. Fannie Mae, "Letter to Shareholders," 2002 Annual Report (Washington, DC: Fannie Mae, 2003); Fannie Mae, "Letter to Shareholders," 2003 Annual Report (Washington, DC: Fannie Mae, 2004).

180. Office of Federal Housing Enterprise Oversight, "Report of Findings to Date," Special Examination of Fannie Mae (Washington, DC: OFHEO, 2004), i, report released on September 17, 2004.

181. Eric Dash and Stephen Labaton, "The Welcome Mat Is Out," Wash- ington Post, February 18, 2006; Fannie Mae, 2005 Form lO-K (Washing- ton, DC: Fannie Mae, 2006), 52 and 91; Fannie Mae, 2006 Annual Report (Washington, DC: Fannie Mae, 2007), 37.

182. Annys Shin, "New Paths for Mortgage Giants," Washington Post, December 5,2005.

183. Fannie Mae, "Letter to Shareholders," 2006 Annual Report (Washington, DC: Fannie Mae, 2007), 5; David S. Hilzenrath, "Fannie, Freddie Face Conflicting Demands," Washington Post, December 4, 2007; "End of Illu- sions; Fannie Mae and Freddie Mac," Economist, July 19, 2008; David S. Hilzenrath, "Fannie's Perilous Pursuit of Subprime Loans," Washington Post, August 19, 2008.

184. Charles Duhigg, "The Reckoning: Pressured to Take More Risk, Fannie Reached Tipping Point," New York Times, October 5, 2008.

185. David S. Hilzenrath, "Fannie Loses $2.2 Billion As Home Prices Fall," Washington Post, May 7, 2008; Charles Duhigg, "Mortgage Giants to Buy Fewer Risky Home Loans," New York Times, August 9, 2008; "How the Rescue Plan Will Work," Washington Post, September 8, 2008.

186. "Office Equipment," Forbes, January 1, 1964, 79; "The Competitive Office Equipments," Financial World, May 19, 1965, p. 6; "Information Processing," Forbes, January 1,1968,47.

187. "Taking On Xerox with a Fast Copier," Business Week, April 26, 1969, 78;

NOTES 201

"Addressograph Multigraph Had a Great Fall," Forbes, September 15, 1973, 88; David Pauly and James C. Jones, "Corporations: Roy Ash's Challenge," Newsweek, December 13, 1976, 90; "The Man on the Spot," Forbes, June 1, 1975,24.

188. Al Heller, "Gilman's Informality Spurs Creativity, Growth at Ames," Dis- count Store News, August 19, 1985, 1; Elizabeth Rourke and David E. Sa- lamie, "Ames Department Stores, Inc.," International Directory of Company Histories, Vol. 30 (New York: St. James Press, 2000), 55.

189. Peter Hisey, "Herb Gilman: 'The Concept is So Simple,''' Discount Store News, May 23, 1988, 49; Steven Jacober, "Ames Redefines Itself at $2 Bil- lion," DM, August 1988, 22; "Building Ames with Careful Shopping," Dis- count Store News, September 25, 1989, 85; Joseph Pereira, "Digesting Zayre Gives Ames Heartburn," Wall StreetJournal, December 28,1989; Ames De- partment Stores, Inc., 1989 Annual Report to Stockholders (Rocky Hill, CT: Ames Department Stores, Inc., 1990), 13-14.

190. "Under the Wire," Forbes, June 15, 1969, 61; Milton Moskowitz, "Bank of America's Rocky Road to Corporate Social Responsibility," Bankers Maga- zine, Autumn 1977, 77. "Why They're Slowing Growth at the World's Big- gest Bank," Business Week, February 24, 1975, 54.

191. John J. O'Rourke, "Bank of America's Tom Clausen ... A Man for the Seventies," Burroughs Clearing House, January 1970, 1, 21.

192. "The Biggest Bank Bets More on High Risk," Business Week, May 22, 1971, 80.

193. "Why They're Slowing Growth at the World's Biggest Bank," Business Week, February 24, 1975, 54.

194. "BankAmericard Due to Carry New Name Beginning Next Year," Wall StreetJournal, August 20, 1976.

195. G. Christian Hill and Mike Tharp, "Stumbling Giant: Big Quarterly Defi- cit Stuns BankAmerica, Adds Pressure on Chief," Wall Street Journal, July 18, 1985; Gary Hector, Breaking the Bank: The Decline of BankAmerica (Boston: Little, Brown & Company, 1988), 190-192.

196. Circuit City Stores, Inc., "Management Letter," Annual Report 1996 (Richmond, VA: Circuit City Stores, Inc, 1996),4.

197. John R. Wells, "Circuit City Stores, Inc.: Strategic Dilemmas," Harvard Business School, case study #9-706-419 (Boston: Harvard Business School Publishing, 2005); Peter Spiegel, "Car Crash," Forbes, May 17, 1999.

198. Evan Ramstad, "Circuit City CEO Meets with Rivals to Peddle Alternative DVD Product," Wall Street Journal, January 14, 1998; "Richard L. Sharp- Circuit City Stores Inc. (CC)," Wall Street Transcript, November 11, 1998.

199. Gregory C. Rogers, "Human Resources at Hewlett-Packard (A)," Harvard Business School, case study #9-495-051 (Boston: Harvard Business School

202 NOTES

Publishing, 1995); Michael Beer, Rakesh Khurana, and James Weber, "Hewlett-Packard: Culture in Changing Times," Harvard Business School, case study #0-404-087 (Boston: Harvard Business School Publishing, 2005).

200. Alan Deutschman, "How H-P Continues to Grow and Grow," Fortune, May 2, 1994, 90.

201. Dana Wechsler Linden and Bruce Upbin, "Top Corporate Performance of 1995: 'Boy Scouts on a Rampage,'" Forbes, January 1, 1996,66.

202. John H. Sheridan, "Lew Platt: Creating a Culture for Innovation," Industry Week, December 19, 1994, 26; Alan Deutschman, "How H-P Continues to Grow and Grow," Fortune, May 2, 1994, 90; Jennifer Telford, "Street-Smart CEO Shapes Hewlett Packard Vision," Denver BusinessJournal, March 1-7, 1996, 1.

203. David Einstein, "Anonymous, Inc.," Marketing Computers 15, no. 4 (April 1995): 28; Peter Burrows, "The Printer King Invades Home PCs," Business Week, August 21, 1995, 74; Richard A. Shaffer, "The Bittersweet Success of Home PCs," Forbes, September 11, 1995,262; Lee Gomes, "Hewlett-Packard Sets Its PC Bar Higher and Higher," Wall StreetJournal, September 8, 1997.

204. Arthur M. Louis, "HP to Quit Disk-Drive Business," San Francisco Chroni- cle, July 11, 1996; Tom Quinlan and Scott Thurm, "HP Buys Electronic Card Firm Verifone," San Jose Mercury News, April 24, 1997; Nikhil Hutheesing, "HP's Giant ATM," Forbes, February 9, 1998, 96.

205. Brian Gillooly, "HP's New Course," Information Week, March 20, 1995, 45; Peter Burrows, Geoffrey Smith, and Steven V. Brull, "HP Pictures the Future," Business Week, July 7,1997,100.

206. Joseph Weber and Rochelle Shoretz, "Is This Rx Too Costly for Merck?" Business Week, August 9, 1993, 28; Joseph Weber, "Mr. Nice Guy With a Mission," Business Week, November 25, 1996, 132; Merck & Co., Inc., 1995 Annual Report (Whitehouse Station, NJ: Merck & Co., Inc., 1996).

207. Merck & Co., Inc., "Letter to Shareholders," Annual Report 2000, (Whitehouse Station, NJ: Merck & Co., Inc, 2000).

208. John Simons, "Will R&D Make Merck Hot Again?" Fortune, July 8, 2002, 89.

209. Merck & Co., Inc., 1998 Annual Report (Whitehouse Station, NJ: Merck & Co., Inc., 1999),22.

210. Barnaby J. Feder, "Motorola Will Be Just Fine, Thanks," New York Times, October 31, 1993.

211. Karl Schoenberger, "Motorola Bets Big on China," Fortune, May 27, 1996, 116.

212. Quentin Hardy, "Unsolid State: Motorola, Broadsided by the Digital Era, Struggles for a Footing," Wall StreetJournal, April 22, 1998.

NOTES 203

213. Karl Schoenberger, "Motorola Bets Big on China," Fortune, May 27, 1996, 116; Rick Tetzeli, "And Now for Motorola's Next Trick," Fortune, April 28, 1997, 122.

214. Motorola, Inc., 1995 Summary Annual Report (Schaumburg, IL: Motorola, Inc., 1996), 12.

215. Gary Slutsker, "The Company that Likes to Obsolete Itself," Forbes, Sep- tember 13, 1993, 139; Ronald Henkoff, "Keeping Motorola on a Roll," Fortune, April 18, 1994,67.

216. Lois Therrien, "The Rival Japan Respects," Business Week, November 13, 1989, 108; Motorola, Inc., "About Motorola University: The Inventors of Six Sigma," Motorola University, http://www.motorola.com/content.jsp? globaIObjectId=3079.

217. G. Christian Hill and Ken Yamada, "Staying Power: Motorola Illustrates How An Aged Giant Can Remain Vibrant," Wall StreetJournal, December 9, 1992.

218. Jim Collins, Good to Great: How Some Companies Make the Leap . .. and Others Don't (New York: HarperCollins Publishers, Inc., 2001), 26.

219. Zachary Schiller, "At Rubbermaid, Little Things Mean A Lot," Business Week, November 11, 1991, 126.

220. Rahul Jacob, "Thriving in a Lame Economy," Fortune, October 5, 1992, 44.

221. Seth Lubove, "Okay, Call Me A Predator," Forbes, February 15, 1993, 150. 222. Seth Lubove, "Okay, Call Me A Predator," Forbes, February 15, 1993, 150. 223. Wolfgang R. Schmitt, "A Growth Strategy," Executive Excellence 11, no. 8

(August 1994): 17. 224. "Scott Paper Fights Back, At Last," Business Week, February 16, 1981, 104;

"Profits Peak for Scott Paper," Financial World, April 22, 1970, 13; Ira U. Cobleigh, "Scott Paper Company," Commercial and Financial Chronicle, Jan- uary 22, 1970, 5; "A Paper Tiger Grows Claws," Business Week, August 23, 1969, 100; "Scott Paper: Back On Its Feet," Forbes, December 15, 1976,69.

225. "A Paper Tiger Grows Claws," Business Week, August 23, 1969, 100. 226. "Zenith Electronics Corporation," Electrical &- Electronics, [no date], 123. 227. "Sam Kaplan: 'That's Our Plan,'" Forbes, May 15, 1968, 80; "Zenith Elec-

tronics Corporation," Electrical &- Electronics, [no date], 123; "Zenith Fills the Rooms at the Top," Business Week, May 16, 1970, 62.

228. "Zenith Fills the Rooms at the Top," Business Week, May 16, 1970, 62. 229. "Troubled Zenith Battles Stiffer Competition," Business Week, October 10,

1977, 128; "Zenith Radio Corporation (C)," Harvard Business School, case study #9-674-095 (Boston: Harvard Business School Publishing, 1977); "Every Dog Needs His Flea," Forbes, May 15, 1975, 131.

230. "The Big Winner," Forbes, April 1, 1974.

204 NOTES

231. Richard Hammer, "Zenith Bucks the Trend," Fortune, December 1960, 128; "At Zenith and On the Spot," Forbes, September 1, 1961, 19; "Every Dog Needs His Flea," Forbes, May 15, 1975, 131.

232. William I. Walsh, The Rise and Decline of the Great Atlantic &- Pacific Tea Company (Secaucus, NJ: Lyle Stuart, Inc., 1986), 94, 111; "Hermit King- dom," Wall Street journal, December 12, 1958; "Pinching 500 Billion Pen- nies," Fortune, March 1963, 105; "New Crowd Minds Store for the Tea

Company," Business Week,June 13,1964,90. 233. "Pinching 500 Billion Pennies," Fortune, March 1963, 105. 234. William I. Walsh, The Rise and Decline of the Great Atlantic &- Pacific Tea

Company (Secaucus, NJ: Lyle Stuart, Inc., 1986),94. 235. William I. Walsh, The Rise and Decline of the Great Atlantic &- Pacific Tea

Company (Secaucus, NJ: Lyle Stuart, Inc., 1986), 104-105; Norman C. Miller,Jr., "Ailing A&P," Wall Street journal, April 21, 1964.

236. "A&P's 'Price War' Bites Broadly and Deeply," Business Week, Septer.1ber 30, 1972,56; "Shopping Center Shoot-Out: Price War in Supermarkets Im-

perils Some as A&P Sets Out to Regain Market Share," Wall Street journal, July 21, 1972.

237. "A&P's Ploy: Cutting Prices to Turn a Profit," Business Week, May 20, 1972, 76; William I. Walsh, The Rise and Decline of the Great Atlantic &- Pacific Tea Company (Secaucus, NJ: Lyle Stuart, Inc., 1986), 146; "A&P's 'Price War' Bites Broadly and Deeply," Business Week, September 30, 1972, 56; Eleanor Johnson Tracy, "How A&P Got Creamed," Fortune, January 1973, 103; Mary Bralove, "New A&P Chairman Unveils 5-Year Plan to Reverse Chain's Declining Fortunes," Wall Street journal, February 7, 1975; "A&P Puts Big Money On Its Family Marts," Business Week, January 23, 1978,50; "Stumbling Giant," Wall Street journal, January 10, 1978; Peter W. Bern- stein, "Jonathan Scott's Surprising Failure at A&P," Fortune, November 6, 1978, 34; "German Group Planning to Buy 42% A&P Stake," Wall Street journal, January 17, 1979; Gay Sands Miller, "A&P's New President Isn't Signaling Any Retrenchment Wave Despite Deficit," Wall Street journal, May 2,1980.

238. "Addressograph Multigraph Had a Great Fall," Forbes, September 15, 1973, 88; "Taking on Xerox with a Fast Copier," Business Week, April 26, 1969, 78; "The Man on the Spot," Forbes,June 1, 1975,24; David Pauly and James C.

Jones, "Corporations: Roy Ash's Challenge," Newsweek, December 13, 1976,90; "AM International: When Technology Was Not Enough," Busi- ness Week, January 25, 1982, 62; "Addressograph Gets the Roy Ash Treat- ment," Business Week, March 21,1977,36; Louis Kraar, "Roy Ash is Having

Fun at Addressogrief-Multigrief," Fortune, February 27, 1978, 46; Andrew

NOTES 205

Baxter, "AM International Rebuilds On Its Old Foundations," Financial Times, March 29, 1984; Susie Gharib Nazem, "How Roy Ash Got Burned," Fortune, April 6, 1981, 71; "An Aftershock Stuns AM International," Busi- ness Week, March 22, 1982, 30; N.R. Kleinfield, "AM's Brightest Years Now Dim Memories," New York Times, April 15, 1982; "AM Files Chapter 11 Petition," New York Times, April 15, 1982.

239. Ames Department Stores, Inc., "Letter to the Shareholders," Annual Report 1993 (Rocky Hill, CT: Ames Department Stores, Inc., 1993), 2; Ames De- partment Stores, Inc., "Letter to the Shareholders," Annual Report 1995 (Rocky Hill, CT: Ames Department Stores, Inc., 1996), 3; Ames Depart- ment Stores, Inc., "Letter to Our Shareholders," Annual Report Fiscal 1999 (Rocky Hill, CT: Ames Department Stores, Inc., 2000), 2; "Ames Nears Day of Reckoning," Discount Store News, August 6, 1990, 1; Don Kaplan, "Ames Redefines Its Niche in the Northeast," Daily News Record, October 14, 1994,3; Donna Boyle Schwartz, "Hanging Tough," HFM: The Weekly Newspaper for Home Furnishing Network, November 20, 1995, 1; Jean E. Palmieri, "At the Magic Show, Ames' Buyers Will Be Seeking the Next Wave in Tops," Daily News Record, February 22, 1999, 18; Mike Duff, "Dis- count Veteran Ames to Liquidate After 44 yrs," DSN Retailing Today, August 26,2002, 1.

240. Gary Hector, "More Than Mortgages Ails BankAmerica," Fortune, April 1, 1985, 50; "Bank of America Rushes Into the Information Age," Business Week, April 15, 1985, 110; George Palmer, "Sam Armacost's Sea of Troubles at BankAmerica," Banker, September 1985, 18; "BankAmerica: Wrenching Year," Banker, March 1986, 7; Richard B. Schmitt and G. Christian Hill, "BankAmerica's Board to Request that Armacost Quit, Sources Say," Wall Street Journal, October 10, 1986; Richard B. Schmitt and G. Christian Hill, "BankAmerica Names Clausen Top Executive," Wall Street Journal, Octo- ber 13, 1986; Jonathan B. Levine, "Clausen May Be the Safe Choice, But Is He the Right One?" Business Week, October 27, 1986, 108; Richard B. Schmitt, "Reviving Giant," Wall StreetJournal, July 18, 1988.

241. Circuit City Stores, Inc., Annual Reports 2002-2007 (Richmond, VA: Circuit City Stores, Inc., 2002-2007); "Circuit City Stores, Inc, (CC)," Wall Street Journal, November 5, 1987; Philip H. Dougherty, "Advertising: Research on Haggling Influences Ad Effort," New York Times, November 12, 1984; "Circuit City Stores Inc. 9950," Washington Post, April 29, 2002; Martha McNeil Hamilton, "Circuit City's New Direction," Washington Post, Febru- ary 16, 2002; Stuart Elliott, "Circuit City Uses an Old Song to Personify Customer Advice," New York Times, October 1, 2004; Terence O'Hara, "Cir- cuit City Taps President to be New CEO," Washington Post, December 20,

206 NOTES

2005; John R. Wells, "Circuit City Stores, Inc.: Strategic Dilemmas," Har- vard Business School, case study #9-706-419 (Boston: Harvard Business School Publishing, 2005), 7; Pallavi Gogoi, "Circuit City: Due for a Change?" BusinessWeek.com, February 29, 2008, http://www.business week.com/bwdaily / dnflash/ contentlfeb2008/ db20080229 _251654.htm; Pallavi Gogoi, "Is Circuit City Up for Sale?," BusinessWeek.com, April 8, 2008, http://www.businessweek.com/bwdaily / dnfIash/ content/ apr 2008/db2008048_602083.htm; Pallavi Gogoi, "Is Circuit City Headed For a Blowout?" BusinessWeek.com, July 2, 2008, http://www.businessweek .com/bwdaily / dnflash/ content/juI2008/ db2008072_040726.htm.

242. Brian P. Knestout, "Hewlett-Packard: Separating Dr. Jekyll From Mr. Hyde," Kiplinger's Personal Finance Magazine, May 1999, 28; David P. Hamil- ton and Rebecca Blumenstein, "H-P Names Carly Fiorina, A Lucent Star, To Be CEO," Wall StreetJournal,July 20,1999; Hewlett-Packard Company, 2000 Annual Report (Palo Alto: Hewlett-Packard Company, 2000); "HP Sends Letter to Shareowners on Value of Compaq Merger," Business Wire, January 18, 2002; Hewlett-Packard Company, 2002 Annual Report (Palo Alto, CA: Hewlett-Packard Company, 2002); Carol]. Loomis, "Why Carly's Big Bet is Failing," Fortune, February 7,2005, 50; Ben Elgin, "The Inside Story of Carly's Ouster," BusinessWeek.com, February 21, 2005, http://www.businessweek.com/technology / content/feb2005/tc20050210 _5176_tc119.htm; Carly Fiorina, Tough Choices: A Memoir (New York: Pen- guin Group, 2006); "If HP Just Wants to Cut Costs, It Picked the Right Guy," Business Week, May 2, 2005, 20.

243. Barnaby Feder, "Motorola Picks an Outsider to Be Its Chief Executive," New York Times, December 17, 2003; Laurie]. Flynn, "Motorola Replaces Chief With an Insider," New York Times, December 1, 2007; Motorola, Inc., 1999-2004 Summary Annual Reports (Schaumburg, IL: Motorola, Inc., 2000- 2005); David Barboza, "Motorola Rolls Itself Over," New York Times, July 14, 1999; Roger O. Crockett, "A New Company Called Motorola," Business Week, April 17, 2000, 86; Roger O. Crockett, "Chris Galvin Shakes Things Up-Again," Business Week, May 28, 2001, 38; Roger O. Crockett, "Motor- ola," Business Week, July 16, 2001, 72; Roger O. Crockett, "Reinventing Motorola," Business Week, August 9, 2004, 98.

244. Claudia H. Deutsch, "A Giant Awakens, To Yawns: Is Rubbermaid React- ing Too Late?" New York Times, December 22, 1996; Susan Sowa, "Restruc- turing May Salvage Rubbermaid," Rubber &- Plastics News 25, no. 10 (December 18, 1995): 7; Lornet Turnbull, "Ohio-Based Rubbermaid Inc. Heeds Findings from Consumer Focus Groups," Akron BeaconJournal, February 18, 1996.

NOTES 207

245. Raju Narisetti, "Rubbermaid's Plan to Buy Graco Is Eclipsed by Poor Profit Forecast," Wall Street journal, September 5, 1996; "Rubbermaid Sells Divi- sion To Newell," Discount Store News, May 19, 1997, 2; Glenn Gamboa, "Rubbermaid Corp. Is Proposing a Nice, Neat Solution," Akron Beaconjour- nal, August 6, 1997; "Rubbermaid to Consolidate Its Manufacturing, Distribution Operations," Akron Beacon journal, January 22, 1998; "Rub- bermaid: Giant With a Fearful Sense of Purpose," DIY Week, February 6, 1998,22; Timothy Aeppel, "Rubbermaid Is On a Tear, Sweeping Away the Cobwebs," Wall Street journal, September 8, 1998.

246. Michael]. Milne, "Scott Paper Is On a Roll," Management Review 77, no. 3 (March 1988): 37.

247. "Scott Paper Fights Back, At Last," Business Week, February 16, 1981, 104. 248. Bill Saporito, "Scott Isn't Lumbering Anymore," Fortune, September 30,

1985,48; Michael]. Milne, "Scott Paper Is On a Roll," Management Review 77, no. 3 (March 1988): 37; "Scott Paper Co.-History," Gale Business Re- sources, 1990; "North American Earnings Plunge Again," Pulp &- Paper 65, no. 13 (December 1991): 25; Stuart C. Gilson andJeremy Cott, "Scott Paper Company," Harvard Business School, case study #9-296-048 (Boston: Har- vard Business School Publishing, 1997); Albert]. Dunlap and Bob Andel- man, Mean Business: How I Save Bad Companies and Make Good Companies Great (New York: Fireside, 1997), 11.

249. "Zenith Wants to Give the Boob Tube a Brain," Business Week, May 6, 1985, 71; Bob Tamarkin, "Zenith's New Hope," Forbes, March 31, 1980, 32; "Zenith May Lead the Way in the Video Revolution," Business Week, February 23, 1981,94.

250. Robert Levering, Milton Moskowitz, and Michael Katz, "International Business Machines Corporation," The 100 Best Companies to Work For In America (New York: New American Library, 1984), 163; Jonathan Martin, "IBM: International Business Machines Corporation," Information Technol- ogy, no date, 147; David Kirkpatrick, "Breaking Up IBM," Fortune, July 27, 1992, 44; International Business Machines, IBM 1992 Annual Report (Armonk, NY: International Business Machines Corporation, 1993); In- ternational Business Machines, IBM 1993 Annual Report (Armonk, NY: International Business Machines Corporation, 1994).

251. Louis V. Gerstner, Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), dedication, 279.

252. Louis V. Gerstner, Jr., Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 36, 54, 88, 102, 208;Judith H. Dobrzynski, "Rethinking IBM," Business Week, October 4, 1993, 86; Ira Sager, "IBM Reboots-Bit By Bit," Business Week, January 17, 1994,82.

208 NOTES

253. Louis V. Gerstner,Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 44, 48, 50, 61,63,67, 72, 139, 204,223.

254. Louis V. Gerstner, Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 60, 132.

255. Louis V. Gerstner, Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 1, 186,201,205,221.

256. Louis V. Gerstner, Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 20, 24, 36, 54, 57, 68-70, 92, 124, 139, 157, 165,221; David Kirkpatrick, "Breaking Up IBM," Fortune,July 27, 1992, 44.

257. Louis V. Gerstner,Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 95, 98, 182,208,280.

258. Louis V. Gerstner, Jr., Who Says Elephants Can't Dancer Inside IBM's Historic Turnaround (New York: HarperCollins, 2002), 66, 124, 188, 213.

259. Jeffrey L. Rodengen, The Legend ofNucor (Ft. Lauderdale, FL: Write Stuff, 1997), 63, 70, 82; Fortune 1000 rankings, from Fortune.com website, February 9, 2001; Nucor Corporation, 2004 Annual Report (Charlotte, NC: Nucor Corporation, 2005), 3; Nucor Corporation, 2007 Annual Report (Charlotte, NC: Nucor Corporation, 2008), 23;John P. McDermott, "Steel- maker Nucor Pushes Ahead with Growth Plan Despite Turbulent Times," Post and Courier, February 20, 2001; "Nucor CEO Resigns After Dispute Over Company Direction," Industrial Maintenance &- Plant Operation, July 1999.

260. Vicki Lee Parker, "Steel Company Nucor Dominates North Carolina Economy," News &- Observer, June 5, 2005; John P. McDermott, "Steel- maker Nucor Pushes Ahead with Growth Plan Despite Turbulent Times," Post and Courier, February 20, 2001; Nucor Corporation, 2008 Form lOoK (Charlotte, NC: Nucor Corporation, 2008).

261. Norm Heikens, "Profitable Steelmakers in Indiana Point to Management, Pay Structure," Indianapolis Star, February 24, 2001; Nanette Byrnes and Michael Arndt, "The Art of Motivation," Business Week, May 1, 2006, 56; Susan Berfield, "The Best of 2006: Leaders," Business Week, December 28, 2006, 58; John P. McDermott, "Steelmaker Nucor Pushes Ahead with Growth Plan Despite Turbulent Times," Post and Courier, February 20, 2001; Jessica Marquez and Patrick J. Kiger, "Retooling Pay," Worliforce Management, November 7, 2005,1.

262. Nucor Corporation, 2000 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2001).

263. Nucor Corporation, 2002 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2003); Nucor Corporation, 2007 Annual Report (Charlotte, NC: Nucor

NOTES 209

Corporation, 2008); "Nucor Gets Loan," Wall StreetJournal, March 3,1972, 11; "Nucor's Big-Buck Incentives," Business Week, September 21, 1981,42.

264. Sue Herera, "Nucor Corp.-CEO Interview," CEO Wire, December 2, 2003.

265. Nucor Corporation, 2005 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2006).

266. Nucor Corporation, 2000 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2001); Nucor Corporation, 2001 Annual Report (Charlotte, NC: Nucor Corporation, 2002); Nucor Corporation, 2002 Annual Report (Charlotte, NC: Nucor Corporation, 2003); "Up From the Scrap Heap," Business Week, July 21, 2003.

267. Jim Collins, Good to Great: Why Some Companies Make the Leap . .. And Others Don't (New York: HarperCollins Publishers, Inc., 2001), 107; Nucor Corporation, 2000 Annual Report (Charlotte, NC: Nucor Corporation, 2001).

268. Nucor Corporation, 2000 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2001); Nucor Corporation, 2001 Annual Report (Charlotte, NC: Nucor Corporation, 2002).

269. Jessica Marquez and Patrick]. Kiger, "Retooling Pay," Workforce Manage- ment, November 7, 2005,1; Ani! K. Gupta and Vijay Govindarajan, "Knowl- edge Management's Social Dimension: Lessons from Nucor Steel," Sloan Management Review 42, no. 1 (Fall 2000); Susan]. Marks, "Incentives That Really Reward and Motivate," Workforce 80, no. 6 (June 2001): 108; Nanette Byrnes and Michael Arndt, "The Art of Motivation," Business Week, May 1, 2006,56.

270. Nucor Corporation, 2001 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2002); Nucor Corporation, 2003 Annual Report (Charlotte, NC: Nucor Corporation, 2004).

271. Daniel DiMicco, "Steel Success Strategies XVI: Mini-Mill Takes Second Look-At Implementation," American Metal Market, June 20, 2001, 17A.

272. Nucor Corporation, 2001 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2002).

273. Nucor Corporation, 2002 Annual Report (Charlotte, NC: Nucor Cor- poration, 2003).

274. Nucor Corporation, 2004 Annual Report (Charlotte, NC: Nucor Corpora- tion, 2005).

275. Kathy Mulady, "Nordstrom Reports Earnings Nosedive: Disappointing Holiday Season, Economic Slump Blamed," Seattle Post-Intelligencer, Febru- ary 23, 2001; Kathy Mulady, "Back In the Family," Seattle Post-Intelligencer, June 27, 2001; Rajiv Lal and Arar Han, "Nordstrom: The Turnaround," Harvard Business School, case study #9-505-051 (Boston: Harvard Business

210 NOTES

School Publishing, 2005); Louise Lee, "Nordstrom Cleans Out Its Closets," Business Week, May 22, 2000, 105; Carol Tice, "Reinvention Rebuffed?" Puget Sound Business Journal, August 4, 2000, 1; Devon Spurgeon, "In Return to Power, The Nordstrom Family Finds A Pile of Problems," Wall StreetJournal, September 8,2000; Bill Kossen, "A Good Fit?" Seattle Times, May 29, 2001; "Can The Nordstroms Find the Right Style?" Business Week, July 30, 2001; Nordstrom, Inc., Annual Report 2007 (Seattle: Nordstrom, Inc., 2008).

276. Rajiv Lal and Arar Han, "Nordstrom: The TUrnaround," Harvard Busi- ness School, case study #9-505-051 (Boston: Harvard Business School Pub- lishing, 2005); Kathy Mulady, "Nordstroms Again Take the Reins," Seattle Post-Intelligencer, September I, 2000.

277. Kathy Mulady, "Another Move At Nordstrom," Seattle Post-Intelligencer, September 12, 2000; Rajiv Lal and Arar Han, "Nordstrom: The TUrn- around," Harvard Business School, case study #9-505-051 (Boston: Harvard Business School Publishing, 2005); Robert Spector and Patrick McCarthy, The Nordstrom Way to Customer Service Excellence (Hoboken, NJ: John Wiley & Sons, Inc., 2005), 91, 144.

278. Bill Kossen, "A Good Fit?" Seattle Times, May 29,2001; Nordstrom, Inc., Annual Report 2002 (Seattle: Nordstrom, Inc., 2003); Rajiv Lal and Arar Han, "Nordstrom: The Turnaround," Harvard Business School, case study #9-505-051 (Boston: Harvard Business School Publishing, 2005).

279. Rajiv Lal and Arar Han, "Nordstrom: The TUrnaround," Harvard Busi- ness School, case study #9-505-051 (Boston: Harvard Business School Publishing, 2005).

280. Rajiv Lal and Arar Han, "Nordstrom: The TUrnaround," Harvard Busi- ness School, case study #9-505-051 (Boston: Harvard Business School Publishing, 2005); Carol Tice, "Bringing Nordstrom Back," Puget Sound Business Journal, December 26, 2003; Bill Kossen, "A Good Fit?" Seattle Times, May 29, 2001; Robert Spector and Patrick McCarthy, The Nordstrom Way to Customer Service Excellence (Hoboken, NJ: John Wiley & Sons, Inc., 2005), 143; Nordstrom, Inc., Annual Report 2003 (Seattle: Nordstrom, Inc., 2004).

281. Nordstrom, Inc., Annual Report 2002 (Seattle: Nordstrom, Inc., 2003); Bill Kossen, "A Good Fit?" Seattle Times, May 29,2001; Nordstrom, Inc., Annual Report 2003 (Seattle: Nordstrom, Inc., 2004), 11; Devon Spurgeon, "In Return to Power, The Nordstrom Family Finds A Pile of Problems," Wall StreetJournal, September 8, 2000.

282. Rajiv Lal and Arar Han, "Nordstrom: The TUrnaround," Harvard Business School, case study #9-505-051 (Boston: Harvard Business School Publish- ing, 2005).

NOTES 211

283. Jon Rhine, "Refashioning the 'Nordstrom Way,'" San Francisco Business Times, June 8, 2001, 3; Amy Merrick, "Nordstrom Accelerates Plan to Straighten Out Business," Wall Street Journal, October 19, 2001; Rajiv Lal and Arar Han, "Nordstrom: The Turnaround," Harvard Business School, case study #9-505-051 (Boston: Harvard Business School Publishing, 2005).

INDEX

Note: Page numbers in italics refer to charts.

A&P, 8, 14, 128, 133, 135 competition against, 91, 154 complacencyin,47,154 early years of, 37 and Hartford brothers, 36-37 Kroger contrast with, 141 preserving the culture in, 37, 39 Rise and Decline of The Great Atlantic

&- Pacific Tea Company, 37 Stage 2 in, 20, 154 Stage 4 in, 155

Abbott Labs, 128, 132, 140 acquisitions:

as binary decision, 45-46 game changing, 22

addiction to scale, 55 Addressograph Corporation, 14, 128,

133, 135 bankruptcies of, 99 competition against, 97 core capability of, 98-99 jobs lost in, 99 panic and desperation, 97-99 Pitney Bowes contrast with,

141

Stage 2 in, 149 Stage 4 in, 155-56

age fit, 136-37 Alexander, Caroline, The Endurance,

115 Allaire, Paul, 114 Amazon, 84 American Express, 128, 132 Ames Department Stores, 14, 23, 128,

133, 135 bankruptcy of, 46, 156 CEO turnover in, 91 liquidation of, 46, 156 Stage 2 in, 150 Stage 4 in, 156 Wal-Mart contrast with, 15-16, 16,

39-42,46, 141 Zayre bought by, 45-46, 150, 156

Anders, George, Perfect Enough, 84 Anna Karenina (Tolstoy), 19 Apple, 48, 139, 152 Applied Materials, 140 Armacost, Samuel, 9-11 arrogance,43,145 Astor, Lady, 121

214 INDEX

atrophy, III Augustus Caesar, 58-60

Bank of America, 7-11, 14, 18, 128, 133, 135

as Bank ofItaly, 6-7 bureaucracy of, 58 CEO pick of, 8-11 and Charles Schwab, 9 and Merrill Lynch, 76 net income (1972-1987), 9 responsibilities in, 57-58 and Seafirst Corp., 10 Stage 2 in, 150 Stage 4 in, 156 Wells Fargo contrast with, 141

Bank ofItaly, 6-7 Bear Stearns, xiii, 23, 76, 146 Beethoven, Ludwig van, 36 Bell Atlantic, 29 Best Buy, 33-34, 35, 36, 91, 139, 141,

157 Bethlehem Steel, 128, 133 BHAGs (Big Hairy Audacious Goals),

182 big bets, unwarranted, 68-70, 81 blame, externalizing, 79, 81, 109 Blockbuster, 91, 157 blockbuster product, 22 Boeing Corporation, 116, 128,

132 Boston Globe, 52 Box, George E. P., 20 Bristol-Myers Squibb, 128, 133 Built to Last (Collins and Porras),

xiv, 28, 33,54,94-95, 128, 148, 179

Bull Corporation, 110 bureaucrac~56,58,63

Burger, Ralph, 36-37 Burroughs, 128, 133 Burrows, Peter, Backfire, 84 business fit, 136 Business Week, 10,29, 51, 85, 87, 92,

109

Caesar, Gaius Julius, 58-59 Caesar, Octavian (Augustus), 58-60 Caligula, Roman Emperor, 59 capitulation to irrelevance or death,

22-23, 103-23, 103 cash shortages, 104-5 denial vs. hope, 111-12 giving up, 105-7 running out of options, 107-11

CarMax, 30-31, 33, 151 cash:

easy, vs. cost discipline, 63 shortage of, 104-5, 118

cell phones, 65-68 CEOs, outside, 85, 87-88, 95, 98, 100,

155, 157, 158 Challenger, 71-74 Chamberlain, Neville, 121 change, consistency vs., 38 character flaws, 49 Charles Bruning Co., 149 Charles Schwab, 9 Chase Manhattan Bank, 128, 131 Chase National Bank, 7 ChiejExecutive, 83 Chrysler Corporation, 128, 132 Churchill, Winston, 120-23 Circuit City, 8, 14, 60, 128, 133

arrogant neglect, 32 bankruptcy filing of, 31 Best Buy vs., 33-34, 36, 139, 141 CarMax, 30-31, 33 CEO replaced in, 91 core business of, 32-34 Divx, 30-31, 33 employees fired in, 91 hubris born of success (Stage 1),

30-34 profit margins in, 31 Radio Shack vs., 139 Stage 2 in, 150-51 Stage 4 in, 156-57 Wal-Mart vs., 139

Cisco Systems, 140 Citicorp, 128, 132

INDEX 215

Citigroup, 144 civilization, declining, 2 Clark, Dick, 116 Clausen, A. W., 150 Cleopatra, 59 clock building, 182 Colgate, 128, 132 Columbia Pictures, 128, 131 commitments, 160 companies in recovery, 14-15 Compaq Computer Corporation, 89,

157 comparison company criterion,

129-31 complacency, 46-47, 49, 151, 154 Conference Board, 1 conflict, cult of, 152 confusion, 101 consistency, change vs., 38 contrasts, study of, 15-16, 16,135 core business, 32-34, 35-36, 43, 55,

182 core values, 55, 101, 111, 159, 166,

171-72,182 correlations, 16-17 cost discipline vs. easy cash, 63 Countrywide, 146 Cowles, Virginia, 121 Crockett, Roger 0., 29 cultural revolution, 22 culture, preservation of, 37, 39 customer loyalty, 76 customer priority, 87 cynicism, 101

decision analysis, 4 decision making, "waterline"

principle of, 74 decisions, irreversible, 73-74, 76 decline, chronic, 132-33 decline, five stages of, 13-23, 24

applied to entire industries, 147-48

capitulation to irrelevance or death (Stage 5), 22-23, 103-23

denial of risk and peril (Stage 3), 21-22,65-82

framework of, 19-23,20 grasping for salvation (Stage 4), 22,

83-101, 155-58 hubris born of success (Stage 1),

20-21,27-44 research process, 13-19 self-inflicted, 25 study of contrasts, 16 undisciplined pursuit of more

(Stage 2), 21, 45-64, 149-58 way out of, 23-26, 117

Dell Corporation, 139 Deming, W. Edwards, 118 denial of risk and peril, 21-22, 65-82,

65 accentuate the positive, 81 blaming others, 79, 81 culture of, 76-80 eroding team dynamics, 81 imperious detachment, 82 making big bets, 68-70, 81 markers, 81-82 Morton Thiokol, 71-73 Motorola, 65-68 obsessive reorganization, 79-80,

81 taking risks, 71-76, 81

detachment, imperious, 82 DiMicco, Daniel R., 167, 168-72 discipline:

culture of, 56, 181-82 management, 117, 118, 119-20 self-discipline, 160

disciplined action, 180, 181-82 disciplined people, 179, 180, 181 disciplined thought, 180, 181 disease, hidden, 3-4 Disney, 116, 128, 133 Divx,30-31,33,151 dogmatism, 39 Drucker, Peter F., 1I8 Dunlap, Al "Rambo AI"; "Chainsaw

AI," 105-6

216 INDEX

Eckerd, 128, 133 El Capitan, climbing on, 75 Eldorado Canyon, Colorado,

74-75 Eli Lilly, 140 Emerson, 140 Engibous, Tom, 69, 94 entitlement, 43 entrepreneurial phase, 104 escape, 23-26 excellence, passion for, 166 exclusions:

for chronic decline, 132-33 for founder effect, 132 for industry effect, 132 for pre-1950, 132

facts, confronting, 181 Fagan, Garrett G., 59 Fannie Mae, xiv, 15, 76, 128, 132,

143-48 Fears, J. Rufus, 29 financial crisis (2008), 143-48 financial institutions, downward

spiral of, 147 financial strength, erosion of, 101 Finkelstein, Sydney, 66 Fiorina, Carly, 85, 86, 87-88

Tough Choices, 88 flywheel, 182 Forbes, 8, 30, 85, 86, 94, 151 Ford Motor Company, 128, 132 Fortune, 48, 85, 87, 91, 114, 136 founder effect, 132 Freddie Mac, xiv, 144, 147

Galvin, Paul, 28, 54 Galvin, Robert, 27-28, 66, 67 Galvin Manufacturing Corporation,

28 Gandhi, Mohandas K. (Mahatma),

121 Geek Squads, 34 General Electric (GE), 128, 132, 140,

151

General Instruments Corporation, 92-93, 157

General Motors (GM), 104, 133 Georgia Pacific, 79 Gerstner, Louis v.,Jr., 85-88, 95-96,

161 assessing brutal facts, 78, 163-64 and core values, 166 disciplined focus of, 85, 86-87, 97,

164-65 inner drive of, 117 Level 5 leadership of, 162 and succession planning, 165 Who Says Elephants Can't Dancer,

86, 162 Giannini, Amadeo Peter, 5-6 Giannini family, 7 Gillette, 128, 132 Gilman, Herb, 42 Gilmartin, Ray, 50-53, 116 giving up, 105-7 Glamour, 85 Glass, David, 41-42 Glass-Steagall Act, 9 Goldman Sachs, 91 Good to Great (Collins), xiv, 4, 94, 128,

143, 179 good-to-great framework, 179-83

building greatness to last, 180, 182 diagnostic tool, 179 disciplined action, 180, 181-82 disciplined people, 179, 180, 181 disciplined thought, 180, 181

Gore, Bill, 74 Great Depression, xiv greatness test, 138-39 Great Western, 128, 131 growth:

disciplined quest for, 54 obsession with, 50-54, 55 unsustainable quest for, 54, 55, 63,

84

Hall, Rob, 66 Hansen, Morten, 118

INDEX 217

Harris, 128, 132, 140 Hartford, George, 36-37 Hartford, John, 37 Harvard Business Review, 7 Hasbro Toys, 128, 133 hedgehog concept, 170, 181 Hesselbein, Frances, 1 Hewlett, Bill, 54, 86 Hewlett-Packard (HP), 14, 128, 133

and Compaq, 89, 157 founding purpose of, 54 IBM contrast with, 139, 141 leadership succession in, 85, 87-88 restructuring, 88 searching for silver bullet, 88-89 Stage 2 in, 54, 55, 84, 151 Stage 4 in, 83-85, 157 stock price of, 84 success-contrast candidates, 139 turnaround, 116 and undisciplined growth, 54, 55,

84 Hills Department Stores, 156 historical analysis, 17-18 hope, 113-23, 113

abandonment of, 107 and Churchill, 120-23 denial vs., 111-12 and recovery, 25, 113-18, 120 in solid management discipline,

117, 119-20

housing market bubble, 75 Howard Johnson, 128, 131 hubris, multiple forms of, 30 hubris born of success, 20-21, 27-44,

27 A&P, 37 Ames, 39-42 approach 1, 38 approach 2, 38-39 arrogant neglect, 29-36 Circuit City, 30-34 confusing what and why, 36-42 and core business, 32-34, 35-36, 43 dogmatism, 39

markers, 43-44 Motorola, 27-30 overreaching, 39,53,68

hype, 100

IBM, 128, 132 competition of, 164 customer priority in, 87, 163, 164,

165 decline and recovery case, 116, 117,

161-66,161 decline of, 78 discipline in, 164-65 HP contrast with, 139, 141 Motorola contrast with, 140, 152 passion for excellence in, 166 right people in key seats, 163 succession planning in, 85-88, 165 turnaround of, 78, 88, 95, 97, 116,

117 value created in, 165

inconsistency, 92 industry effect, 132 innovation, undisciplined, 47-49, 151 Intel, 48, 69, 94, 139, 140, 151, 152 Internet Bubble, 84, 93 Internet economy, 84 investors, cumulative returns to, 54 Iridium, 66-68, 70, 76, 152 Iverson, Ken, 168, 169, 171

Japanese competition, "unfair," 79, 108,109

Johnson & Johnson, 25, 128, 132, 140, 141, 151

JPMorgan Chase, xiii Julius Caesar, 58-59 Junkins, Jerry, 93-94

Kaufman, Marc, 52 Kennedy Space Center, 71 Kenwood, 128, 131 key seats, filled with the right people,

55,56-5~63, 76,8~ 159-60, 163, 169, 174-75, 181

218

Kimberly-Clark, 79, 105, 106, 128, 132, 141, 158

Kirkpatrick, David, 87 Kmart,40 Kroger, 37, 128, 132, 141

launch decisions, 74 Lazier, Bill, 1, 103-4 Leader to Leader Institute, 1 leadership:

charismatic, 88 family dynamics of, 61 focused approach to, 97 level 5, 179, 181 multiple generations of, 182 outside CEOs, 85, 87-88, 95, 98,

100, 155, 157, 158 problematic succession of, 58-61,

63-64 refusal to give up, 116 visionary, 22, 88

leadership-team dynamics, 76-78, 77-78

leaps, discontinuous, 48, 63 learning vs. knowing, 39, 43 Lehman Brothers, xiii, 23, 76, 146 Lorentz, Francis, 110 luck, role of, 44

Manchester, William, The Last Lion, 121

Maney, Kevin, 114 Mark Antony, 59 Marriott Corporation, 128, 132 Masters, Brooke, 52 maturity, 160 Maxwell, David, 143, 145 McAuley, Kathryn, 105-6 McDonald, Eugene, 107-8 McDonnell Douglas, 128, 133 Medco Containment Services, Inc.,

152 mediocrity, 56, 92, 111

decline to, 131-32 Melville, 128, 133

INDEX

Merck, 14, 128, 133 core purpose of, 53 and generic drugs, 50 and hubris, 53 J&J contrast with, 141 new patents in, 47 obsession with growth, 50-54, 55 recovery of, 116 Stage 2 in, 152 stock price of, 52 success-contrast candidates, 140 and Vioxx, 51-53 vision of, 53

Merck, George II, 53, 54 Merrill Lynch, xiv, 76 missionary zeal, 148 Morton Thiokot, 71-73 motivation, 160 Motorola, 8, 14, 128, 133

arrogant neglect in, 29-30 cultural shift in, 28-29, 152 denial of risk, 65-68 founding culture of, 28, 54 and General Instruments, 92-93 IBM contrast with, 140, 152 and Iridium, 66-68, 70, 152 jobs lost in, 29 patent productivity in, 47 Six Sigma at, 28, 152 Stage 1 in, 27-30 Stage 2 in, 152 Stage 4 in, 157 StarTAC cell phone, 28-29 stock returns in, 30 success-contrast candidates, 140 TI contrast with, 92-94, 140, 141 and undiSciplined growth, 54 and Zenith, 140, 141

Mount Everest, 66, 118-19 Mulcahy, Anne, 113-16

NASA, 71-73 NationsBank, 7, 14 negative, discounting, 81 negative inflection, 131

INDEX 219

neglect, arrogant, 29-36 Nero, Roman Emperor, 59 Newell Corporation, 49, 158 Newsweek, 115 Nordstrom, 128, 132

core concept of, 175, 176-77 culture of discipline in, 175-76, 176 customer service in, 174, 175,

176-77 decline and recovery case, 116, 117,

173-77,173 inverted-pyramid structure in,

174 level 5 leadership in, 174 right people in key seats, 174-75 rule book of, 176

Nordstrom, Blake W., 173, 174-76 Norton, 128, 131 Nucor, 128, 133

acquisitions of, 172 benchmarking in, 172 confront brutal facts, 169-70 consistency, 171 core values, 171-72 culture of diScipline, 170-71 customer focus of, 172 decline and recovery case, 116, 117,

167-72,167 hedgehog concept, 170 level 5 leadership in, 168-69 right people in key seats, 169

Office of Federal Housing Enterprise Oversight (OFHEO), 146

overreaching, 39, 46-50, 53, 61, 68

Pacific Southwest Airlines, 17 Packard, David, 54, 86 Packard's Law, breaking, 55-58 Pandit, Vikram, 144-45 panic, 96-99, 100 passion, 160 Pearlman, Jerry, 109-10 performance divergence, 137-38 performance fit, 137

Peters, Thomas J., and Waterman, Robert H., Jr., In Search of Excellence, 118

Pfizer, 128, 132, 140 Philip Morris, 128, 132 Picasso, Pablo, 36 Pitney Bowes, 116, 128, 141 Platt, Lew, 83-84, 151 Porras, Jerry, 148, 179 Porter, Michael E., 118 positive, amplification of, 81 power:

and personal interests above organizational interests, 64

succession of, see succession primary flywheel (core business),

32-34,35, 43, 182 Procter & Gamble (P&G), 25, 79, 105,

128, 132, 153 public corporations, pressure on, 54

Radio Shack, 139 RCA, 108 recovery, 25, 113-18, 120 reorganization, obsessive, 79-80, 81,

91, 105, 158 research process, 13-19

candidacy criterion, 129-31 companies in recovery, 14-15 contrast methodology, 135 correlations vs. causes, 16-17 diagnostic tool, 179 evidence table, 149-58 exclusions, 132-33, 139 Fannie Mae and other financial

meltdowns (2008), 15 historical analysis, 17-18 matched-pair contrast method,

120, 135-41 results of, 19-23 selection criteria, 127-33 success comparison set, 15-16,16 success-contrast selection criteria,

135-41 responsibilities, 57, 160

220 INDEX

restructuring, chronic, 49, 80, 101, 105

revolution, with fanfare, 100 risk taking, 71-76

on ambiguous data, 81 "waterline" principle of, 74

RJ. Reynolds, 128, 131 RJR Nabisco, 95 rock-climbing, 66, 75, 96 Roman Empire, fall of, 59 Rubbermaid, 14,23, 128, 133, 140, 141

jobs lost in, 49, 158 overreaching, 47-49 restructuring, 49 Stage 2 in, 152-53 Stage 4 in, 157-58

salvation, grasping for, 22, 83-101, 83 A&P,155 Addressograph, 97-99, 155-56 Ames, 156 Bank of America, 156 behaviors that exemplify/reverse,

90 chronic restructuring, 101 Circuit City, 156-57 confusion and cynicism, 101 HP, 83-85, 157 hype before results, 100 IBM, 85-88, 95-96 initial upswing, then

disappointments, 100 markers, 100-101 Motorola, 157 outside savior, 100 panic and desperation, 96-99, 100 revolution with fanfare, 100 Rubbermaid, 157-58 Scott Paper, 158 search for silver bullet, 88-96,

100 survival instinct, 96 Zenith, 158

Sanford, Shade H., 66 San Francisco earthquake, 5

Sarbanes-Oxley Act (2002), 146 Sawyer, Diane, 85 Schering-Plough, 140 Schulze, Richard, 33-34 Schumpeter, Joseph, 118 Scott Paper, 14,47, 128, 133, 135

capitulation of, 111 competition against, 79, 105 debt-to-equity ratio, 105 and Kimberly-Clark, 106, 141,

158 obsessive reorganization in, 79-80,

91, 105, 158 Stage 2 in, 153 Stage 4 in, 158

Seafirst Corp., 10 self-managed employees, 56, 159-60 Shackleton, Ernest, 115 share price vs. value, 54 Silo, 128, 131 silver bullets, searching for, 22,

88-96,100 Six Sigma, 28, 152 size fit, 136 Sony Corporation, 128, 133 Southwest Airlines, 17 Speak & Spell, 68-69 spin, positive, 22 stakeholder engagement, 76 Stalin, Joseph, 121 StatTAC cell phone, 28-29 Stockdale Paradox, 181 strategic thinking, 117 strategy, bold, 22 success:

comparison set, 15-16, 16 deserving, 38-39,43 discounting, 38 hubris born of, see hubris study of, 24-25 underlying causes of, 38 Wall Street's definition of, 54

succession: at HP, 85, 87-88 at IBM, 85-88, 165

INDEX 221

modes of turmoil in, 60-61 problematic, 58-61, 63-64

Sun Microsystems, 93, 139 survival instinct, 96

team dynamics, erosion of, 81 Teledyne, 128, 133 Templeton, Richard, 94 Texas Instrumnts (TI), 128, 132

and DSP technology, 68-70 HP contrast with, 139 Motorola contrast with, 92-94,

140, 141 recovery of, 116 succession in, 93-94

Thoman, Richard, 114 3M, 25, 48, 128, 132 Titanic (film), 144 Tolstoy, Leo, Anna Karenina, 19 transformation, radical, 22 Tufte, Edward, Visual Explanations,

72 turbulence, 118-19

UCLA Bruins, 4 undisciplined pursuit of more, 21,

45-64,45 Addressograph, 149 Ames, 45-46, 150 Bank of America, 150 breaking Packard's Law, 55-58 bureaucracy, 63 Circuit City, 150-51 declining percentage of key

people, 55, 56, 63 discontinuous leaps, 48, 63 easy cash vs. cost discipline, 63 HP,54,55,84,151 markers, 63-64 Merck,50-54,152 Motorola, 152 obsession with growth, 50-54, 63 overreaching, 46-50, 61 personal interests above

organizational interests, 64

problematic succession of power, 58-61, 63-64

Rubbermaid, 152-53 Scott Paper, 153 Zenith,153

Upjohn, 128, 131 upswing, initial, 100 USA Today, 85, 87

Vagelos, Roy, 50 value:

creating, 165 share price vs., 54

values, core, 55, 101, Ill, 159, 166, 171-72, 182

Vaughan, Diane, The Challenger Launch Decision, 72

Verifone, 151 Vioxx, 51-53 Vogue, 85 vulnerability, 8, 147, 148

Walgreens, 128, 132 Wall StreetJournal, 10 Wal-Mart, 128, 132

Ames contrast with, 15-16,16, 39-42,46,141

Circuit City contrast with, 139 core values of, 42, 46

Walsh, William, The Rise and Decline of The Great Atlantic &- Pacific Tea Company, 37

Walt Disney, 116, 128, 133 Walton, Sam, 40-42 Warner-Lambert, 128, 132 warning signs, 76 Washington Mutual, xiv Washington Post, 52 Waterman, Robert H.,Jr., 118 Watson, Thomas J., Jr., 162 Watson, Thomas).. Sr., 162 wealth creation, 83 Wells Fargo, 128, 132, 141, 156 Westinghouse, 128, 133 what and why, confuSing, 36-42, 43

222

Williams, Elisa, 94 "window and mirror" maturity, 160 Winfrey, Oprah, 85 W. 1. Gore & Associates, 74 Wooden, John, 4 World War II, 121-23 Wright, Joseph, 108-9 Wurtzel, Alan, 31 Wyeth Corporation, 140

Xerox Corporation, 97, 98, 113-16, 149

Yahoo!,84

Zander, Ed, 93 Zayre, 45-46, 150, 156

INDEX

Zenith Corporation, 8, 14, 23, 128, 133, 135

in bankruptcy, 110 blaming others, 79, 109 core business of, 32 Data Systems Division, 109-10 debt-to-equity, 108, 109 failure to innovate, 47 historical analysis of, 18 jobs lost in, 111 Motorola contrast with, 140, 141 in Stage I, 108 in Stage 2, 108-9, 153 in Stage 3, 109 in Stage 4, 109-10, 158 in Stage 5, 107-8, 111 succession in, 108-9, 110