Korva is a scroll of the internet’s best ideas.
Great companies fall by overreaching
Why decline is harder to map
Climbing is a narrow path, and decline has many. Racking pool balls in a perfect triangle in the middle of the table can be done in only a small number of ways, while the ways to scatter them are almost infinite. That made a framework for how great companies fall much harder to build than one for how they rise.
The first three stages
The research found five stages. Stage one is hubris born of success, when success turns into arrogance. Stage two is the undisciplined pursuit of more: too much growth, big uncalibrated bets, expansion into areas where the company has no business, a bigger acquisition, or a new CEO who wants to prove mettle with something bold. Stage three is denial of risk and peril while the warning signs mount.
The visible fall
Through the first three stages a company can look healthy from the outside. Stage four is the visible fall, and the reaction is grasping for salvation with lurching, panicky moves that land in the doom loop, often with more uncalibrated cannonballs. If the balance sheet runs out, stage five follows: capitulation to irrelevance or death.
Why are there more ways to fail than succeed?
Tolstoy opened Anna Karenina by saying happy families resemble one another while each unhappy family is unhappy in its own way. The scientist Jared Diamond used the idea in Guns, Germs, and Steel to explain why success in a task often requires avoiding many separate failure points at once. Success needs every condition to be met, and failure needs only one to be missed.
Why does success breed overreach?
In 1986 the economist Richard Roll proposed the hubris hypothesis to explain why acquiring companies often overpay. He argued that managers who overestimate their own ability pay more than a target is worth. Studies of mergers since then have repeatedly found that buyers' shares tend to lag after large deals.
Where do the five stages of decline come from?
Collins laid them out in his 2009 book How the Mighty Fall. He studied companies that had been great and then fell, tracing the path from hubris to capitulation. The book was written as a counterpart to Good to Great, which covered the rise.
More from The Knowledge Project Podcast
