In numerous studies, Jim Collins, one of today’s best-known thought leaders on management, has shown that even under the most difficult conditions, it is less the operating environment that shapes the fate of a company and more the people that chart its course. Talking with THE FOCUS , Collins explains how that impacts on an organization’s resilience.
The Focus: You have said on many occasions that business success is not a function of circumstance but the result of conscious choice and discipline. Does this assessment still apply given the recent crisis and turbulence that everyone has experienced?
Jim Collins: It applies even more. One of the things that is very clear across all of our work is that circumstance really doesn’t cause outcomes. People cause outcomes. Circumstance is simply the stage on which a company happens to play. How do we know? Because in our studies everything we do is prevaricated upon a very rigorous process of matching, where we are looking at companies that were in very similar circumstances but ended up with different outcomes. That applies in pretty much any type of setting that we’ve looked at, including settings that are enormously tumultuous. In fact, in tumultuous environments it is even more important what people do, and not what circumstances do.
“In tumultuous environments it is even more important what people do.”
The Focus: Many companies have suffered as a result of the crisis and will take a long time to recover. Some companies, though, have proved remarkably resilient. What makes a company resilient?
Collins: I think there are multiple types of resilience, and they actually overlap with the different studies that we’ve done. There’s one kind of resilience that I would say is the hardest to achieve, and that is the resilience to transcend mediocrity. Mediocrity is an enormously oppressive force in any kind of organization and it needs resilience to overcome it. Then there is the kind of resilience that a company needs if it happens to find itself on the downswing.
The key question is: How far it can fall and still recover? But there’s also another type of resilience that we’ve encountered when we were looking at enterprises that had really long runs of success – at least in the era in which we studied them. There were many times in their history when they had to be resilient, either because the world around them had changed or because they themselves had a need to be resilient: Over a 100-year period, the number of events that can hit an enterprise is huge and the question of how these companies would self-renew again and again, was what my co-author Jerry Porras and I were looking at some years ago.
The Focus: In those long-term studies, did you identify any key behaviors that could also help companies in the current (post-)crisis situation?
Collins: Over twenty years ago we selected eighteen visionary companies for our book Built to Last. All eighteen are still independent companies today. Most are still strong. Some aren’t, but most still are. On top of that, fifteen of those companies lived through the 1930s depression. Most of them were founded well over 100 years ago; some of them went through the American Civil War, the late 1800s, early 1900s, World War I, and World War II. And while it’s acute, the present crisis is not as severe as what some companies that are still strong today had to live through before. Although maybe today the cycles are shorter and they come more unexpectedly.
The Focus: What did your eighteen successful survivors all have in common? There must have been some distinct similarities…
Collins: What we really see in these companies is a sort of dual dynamic inside the enterprise. One factor that holds them together is that before the crises strike they already have their values in place. Their values are deep; they are real; the values are living, breathing and strong, and the people who are attracted to the enterprise are attracted to it because of its values. In turbulent times all sorts of things are going to come under pressure. If a company waits to create the values that will hold it together until it is already feeling the pressure, it is going to blow apart. Values are often considered soft assets; they’re not soft. They are the real tensile strength that allows an organization to survive crises intact. The second factor that these long-term successful companies share is that they have really audacious goals. So in short, they stimulate progress while at the same time preserving the core. I haven’t studied this recent crisis, but I would be very surprised if, when somebody looks back in twenty years, they didn’t find that same pattern in those companies that do really well and come out of it in robust health. They will exhibit a really strong core and a remarkable ability to set audacious goals even in the most difficult of times. And they successfully put those two things together.
The Focus: But even great companies have been known to surrender their stability, stumble and fall. In your recent book How the Mighty Fall, you outline the five stages of decline of once great companies.
Collins: There are many more ways to fail than there are to be great. The path to greatness is by far the narrower path. There are certain things that an enterprise has to have. They don’t necessarily guarantee that a given company will make it to the highest level, but if it doesn’t have them, then its chances of getting there are low. That said, it took us a very long time to distill the five stages of decline that you mentioned out of the vast volume of data we obtained from our studies.
The first thing you need to know about the five stages is that most companies would not be aware that they are falling until stage four. What’s really scary about this is that companies and their leaders are actually late in the process of decline before it becomes obvious that they are in decline. They still look healthy, although they are already mortally ill. The second point and the good news is that your company can go a long way down and still come back. Xerox is one such example, as are IBM and Nordstrom. We have throughout history examples of companies that fell, really stumbled, and yet came back as great enterprises. So the bottom line is: Unless you reach stage five, there still is hope.
The Focus: Could you briefly describe the five stages?
Collins: Let me first just name them: Stage one is hubris born of success; stage two is the undisciplined pursuit of more; stage three is denial of risk and peril; stage four is grasping for salvation; and the final stage five is capitulation to irrelevance or death. Now let’s look at each of those stages and how they sequence one into another: Stage one happens when people think they are successful and that their success is deserved. They don’t ask if their success was maybe an accident or based on fortunate circumstances. People begin to lose sight of the real factors about why they were successful in the first place, and that can lead to straying from what enabled them to be successful. Then they begin to think, well, we were successful at this, therefore we can be successful at something else. Or we can neglect what made us successful while we pursue these exciting new adventures.
The second stage flows right out of that. It is the undisciplined pursuit of more: It’s too much growth; giant acquisitions that don’t fit with what a company truly can be the best at, that don’t fit with its values or its economic engine. The self-perception of the organization in stage two often leads to big, bold bets, and if they pay off, the company and its leaders look great. But taking bets puts your enterprise at risk. If they don’t turn out well, then you can be in real trouble.
That brings us to the people part of the equation. The ultimate sign of the undisciplined pursuit of growth is when a company fails to acknowledge Packard’s law – “No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth.” That means if you allow growth and revenues and adventure and scale and all these exciting things, you will invariably exceed your ability to have enough of the right people in the key seats to execute on that growth brilliantly. So you’re heading for a fall.
The Focus: How important is it to have the right person in the top seat at this stage?
Collins: While I’ve always been a leadership skeptic, stage two really relates to putting the right leaders in positions of power. I don’t believe a single leader makes a great enterprise, but I think a single wrong leader can destroy one. You can get a strategy wrong and recover from it; you can miss a technology break; you can even make a bad acquisition and you’re likely to be okay, but if you put power in the wrong hands, that becomes much harder to correct.
The Focus: Enterprises are often criticized for getting into difficulties because they become too resistant to change and complacent…
Collins: That’s why I find phase two the most interesting stage – because what we had thought would happen is that an enterprise would fall simply because it became lazy, fat, complacent, or never did anything new. Let me be very clear: If you do that you’re going to fall, but it’s not the pattern of how really great enterprises tend to fall.
The Focus: So what do the next typical stages of decline look like?
Collins: Stage three is the denial of risk and peril. The company still looks fabulous, but there are warning signs. Little things start to come apart, often internal things that are not visible from the outside – like irritated customers who didn’t use to be irritated and changes in certain economic metrics, none of which of itself is catastrophic. But all the warning signs and the risks are there, and they are denied. Maybe the most important sign is the erosion of a healthy team dynamic. There is a marked decline in the quality and amount of dialogue and debate. Instead there is a shift toward either consensus or dictatorial management. Finally the game’s up and you fall. There’s no question about it; you’re in trouble and everyone knows you’re in trouble. Stage four is when you react to that fall and start grasping for salvation. It is the search for that game-saving acquisition; the single charismatic heroic leader; the dramatic new strategy; the bold new vision; the program; the cultural revolution. But the problem is, if these don’t take you back to the basic disciplines that made your enterprise great, they don’t work. Each of these actions may initially produce an upturn; a sense of hope. The enterprise may get some initial momentum out of it and that’s what makes it so dangerous: It doesn’t have any sustained momentum behind it, then bang! the downslide starts again. People try another silver bullet, then bang! down they go again.
The Focus: How does that pattern of try-and-fail impact on an organization’s resilience? Is there a resurgence or just steady erosion?
Collins: There may be some initial resurgence but in the end there is inevitably erosion. What happens if a company stays at stage four long enough is the erosion of two crucial forms of capital: One is financial capital, and if at some point you lose financial control of the company, you simply don’t have any more options. You’re headed for stage five. The other is the erosion of cultural capital: All the good will and all the incredible creative ardor that people bring into the enterprise begin to get dissipated the longer the company stays in grasping-for-salvation mode. If there is anything that will destroy resilience, then it is hope dashed and dashed again. That will kill it. And it will directly lead to the point of no return, stage five, capitulation to irrelevance or death.
The Focus: Before that final fall, how can companies grow the strength they need to recover from dashed hopes – how can they build up their resilience? How important are values here? Did you see a lack of values in the companies that fell?
Collins: What’s very interesting – because we were looking at not just any companies but at great companies that fell – is not that they didn’t have strong values, it’s that they began to stray from those values. Then at the very time when they really need to refocus on their real values, with new practices, with new goals, with new strategies, with new structures, they tended to stray further and further away. Returning to the company’s core values calls for a genuine process of reorientation.
Let me give you a couple of historical examples of companies that were in a really difficult spot. Let’s take Disney in the late 1970s: Walt Disney had died, the company was kind of bumping along, and they got into a difficult period. They came under attack, and a takeover was threatening. Disney was going to be destroyed. What then happened was that the Disney family and other key people, plus all the employees, said: “This is not just a collection of assets. This is about more than film rights, theme parks, and land in Florida. If we lose this company, we lose something special that cannot be replaced.” That’s what gave them the fortitude for the fight, which then attracted Eisner and Wells and so on, and they were able to bring Disney back. Another great example of a company recovering from its difficulties is Nordstrom: Blake Nordstrom came back into the company, reignited the passion for customer service, and then added to it. The company changed a lot of practices, put in place better inventory systems and systematic stuff, but in making these changes it was not drifting further from the values that made it great; it had to return to those values in order to make the changes.
“Before we figure out how to apply our values in a changing world, we have to start by asking who we are and what we stand for.”
The Focus: So a key question is, how can management identify these core values?
Collins: They are in the roots of the firm. It is not about asking: What values should we have or what values do other people think we should have? It is rather an inward-looking discovery process: What values do we actually hold, and hold so tightly – even if they’re out of favor, even if it hurts us to hold them – that they’re not open for negotiation and not about to be overturned? So it’s an introspective process. Before we figure out how to apply our values in a changing world, we have to start by asking who we are and what we stand for.
The Focus: You already mentioned being skeptical about the role of the leader in a company’s well-being. Does his or her personal resilience not enter the equation?
Collins: During our studies I really didn’t want to get caught up in the leadership question, but then it emerged that, in truly great companies, the leaders displayed specific characteristics that have a lot to do with the subject of resilience. One central question, for example, concerns personal motivation: If the top manager places his or her entire personality, energy, and ambition at the service of the company; if he or she cares enough about it that he or she is willing to suffer for it, then this motivation is channeled outward into something bigger than the person; something more enduring. True leadership is a form of suffering. And that brings us back to the resilience question. If it really is about a responsibility you hold to something that is bigger and more important than you, like Bill Allen had with Boeing, like Blake Nordstrom felt for his family’s company, like Anne Mulcahy felt with Xerox, then you can draw upon that as a source of personal strength through the difficulties you encounter.
The second thing is this: I don’t believe in resilient companies, but I do believe in resilient people and companies are made up of people. People have to go through calamity times together. Everybody has to bear their own share of the suffering, which people are only really willing to do if the leadership is right in there with them.
The Focus: In your books, though, you give greater importance to strong teams than to strong individual leaders.
Collins: It’s about more than just leaders; it’s about all of those who are the right people to be engaged in the struggle.Because ultimately it’s about the company and its work, so everybody has to be involved. It is about what we call a level-five team, which is when you get multiple people who have the will and the humility and extraordinary competencies to win through. If you’ve got a level-five team at the top and they create other level-five teams, cascading down through the organization, then you have one of those things that are really hard to defeat. A while ago I was privileged to spend some time with General Officers of the United States Marine Corps; a very resilient organization by design. They are in the business of creating exceptional leaders and I asked them: What is the purpose of boot camps? Is it to find the strongest? The answer was: No, because we could break anyone, no matter how strong they are. The purpose is to weed out the people who, when the going gets really tough, do not turn to help their partners. The ones who just want to get through it themselves, don’t make it. So then you start building a culture that responds to adversity with the attitude that no matter how bad it gets, first and foremost I’m in there with you.
The Focus: How can a new management team build this culture of resilience? Is this something one can learn through practice?
Collins: It depends on the circumstances. If you are not in times that test you severely, you should test yourself severely and make sure that you have the foundations very much in place, because if it’s not bad now, it’s only a matter of time until the bad times arrive. It is very unlikely that stability and prosperity combined are going to return. We’re going to have good times and bad times, but certainly not stable times. So if a company happens to be in a reasonably good phase, it’s down to the discipline of the top team to say: We need to have the values; we need to have the right people; we need to have our finances in order; we need to really understand on a deep level what we can do better than anyone else, and make sure we cultivate that, and build it and maintain our relationships. We don’t wait until we get in trouble to make ourselves strong.
What we found in our work is that the more successful companies had difficult starts. Less successful companies had easier starts. Part of how to build resilience seems to be that those that have been through difficulties early on, and have come through them, have forever the advantage of knowing that they came out stronger on the other side. How do you get people to have confidence in difficult times? The answer is you build in small steps, and you point to actual empirical success. That is a really critical step.
“Empirical success creates confidence. It gives you confidence when you went through something difficult, huge or scary.”
The Focus: Do companies need to create artificial negative circumstances?
Collins: Not necessarily, but like I said, empirical success creates confidence. It gives you confidence when you went through something difficult, huge or scary. I really like seeing people who have had the harder starts succeed. Young people, for example, who get through to their late twenties by rushing from one success to the next and then have their first crushing setback are not prepared for it. They are much more likely to be devastated by it. Excessive optimism can be dangerous, too. According to the late Admiral James Stockdale, it was the optimists among the prisoners of war who were the first to go under. When their initial hopes of early release were dashed, they were destroyed by disappointment. In my view, we’re heading into a time when young people are going to need extraordinary resilience, even more than we did.
The Focus: Many companies look for a savior or a visionary leader from the outside, but your research has often shown that it was an internal candidate who saved the day. What’s the best way to find the right successor for the top job?
Collins: Let me be very clear: You certainly can have the right leader from the outside; but statistically, historically, more often they come from the inside – although that’s more a statistical tendency than a hard and fast rule. The really critical question is “Who is the right leader?” not “Where does that leader come from?” Boards often get very excited by the idea of the glamorous, charismatic savior. But the right leader isn’t necessarily the one who is going to impress you most with their external personality; they are going to be the most effective. That may be an insider or it may be an outside candidate. Our data suggests it’s more inside than outside. I think that’s because it goes back to the values: It’s very hard to get people with the right, matching values from the outside. It’s also hard to have the empirical ability to assess people from the outside versus those from inside, because with insiders you can see how they’ve actually performed within the corporate culture.
The Focus: Turning to your next project, which is investigating what it takes to endure or prevail when the world spins out of control, are there any initial insights you’d care to share with us?
Collins: This study which I am conducting with my colleague, Morton Hansen, is going to provide the ultimate proof of the idea that people create greatness, not circumstances – because we deliberately selected on the severity of the environments. We contrasted companies that produced exceptional sustained results with those that didn’t, and put the lens on the most out-of-control environments that we could find, and looked at companies exposed to those environments. This is the first study in which we picked our companies as start-ups, studied them as small players, and where they only then went on to become the great winners. We went for those that were vulnerable little specks, high on the mountain, exposed to the environment, where they didn’t have the advantages of being big and powerful. Their competitors were all on the same mountain and some of them didn’t even survive.
It is absolutely clear that people make the difference, not circumstances. Whether you prevail or fail, do or die, depends more on what you do to yourself than on what the world does to you. It doesn’t mean that in the end something won’t get you – life has no guarantees – but the odds are better. For me, that’s a great outcome. Because however scary and out-of-control this world may look, I now feel more calm about being able to deal with it than ever before.
The interview with Jim Collins in Boulder was conducted by Brian Reinken, Egon Zehnder, Dallas, and Karena Strella, Egon Zehnder, San Francisco.
RESUMÉ Jim Collins
Jim Collins is regarded as one of today’s foremost experts and thinkers on matters relating to corporate and organizational structures. He studied applied mathematics and business administration at Stanford and also taught at the Stanford Graduate School of Business for several years. In 1995 he returned to Boulder in Colorado, the town of his birth, where he founded his “Business Research Laboratory.” Since then he has undertaken extensive studies investigating corporate structures and processes, publishing the results of his research in books which include such business best-sellers as Built to Last – Successful Habits of Visionary Companies, co-authored with Jerry Porras, and Good to Great – Why Some Companies Make the Leap … And Others Don’t. In his latest book, How the Mighty Fall – And Why Some Companies Never Give In, Collins investigates the reasons for and stages of the decline of once-great corporations, while showing how business leaders can halt the downward spiral.
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