The Business Book

102

Continued management arrogance
breeds indiscipline; decisions are
made out of greed and warning
signs are ignored. Companies at
stage 2 make indisciplined leaps
into areas where they have little
competitive advantage; diversify
into areas in which they have no
expertise; or undertake ill-conceived
mergers and takeovers. The
complacency of stage 1 turns into
the overreaching of stage 2.
By stage 3, problems begin to
mount, staff begins to question
management decisions, and
disturbing data suggest things
might not be all that they seem.
However, as Collins points out, it is
possible to be in stage 3 of decline
and not yet realize that it is
happening. Anomalies in
performance at this stage tend to be
explained away; any problems are
blamed on “difficult trading
conditions.” Management holds firm
in the view that the company is
strong and nothing is fundamentally
wrong. They believe that once the

markets pick up, their business

brilliance will ensure that the

company regains market leadership.

Now or never

Stage 3 represents the turning point.

Many companies reach this stage

but manage to avert collapse. If

management listens to the views of

its staff (especially from the front

lines, such as sales staff), heeds

shareholder concerns, and changes

strategy in line with the changing

reality, it is likely to recover. Andy

Grove famously pulled Intel back into

profitability by pursuing this strategy.

However, the same cannot be said

for Lehman Brothers. In 2007, with

its stock price at a record high, the

US investment bank ignored the

early warning signs of collapse. Even

as cracks in the US housing market

became apparent, with subprime

mortgage defaults rising to a seven-

year high, Lehman continued to

expose itself to mortgage-backed

financial products. Management,

particularly the chief executive,

Richard Fuld, were blinded by hubris

and deep in denial. They pressed on

with ill-conceived strategies and

quickly found themselves in stage 4.

Dealing with disaster

By stage 4 a company’s difficulties

become undeniable—even the

most headstrong and arrogant

manager has to acknowledge that

there are problems. The question

now is how to respond. Unfortunately,

as the Lehman example shows,

acknowledgment does not always

result in appropriate action.

As the global credit crisis

erupted in August 2007, Lehman’s

stock fell sharply. Having grown

Lehman to become the fourth

biggest bank on Wall Street, Fuld

could not accept that it was time to

adopt a new strategy. When

uncertainty started to grip the

HUBRIS AND NEMESIS

“Rogue trader” Jérôme Kerviel
claimed his company, Société Générale
bank, was aware of his dangerously
large trades, but turned a blind eye
because they were focused on profits.

bank and journalists asked

questions about its future, Fuld

was reluctant to countenance any

capital infusion. Selling parts of the

bank was not an option he felt he

could consider. Although Fuld

eventually revoked this decision, it

was too late: the bank declared

bankruptcy on September 15, 2008.

The way in which management

responds to a crisis brought about

by success and accompanying

hubris is critical. Inevitably, “band-

aid” solutions that do not address

the underlying problems rarely

succeed. Quick fixes based on the

same overconfidence that brought

crisis in the first place—such as a

bold but risky strategy, a hoped for

blockbuster product, or a “market-

changing” acquisition—usually

result in the company moving

to stage 5: capitulation to

irrelevance, or death.

Capitulating to irrelevance

In stage 5, reality finally hits home.

Expensive failed strategies erode

financial strength and accumulated

setbacks damage the individual

spirits trying to repair the damage.

Key managers generally leave the

company at this stage, and the few

customers that remain migrate to

The best leaders never

presume they’ve reached

ultimate understanding

of all the factors that

brought them success.

Jim Collins