BUILDING TO LAST—THE FOURTH STAGE ON THE ROAD TO GREATNESS

Our journey along the road to greatness continues this week.??If you carefully follow the principles in stages One, Two and Three, you will, with some luck, build a very successful company or organization.

The foundation has been laid.??The right leaders, humble and resolute in the pursuit of a noble cause, have ensured they have the right people in the right roles, inspired by a shared purpose and guided by a set of core values and beliefs.??Now those people must engage in work that is the result of the combination of passion and talent which increases profitability.

However, disciplined people guided by disciplined thought processes must execute consistently with fanatic discipline focused on continually improving to ensure that all parts of the system are functioning well, to achieve momentum and exceptional results.??But disciplined action demands patience and focus on continually improving each component of the flywheel, building momentum over time to eventual breakthrough.

Having built a successful company, what do you need to be doing to ensure that it endures and achieves greatness?

“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.” (How the Mighty Fall, Jim Collins).

So, how would you know if your company or organization is already on the path to decline???How do you not become a CL Financial (CLICO) or a Trinidad Cosmetics?

HOW DO THE MIGHTY FALL?

An institution can look strong on the outside but already be sick on the inside, dangerously on the cusp of a precipitous fall....

Collins sees the decline of formerly great companies like the progression of a disease like cancer—you appear to be healthy on the outside, but the disease is working to kill you on the inside.??He notes in “How the Mighty Fall”:

“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....

“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 unquestioned 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 matter how much you’ve achieved, no matter how far you’ve gone, no matter how much power you’ve garnered, you are 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.”

Collins researched the fallen angels carefully studying what happened leading up to the point at which decline became visible and the companies’ response when they began to fall.??The result of his research was captured in what he calls the five stages of decline.

Stage 1: Hubris Born of Success

When leaders become arrogant and believe that success is their birth right; when they forget the 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 understanding and insight (“We’re successful because we understand why we do these specific things and under what conditions they would no longer work”), decline will very likely follow.” (How the Mighty Fall, Jim Collins).

Stage 2: Undisciplined Pursuit of More

Arrogant pride from Stage 1 leads to the undisciplined pursuit of more scale, more growth, more acclaim, more of whatever those in power see as “success”.??Companies in Stage 2 leap into areas where they cannot be great or grow faster than they can achieve with excellence, or both.??They begin to grow faster than they can fill key seats with the right people, setting their organizations up for a fall.

Companies in Stage 2 leap into areas where they cannot be great or grow faster than they can achieve with excellence, or both.?

Stage 3: Denial of Risk and Peril

As companies move into Stage 3, internal warning signs contradict external results, which remain strong enough to 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. Leaders blame external factors for setbacks rather than accept responsibility. The vigorous, fact-based dialogue that characterizes high-performance teams dwindles or disappears altogether.” (How the Mighty Fall, Jim Collins).

Stage 4: Grasping for Salvation

The cumulative risks of Stage 3 throw the enterprise into a sharp decline visible to all. The critical question is, how does its leaders respond???By looking for a savior—quick salvation or by getting back to the disciplines responsible for success? 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, or a “game changing” acquisition.

Stage 5: Capitulation to Irrelevance or Death

The longer a company remains in Stage 4, the more likely it will fail. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit.??Leaders abandon all hope of building a great future and the company is sold or the organization dies

THREE KEY PRINCIPLES TO BUILD LASTING ORGANIZATIONS

To ensure that your company not only survives but continues to thrive in a rapidly changing world. Collins three key principles:

• Practice productive paranoia (avoid the 5 Stages of Decline).
• Do more clock building, less time telling.
• Preserve the core/stimulate progress (achieve the next big hairy audacious goal (BHAG).

Practice Productive Paranoia (Avoid the 5 Stages of Decline)

The great companies carried 3 to 10 times the ratio of cash to assets relative to the median of most companies and maintained more conservative balance sheets.

I believe that it was Andy Grove of Intel who said, only the paranoid survives.??No one can reliably and consistently predict future events.??Therefore, you need to prepare ahead of time, all the time, for the unpredictable.??Plan, based on the assumption that you can be blindsided by a series of calamities, even while you hope for the best.??Remember that it’s what you do before the storm that matters most in determining whether you thrive, survive or meet your demise.??Collins notes that the first step in building to last is to survive—don’t die.??He offers three key dimensions of productive paranoia:

1. Build Cash Reserves and Buffers?much bigger than others to prepare for unexpected events and bad luck before they happen.??The great companies carried 3 to 10 times the ratio of cash to assets relative to the median of most companies and maintained more conservative balance sheets.
2. Identify, Understand and Manage Risks?that could destroy your organization.??Obsess about what can go wrong by asking questions like: What is the worst-case scenario? What are the consequences of the worst-case scenario? Do we have contingencies in place for the worst-case scenario? What’s the upside and what’s the downside of this decision? What’s the likelihood of the upside and the downside? What’s out of our control? How can we minimize our exposure to forces we can’t control? What if? What if? What if?”
3. Zoom Out, Then Zoom In.??When the great companies sense danger, they immediately zoom out to consider how quickly a threat is approaching and whether it calls for a change in plans. Then they zoom in, refocusing their energies into executing objectives.??First, they work on the business, then dive in to work in the business.

Next week we will continue to explore Collins’ Built to Last advice, specifically, clock building and maintaining focus through the next BHAG.

Have a disciplined week as you work to build your financial freedom.??If you find this advice helpful, please share with your friends and colleagues.??As usual, I look forward to your questions and comments.??Be safe.??Take good care, and if you can, help someone in need.

Cheers, Nigel

Nigel Romano, Partner, Moore Trinidad & Tobago, Chartered Accountants