Why Incumbents Fall: The Challenges of Adaptation in the Private Sector

Jim Collins (How the Mighty Fall, 2009) argues that companies decline due to emotional failings—hubris, arrogance, complacency, denial. While this makes for a compelling narrative (and sells books to executives who like to think they’re in control), it misses a deeper structural truth: incumbents in the private sector are wired for decline. The very structures that help businesses scale—risk aversion, bureaucracy, and a focus on operational efficiency—ultimately cripple their ability to innovate and respond to change.

A company that once thrived on disruption and bold moves inevitably shifts to defense and preservation. It prioritizes shareholder satisfaction over customer obsession, risk management over agility, and incremental gains over bold leaps. And once this shift happens, decline is just a matter of time.

This article was sparked by conversations with two professors we’ve been working with—Mitch Glavin in Boston, who generously sent me a couple of copies of Baptist Health: Journey to Excellence (2011), and Michael Merrigan at AdventHealth, who pointed me toward Jim Collins’ work. Both reinforced how strategic decision-making determines whether an organization thrives or declines.

The Defensive Death Spiral

Startups innovate out of necessity. They take risks because they have no moat—no brand recognition, no massive customer base, no regulatory leverage. Every decision is about gaining ground—identifying gaps, moving fast, and exploiting inefficiencies bigger players miss.

Fast-forward a few years, and the company is now an industry leader. It has customers to protect, shareholders to appease, and regulators watching closely. What was once an aggressive, risk-taking organization becomes focused on protecting its position.

Then the real rot sets in:

• Growth shifts to expanding market share safely instead of bold innovation.
• Internal decision-making gets bogged down in bureaucracy—committees, approval chains, endless risk assessments.
• Leadership is incentivized to avoid failure rather than pursue bold moves.
• Disruptions are seen as threats to be squashed rather than opportunities to reinvent.

The moment a company shifts from offense to defense, its fate is sealed. The decline may take years, even decades, but it’s inevitable. Meanwhile, the next generation of disruptors is already lining up to take over.

The Startup vs. The Incumbent

Let’s break this down simply. If you’re a startup, your incentives are clear: find an underserved market, build something better, and grow fast. You take risks, break rules, and move quickly.

Compare that to an incumbent—a Fortune 500 company, a global bank, a 100-year-old industrial giant. Their priorities shift:

• Don’t cannibalize existing revenue streams.
• Keep shareholders happy with predictable growth.
• Avoid risks that could damage the brand.
• Appease regulators and play within the system.

These strategies are rational for incumbents. A CEO who kills a profitable division to chase innovation is more likely to be fired than celebrated. The board wants steady returns, not big gambles. So instead of game-changing ideas, they optimize for operational efficiency—and in doing so, they suffocate the very spirit that made them great in the first place.

That’s why true innovation rarely comes from industry leaders (Christensen, The Innovator’s Dilemma, 1997). It comes from outsiders who have nothing to lose.

The Business Simulation Digest Perspective

At The Business Simulation Digest, we explore these dynamics through simulations that reveal how over-optimization at the expense of adaptability and stakeholder focus leads to stagnation.

This isn’t just theory—companies that shift from efficiency-driven mindsets to strategic reinvention often thrive. Baptist Health’s transformation is a prime example, their turnaround wasn’t driven by cost-cutting or aggressive expansion but by a focus on service culture. They didn’t just chase numbers—they rebuilt around delivering real value to patients. And it worked.

Is Decline Inevitable?

Does this mean every organization is doomed to decline? Almost. With a few exceptions.

Some reinvent themselves before stagnation. Amazon did it by cannibalizing its own success (AWS being the best example). Apple pivoted from computers to consumer electronics. Microsoft, written off in the early 2000s as a corporate dinosaur, is now worth trillions because Satya Nadella shifted it from a Windows-obsessed giant to a cloud-first powerhouse.

But those are rare cases. Most incumbents get comfortable, stop taking risks, and fall into the defensive death spiral, focused on preserving what exists rather than creating something new. And when that happens, hungry upstarts are already positioning themselves to take over.

So, what’s the lesson? If you’re an incumbent, staying ahead means adapting before the market forces you to. If you’re a startup, your agility won’t last forever—you’ll eventually face the same pressures as today’s giants. The best protect their core while innovating at the edges.

If you’re an incumbent, act like a startup or risk stagnation. If you’re a startup, your window of offense is limited—eventually, you’ll be the one defending.

To learn more out more about how simulations can be used to enhance your educational programs, please contact us today.