With some investigation, you may be able to get some idea. It begins with the numbers for the past 15 years or longer, because Jim Collins, author, consultant, pointed out a company’s direction can develop over many years. You will identify indications of what direction through the numbers. A list of suggestions is:
| Balance Sheet – details preferred |
Income Statement – details preferred |
| GM by product |
Revenues – details preferred |
| Overall profit – details preferred |
Ratios |
| Debt – for what, what value created |
Cash flow, cash-on-hand |
| Patents filed, held, expired past 3 years |
Patents turned into revenue generating |
| Results of acquisition(s) investment, debt associated, integration cost, contribution of acquisition to income statement, what value did it provide, any impairment write-offs. |
Did acquisition help make your company the best in your market or industry?
Y or N? |
| What innovations have or are developing, what proposed or actual value created?
Did innovation help your company become the best in your space? Y or N? |
What is your company’s history with innovation, commercialization, products/services adding value |
In any economic climate, knowing growth or decline is required. When you reach an understanding (numbers based), of what direction your company’s COMPASS is pointing, then what? I suggest that you investigate either the growth or decline elements, develop information, summaries, insight and develop a case study for your business. Numbers are important but context around the numbers are necessary – it tells a story. Important to note, make sure you align the words with the numbers. Both need to reflect the same story. The following scenarios for growth and decline are a Cliff Notes Version. You could go to the books for all the details – Thiel’s book, Zero to One and Collins’ book, How The Mighty Fall.
GROWTH
According to Thiel, a strong factor for growth is creating a “legal monopoly.” How does a company rise up to create a “legal monopoly?” Peter Thiel suggested 4 things to improve your opportunity for growth in Zero to One.
PROPRIETARY TECHNOLOGY – according to Thiel, this is the “substantive advantage.” To achieve this, Thiel described the following:
- Proprietary Technology needs to be 10 times better than the nearest offering in a significant way.
- Create something new because there is no second
- Radically improve an existing technology by a factor of 10. (This may be the easiest way)
- Achieve 10 times improvement by “superior integrated design.”
Examples of companies included: PayPal, Amazon and Apple. Does your company have such a proprietary technology? Y or N? Is there opportunity in your market? Y or N? Are you looking? Y or N?
NETWORK EFFECTS – “makes product more useful as more people use it.” Historically, this develops from a small footprint to begin and spreads. Facebook was cited by Thiel as an example. I suggest FedEx and UPS, both developed a network and took business away from USPS. Does your company have such a network? Y or N? What examples of companies would you put here? A client had an excellent global network. A colleague and I developed an approach for more to use the network. Client chose instead to reorganize. Reorganization is a factor in decline mode and will be discussed later.
ECONOMIES OF SCALE – “monopoly company gets stronger as it gets bigger.” Is your company getting stronger as it gets bigger? Y or N? What examples of companies would you put here?
BRANDING – “a company has a monopoly on its own brand.” Consider the brands, who comes to mind? Do they have much challenge to their brand? Y or N?
The answers to these questions won’t guarantee that your company is in a growth mode. BTW, with the branding question, was your own company in the list?
The team with Thiel at PayPal where this model developed: Elon Musk founded SpaceX and co-founded Tesla; Reid Hoffman co-founded LinkedIn; Steve Chen, Chad Hurley and Jawed Karim founded YouTube; Jeremy Stoppelman and Russel Simmons founded Yelp. No guarantee but this group experiences success.
Numbers (credible, accurate), if trends are up through the years, it could indicate a growth mode. Physically, we can live every day and appear healthy. This is why we go get physicals, lab work, specific tests to see if there is an underlying disease developing that could affect our health long-term. So, conduct a Growth analysis, to see if you conclude a growth trend. If not growth then, conduct a Decline trend analysis.
DECLINE
From the numbers, if trends are flat or in decline, this is certainly a more urgent study. Collins pointed out 5 stages of decline. At Stage 5, no company ever reversed course in his study. The company became irrelevant or cease operations or lost their identity.
Like growth analysis, it all begins with the numbers. Identify clearly why you concluded that decline is your company’s COMPASS direction. It is essential to assess at what stage of decline your company is in.
Here is the list of 11 companies that were the basis for How The Mighty Fall published in 2009. The basis for this book is extensive, 70 years of corporate documents, cumulative of 6,000 years of combined history, 60 corporations with a narrowed list of 11.
| A&P |
Addressograph |
| Ames Department Stores |
Bank of America (before acquired by Nations Bank) |
| Circuit City |
Hewlett-Packard |
| Merck |
Motorola |
| Rubbermaid |
Scott Paper |
| Zenith |
|
According to Collins, companies do go through each stage of decline. However, the length in each stage varies. This is important to grasp and identify at what stage of decline you are in. If your decline is in Stages 1 to 4, don’t despair, your company can turn it around. Collins also listed companies whose compass pointed to decline, however, they recovered. Leaders turned the direction around and the company emerged stronger and viable.
| Nucor |
Xerox |
| Nordstrom |
Texas Instruments |
| Disney |
Pitney Bowes |
| IBM |
Nordstrom |
| Boeing |
|
Now, 11 years later from published book date, some of these companies are back into decline mode. Then, as now, Collins reminds readers, decline is largely self-inflicted and recovery largely within our own control.
The Five Stages of Decline
“Stage 1 – Hubris Born of Success “
The description for this stage, “company success will continue almost no matter what the organization decides to do or not do.” Leaders neglect the primary business for something else. Company example is Circuit City. The timeline for this fall, October 1995, Circuit City is a high flyer, accolades are flowing in, started up CarMax and Divx. The leader’s arrogance and neglect for the primary business, resulted in profit margins eroding and ROE declined. November 10, 2008, Circuit City filed for bankruptcy. Circuit City declined through all five stages in 13 years. Identify what if anything applies to your company.
“Stage 2 – Undisciplined Pursuit of More”
Collins described this stage with these symptoms (not a complete list, pages 48, 49, 63, 64).
“Unsustainable quest for growth, confuse big with great, success creates pressure for more growth, strains people, culture and could begin to fray edges. Declining proportion of right people in right seats. Bureaucracy subverts discipline, system of bureaucratic rules subverts responsibility; people think in terms of job rather than responsibility. Personal interests placed above organization’s interests.”
Company examples from Collins’ book include: Ames Department Stores, Rubbermaid, Merck and Bank of America (before NationsBank acquired). Rubbermaid as a highlight is of particular interest because I lived near the HQ, participated in a NFP Group and interacted at the HQ during the mid-80’s. What happened to Rubbermaid in Stage 2, it progressed through Stages 3, 4 and 5.
In 1994, the CEO declared a “leap growth” program by any and all means. Fortune declared Rubbermaid #1 Most Admired Company in America, more innovation than 3M, Apple and Intel. Collins wrote in his book, 1994 to 1998, “Rubbermaid raced through the stages of decline so rapidly that it should terrify anyone who has enjoyed a burst of success.” Rubbermaid then cut products, 9 plants, 1,170 jobs, made a large acquisition, recast incentive compensation and installed radical marketing. Rubbermaid restructured again in less than 2 years. Then, October 21, 1998 it was sold to Newell Corporation. Identify what, if anything applies to your company.
“Stage 3 – Denial of Risk and Peril”
Collins’ partial list for this stage is: “big bets and bold goals without empirical validation. Externalizing blame – blame external factors rather than accept responsibility (COVID-19 anyone). Obsessive reorganizations.”
Company examples from Collins, How The Mighty Fall include: Motorola, NASA & Morton Thiokol, IBM, Scott Paper and Zenith. With all the recent demands on TP, let’s single out Scott Paper.
Collins explained that by 1961, Scott Paper built a successful consumer products company. Then, enter P&G into the market that already included Kimberly-Clark and Georgia Pacific. The decade of 1961 to 1971, Scott’s market share went from about 50% to about 33%. P&G in 1971 went national with its Charmin product and Scott’s response was a reorganization – move the chairs in the room and without a strong strategic response for 5 years. Reorganization continued 3 times over 4 years. Scott Paper moved out of Stage 3 into Stage 4. Eventually, Kimberly-Clark purchased Scott Paper for $9.4 Billion on December 12, 1995.
“Stage 4 – Grasping for Salvation”
Collins’ partial list for this stage includes: “series of silver bullets – make dramatic moves, acquisition, exciting innovation to have a breakthrough, do this repeatedly from 1 to another – no consistency. Grasping for Leader as Savior. Initial upswing followed by disappointment.” This refers to initial actions that deliver short-term results. However, improvements quickly disappear. “Chronic restructuring and erosion of financial strength. Panic and haste – rather than calm, deliberate, disciplined, people are reactive, hasty, undisciplined.”
Company examples from Collins,’ How The Mighty Fall, include: HP, IBM, Circuit City, Scott Paper, Ames Department Stores, Motorola, TI. Let’s look at one example in the Stage 4 Chapter, HP.
HP Board hired a new CEO in July 1999. CEO approach included media coverage of planned restart with excitement, enthusiasm of new strategies. Initial 12-month results for the new CEO, 7% Return on Sales, 2002 HP first recorded annual loss, 2005 Return on Sales at 4%. In 2002 HP Board continued with Stage 4 behavior with $24 Billion acquisition of Compaq Computer, as the silver bullet to fix HP. CEO hired in July 1999. Board fired in February 2005.
“Stage 5 – Capitulation to Irrelevance or Death”
At this point in the Decline Journey, Collins pointed out these: “lack of cash, increased debt.” He also stated that the company is possibly facing two options. “Leaders capitulate rather than fight or leaders continue struggle, run out of options, enterprise dies completely or shrinks into irrelevance.”
Collins reviewed two companies in this stage, Scott Paper and Zenith. He demonstrated Zenith’s decline through all 5 stages. Here is a summary.
- Stage 1 – 1950 to 1965 success run. The Japanese television hits the market. Zenith ignored the Japanese products.
- Stage 2 – Zenith 1960’s to early 1070’s goal – pursued #1 Status in their market, but it required increased investment (debt) in manufacturing capacity. Transition of new CEO experienced difficulty, brought in outside executive to be new CEO.
- Stage 3 – Zenith, blames outside issues for results rather than management decisions. Decisions made during Stages 1 and 2 resulted in lower prices to hold market share, more debt and impact on ratios.
- Stage 4 – Reaction of leadership was to try everything and one pursuit demonstrated promising results, Data Systems. Zenith became the #2 producer of IBM-compatible PC’s over a 10-year period. It was too late, debt increased, cash-on-hand dropped. The Zenith’s story in the end – 5 CEO’s in ten years, bankruptcy, and came out with 400 employees down from 36,000 in 1988.
- Stage 5 – In 1999, Zenith became a wholly owned subsidiary of LG Electronics.
You know this, corporations (for profit or NFP) are complex, their market/industry is complex, supply chain is global, digital economy, e-commerce, technology and new dimensions are developing.
Understanding your company’s COMPASS direction is important to YOU. Why? You read how Collins described a company’s decline can drop through all 5 stages in 5 years.
I attempted to give you enough information to determine which direction and develop a story for context. The examples from this book are dated. However, the principles to me remain. An observation of the current business climate recognizes the corporations in growth mode and aligned with Thiel’s description – AAPL, AMZN, MSFT, there are more. Those in decline mode and aligned with Collins’ 5 stages of decline. Boeing is struggling but may yet turn it around, to me they certainly had Stage 1 characteristics of decline. Corporations in retail space, those who ignored e-commerce and filed bankruptcy protection or now ceased operations.
Enjoy your journey and all the best.
