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Book Excerpt May 14, 2009, 5:00PM EST

How the Mighty Fall: A Primer on the Warning Signs

(page 2 of 5)

Giannini lent to the little guy when the little guy needed it most, and his bank, later renamed Bank of America (BAC), gained momentum—little guy by little guy, loan by loan, deposit by deposit, branch by branch, expanding ever outward from San Francisco. By 1945 it had surpassed Chase National Bank as the largest commercial bank in the world, and by the late 1970s it had grown to more than a thousand branches in more than a hundred countries. Along the way it became admired not just for its size but also for its quality of management. (Note of clarification: In 1998, NationsBank acquired Bank of America and took the name; the Bank of America described here is a different company than NationsBank.)

Entering the 1980s, Bank of America held a revered position and was widely regarded as one of the greatest companies in the world. Within eight years it would post some of the biggest losses in U.S. banking history, rattle the financial markets to the point of briefly depressing the U.S. dollar, watch its cumulative stock performance fall more than 80% behind the general stock market, face a serious takeover threat from a rival California bank, cut its dividend for the first time in 53 years, sell off its corporate headquarters to help meet capital requirements, see the last Giannini family board member resign in outrage, oust its chief executive, bring a former CEO out of retirement to save the company, and endure a barrage of critical articles in the business press, with titles such as "The Incredible Shrinking Bank" and "Better Stewards (Corporate and Otherwise) Went Down on the Titanic." Anyone predicting such a fall as the decade began would have been viewed as a pessimistic outlier.

If a company as powerful and well-positioned as Bank of America in the late 1970s could fall so far, so hard, so quickly, then any company can. If companies such as Motorola (MOT), Circuit City (CCTYQ), and Fannie Mae (FNM)—icons that once served as paragons of excellence—can succumb to the forces of gravity, then no one is immune. If companies such as 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. There is no law of nature that the most powerful will inevitably remain at the top. Anyone can fall, and most eventually do.

But all is not gloom. By understanding the five stages of decline we uncovered in our research for How the Mighty Fall, leaders can substantially increase the odds of reversing decline before it is too late—or even better, stave off decline in the first place. Decline can be avoided. The seeds of decline can be detected early. And decline can be reversed (as we've seen with notable cases such as IBM (IBM), Hewlett-Packard (HPQ), Merck (MRK), and Nucor (NUE)). The mighty can fall, but they can often rise again.

FIVE STAGES OF DECLINE

I feel a bit like a snake that swallowed two watermelons at once. I'd started this project as a diversion to engage my pen while completing the research for my next full-sized book on what it takes to endure and prevail when the world around you spins out of control (based on a six-year research project with my colleague Morten Hansen). But after my West Point visit, the question of how the mighty fall evolved into a topic of passionate curiosity channeled into a research effort that led to this small book.

In one sense, my research colleagues and I have been studying failure and mediocrity for years. Our research methodology relies on contrast, studying those companies that became great in contrast to those that did not and asking: "What's different?" But we had not explicitly delved into the question: Why do some great companies fall, and how far can a company fall and still come back? I began to joke with my colleagues: "We're turning to the dark side."

We had a substantial amount of data collected from prior research studies, consisting of more than 6,000 years of combined corporate history. From this data set, we identified a set of once-great companies that fell and constructed a set of "success contrasts" that had risen in the same industries during the era when our primary study companies declined. Our principal effort focused on a two-part question: What happened leading up to the point at which decline became visible, and what did the company do once it began to fall?

Our comparative and historical analysis yielded a descriptive model of how the mighty fall that consists of five stages that proceed in sequence. And here's the really scary part: You do not visibly fall until Stage 4! Companies can be well into Stage 3 decline and still look and feel great, yet be right on the cusp of a huge fall. Decline can sneak up on you, and—seemingly all of a sudden—you're in big trouble.

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