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

How the Mighty Fall: A Primer on the Warning Signs

(page 4 of 5)

STAGE 4: GRASPING FOR SALVATION

The cumulative peril and/or risks gone bad of Stage 3 assert themselves, throwing the enterprise into a sharp decline visible to all. The critical question is: How does its leadership respond? By lurching for a quick salvation or by getting back to the disciplines that brought about greatness in the first place? 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, a "game-changing" acquisition, or any number of other silver-bullet solutions. Initial results from taking dramatic action may appear positive, but they do not last.

When we find ourselves in trouble, when we find ourselves on the cusp of falling, our survival instinct and our fear can prompt lurching—reactive behavior absolutely contrary to survival. The very moment when we need to take calm, deliberate action, we run the risk of doing the exact opposite and bringing about the very outcomes we most fear. By grasping about in fearful, frantic reaction, late Stage 4 companies accelerate their own demise. Of course, their leaders can later claim: "But look at everything we did. We changed everything. We tried everything we could think of. We fired every shot we had, and we still fell. You can't blame us for not trying." They fail to see that leaders atop companies in the late stages of decline need to get back to a calm, clear-headed, and focused approach. If you want to reverse decline, be rigorous about what not to do.

STAGE 5: CAPITULATION TO IRRELEVANCE OR DEATH

The longer a company remains in Stage 4, repeatedly grasping for silver bullets, the more likely it will spiral downward. In Stage 5, accumulated setbacks and expensive false starts erode financial strength and individual spirit to such an extent that leaders abandon all hope of building a great future. In some cases the company's leader just sells out; in other cases the institution atrophies into utter insignificance; and in the most extreme cases the enterprise simply dies outright.

The point of the struggle is not just to survive, but to build an enterprise that makes such a distinctive impact on the world it touches (and does so with such superior performance) that it would leave a gaping hole—a hole that could not be easily filled by any other institution—if it ceased to exist. To accomplish this requires leaders who retain faith that they can find a way to prevail in pursuit of a cause larger than mere survival (and larger than themselves) while also maintaining the stoic will needed to take whatever actions must be taken, however excruciating, for the sake of that cause.

WELL-FOUNDED HOPE

When Anne Mulcahy became chief executive of Xerox (XRX) in 2001, she inherited a company mired in Stage 4. With Xerox's debt-to-equity ratio above 900%, Moody's (MCO) rated its bonds as junk. With $19 billion in debt and only $100 million in cash, Mulcahy described the situation as "terrifying."

Mulcahy had never planned or expected to become CEO, describing her ascension as a total surprise. The consummate insider, she'd worked for nearly a quarter-century at Xerox, never drawing outside attention. For Mulcahy, it was all about Xerox, not about her. In fact, we found only four feature articles about Mulcahy during her first three years as CEO, a surprisingly small number given how few women become CEOs of storied companies.

Some observers questioned whether this insider, this unknown team player who had Xerox DNA baked into her chromosomes, would have the ferocious will needed to save the company. They needn't have worried. Their first clue might have come from reading her favorite book, Caroline Alexander's The Endurance, which chronicles how, against all odds, adventurer Ernest Shackleton rescued his men after their ship splintered into thousands of pieces as Antarctic ice crushed in around it in 1916. Drawing inspiration from Shackleton, Mulcahy didn't take a weekend off for two years. She shut down a number of businesses, including the inkjet-printer unit she'd championed earlier in her career, and cut $2.5 billion out of Xerox's cost structure. Not that she found these decisions easy—"I don't think I want them to get easy," she later reflected—but they were necessary to stave off utter catastrophe. During its darkest days, Xerox faced the very real threat of bankruptcy, yet Mulcahy rebuffed with steely silence her advisers' repeated suggestions that she consider Chapter 11. She also held fast against a torrent of advice from outsiders to cut research and development to save the company, noting that a return to greatness depended on both tough cost-cutting and long-term investment. She actually increased R&D as a percentage of sales during that bleak period.

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