Why Even The Most Successful Companies Go Bankrupt

Five Mistakes from the How the Mighty Fall Book.

No matter how large a company may be, it is not protected from bankruptcy and total collapse. This usually starts with overconfidence in one's leadership.

In his book How the Mighty Fall, business consultant Jim Collins analyses how and why the world's business leaders shut down.

Here are a few striking stories.

There are five stages of successful companies’ collapse:

  1. Arrogance because of success.
  2. Uncontrolled desire for more.
  3. Denial of risk and danger.
  4. Attempts to survive.
  5. Capitulation.

Jim Collins believes that this pattern works for almost all large companies that find themselves in deep crisis. At the peak of growth, the managers of such companies believe their success is here to stay. They relax, stop controlling their decisions and analyse the results.

Later, they start scaling up quickly and take risks, confident they can handle anything. Once the company faces problems, top management ignores them.

"At this stage, managers underestimate negative data, overestimate positive data, and perceive questionable data positively," Collins writes.

When collapse becomes apparent to all, directors or owners of such companies start acting chaotically. They decide to rebuild everything, launch a new product and change the strategy completely. However, this gives short-term results and eventually leads to bankruptcy.

It may take only a few years (as with Lehman Brothers), or it may take three decades (as with Swiss watchmaker Zenith) between these stages.

Here are some tips to avoid such collapse.

#1. Adjust to Market Changes

In the 1990s, Motorola Company’s revenue grew fivefold, i.e., from $5 to $27 billion. The company launched the StarTAC phone, the world's smallest cell phone at that time. Motorola was very proud of it.

However, there was a problem as StarTAC used analogue technology. Mobile network operators switched to digital technology a long time ago and demanded it from phone manufacturers.

Motorola's top management shrugged off the changes. They said, "43 million analogue users can't go wrong." 

As a result, more and more competitors that used digital technology have entered the market. In the mid-90s, Motorola dominated 50% of the market. By 1999 this share had reduced to only 17%. Over the next four years, the company had to lay off 60,000 employees.

A similar story happened to the world's oldest supermarket chain, the Great Atlantic & Pacific Tea Company (A&P). In 1957, founder George Hartford died, and his two sons decided to change nothing. Their strategy was: "Let's keep things as they are and remain successful, as we are A&R."

However, as time went on, more new supermarkets appeared in the USA. Soon only older people shopped at A&R, simply out of habit. The company ended up closing down.

#2. Be Realistic About Your Options

Household goods manufacturer Rubbermaid had the rule to bring a new product to market daily. Thus, every day they produced new goods, and every year, they created a new product category.

"Our vision is to grow," Rubbermaid's top managers said.

Over three years, the company brought more than a thousand products to market and drowned in organisational processes. Rubbermaid even failed to deliver goods to customers on time. They soon claimed losses and laid off more than a thousand employees.

According to Collins, the company shall grow at a pace that allows hiring the required number of professional staff. If a business scales up faster than it increases its staff, sooner or later, it faces significant problems.

#3. Boldly Reject Outdated Ideas

In 1985, a Motorola engineer was vacationing in the Bahamas with his family. His wife tried to call her clients on a cell phone, but there was no connection.

That's how Motorola came up with the idea of creating Iridium, a satellite phone with 100% coverage so one can make calls even from the North Pole.

The development has taken more than ten years. Over this time, mobile communications became more affordable, and being able to talk on the cell phone from anywhere no longer seemed fantastic.

Motorola faced the dilemma of whether continue investing in the project or abandon it. However, the top managers decided not to deviate from their goal as they had already invested too much time and money into it.

In 1998 Iridium went on sale. It cost $3,000, and a minute of call ranged from $3 to $7. The company announced a $1.5 billion loss on this project a year later. It was shut down, but the fact that it was not stopped on time only accelerated Motorola's decline.

#4. Do Not Get Carried Away with Restructuring

In the 1960s, Scott Paper was a world leader in paper products, including napkins, toilet paper and towels. However, Procter & Gamble and a few other smaller companies have entered this market.

Scott Paper management decided to restructure the company. Top managers have changed departments, management systems and marketing strategies over five years. During this time, they have restructured the company three times. The company ended up in a deep crisis and lost almost its entire market share.

Collins writes, "Restructuring can create the illusion that you are doing something useful. However, in doing so, you risk ignoring reality. It's like rearranging the furniture in the living room when the house is falling apart."

#5. Do Not Panic

Addressograph Company was the market leader in copiers until Xerox appeared. In a panic, Addressograph launched an "anti-crisis" programme. They launched 23 new device models in three years.

In the end, about the same thing happened to Addressograph as to Rubbermaid, i.e., the company failed to keep track of orders and work with customers. 16 out of 23 new products turned out to be unsuccessful.

Addressograph started to suffer losses. The company changed directors, strategies and even the location of the head office several times. However, it all was done in vain. Over time, the company was left with only a few hundred out of 30,000 employees.

Collins believes that "Instead of staying calm, goal-oriented and responsible, managers make decisions in a hurry and panic. This is what kills big businesses."