Practice Productive Paranoia (Avoid the 5 Stages of Decline)

The first step in being built to last is don’t die. The only mistakes you can learn from are the ones you survive. Every company is vulnerable to decline. There’s no law of nature that the most successful companies will inevitably remain at the top. Any can fall and most eventually do. Entrepreneurs who build great companies differ from less successful comparisons in how they maintain hypervigilance in good times and bad. Leaders who navigate turbulence and stave off decline assume that conditions can unexpectedly change, violently and fast. They obsessively ask, “What if? What if? What if?” By preparing ahead of time, building reserves, preserving a margin of safety, bounding risk, and honing their discipline in good times and bad, they handle disruptions from a position of strength and flexibility. Productive paranoia helps inoculate organizations from falling into the 5 Stages of Decline that can stop the flywheel and destroy an organization. Those stages are (1) Hubris Born of Success, (2) Undisciplined Pursuit of More, (3) Denial of Risk and Peril, (4) Grasping for Salvation, and (5) Capitulation to Irrelevance or Death.

Consider whether the assumptions you are making about your business might need a fresh look. Review the warning signs of fading advantage.

I was also told that a brand-new CEO shouldn’t be trying to make huge acquisitions. I was “crazy,” as one of our investment bankers put it, because the numbers would never work out and this was an impossible “sale” to the street.

The banker had a point. It’s true that on paper the deal didn’t make obvious sense. But I felt certain that this level of ingenuity was worth more than any of us understood or could calculate at the time. It’s perhaps not the most responsible advice in a book like this to say that leaders should just go out there and trust their gut, because it might be interpreted as endorsing impulsivity over thoughtfulness, gambling rather than careful study. As with everything, the key is awareness, taking it all in and weighing every factor—your own motivations, what the people you trust are saying, what careful study and analysis tell you, and then what analysis can’t tell you. You carefully consider all of these factors, understanding that no two circumstances are alike, and then, if you’re in charge, it still ultimately comes down to instinct. Is this right or isn’t it? Nothing is a sure thing, but you need at the very least to be willing to take big risks. You can’t have big wins without them.

If you continue down the road you are on you will be counting on motivation to move the company forward. I cannot honestly recommend that as a way forward because business competition is not just a battle of strength and wills; it is also a competition over insights and competencies. My judgment is that motivation, by itself, will not give this company enough of an edge to achieve your goals.

Some Guideposts

It is hard to show your skill as a sailor when there is no wind. Similarly, it is in moments of industry transition that skills at strategy are most valuable. During the relatively stable periods between episodic transitions, it is difficult for followers to catch the leader, just as it is difficult for one of the two or three leaders to pull far ahead of the others. But in moments of

transition, the old pecking order of competitors may be upset and a new order becomes possible.

There is no simple theory or framework for analyzing waves of change…

Fortunately, a leader does not need to get it totally right—the organization’s strategy merely has to be more right than those of its rivals. If you can peer into the fog of change and see 10 percent more clearly than others see, then you may gain an edge…

… I use a number of mental guideposts. Each guidepost is an observation or way of thinking that seems to warrant attention.

The first guidepost demarks an industry transition induced by escalating fixed costs. The second calls out a transition created by deregulation. The third highlights predictable biases in forecasting. A fourth marks the need to properly assess incumbent response to change. And the fifth guidepost is the concept of an attractor state.

Guidepost 1 - Rising Fixed Costs

The simplest form of transition is triggered by substantial increases in fixed costs, especially product development costs. This increase may force the industry to consolidate because only the largest competitors can cover these fixed charges…

Guidepost 2 - Deregulation

Many major transitions are triggered by major changes in government policy, especially deregulation…

… the newly deregulated players chased what used to be the more profitable segments long after the differential vanished. This happened because of the inertia in corporate routines and mental maps of the terrain, and because of poor cost data. In fact, highly regulated companies do not know their own costs—they will have developed complex systems to justify their costs and prices, systems that hide their real costs even from themselves…

Guidepost 3 - Predictable Biases

In seeing what is happening during a change it is helpful to understand that you will be surrounded by predictable biases in forecasting. For instance, people rarely predict that a business or economic trend will peak and then decline…

A third common bias is that, in a time of transition, the standard advice offered by consultants and other analysts will be to adopt the strategies of those competitors that are currently the largest, the most profitable, or showing the largest rates of stock price appreciation. Or, more simply, they predict that the future winners will be, or will look like, the current apparent winners…

Guidepost 4 - Incumbent Response

This guidepost points to the importance of understanding the structure of incumbent responses to a wave of change. In general, we expect incumbent firms to resist a transition that threatens to undermine the complex skills and valuable positions they have accumulated over time…

Guidepost 5 - Attractor States

In thinking about change I have found it very helpful to use the concept of an attractor state. An industry attractor state describes how the industry “should” work in the light of technological forces and the structure of demand. By saying “should,” I mean to emphasize an evolution in the direction of efficiency—meeting the needs and demands of buyers as efficiently as possible. Having a clear point of view about an industry’s attractor state helps one ride the wave of change with more grace…

An attractor state provides a sense of direction for the future evolution of an industry. There is no guarantee that this state will come to be, but it does represent a gravitylike pull…

The strategic challenge for the New York Times and the Chicago Tribune is not “moving online” or “more advertising,” but unbundling their activities.

In this unbundled attractor state, it is very likely that there would be a continuing market for local news, weather, and sports reported by a daily newspaper, although it would have to operate with less overhead and less pretension than the current New York Times.