Five Stages of Rapid Decline

Jim Collins wrote the popular book “Good to Great” at the peak of the Dot Com boom.  His latest book is titled “How the mighty Fall” and features the five stages of rapid decline:

Stage 1: Hubris Born of Success

Stage 2: Undisciplined Pursuit of More

Stage 3: Denial of Risk and Peril

Stage 4: Grasping for Salvation

Stage 5: Capitulation to Irrelevance or Death

Strategic failure of a firm – which could come from a hubris fueled rapid decline or simply a shift of your customers when you are not paying enough attention is really a risk that for most firms dwarfs the risks that are measurable and that are managed through the techniques of quantitative risk management.

According to a study conducted by Royal Dutch Shell the average life expectancy of Fortune 500 firms is 40 to 50 years.  That implies a 2% to 2.5% average annual failure rate.

Firms that are holding capital for measurable risks at a 1/200 level are pretending to protect their firm at a 0.5% annual failure rate.

But are quantitative risk management programs focusing too much resources on the things that can be measured and creating the Hubris, the false sense of invulnerability that is number one on the list above.

Certainly at some banks and some insurers that was the case.

Once you are convinced that you “know how to control risk” you are likely to go for it – the Undisciplined pursuit of More of the second item.  Even if quantitative risk management is doing most of what is needed, successful risk management can and will lead to Hubris and undisciplined growth.

Of course, sooner or later that lack of discipline will result in a misstep.  And here is where risk management needs to be ready to make it real.  The most common reaction to a problem in this situation is to assume that (a) this is not real, (b) this could not be happening to us – we are too good for this and when the bad news persists and grows in size and scope (c) this will turn around soon, it is only a temporary blip.  Those attitudes result in waiting too long to start doing anything.  That is where risk management must be ready to step in again with realisim and good plans for what to do next.

Unless risk management is caught up in the Hubris and Denial.

So try to make your move, risk managers, before it is to volunteer as a pall bearer.

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One Comment on “Five Stages of Rapid Decline”

  1. riskczar Says:

    I think of the 100% of organizations without any risk management processes are hoping they won’t be the failing 2.5% this year, which from their perspecitve are pretty good odds to justify not investing in risk management.

    Too bad for us.


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