Book Review: 5 Key Lessons from “How the Mighty Fall”

Book Review:  5 Key Lessons from "How the Mighty Fall"I recently finished reading “How the Mighty Fall” by bestselling author Jim Collins.

In this book Jim covers what makes companies that were once great decline and fall.

Through careful study of the companies, their decisions, and their results he identifies five stages of decline.

He also shows us that it is possible to reverse course and for those companies to go from decline to greatness again.

As the book says, “As long as we never get entirely knocked out of the game, hope always remains.

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As I went through the book I kept thinking that these stages of decline and their key lessons apply not only to companies and organizations, but also they could apply to individuals. In other words, you and me.

More importantly for the purpose of my financial coaching and of this blog, I believe these lessons can apply to our personal finances as well.

So here are the 5 stages of decline for companies that were once great, and the 5 key lessons from “How the Mighty Fall” that can be applied to our finances.

Stage 1: Hubris Born of Success

Hubris of course is another word for pride. In the book, Jim indicates that Stage 1 kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underling factors that created success in the first place.

How could we become arrogant in terms of our finances? I can think of a couple of ways.

First, we may have a great income. We either have a great steady job or maybe we are great at sales. We think we can always earn what we have always earned and even more.

Second, we spend and spend without regard to optimizing our purchases. We just think we can always catch-up with the next paycheck or the next big bonus, so it does not matter what we pay for something today.

We just simply think that we can’t fail because of what we have earned in the past.

“Pride goes before destruction, And a haughty spirit before stumbling.”
Proverbs 16:18

Stage 2: Undisciplined Pursuit of More

The pride of stage 1, leads right into Stage 2: “the Undisciplined Pursuit of More –more scale, more growth, more acclaim, more of whatever those in power see as ‘success’.

I believe the application to our money management is clear for this stage. We all battle with the disease of wanting more things.

We want the newer car model all the time, so we fall into the trap of car payments or worse car leases.

We get the raise at work and we just want to move up in house right away, stretching our budget to the maximum instead of using the extra money for saving more or paying down debt.

Speaking of debt, because we all want more and more things now, we use credit cards without control and we fall into more and more debt.

“A good name is to be more desired than great wealth, favor is better than silver and gold.”
Proverbs 22:1

Stage 3: Denial of Risk and Peril

In this stage, “leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data.

How can see this in our financial management? Well, perhaps we get into tons of credit card debt, but we are ok because we have a great FICO score and if we need to, we can always borrow more money.

It is also possible that even though we have no emergency savings, we feel ok because we have equity in our home. We could always get a home equity loan if we really needed to do it.

And what about not having the proper amount of insurance? Well, we’ll just take a chance that nothing bad is going to happen.

We can deceive ourselves into thinking everything is ok, even when we don’t have a firm financial foundation.

“A prudent man sees evil and hides himself, the naive proceed and pay the penalty.”
Proverbs 27:12

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Stage 4: Grasping for Salvation

By the time you reach stage 3, the signs of decline are clear. In stage 4, the companies respond “by lurching for a quick salvation”. In other words, they want the quick fix, the magic pill.

With our money it might look something like this. We think we if we can just consolidate all of the credit card debt into one single payment, we will be ok. So we just move the debt instead of paying it down.

We can’t afford to send the kids to college, so we take a home equity loan and put our home at risk or we further delay saving for retirement.

Of course, the ultimate quick fix these days seem to be to just give in and declare bankruptcy. Now, there may be situations where we are forced to go into bankruptcy due to medical bills, a failed business, or a large tax bill.

But bankruptcy is not a panacea to heal all of our financial problems. It is a major financial decision with long term implications. It is not a simple quick fix.

“The naive believes everything, but the sensible man considers his steps.”
Proverbs 14:15

Stage 5: Capitulation to Irrelevance or Death

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.

An interesting finding in the book for me was that “Organizations do not die from lack of earnings. They die from lack of cash.

And that’s the key lesson of this. When we really on debt, on a quick fix, a risky investment, a government program, we are simply building on quick sand instead of building on a firm foundation.

When we get to this stage, there is no more leverage, no more credit lines, and no more home equity loans. So what do we do? Is there no hope?

“Hope deferred makes the heart sick, but desire fulfilled is a tree of life.”
Proverbs 13:12

So what, is There No Hope? Hardly

There is always help and hope for your finances!

In his book Collins reminds us that some of these companies fought their way out of decline and back to greatness.

They did it by getting back to the disciplines and practices that made them great in the first place.

You too can get back on the path towards financial wellness. You too can learn the basics of personal finance management.

You can get on a budget, save for emergencies, and get out of and stay out of debt.

You can apply discipline, focus, and sacrifice to get you and your family a better financial destiny. You never, ever have to give in and capitulate.

“Failure is not so much a physical state as a state of mind; success is falling down, and getting up one more time, without end.”
Jim Collins (“How The Mighty Fall”)

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