Introduction
Jack Welch, ex-Chairman and ex-CEO of General Electric once said, “If you don’t have a competitive advantage, don’t compete”. While this quote makes sense, organizations can always strive for opportunities to build new competitive advantage by investing passion, right strategic thinking, perseverance, and determination. However, while gaining competitive advantage is one thing, sustaining the advantage is quite another. While it is a challenge for firms to identify core competence, and focus on it consistently to build competitive advantage, a bigger issue is – How do you know when an organization that looks successful might actually have started to fail?
When Jim Collins, author of the book “How the mighty fall”, was first asked this question by a business executive he was astounded, not being able to answer it. When he was later confronted with his ever so happy and healthy wife being diagnosed with cancer, the question became more pronounced in his mind, encouraging him to outline the five stages of decline that firms typically go through. As one reads the book, it becomes evident that the fundamentals of sustaining success are similar for both individuals and organizations. It is only that, when an individual fails it’s a family misfortune, but when a large corporation fails it’s a national catastrophe.
In the book, Jim Collins provides many exemplary examples to describe each stage of decline. A fine example of a company that passed through the five stages of decline to ultimately collapse was the one popularly known as “the king of good times” – Kingfisher Airlines. We will refer to that example as we explore the five stages of decline below.
Stage 1 – Hubris born of success
Organizations tend to believe that their success will continue eternally, failing to recognize the opportunities and threats in the industry and their former strengths which have deteriorated through neglect and the passage of time. As a result, they make way for competitors to gain a competitive advantage.
Kingfisher Airlines, once known for its best in class service, on board meals, and staff courtesy fell from grace due to excessive arrogance. UB Group, the owner of Kingfisher Airlines, had gained considerable success in the brewing industry. Drunk on its past victories, it decided to plunge into the aviation industry, a world away from its core business, and apply the exact same strategy. Kingfisher Airlines was positioned as a premium business class airline without understanding the needs of the domestic market.
The UB Group failed to ask the following two important questions that Jim Collins suggests organizations should ask themselves before venturing into a new industry:
- Does your primary flywheel face inevitable demise within the next 5 to 10 years due to forces outside your control? Breweries were not set to decline anytime soon, and UB Group still had the chance to be industry leader.
- Have you lost passion for your primary flywheel? UB Group may not have lost its passion for brewing, but it was compelled to divert most of its energies towards its secondary flywheel, airlines, which diluted management focus.
Stage 2 – Undisciplined pursuit of more
This occurs where companies undertake new ventures in pursuit of more revenue and growth, losing focus on the core business. While one might point out that there have been successful businesses that have entered into a wide range of industries, venturing into unrelated fields such as aviation, fertilizer, engineering, and Formula1 did not work for UB Group. This was mainly because they failed to realize that they could not become the market leader in these other arenas. Leadership was also at fault with the head of the group, Vijay Mallya, exhibiting undisciplined extravagance in the low-margin aviation industry leading him to borrow heavily from the banks. Mallya gave away merchandise to passengers, and continued to release the famous Kingfisher calendar featuring some of the top models in the world. At the same time, he failed to provide salaries to his own employees completely ruining the morale of the company. He expected the flamboyant picture of the airline to turn things around, but his strategy went haywire with growing losses and colossal debts.
There is an ancient saying in Sanskrit, “at the time of destruction, the mind goes berserk”. Kingfisher’s acquisition in 2007 of Air Deccan, a lowcost airline, fits the quote perfectly. Kingfisher became saddled with 88 aircraft in a declining market, just when a global slowdown was beginning to hurt the aviation industry, and this pushed Kingfisher Airlines into the third stage of decline.
Stage 3 – Denial of risk and peril
Companies ignore the warning bells that have been ringing during Stage 1 and 2. They continue to believe that things will get better without taking appropriate action. Like most CEOs, Vijay Mallya continued to blame external factors such as the declining market for aviation, inflation, the recent acquisition of Air Deccan, and employee strikes. While all of this was true, flaws within the company were ignored. Prior decisions that caused the company to post losses were not re-examined. The employees continued to strike, eroding the team dynamics within, and damaging the reputation of the airline.
Stage 4 – Grasping for salvation
Companies accept that they are in deep trouble and look for a new CEO who will launch a new vision, introducing a silver bullet solution. Companies undertake acquisitions in pursuit of synergies in order to rescue the situation. Mallya brought in a new CEO in October 2010, Sanjay Aggarwal, who had managed to turn things around for SpiceJet, another aviation company. Although the Air Deccan acquisition had happened a few months before he came in, Aggarwal took no significant action to further cash in on the acquisition. However, he revamped policies and took measures to reduce losses. Kingfisher Airlines dropped prices, unprofitable flights, and even overseas operations. Aggarwal also struck a multi-billion dollar deal between UB spirits and UK based Diageo that was used to pay down Kingfisher’s debt. These steps were only a temporary relief though as the airline had already lost momentum. In February 2014, Aggarwal stepped down as CEO of Kingfisher Airlines, which was a blow to the company and its stakeholders, pushing the organization towards the abyss.
Stage 5 – Capitulation to irrelevance or death
By the time an organization passes from Stage 1 to Stage 4, the management can be exhausted, losing any further hope.
Kingfisher Airlines could not turn the situation around. It continued to be in debt, and its revival strategy failed. Stakeholders, staff, and banks continued to demand payment. The owner, Vijay Mallya, did not pay heed. He was named by the court as a wilful defaulter who did not repay stakeholders even though he had his personal wealth that he could have used to repay loans and salaries. The other subsidiaries of UB Group continue to run today, except for the king of good times which never took off.
Key takeaways
- UB Group should have carefully analysed the aviation market before jumping in, and understood its capabilities to gain and sustain competitive advantage.
- UB Group failed to carry out a satisfactory value chain analysis.
- Arrogance, ignorance, and lack of strong leadership from senior managers outweighed open mindedness to a change of tactics, perseverance, grit, and right strategic thinking.
Conclusion
Jim Collins argues that it is possible to build a successful organization that sustains competitive advantage for multiple decades, even in the face of chaos, disruption, uncertainty, and violent change. In fact, for a strong company, research shows that severe turbulence in the market can help it pull further ahead. However, if the organization has succumbed to hubris, overreaching, denial, and grasping for salvation, its decline can instead be swift and violent. It is clear that the circumstances alone do not determine the outcome.
References
(n.d.). Retrieved from 1) http://www.firstpost.com/business/kingfisher-crisis-how-bloodied-are-ceo-sanjay-aggarwals-hands-482936.html
Kwan, K. (n.d.). How the Mighty Fall Summary. Retrieved from Deepimpactonline: 1) http://www.deepimpactonline.com/download/How%20The%20Mighty%20Fall%20Book%20Summary.pdf
wiki/Kingfisher_Airlines. (n.d.). Retrieved from Wikipedia: https://en.wikipedia.org/wiki/Kingfisher_Airlines
Sandhya Vasudeva Rao is a Consultant/Engagement Manager at CloudGo, Singapore. She has a Masters degree in Business Analytics from Singapore Management University. She has worked in elite companies such as DBS Bank, Capgemini, and Hewlett Packard Enterprise before and during Masters in Singapore that she calls her second home, first being India. In her free time, she loves to read books, write posts on varied topics including Consulting, Marketing, Analytics, Leadership, Innovation, and Travel. She is also an Indian music vocalist, and enjoys humour like nothing else! You can find her personal blog here – http://www.sandmem.com/
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