Why companies decline – a new understanding

(Published on Feb 18, 2011. Last updated on Dec 14, 2017)

A well-known problem in business life is that companies tend to lose their initial vitality and creativity after a period of growth and stability, ending in a decline of the company which may defy attempts to save it. So far, the reason for this phenomenon has been considered more or less “mysterious” and there has not been any really effective remedy.

I have found reasons to believe that a so far overlooked mechanism may be the root cause of the problem in perhaps a majority of cases, although of course, other factors may contribute. This issue can be solved when the cause is as proposed (which I believe is mostly the case) and the decline can be prevented.

This understanding is based mainly on:

  • My experiences as an Occupational Health consultant, which included working for a multinational company
  • Experiences from 7 years as an adviser and appeal court expert witness in hundreds of occupational health cases of a major association of labor unions (often I got an insight into the workings of the management when I investigated the court case.)
  • Experiences of two top-level business consultants (friends of mine) who have been dealing with reanimation attempts of failing companies.
  • My experiences since over 30 years from dealing with stress-related disorders as well as from research on chronic stress and its effects.

Three phases of a company life cycle

Corporate life cycle

[Diagram copied from Bersin&Associates with permission]

This is the “classical” pattern based on the experience of many companies.

  1. In the upstart, the company is in a creative, entrepreneurial phase where there is a significant risk of failure.
  2. Thereafter comes the maturity phase where it has established itself on the market and functions in a stable and adequate way when it comes to satisfying the needs of the market. The company has turned into a safe workplace for the employees.
  3. This is sooner or later followed by a decline phase ending in company death unless radical measures are taken. Factors that often has contributed to the decline are the loss of creativity, flexibility, and alertness to the market trends, resulting in too late or inadequate adaption to changing market conditions requiring creative renewal or change of the product range. Some consultants dealing with this problem have noted that the declining company has lost its creative freshness and has turned bureaucratic.

To prevent decline, managements have tried moving top managers to different positions, employing new company leaders, dividing the company into smaller, independent units, retraining the managers, using manager coaching etc. Mostly these measures had had only partial if any, success.  The reason is that they have not addressed what I think is the root cause in most cases.

The overlooked difference

On the basis of experiences and observations as declared above, I am proposing that a decisive factor leading to decline is a change in the psychological makeup of people seeking employment as managers in the company in the different phases.

Because a company in the entrepreneurial phase is a more insecure place, they tend to attract emotionally secure people because these are less bothered by the risk of company failure.

In the maturity phase, however, more insecure people are attracted to the same company because it seems to be a safe place. Such people are more stress-prone.  For this reason, a gradual increase may occur of managers with stress-related suboptimal brain functioning (please note that even moderate, often unnoticeable, stress can affect the brain).

This may not sound very dramatic but it can lead to a gradually increasing and ultimately destructive decline. I will explain this in detail below.

Entrepreneurial phase

In the entrepreneurial phase, people who like challenges, daring to take the risk of losing their job due to project failure are most likely to thrive in the management. Such people tend to be significantly more creative, secure, confident than the average person. They tend to have a low anxiety level, caring more about stimulating work conditions than money and a safe job. These traits are characteristic of Balanced-Emphatic-Behavior (BEB) which is associated with low stress-proneness. For a full understanding of this article, I recommend you to read about BEB here if you have not read about it before.

Maturity phase

Not until the company reaches the maturity phase, people who prefer stable, successful companies will want to get employed.

Such people are more likely to be insecure (weak “emotional basic trust”) with proneness for conscious or suppressed anxiety. Insecurity makes people care more about status, high income, and safe employment because this reduces their anxiety.

Such people tend to be less creative, more rigid, more assertion-oriented (prestige/status-fixed), overtly or covertly aggressive and more or less dishonest. These traits are characteristic of Survival-Oriented-Behavior (SOB) which is not an inherited trait, but an acquired alteration of brain function associated with high-stress-proneness. I recommend you to read about SOB here if you have not read about it before.

For reasons explained below, BEB people are less likely to seek employment in a company that has reached the maturity phase.

The inapparent start of the decline

I am suggesting that the decline starts when the there is an increase of SOB-dominated people in the management to such an extent that the BEB-people lose influence. Such a change would not be obvious, even to those in charge of employing people, because the SOB problem is mostly concealed. Even the SOB-persons themselves are mostly unaware of it or don’t recognize their problem.

The reason why a shift may occur towards SOB-dominance can be understood from a social-psychological viewpoint:

BEB-people are by nature non-assertive, non-aggressive and thrive in a positive, friendly atmosphere that enables them to apply their creativity without unnecessary restrictions and bureaucratic formalities.

When SOB people enter the company, they do so in order to increase their incomes (thereby their security) and make a career. So they are intent on aggressively asserting themselves.

When SOB people are approaching leading positions, their nature is such that may not hesitate to use unfair and unethical methods to bypass the BEBs.

The critical conflict transforming the company

When SOB people have reached leading positions,  subordinate BEB people tend to leave the company. This occurs for different reasons.

SOB people are “bureaucracy-minded” – they want full control and thereby they tend to restrict the flow of creativity and innovation in the company. This is because SOBs want maximum security, and therefore resist change – they feel secure and fine when things are as usual. Therefore they tend to consciously or subconsciously resist innovative solutions. This creates frustration in BEB persons whose creativity makes them the main innovators in the company.

Moreover, the SOBs experience BEB persons as potential threats in the competition for higher positions because of their greater brilliance and creativity. So the BEB-persons experience that they are less appreciated if not suppressed by their new SOB-superiors.

As BEBs are not very career-minded and assertive and prefer constructive and friendly cooperation in a creative, non-bureaucratic atmosphere, they tend to leave the company when SOBs are taking over.

For the same reason, the likelihood for new BEB people to seek employment will decrease the more there is of SOB-dominance. BEB people are usually good at grasping the situation realistically and are likely to avoid seeking employment in a SOB-dominated company when sensing the rigid, anti-creative, formalistic and bureaucratic mentality.

The probability for SOB-dominance to develop in a company is considerable, because most people in modern societies are more or less in the SOB state, see footnote “Air Force experiences about SOB”.

The most harmful personality makeup

People with pronounced SOB have a personality makeup that is especially harmful to a company. I call them the “Authoritarian personality”.  They are anxiety-laden to a considerable extent. They are often unaware of their anxiety or can effectively conceal it even to skilled psychologists as well as in common psychological tests (this was the reason why the Swedish Air Force developed the “Defense Mechanism Test“, a test that effectively reveals this disturbance that makes pilots prone to make dangerous mistakes under stress).

Their anxiety and related inner insecurity create a strong urge to maximize the sense of security by being “in control” of their situation. Therefore, they aggressively fight for arriving at the very top of the organization, the position of greatest control. Often they skilfully hide these tendencies until they reach the goal.

I don’t think power corrupts, I think power reveals a corrupt mind – which becomes manifest when safely established.

I believe it is not a coincidence that many dictators are typical exponents of the Authoritarian personality disturbance, often to an extreme degree.

Their strong need to establish outer security makes them abhor unpredictability in every sense. They want maximal possible bureaucratic and secret service control and precise, inflexible planning.

They want people to conform and to obey orders without questioning them.

They love people of the same kind because they are conformists and therefore predictable. They want people who don’t think independently but follow orders slavishly without questioning them.

 “I don’t want men who think; I want men who know.” 

Emperor Julius Cesar. (“Knowing” in this quote means probably the unquestioned acceptance of established truths and conventions).

The Authoritarian types tend to have a strong aversion to BEB people because the creativity and self-confidence of the latter make them think independently, questioning inadequate management decisions, and behave in a non-conformist way. This creative unpredictability evokes “bad feelings about the person”, in the pronounced SOB types.  Therefore they want to get rid of BEB-people without realizing that the reason for their dislike lies in their own intolerance against unpredictability.

As BEB-people are unaggressive, they don’t take strife but tend to leave an organization or a department where an Authoritarian type is in the top.

For more about the Authoritarian personality type, see “An especially unsuitable trait” .

The destructive effects of SOB dominance

Gradually, with an increasing SOB dominance, or quite rapidly if an authoritarian SOB type acquires the CEO position, the psychological makeup of people in the management is likely to shift from BEB-dominated to SOB-dominated persons.

Thereby, the company loses its creative competence more and more. The BEBs who remain, find increasing difficulties to influence the policy and business strategy of the company and to make the leadership accept their innovative ideas.

Moreover, the SOB persons, especially the extreme SOB types, have important weaknesses that increase the risk of precipitating a decline. Their avoidance of unpredictability makes them rigidly conservative, resisting change in every sense. They tend to force their plans and strategies on to reality rather than to adapt to the situation in a realistic way. Therefore they tend to be too late in making decisions necessary for adaptation to changing market and competition conditions.

In addition, their brains work sub-optimally, with less clarity of mind and with faltering judgment, especially because of defense mechanisms that make them prone to underestimate or misinterpret threats (see Defense Mechanism Test). So they tend to make important mistakes that may further enhance the progression of the decline.

Psychopaths are the extreme variety of SOB, exhibiting many authoritarian personality traits. The absence of empathy with callous ruthless and highly egoistic behavior is especially characteristic. These tendencies are already found in SOB but in a less pronounced degree.

Addition dec 7, 2013. FBI has published a good description of the Corporate Psychopath.

Major companies run the greatest risk

These companies are most likely to be targeted by the most disturbed authoritarian SOB types. The reason is that this mentality brings about a strong prestige- and status-orientation. Also, famous companies create the greatest feeling of safety in these neurotically security-seeking types.

They are, since childhood, experts on making themselves popular being highly skillful and dishonest manipulators (because such strategies, when successful, increase the feeling of being “in control” and secure as explained in my article on the authoritarian type). So they are skillful in making a good impression.

Their strong suppressed anxiety presses them to study extremely hard so as to lay the foundation for a top position (mentally sound BEB persons are unlikely to expose themselves to such incredible hardships – if they are successful in school, it is due to their brilliance). With their impressive qualifications and charming and winning demeanor they can rapidly manipulate themselves up through the hierarchy (I have seen such cases going all the way to the top in a few years).

When they reach the top, they are likely to kick out BEB-persons very soon and consolidate SOB dominance at all levels of management and so the company runs the risk of rapid decline, which is difficult to prevent unless a wise board understands that this charming and highly qualified CEO is the cause of the trouble, although he has been able to conceal that, being an expert manipulator and a ruthless liar, convincingly blaming everybody else.

The greatest danger to the company is that, if a pronounced SOB-person or psychopath is the CEO, he may, due to defense mechanisms, or because of his strong prestige-mindedness, actively conceal or downplay serious threats and problems to the company before themselves and the board so that decisions to make necessary changes to save the company occur too late.

For more see the posting “The danger of Corporate Psychopaths”.

Illustrative cases

The Apple Computer Inc case

The developments in the Apple (McIntosh computer) company seem to be an illustrative example.  When Steve Jobs left the company in 1985, Peter Drucker said the problem, was that Jobs didn’t adequately understand the discipline of management. The board asked for more “order” and traditional administration

Comment I. Drucker, a traditional management consultant, emphasized the importance of formal administrative leadership.

After Jobs left the company, the chief executives well versed in “the discipline of management” nearly ran the company into the ground and it lost more and more of its innovative air.

Comment 2. So much for the “management discipline” style that evidently emphasized bureaucratic non-innovative leadership of SOB kind.

Jobs returned to Apple in 1997 and after that the company regained the innovative, entrepreneurial style, soaring from near bankruptcy to huge success, pouring out a number of innovations making it the market leader in different market sectors including cellphones and media players.

Comment 3. This example demonstrates the great value of upholding “entrepreneurial” leadership and the danger of letting bureaucratic administrative managers take over. That is – upholding BEB-dominance and not letting SOB-dominant people lead the company.

Jobs is described as a “transformational leader”, he focused on “transforming” others to help each other, to look out for each other, to encourage each other, to  cooperate harmoniously, and to look out for the organization as a whole (Source: Jobs leadership)

Comment 4. This indicates a BEB-kind of mentality. Caring for and supporting each other in harmonious cooperation are important BEB-indicators in addition to the great innovative talent of Jobs.

Conclusion: Steve Jobs seems to be predominantly BEB (though some indicate Jobs had some behavior that might be of the SOB kind, this does not exclude that he is predominantly BEB – few are “perfectly BEB”). As long as he led the company it flourished and expanded (except during an economic recession). It is probable that more and more of SOB people were attracted to the company when its success was established and it is probable that these were uncomfortable with the unpredictable and unconventional BEB-leadership of Jobs. It is known that such dissatisfaction in his subordinates was the key reason for his dismissal as the leader of the company (their description of the situation may have been tainted by the need to justify their actions so it is probably not quite reliable). When Jobs returned and brought back his BEB leadership style and focus on innovative solutions, Apple soared…

Addition Oct 28, 2011

Will the new CEO Tim Cook manage to maintain the success? I spotted a quote “[Tim Cook] also spoke about the importance of intuition and told students that “you can’t plan for a predictable life.”” (USA Today). This may indicate BEB dominance as well as the fact that he has been a very well organized person with a great work capacity and is known for his excellent judgment. Moreover, it is likely that Jobs recommended a like-minded CEO. This is not enough for a definite judgment but the preliminary impression is that he may be predominantly BEB, and if so, it bodes well for the future of the company.

This is not enough for a definite judgment but the preliminary impression is that he may be predominantly BEB, and if so, it bodes well for the future of the company.

The Goldman Sachs case

This is a very illustrative case revealed by the former top executive Greg Smith. When he left the company in March 2012 he wrote a column in New York times that closely revealed the destructive change that had occurred in the finance company Goldman Sachs in New York. When he started to work there, he describes a culture dominated by BEB-values but gradually it degenerated to a pronounced SOB-pattern with an accumulation of what he calls “morally bankrupt people”.

This development is not surprising. As greed (an egoistic behavior with the purpose of compensating the lacking sense of inner security by hoarding money) is a key aspect of grave SOB, it is natural that such types are strongly attracted by the possibilities of earning large salaries and huge bonuses in Wall Street companies.

Because it is so telling, I have made a separate posting out of this case, see “Why Goldman Sachs went morally bankrupt“.


The Blackberry case

Here I have only indirect data that may indicate a SOB-problem.

The mobile phone manufacturer Blackberry was one of the leading ones, only a few years ago, dominating the corporate market. But it has very rapidly plunged to a very low market share.

Analysts find that the leadership of Blackberry did not adapt in time to the changing trends in the cell phone market. It held on to its once highly successful technology for a too long time and introduced adaptive changes too late, underestimating the potential of touch-phones. Blackberry was generally very conservative, holding on to its initially greatly successful design:

“If you just look at a typical BlackBerry phone, it’s really hard to tell a new one from one from five years ago. The form factor is the same,”.. “From my perspective, they’re just not keeping up.”

Source: The Decline of Blackberrry. For more see also for example “The reason for the Blackberry decline” and “BlackBerry: Five key moments in its decline

An insider article reveals one more SOB pattern in addition to the SOB-suspicious resistance to change and renewal. It reported the presence of a need for tight control over developers:

“RIM exerted tight control over developers before it would sign off on their apps for use on BlackBerrys, stifling creativity. “Developers wanted to be embraced, not controlled,”

Source: “Inside the fall of Blackberry”

Without direct information of the behavior of managers, it is not possible to make a definite judgment. One can only conclude that the above-mentioned patterns could be the result of SOB dominance among key managers. Anyway, the catastrophic Blackberry decay illustrates how disastrous SOB-type behavioral patterns can be, even if it is not sure that the managers really were SOB in this case.


Why IBM was declining

My impression about the immediate cause of the problems, from studying some commentators, is that the former CEO, Palmetto,  too rigidly held on to the principle of making IBM a “cash machine” for the major stock owners. This brought about relentless cost-cutting far beyond healthy levels.

The indications of a SOB-pattern here were so convincing and the behavior very illustrative so I wrote a so long story about it that has been posted separately, see: Why IBM is declining. Here only a truncated version of the conclusion is included:

Conclusion

IBM suffered heavily from the regime of a former SOB-type CEO. The company culture seems to have been SOB predominant for decades.

I think, with such a pronounced SOB pattern, the only chance of effectively revitalizing the company is to profoundly transform it to a BEB-dominant one, starting with a thorough make-over of the top and middle management and inviting competent and creative BEB-type technical experts who probably left when the SOB-atmosphere became too “stuffy” unless they were fired, to save money, by the former CEO.

It seems that the new CEO, Virginia Rometty, may be predominantly BEB which bodes well for IBM. Rometty has as it seems, achieved a considerable strategic turnaround. To implement it successfully, she needs to ensure that not too many SOB people stand in the way delaying and obfuscating the implementation. Establishing a BEB-fostering culture would be very useful.

 Turning decline into successful revitalization

This section is being reformulated and will be moved to a separate post that will be published later. (Why not subscribe to the blog to get a notification)


Discussion

It may be objected that competition from new, better products, may be an important contributor to decline in some cases. No doubt this may be true for SOB companies.

However, a BEB-dominated company, with its inherent flexibility and creativity, is able to adapt rapidly to new technological changes. Samsung is a successful example, transforming rapidly to a strong smartphone competitor to Apples iPhone. Blackberry is the opposite, holding on to outdated technology far too long and thereby rapidly diving from a top position to the verge of bankruptcy.

Moreover, a creative (BEB-dominated) company is likely to be able to develop new products that keep them “ahead of the pack”, provided the company has enough financial power to develop new competitive models or to switch to other innovative products. Steve Jobs of Apple computer I think is an excellent example of this when he used the Mac and iPod experience for entering the mobile phone business in a situation when the computer section did not show a significant growth potential.

So the key issue is still mental (BEB/SOB) in the case of new technologies – the ability to flexibly adapt to, or to foresee important changes of the market situation – it is here that a creative and flexible BEB-dominated company has a great advantage over the conservative and uncreative SOB-dominated one.

I have experienced that, sometimes when I have pointed out an obvious case of this kind, the directors completely fail to understand. It reminds of the inability of a mentally ill person to realize that he is ill. I think this may be an ominous sign, that may indicate, according to my experience, a dangerous level of SOB dominance in the leaders, because this brings about mental rigidity with a resistance to changing views and understandings even before fairly obvious signals. Psychological Defense Mechanisms that are active in the SOB condition are likely to contribute to an unrealistic appraisal of the situation because they make people downplay, distort or ignore information that generates conscious or subconscious anxiety.

As BEB is possible to identify and to develop, I think promoting BEB should be a major issue in all companies not only for preventing decline but for enabling continued and growing success because it depends on creativity, flexibility, realism and dynamism – that all are BEB-traits.

Summary

A change of the traits in top management people can cause the transformation of a company from success to decline and death. I think this is the most common reason for this problem.

This transformation occurs when the creative, flexible, secure and non-assertive entrepreneurial type “BEB” personalities, that are attracted to the company management in the risky start phase, get “crowded out” in the maturity phase by people who seek employment because they want security and prestige. These people are not very creative, insecure, aggressive and assertive career-seekers with rigid minds (“SOB-types”). So with “SOB-dominance”, the company loses its “vital nerve”, the creativity, flexibility, and adaptability. The probability for this to happen is considerable, not only because SOB-s are attracted to successful companies, but because most people in modern societies are more or less in a SOB-condition.

Especially if a new CEO is employed is an authoritarian type there is a risk for rapid company death because he may tend to delay necessary measures to a too late stage due to faltering judgment because of defence mechanisms that prevent a realistic assessment of the situation.

If SOB- dominance is the cause, which I think mostly is the case, the decline of a company can most effectively be prevented through proper measures aimed at shifting from a dominance of  SOB-type managers to BEB-type manager dominance. This effect could be further enhanced by creating a BEB-supportive company culture and applying a technique for developing increased BEB in the employees. This would be the most effective way to revert the situation.

The best-documented technique for this purpose is Transcendental Meditation (TM),  and experience from companies using it confirms that it works well in practice. See for example: “Performance in the workplace“. The most renowned CEOs who have introduced TM to all employees are Ray Dalio of Bridgewater and Oprah Winfrey, both reporting very positive results.


Addition Oct 8, 2011

Political parties run the same risk

For obvious reasons precisely the same transformation from open democracy to totalitarian rule may occur in a political party, especially when its leader has achieved a ruling position in the country and it seems secure not to hide his totalitarian intentions anymore.

There are numerous examples of democratic parties whose leaders, when achieving a ruling position as a president or prime minister have developed a totalitarian rule. In western Europe, where the democratic tradition is strong, it is more likely that this does not occur. Instead, it is more likely that the party declines in an analogous way as an “over-mature” business, losing its appeal due to lack of creativity and adaptability as a result of being abandoned by BEB people.

Footnotes

Air Force experiences about SOB

In the 1970-ies I became involved in a project dealing with SOB cases in the Swedish Air Force. Their experience was that almost all flight crashes occurred because the pilot panicked. The very best psychological tests were unable to detect this weakness. So every year there was over 20 flight crashes due to “pilot errors”. A new test was developed, “Defense Mechanism Test” (ad modum Neumann). It turned out to be 100% effective. Since this test was introduced, flight crashes became very rare,  a few a decade and almost never due to pilot errors.

It is interesting to note that, out of 8-900 applicants, the Air Force has had difficulties in finding sufficient numbers to fill the annual quota of 20 non-SOB combat pilot trainees.

The Air Force tested the effect of Transcendental Meditation (TM) with DMT, and found that it had a remarkable ability to heal SOB.

For more see:

Pitfalls in detecting SOB

This note is addressed especially to anyone who might want to “tidy up” the company on the basis of my hints and without proper testing.
1. Needless to say, there may be other motives for seeking an employment in an established company than SOB-insecurity, for example, a responsible father or mother wanting to establish secure financial preconditions for their children.
2. Creative persons tend to be more sensitive, more emotional and may have some tendency for anxiety without being really SOB. They can even be BEB to some degree, even if further evolution has a stabilizing and anxiety-eliminating effect.
So eliminating any anxious or emotional person may be throwing out the baby with the bath-water, perhaps losing some of the most valuable creative elements in the company.
3. Some persons may be conservative by nature, without being SOB. This is characteristic of the “flegmatic” personality, which corresponds largely to “kapha” in the Ayurvedic classification of body/personality types, which is the most advanced and profound personality classification that I have found. A good kapha is a valuable asset to a company, in the right position, because of his stability, persistence and high performance capacity.  He is suitable for taking care of administrative departments like economy and assets administration. Because of his conservative, not very creative nature, he should not be involved in, for example, product development and marketing. It might be a good idea to involve an Ayurveda expert in the selection of employees.

Conclusion

These are just a few notes to indicate that qualified testing and good knowledge of personality types is required for optimal selection and usage of the human resources in the company when it comes to restoring it from the decline caused by SOB-dominance.
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Copyright 2011, Jaan Suurküla. This article may be quoted provided it includes a reference to the source like this:

Quoted from Suurkula, J, “Why companies decline – a new understanding” at https://drgrandville2.wordpress.com/2011/02/18/why-companies-decline-a-new-understandin/

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