INTERVIEW:Jim Collins's new book 'How the Mighty Fall' is the flip side to ' Good to Great' which studied the phenomenal rise of 11 companies to greatness

SO, YOU'RE Jim Collins, the business publishing phenomena of the noughties. Your previous books, Built to Last and Good to Great, have sold many millions, the latter still shifting over 100,000 units a year in hardback, eight years after publication. Your fame has made you the go-to guy for chat shows and conferences while Businessweekand other influential magazines put you on their cover. You receive pleas for help from politicians, military leaders and Fortune 500chief executives all desperate to know the secret of going from good to great.

What could possibly go wrong?

Certainly, from the viewpoint of a sleek London hotel - Harrods to one side, Hyde Park to the other - it seems an odd question to ask. On the face of it, life is very good indeed. Collins, a very fit and healthy-looking 51, over from his home in Boulder, Colorado, doing some publicity for his new book, How The Mighty Fall.He's due in Manchester this afternoon to do a talk to the Chartered Institute of Personnel and Development (CIPD), before a few days shopping and touring museums and art galleries back in London with his wife Joanne. "I was just in the gym," he says, his hand outstretched as he climbs the stairs to the hotel lobby, dressed in black suit and matching T-shirt.

But, as he demonstrates in his new book, appearances can often deceive; the clouds may not match his outfit, but they are there.

Good to Greatlooked at 11 companies who, in the opinion of Collins and his team of researchers, had transformed themselves, with greatness defined as a sustained period over which the stock dramatically outperformed the market and its competitors. But the last few years have not been kind to those on the list, and a different sort of headline has been noticeable: Good to Greatto . . . Gone.

Two high-profile casualties are Fannie Mae, the American finance house that went into public ownership, and Circuit City, an electrical retailer, that went bankrupt in January this year.

Analysts have pointed out that had you bought shares in Fannie Mae, when Good to Greatwas published, you would be 80 per cent down on your initial stake. Likewise, Circuit City, was 80 per cent down as the global economic crisis began in September 2008, before the end came a few months later.

Writing at the time, Prof Steven Levitt of Freakonomicsfame, noted that overall, "a portfolio of the Good to Greatcompanies looks like it would have underperformed the S&P 500".

Sitting in the dark corner of the hotel bar, Collins sees the question coming so early that he begins reaching into his jacket pocket for a pen and pad before I've finished the sentence. No he's not worried that his reputation is linked to the performance of the 11 companies after the book came out. In fact, he says, the issue of what they did afterwards is irrelevant: "I don't even generally follow the companies, for a very simple reason. There is a mistake I made, or rather it was something I didn't articulate well," he says. "In Good to Greatwe studied companies that had 15 years of average performance and 15 years of superior performance, in contrast to similar companies in similar circumstances, but which didn't have that period of success." He's drawing me a diagram now, with two lines diverging, one horizontal, the other rising to "greatness".

He points to the X axis: "What we were studying is a company era," he says, making a sporting analogy. "It's like saying the Yankees were a great team at a given time in history. If you won 10 Superbowls then you've won 10 Superbowls. If you win the Tour de France seven times you've won it seven times, you can't take that out of the record books. What we did was try to understand how it happened, which is a very different thing than saying that you're studying a company that is going to continue to have the same level of performance forever. We're not in the prediction game."

How the Mighty Fallis the flip side of Good to Great, using the same research methodology to this time pose the questions: Why do some great companies fall, and how far can a company fall and still come back?

Collins claims his team had a substantial amount of data collected from prior research studies, consisting of more than 6,000 years of combined corporate history. From this data set, they identified a set of once-great companies that fell and constructed a set of "success contrasts" that had risen in the same industries during the era when the primary study companies declined. This allows them to focus the reader's attention on what happened leading up to the point at which decline became visible, and what the company did once it began to fall.

According to the book's premise there are five distinct stages of decline. Stage One:Hubris born of success. This suggests that great enterprises can become insulated by success; accumulated momentum can carry an enterprise forward for a while, even if its leaders make poor decisions or lose discipline. Stage one kicks in when people become arrogant, regarding success virtually as an entitlement, and they lose sight of the true underlying factors that created success in the first place.

Stage Two:The Undisciplined Pursuit of More. Companies stray from the disciplined creativity that led them to greatness in the first place, making undisciplined leaps into areas where they cannot be great or growing faster than they can achieve with excellence - or both. When an organisation grows beyond its ability to fill its key seats with the right people, it has set itself up for a fall.

Stage Three:Denial of risk and peril. Internal warning signs begin to mount, yet external results remain strong enough to "explain away" disturbing data or to suggest that the difficulties are "temporary" or "cyclic" or "not that bad", and "nothing is fundamentally wrong". Leaders discount negative data, amplify positive data, and put a positive spin on ambiguous data. Those in power start to blame external factors for setbacks rather than accept responsibility.

Stage Four:Grasping for salvation. The cumulative peril and/or risks which had gone bad by Stage Three assert themselves, throwing the enterprise into a sharp decline visible to all. The critical question is: how does its leadership respond? Common "saviours" include a charismatic visionary leader, a bold but untested strategy, a radical transformation, a dramatic cultural revolution, a hoped-for blockbuster product, a "game-changing" acquisition, or any number of other silver-bullet solutions.

Stage Five:Capitulation to irrelevance or death. The longer a company remains in Stage Four, repeatedly grasping for silver bullets, the more likely it will spiral downward. 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.

Collins's five stages of decline contains two controversial themes. The first is that it is due in the most part to internal factors rather than environmental ones. And secondly, the decline can often be invisible to a very late point in the game, even to those inside the business.

"This book is more useful for people on the inside," he says. "It's really hard to see some of the key markers that we use from the outside, if you're an analyst or the media. The reality is that often when the media is writing nice things about you, people within the company take their eye off what's really going on. They get flattered into believing all is well. That's a dangerous moment."

The failing companies often had Cassandra figures, he says, who were able to foretell the future but doomed to know that nobody will listen. "How do you separate the true Cassandra with those who are just gloomy pessimists?"

Only three cases of the 11 companies studied in How the Mighty Fallwere guilty of failing to innovate during the early stages of decline, he says, offering examples from the book. Motorola increased its number of patents from 613 to 1,016 from 1991 to 1995. Pharmaceutical firm Merck patented 1,933 new compounds from 1996 to 2002, the best performance in the industry, 400 ahead of the second most innovative company. "In 1999, HP launched its 'Invent' campaign and nearly doubled patent applications in two years, just as it spiralled in to Stage Four decline."

Knowing that your failing is one thing, getting out of it quite another. According to Collins, Xerox was "deep in Stage Four" when Anne Mulcahy was given the job of chief executive. The turnaround in the company's fortunes he says was remarkable.

"Job one when you're in trouble is to go back to the basics and do those well," he says. "The basis of survival was to strip away the stuff that is not working, make it a smaller flywheel, there is enough that is working to have the basis of good business to build upon." Critically, you also need time, seven years at least, for a chief executive to make an impression.

The enormous global success of Good to Greatbrings expectations of similar sales figures for the new book. But, says Collins, do people want to read about failure in the same numbers they lap up success stories?

"We all struggle with darkness at times, we have setbacks, we make mistakes or have staggering defeats. Life is not an unblemished ascent. I found it inspiring to find out how far you can fall, to know that you can really mess up and still recover and to discover that so much of what happens to us is within our control. You can go all the way to Stage Four, late Stage Four at that, and it's not over."