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Escaping Free Fall: Refounding the Company
Unlike stall-out, free fall represents an existential crisis demanding immediate, dramatic response. Reversing free fall requires leveraging the full power of the founder's mentality to refound the company through five essential steps and one wild card option.
The first step is building a refounding team. When examining fifty companies that successfully reversed free fall, 43 cases involved massive leadership changes starting with the CEO. At Schwab, 70% of top management was replaced, and in eight cases, founders or founding families returned to lead the turnaround. This leadership overhaul serves multiple purposes: injecting new energy into a stressed organization, bringing in people focused on building the future rather than defending the past, adding new skills as strategy evolves, promoting overlooked "franchise players" from the front lines, and replacing those who created the failing strategy.
The second step is focusing on the "core of the core." Successful transformations require concentrating energy and resources on what truly matters. LEGO exemplifies this approach-after expanding into theme parks, television, watches, retail stores, and video games, the company's profit margins plummeted from 15% in 1993 to negative 21% in 2003. When Jrgen Vig Knudstorp became CEO in 2004, he stripped LEGO back to its brick-system core, selling theme parks, shutting down adjacencies, and even reducing unique brick elements from 14,000 to about 7,000. By focusing on its core, adding technology to bricks, engaging superfans, and only pursuing tightly-linked adjacencies, LEGO achieved a remarkable turnaround with 400% revenue growth and 34% operating margins.
The third step is redefining the insurgency. Crown Castle illustrates this perfectly. Founded in 1994 by Ted Miller to build and lease cellular towers, the company initially thrived through aggressive acquisition, going public in 1998 at $13 per share and reaching $42 by 2000. But investors grew concerned about debt levels and negative cash flow, sending the stock crashing to $1. When John Kelly became CEO in 2001, he redefined Crown Castle's insurgency-not as a global tower acquisition business, but as a regional-focused company building dense networks with superior customer service. This redefinition drove immediate changes: divesting towers in 12 countries, creating regional organizations, developing sophisticated tower economics models, and focusing hiring on people who understood telecom customers. The results were impressive-growing from 7,000 to over 40,000 towers and increasing market value from $250 million to over $25 billion.
The fourth step is refounding the company from within. DaVita's remarkable transformation exemplifies this approach. When Kent Thiry became CEO of Total Renal Care in 1999, the company was in crisis-losing $60 million annually, under federal investigation, facing bankruptcy, and with its stock down 95%. Beyond necessary stabilizing measures, Thiry dedicated himself to fundamentally refounding the company from within. He created a "village" concept, eliminating formal titles internally and calling himself "mayor" instead of CEO. He organized town meetings and national calls with thousands of employees, had them rename the company (to DaVita, meaning "giver of life"), and codify seven core values. These values became central to the transformation-creating public metrics for each center, rewarding "DaVita moments" of heroism, screening job candidates for value alignment, and involving patients in recognizing caregivers. The results were extraordinary-from 1999 to 2010, DaVita became the best-performing stock in the S&P 500, growing from $1.3 billion to $6.2 billion in revenue.
The fifth step is investing massively in a core capability. Companies in free fall typically lack at least one crucial capability needed to adapt their business model to new conditions. Nearly all successful free fall reversals studied required developing major new capabilities. Leica provides a striking example. The legendary camera maker was slow to adopt digital technology and lost money throughout the 1990s. By 2007, revenues had fallen from 144 to 90 million euros with annual losses of 10-20 million. Austrian investor Andreas Kaufmann acquired control in 2006, believing in Leica's unique assets-its brand, image quality, heritage, and lens quality. With additional investment from Blackstone in 2011, Leica obtained crucial new capabilities in autofocus, digital cameras, and branded stores. The company has since tripled revenues and returned to profitability.
The wild card option is returning to private ownership. This approach buys time, creates currency to attract talent, and reduces external distractions. NXP (formerly Philips' semiconductor division) illustrates this strategy. After being sold to private equity firms in 2006, NXP underwent complete transformation-replacing management, simplifying the portfolio, divesting businesses, reducing layers, cutting costs by 25 percent, and developing a focused strategy. After returning to public ownership in 2010, NXP grew revenues by 30 percent, achieved over $1 billion in operating income, and initiated a merger to double its size. Its stock price increased tenfold in five years.
