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Last week, we discussed the commoditization/decommoditization loop. In doing so, we nodded to the death spiral, a situation in which a company attempts to rebound through cost cutting measures.

This week we’ll dive more deeply into the death spiral, how to recognize it, and how to escape it.

Here’s what you’ll find:

Success is a dangerous thing.

It breeds confidence. And confidence, over time, hardens into certainty.

Companies that once thrived on experimentation, risk-taking, and innovation become fixated on efficiency, predictability, and control.

They shift from offense to defense, protecting what they have instead of pursuing what’s next.

This is how the death spiral begins.

At first, the shift is subtle. It follows reasonable strategic decision-making. Which makes it dangerously easy to get caught and sucked in.

First, a company doubles down on its most profitable customers, refining existing products rather than investing in unproven opportunities. Execs seek to drive up margins, so they cuts costs and outsources non-core functions.

Then, as revenue growth slows, investors demand answers.

Leadership responds by restructuring, trimming underperforming divisions, and setting ambitious—but often unrealistic—growth targets. On the surface, these decisions look like prudent management.

But over time, they form a pattern that slowly suffocates the company’s ability to innovate, adapt, and compete. By the time leadership realizes what’s happening, it’s often too late.

Public companies don’t just compete in their industries. They also compete in the stock market where valuations are based on both current performance and expected future growth. This is where the innovation premium comes into play.

The market rewards companies that are perceived as future growth engines. Investors assign these companies higher valuations based on the assumption that they will continue to expand into new markets, launch breakthrough products, and maintain a dominant position.

But when a company stops demonstrating this potential, their innovation premium evaporates.

Stock prices decline.
Investors demand immediate action.
Boards grow restless.

Executives are pressured to restore confidence, so they respond with cost-cutting, layoffs, and restructuring. These moves reinforce the very stagnation that caused the problem in the first place.

Once executives decide they need to “restore confidence” quickly, they often take actions that seem rational in the short term but compound the problem over time:

Cut R&D and innovation budgets to protect profitability.
This, in turn, means fewer new products in the pipeline. This makes it harder to generate future growth, reinforcing investor skepticism.

Focus only on high-margin customers.
By eliminating lower-margin offerings, execs are effectively ceding emerging markets to disruptive competitors who then grow stronger.

Push for aggressive efficiency gains.
Layoffs seem attractive and outsourcing becomes commonplace, both of which erode internal capabilities and create operational bottlenecks. In turn, fearful employees become risk-averse. Innovation stalls.

Divest “non-core” business units.
In an attempt to appear more focused, exploratory and innovation-focused business units are cut. In spite of the fact that these divisions control the company’s future growth potential, once they’re gone, the company’s ability to react to changing market demands is eliminated.

Implement cost controls.
These cost limitations further restrict experimentation, making it harder to test new ideas. Without a pipeline of new opportunities, the company becomes stagnant, further confirming investor fears.

Set aggressive revenue targets.
In an effort to appease investors, execs declare unrealistic revenue goals which pressures sales teams to chase large enterprise deals while ignoring disruptive shifts in customer behavior.

At each step, the company becomes less capable of adapting to change, even as external pressures continue to mount. Instead of breaking free from the cycle, these moves deepen the decline.

Once a company is in this cycle, it’s incredibly difficult to break free unless leadership recognizes that defensive maneuvers won’t restore investor confidence.

Only bold, forward-looking strategies will.

Not every company in decline is doomed, but there are clear warning signs that an organization is caught in the cycle:

When these factors appear together, the company isn’t just struggling—it’s in danger.

The first step to recovery is recognizing that optimization is not a growth strategy.

Many companies assume that if they can just fine-tune operations, they’ll get back on track. But if the underlying issue is a failure to invest in new opportunities, no amount of cost-cutting or restructuring will fix it.

Leaders must resist their gut instinct to chase growth through acquisitions or large-scale expansions. Companies in the death spiral often try to buy their way out of stagnation, acquiring smaller players in hopes of reigniting momentum.

But these acquisitions rarely address the root problem.

The better path is to focus on emerging markets, underserved customers, and new business models. Payoffs won’t be immediate, but they provide a path to growth. The only way forward is to shift from defending the past to creating the future.

You can’t defend your way out of the death spiral. The only path forward is creating a culture where calculated risks are encouraged, not punished. Execs who find themselves in the death spiral must make room for disruptive bets, even if they cannibalize existing business.

How? By separating innovation efforts from the core business, so they aren’t suffocated by short-term performance demands.

And, perhaps most importantly, companies need to rethink how they measure success.

Traditional financial metrics can be misleading. If a company is prioritizing ROA (Return on Assets) over reinvestment, it’s likely starving its own future. Leaders must be willing to shift their focus to long-term indicators: customer adoption of new products, early-stage revenue growth, and the development of entirely new market categories.

The corporate death spiral is not inevitable.

Companies that recognize the warning signs and take decisive action can regain their footing. But doing so requires a willingness to make bold, often unpopular moves, especially in the face of investor skepticism.

The market rewards companies that signal they are still on a growth trajectory. That signal can’t be manufactured through financial engineering. It has to come from real, tangible investments in the future—investments that may take years to pay off but are the only way to escape the downward cycle.

The companies that survive are the ones willing to disrupt themselves before someone else does.

By the early 1990s, IBM—once the undisputed leader in computing—was in crisis.

The rise of personal computers had eroded its dominance in mainframes, while more agile competitors capitalized on emerging software and IT services markets. IBM had become a bloated, slow-moving giant, weighed down by an insular corporate culture and an overreliance on proprietary hardware. The company faced record losses of nearly $8 billion in 1993, and many analysts predicted its eventual breakup.

Instead, IBM executed one of the most remarkable corporate turnarounds in history.

The transformation began with a leadership overhaul. In 1993, IBM appointed Lou Gerstner as CEO—the first outsider to lead the company. Unlike his predecessors, who had deep technical expertise, Gerstner came from a consulting and consumer goods background, bringing a fresh, customer-centric perspective.

His first major move was shifting IBM’s focus from selling hardware to providing integrated solutions and IT services. Rather than trying to compete in the increasingly commoditized personal computer market, IBM leveraged its global reach and expertise to help businesses manage complex IT infrastructures.

This strategic pivot laid the foundation for IBM’s long-term success.

Gerstner also tackled IBM’s rigid internal culture. Historically, the company had been known for its bureaucratic, slow decision-making processes, which hindered innovation. He pushed for a cultural reset, encouraging greater collaboration across departments and emphasizing the importance of listening to customer needs.

By cutting costs, restructuring operations, and investing heavily in IT services and consulting, IBM rebounded. Within a few years, the company had returned to profitability, and by the early 2000s, its services and software divisions became its primary revenue drivers.

The IBM of today, focused on AI, cloud computing, and enterprise solutions, is a direct result of the decisions made during this critical period. IBM’s ability to recognize its decline, make difficult strategic shifts, and commit to a long-term transformation demonstrates how companies can break free from the death spiral and re-emerge as industry leaders.

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