Success Is Its Own Worst EnemyWhen entrepreneurs are successful at one thing, they inevitably assume they can replicate that success again and again … until they can't.

If you're not familiar with thePeter Principle, you must be new to the working world. It's a brilliant management concept with far-reaching implications, not to mention a hilariously clever bestselling book by the same name.

The idea, developed by Laurence J. Peter back in the hippie era, is that everyone in an organizational hierarchy inevitably reaches their level of incompetence. The reason is simple. People who are good at their job keep getting promoted until they reach a level that exceeds their capability. And that's where they remain.

Evidence of the Peter Principle is everywhere. We've all come across incompetent managers and wondered how the heck they ended up in positions of authority. It's logical to assume they were once good at something, and indeed, they were. So they were promoted until they were in way over their heads.

As for all the dysfunctional executives that have no business running anything, let alone a corporation or an organization with so much at stake, they got to the top exactly the same way. That also explains why all those incompetent managers never get fired. Their bosses are clueless, just like they are.

While Peter's eponymous principle presents a fascinating theory of why all hierarchies are destined for disaster, it also applies in the entrepreneurial world, where organizations are quite a bit flatter.

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When entrepreneurs are successful at one thing, they inevitably assume they can replicate that success again and again … until they can't. That's how entrepreneurs so often manage to fool themselves – and their investors, too – into believing they have some sort of recipe for success when, in fact, they don't.

For example, Urban Outfitters co-founder and CEO Richard Hayne recently announced his apparel company had acquired the Vetri pizza restaurant chain. No, you didn't read that wrong. Jeans, t-shirts, hoodies … pizza. I'm sure that makes perfect sense in some bizzaro universe, but not in this one.

Granted, Steve Jobs scored with Apple and Pixar, Elon Musk is tackling space travel, and Richard Branson's Virgin Group is in dozens of businesses. But they're rare exceptions, not the rule. For every true serial entrepreneur, there are dozens if not hundreds who attempt to diversify way beyond their expertise into completely unrelated businesses and ultimately flop.

I wouldn't be the least bit surprised if that same mechanism is behindGoogle's restructuring as a holding company called Alphabet, with co-founder Larry Page at the helm. That would certainly explain the search giant's crazy diversification into everything from robotics and neural networks to hot-air balloons and car insurance.

The question is, what makes Page think that anti-aging research is a natural extension of software? I'm thinking it's the Peter Principle. I guess time will tell.

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That's also the only logical explanation for how Enron CEO Jeff Skilling and Adelphia chief John Rigas defrauded shareholders out of billions and cost thousands of employees their jobs and pensions. They doctored the books a little and, when that worked, they did it some more. And they kept doing it until they got caught.

How else do you explain how Bernie Ebbers – a former milkman, gym teacher, and motel owner – somehow managed to turn a regional long-distance service provider into a telecom giant, WorldCom? He just kept acquiring companies until federal regulators put a stop to it and the house of cards came tumbling down.

In every case, things worked until they didn't. That's the Peter Principle.

So how can entrepreneurs avoid what might appear to be an inevitable fate? By remembering three things:

1. Meritocracy is great, but don't promote people to management level positions based solely on their functional expertise. A good engineer won't necessarily make a good engineering manager. Interview people you're considering for promotion as if you were interviewing them from outside the company.

2. Reach for the stars but, when it comes to expanding and diversifying, don't forget to keep your feet planted firmly on the ground. Just because you have a successful apparel business doesn't mean you'll make a good restaurateur. If there's no synergy with your existing business and you don't have the DNA for it, think twice.

3. Have a little humility. Remember that you're just a flesh-and-blood person like everyone else. The rules do apply to you. And there's way more you don't know than you do know. Don't live in denial of your own limitations. And remember that success is its own worst enemy.

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