Table of Contents
| Acknowledgments | |
| 1 | Why Smart Executives Fail | 1 |
| Pt. I | Great Corporate Mistakes | |
| 2 | New Business Breakdowns | 21 |
| 3 | Innovation and Change | 52 |
| 4 | Mergers and Acquisitions | 77 |
| 5 | Strategy Gone Bad: Doing the Wrong Thing | 108 |
| Pt. II | The Causes of Failure | |
| 6 | Brilliantly Fulfilling the Wrong Vision | 137 |
| 7 | Delusions of a Dream Company | 166 |
| 8 | Tracking Down the Lost Signals | 192 |
| 9 | Seven Habits of Spectacularly Unsuccessful People | 213 |
| Pt. III | Learning From Mistakes | |
| 10 | Predicting the Future | 241 |
| 11 | How Smart Executives Learn | 267 |
| Notes | 293 |
| Index | 311 |
Read an Excerpt
chapter 1
Why Smart Executives Fail
What Can Studying Failure Tell You?
You've seen them on the covers of Forbes, Fortune, and Business Week. You've read about their brilliant and often inspirational leadership. You've listened to business gurus and industry analysts praise their companies as examples to be emulated. You've probably invested in their stock, either directly or indirectly. You may even have seized the chance to work for them or partner with them. These people are among the brightest stars of American and world business. They're business heroes, geniuses, titans.
Yet a few years or even a few months after they were so celebrated, their companies crashed. Key operations were shut down. Workers were laid off. The company's stock plunged. Huge ventures, to which these leaders and their companies were deeply committed, turned out to be almost worthless. When the dust settled, we found out that these leaders had destroyed hundreds of millions or even billions of dollars worth of value.
How is this possible? How can these business leaders fall so far so fast? How can so many people be so disastrously wrong? What can possibly account for the scores of business failures we see every year, in different industries, and even in different countries? And how can we prevent this sort of thing from happening again?
Six years ago I set out to answer these questions in the most extensive investigation ever conducted on this subject. My goal was not only to understand why businesses break down and fail, but to focus on the people behind these failures; not only to understand how to avoid these disasters, but to anticipate the early warning signs offailure. Ultimately, I wanted to move beyond ad hoc explanations of failure on a case- by-case basis and expose the roots of these breakdowns in a definitive way.
Some of the answers my research team uncovered were as surpris- ing as the sudden fall from grace experienced by many of the business leaders we studied. In fact, many of the qualities that sound like the attributes of a dream enterprise turn out to be the basis for a business nightmare. For managers, many of the qualities we aspire to emulate, or feel guilty for not having, turn out to be ones we're better off with- out. For investors, many of the signposts of success that we strive to identify turn out to be markers for failure. And for those of us simply fascinated by the world of business, in part because the leaders and executives that run organizations seem so much apart from the rest of us, it turns out that they have the same weaknesses and character flaws, and make the same kinds of mistakes, though perhaps on a grander scale, that we do.
The Causes of Failure
Giant business disasters can be prevented-but only if we start thinking about business leadership and organizations in strikingly new ways. For starters, this means putting aside the easy answers and looking intently at the real causes of business failures-the people who create, manage, and lead the company.
Journalists, employees, business gurus, other managers, investors, members of the general public-everyone has an opinion on how a top executive managed to turn an apparently successful enterprise into a corporate catastrophe. In fact, there are seven theories usually cited for executive failure. But how many are correct?
1. The Executives Were Stupid
The most common explanation for a business failure is to say that the CEO and other senior executives were stupid and incompetent. We point to their incredibly stupid mistakes and conclude that if man- agement could do such stupid things, the executives involved must be stupid people.
But is this true? Are major business failures ever really due to stupidity or lack of talent? The reality is that people who become CEOs of large corporations are almost always remarkably intelligent. Every failed executive who was interviewed for this book was extremely articulate, perceptive, and knowledgeable. No one who talked with these executives for even a few minutes could fail to be impressed with their intelligence. Does anyone really think that former Rubbermaid CEO Wolfgang Schmitt, who was known as an innovative genius and had a knack for knowing the right answers before most people even recognized the critical issues, is lacking in raw intelligence or talent? Does anyone really think that Wang Labs founder An Wang, who earned a Ph.D. from an Ivy League university, owned several patents in his own name, and created a billion-dollar company, was lacking in raw intelligence or talent?
Nearly all of these people reached the top because executives and shrewd investors repeatedly chose them over their fellow managers for being the most able and most competent. Many of them graduated from the world's most selective and demanding schools. In the earlier stages of their careers, they were the managers who turned crises into triumphs. Once they got to the top, they were often able to hang on to their positions long enough to shape the fate of their enterprises, because corporate boards and business partners were utterly confident of these executives' ability to make truly intelligent decisions. Nobody wants to entrust the fate of a large corporation to somebody who isn't very, very smart, so as a rule, they don't.
Despite these executives' general intelligence, could the major business failures nevertheless be due to ignorance of the industry or a lack of relevant knowledge or experience?
This possibility isn't very plausible either. The people responsible for major business disasters almost always have terrific track records in their relevant areas of business. They tend to be enormously knowledgeable about everything that seems likely to affect their company. If they come upon something they don't know, they generally make a point of catching up right away. These people are usually recognized as the top authorities on whatever type of business they are in.
In sum, managers are far from stupid. We cannot understand corporate failure by resorting to the cop-out excuse of poor managerial quality. No, we'll need to look elsewhere for an explanation.
2. The Executives Couldn't Have Known What Was Coming
The second most common way of explaining business disasters is to acknowledge that while the executives were intelligent, they were caught by events they couldn't have foreseen. Even the best executives might be expected to fail when business conditions suddenly shift in unpredictable ways.
The only problem with this explanation is that none of the business disasters we investigated turned out to be due to executives being caught by unforeseeable events. In company after company, regardless of industry, time period, or even country, the managers had every opportunity to see the important changes that were coming to their industry. In most cases, the executives possessed all the necessary facts. In many cases, people tried to tell them what these facts meant.
Executives at the Schwinn Bicycle Company knew all about mountain bikes and the other new designs that would threaten their brand. They had even received presentations on these designs and turned them down. Motorola knew all about the digital cell phones that would cut into its analog sales. Motorola was collecting royalties on them. When the Internet changed the PDA market that General Magic was going after, it was a development that some of General Magic's own people had predicted. In each of these cases and many others, the relevant change in business conditions was foreseen and discussed-and then disregarded.
3. It Was a Failure to Execute
Recently, it has become fashionable to claim that the executives of failed companies probably had the right policies, but that their companies didn't carry out the policies well enough. If the managers and employees at all levels had only done their jobs better and not messed up the details, everything would have been fine. This certainly sounds like an appealing explanation. It implies that the senior managers got the big things right and only slipped up on the little ones. It suggests that a few improvements in "execution" are all that would be necessary to put everything right again.
Yet attributing business failures to "a failure to execute" is a bit like attributing business bankruptcies to insufficient money. Every business failure can be described as a failure to execute because the business ultimately failed to do what it set out to do: create value for its employees, customers, and stockholders. Furthermore, by the time the business as a whole has broken down, many of its operations will also have broken down. Show me a business that has failed, a business guru might proclaim, and I'll show you a failure to execute.
But how often is the root cause of a business breakdown simply a failure to execute? Major business and engineering schools turn out competent management and operations experts by the thousand. Tell these experts exactly what you want to do, and they'll set up a reasonably ef- ficient and reliable system for doing it-usually in a matter of weeks. Major consulting firms can deliver impressive operations expertise to companies in a matter of days. Given the availability of this expertise, no one can realistically claim that an inability to execute operations effectively is the main reason a business fails. If execution were the core problem, all a CEO would have had to do to save his or her company would have been to pick up the phone.
A closer look at companies that underwent major breakdowns makes this explanation even less plausible. In many cases, the businesses that suffered huge losses were typically performing all sorts of operations brilliantly. Even when some kind of operational breakdown was at the heart of a company's problems, it was never where the problems began. What could be more operational than computer glitches that throw data on billing, costs, and internal metrics into turmoil? But the real reasons Oxford Health Plans struggled so mightily in 1997 with operational breakdown had much more to do with fundamental misconceptions about the marketplace and the underlying culture at the company. If we conclude that it's all execution, how do we ever get behind the curtain to tackle the real underlying problems? Operational breakdowns in today's business world are seldom the true cause of failure; they are invariably a symptom of something else.
4. The Executives Weren't Trying Hard Enough
Some would say that if the top executives had the necessary skills and the necessary information, then they must have been asleep at the switch, goofing off. Lower-level employees are especially prone to conclude that senior managers were fiddling while the company burned.
Is the problem, then, that the people responsible aren't trying hard enough? If the top executives were somehow motivated better, would this make them do a better job?
No one who has looked at the daily schedule of a top executive of a major corporation would believe this for a minute. People in these jobs work extraordinarily long hours, most of their activities away from work are work-related, and they stand to profit hugely if their company gains in value. Their whole self-image is often wrapped up with their success at their job. Most of these executives are willing to risk their health, their marriages, their reputations, and practically everything else in their drive to make their companies more successful. To hear some of the executives we interviewed describe the ordeal they went through when disaster struck would be enough to dispel anyone's na•ve assumptions about lack of motivation.
5. The Executives Lacked Leadership Ability
Is it possible that the executives responsible for major business failures have difficulty getting people to follow the course they have set?
Anyone who has met the people involved in these disaster stories knows that lack of leadership ability isn't the problem. Most of these executives are strikingly forceful personalities with an enormous amount of charm and charisma. They all command attention and respect. Although their personal styles vary widely, these are people who have all demonstrated an impressive ability to get other people to do what they want. What's more, these are managers who, in most cases, had a clear vision of their company's future.
If we conceive of leadership ability as some combination of talent and force of personality that enables someone to build a cadre of followers who are prepared to go to battle for the leader, we need look no farther than Jeffrey Skilling, the former CEO at Enron. By all accounts, Skilling had the ability to set a dynamic and clear vision, empower his people to reach that target, and create an environment where excellence in reaching those goals was highly rewarded. Much the same could be said of former Tyco CEO Dennis Kozlowski, among others who are profiled in this book. The idea that weak leadership accounts for failure doesn't hold up to close scrutiny.
6. The Company Lacked the Necessary Resources
OK, if major business disasters aren't due to any obvious qualities of the business leaders, are they then due to some obvious limitation or defect on the part of the larger business enterprise?
Perhaps a lack of technological resources, capabilities, or assets?
This explanation doesn't work either. Companies that manage to fail on a large scale also have resources that are large in scale. Many of these companies that have failed so spectacularly were technological powerhouses. Furthermore, most of the companies that have survived their business disasters remain technological powerhouses to this day, even though in other respects they may be pale shadows of their earlier selves.
How about financial causes then? Are major business failures due to an inability to pay for the resources and expertise that were necessary for success? Were there simply insufficient funds to put the executives' vision into operation?
No. These businesses were able to lose huge amounts of money because they had huge amounts of money to lose. We're talking about monster companies that possessed or acquired tremendous resources and yet still managed to fail spectacularly. And even the dot-coms we studied were generously funded-probably too generously.
7. The Executives Were Simply a Bunch of Crooks
Is the problem, finally, that the top executives were simply crooks? Were the senior managers so greedy that they let the whole company go under while they stripped the business of assets?
That idea doesn't hold up either. Contrary to the recent impression created by a few spectacular scandals, the clear majority of CEOs who preside over major business disasters are scrupulously honest.
But even when the CEOs are, in fact, crooks, this begs the question of why they became crooks. After all, these are people whose salaries alone would make them rich by any ordinary standards. Why, having reached that level of success, would they suddenly decide to start stealing?
Some people claim that it was "just their nature," that some managers are irrationally driven to steal, that dishonesty was part of their characters all along. But even if some of these top executives were always crooks, this still doesn't explain much. What was it about the companies in question that caused them to put crooks into their top positions? And why weren't the crooks promptly exposed and ousted when their behavior began to threaten the company's ability to succeed?
Finally, there is the awkward fact that the sums stolen, while disgustingly large, were not, in most cases, large enough to bring these companies down.
The Failure to Understand Failure
All seven of these standard explanations for why executives fail are clearly insufficient. Understanding why smart executives fail would be much easier if we could rely on these explanations, but we can't.
The faulty theories don't begin to address the overall syndromes associated with major business failures. Even more puzzling than the fact that brilliant managers can make such bad mistakes is the way they so often magnify the damage by making additional ones. Truly colossal blunders don't come in isolation; they come in clusters. Once a company has made a really bad misstep, it often seems as though it can't do anything right. How does this happen? Why, instead of fixing their mistakes, do business leaders regularly make them worse?
The general question of why successful businesses suddenly fail leads to a number of other, more specific questions. How do leaders who have been successful for years suddenly start getting everything wrong? Why do business leaders sometimes do things that seem completely irrational? How do they manage to ignore conspicuous evidence that their policies aren't working? Why do organizations fall into the same traps again and again? Why are safeguard procedures often suspended at the very moment when they are most needed? How can corporate boards sit back and watch all these things happen? Above all, what can company leaders do in advance to guard against making major corporate mistakes? This book is an attempt to answer these questions and more.
The Research Behind the Book
The questions and puzzles raised by studying mistakes and failure required a special kind of research program. The kind of investigations that once led to In Search of Excellence and its many successors were vitally important, but they needed to be supplemented by equally penetrating investigations in search of failure-or, more precisely, in search of the causes of failure.
For six years my research team at the Tuck School of Business at Dartmouth carried out an extensive investigation on business breakdowns. We started off by identifying some forty companies that had gone through a major business failure. The size of the resulting loss in earnings and destruction of market value in absolute terms were less important than that the loss relative to the size of the company was "major." In practice, the magnitude of the loss was usually in the hundreds of millions of dollars, often in the billions of dollars. A number of the companies we studied went bankrupt, but the majority were robust enough to lick their billion-dollar wounds and move on.
A second criterion for selection was to ensure that we were building a sample of companies from many different industries and even some different countries. This criterion was easily met.
Third, we wanted a balance between new and fresh cases on the one hand, and some classic stories of failure on the other. So, for example, General Motors' robotics strategy of the 1980s is a dated story, yet a classic one that still holds relevant lessons for managers today. That's why we took another look at the rise and fall of John DeLorean and his namesake automobile, RJ Reynolds' Project Spa designed to produce a "smokeless" cigarette, Wang Labs' failed quest to destroy IBM, and the Boston Red Sox's decision to field an all-white baseball team after every other major league organization had integrated African-Americans onto their roster.
The research project was first conceived in 1997, so it was natural to look at some of the most interesting failures of the 1990s, including Johnson & Johnson's fall from the top of the cardiovascular stent business, Motorola's failure to shift from analog to digital cell phones, Iridium's even more disastrous foray into the satellite-based cell phone business, Fruit of the Loom's delayed response to the North American Free Trade Act that made it cost-prohibitive to manufacture underwear in the U.S., Rubbermaid's ruinous battle of wills with Wal-Mart, Target, and other megaretailers, and the implosion of advertising industry heavyweight Saatchi & Saatchi.
In truth, that was to be all of it-some classic stories of failure, some more contemporary business breakdowns-in a book that perhaps would have been published a year or two earlier. But two events occurred that made us rethink our research strategy. First, the Internet bubble burst, scattering hundreds of defunct companies across the business landscape, and, second, the business world was rocked by an incredible series of scandal-driven failures that continue to make front-page news. It wasn't possible to close down the research program and call it a day when two such dramatic and impactful developments exploded on the business scene in relatively quick succession.
The result was a significant delay in completing the research proj- ect, but, much more importantly, an opportunity to try to understand the underlying reasons for failure in these two apparently very different arenas, and how the causes of failure differed from the more "traditional" case histories that made up the earlier part of the research. So the sample expanded to accommodate companies such as eToys, PowerAgent, Boo.com, Webvan, Enron, WorldCom, Tyco, Rite Aid, Adelphia, and ImClone.
In the end, our sample consisted of fifty-one companies that we investigated in detail. In addition, perhaps another dozen or so other companies and organizations were studied briefly. Together, this represents the larg- est and most comprehensive study of business failures ever conducted.
The Data
To really understand what happened in the companies we studied, we wanted to try to put ourselves in the shoes of the key decision makers at the time that things went bad. When you do this, one of the first things you realize is that many great corporate mistakes were due to managerial inaction as much as to inappropriate managerial action. And this makes sense, of course. Companies as diverse as Rubbermaid, Schwinn, Encyclopedia Britannica, and the Boston Red Sox fell into serious trouble precisely because they didn't respond to critical challenges when they had the opportunity.
But how can anyone really put themselves in the shoes of key decision makers when the events of interest may have taken place a decade ago? This is where we had one advantage over historians, whose research tactics are similar to ours-at almost each company we were able to interview people who could give us first-hand accounts that inevitably went far beyond the original press reports we also consulted. So, for example, when we investigated the reasons why Motorola refused to shift from analog to digital cell phones in the mid-1990s, we interviewed three former Motorola CEOs, two former midlevel managers, and two executives who held senior positions at the Bell operating company that kept asking Motorola to sell them digital cell phones. There were other companies we studied where fewer interviews were conducted, but overall the interviews played a major role in our ability to distill the lessons from the past.
Altogether, we conducted 197 interviews. In the companies that suffered severe breakdowns, our interviews often included CEOs, former CEOs, other executives, and midlevel managers. Occasionally, successive CEOs from the same company were interviewed. Sometimes, we interviewed competitors, journalists, industry experts, investment bankers, insurance underwriters, and others. In most cases, the subjects of the interviews allowed their answers to be taped, ensuring accuracy and verifiability. We took extensive notes when taping wasn't allowed. Thus, documentation of the interviews was substantial.
In every case, the extensive direct interviews were supplemented with large quantities of information collected from financial statements, news stories, published analyses, press releases, and company reports. This made it possible for us to check out many of the claims made by the people interviewed and to put their comments into a broader context. The fact that a major business failure had occurred in each case we studied was beyond dispute: The hard, verifiable numbers demonstrated in each instance that something had gone badly wrong. In every case, for example, the business failure in question had a large adverse effect on the business's shareholder value. What was nonetheless missing, until our research team put the pieces together, was enough information and insights from enough sources to uncover exactly what happened and why.
As we learned more about what was really going on in these companies, our assumptions changed dramatically. For example, we didn't think that we'd find that executives expressly chose not to respond to change even when they knew it was happening. But at Motorola, our interviews revealed that key decision makers had an abundance of information on the public's preference for digital cell phones, and each of the former CEOs we interviewed confirmed that Motorola executives saw the change happening but chose not to respond. Why they didn't respond is a fascinating story with relevance not just for managers and investors, but even for people who deal with the same challenge of facing unwanted truths in their everyday lives.
By the same token, as we collected more information we also revised our initial ideas on whether a company really did make a huge corporate mistake that led to failure. For example, many people have suggested that IBM made a major blunder in its development of the original PC in 1979 by relying on Microsoft for the operating system and Intel for the microprocessor. While it's certainly true that the operating system and the microchip hold the lion's share of value in this industry, it doesn't seem particularly reasonable to expect IBM to have figured this out almost twenty-five years ago. Few of us, anywhere, have that type of crystal ball. In addition, IBM's strategy to outsource the operating system and microprocessor-both areas that were beyond its core competence in hardware-mirrors the same tight focus that is the hallmark of leading companies such as Honda, Dell, and Nike today. So if you want to critique IBM for its PC strategy, you've got to also argue against state-of-the-art strategy thinking circa 2003.1
The Range of Companies Investigated
The range of companies we investigated is wide enough to include almost everyone's business and investment interests. It includes car companies, entertainment companies, food and drink companies, consumer electronics companies, fashion houses, financial service companies, computer companies, drug companies, communications companies, electronic equipment manufacturers, retail chains, insurance companies, an HMO, a toy company, an advertising agency, a publisher, a restaurant chain, a cigarette company, a plastic container company, a baseball franchise, a cable company, a bicycle company, an energy company, a company that manufacturers landscaping tools and machines, dot-coms, and a conglomerate.
In addition, while American businesses dominate the list of companies in the sample, we also studied four Japanese companies (Sony, Nissan, Firestone, and Snow Brand Milk), four British companies (Saatchi & Saatchi, Marks & Spencer, DeLorean, and Boo.com2), and one company each from South Korea (Samsung), Germany (DaimlerChrysler), Singapore (Barings Bank/ING), and Australia (AMP).
Among the companies whose breakdowns were examined in considerable detail are the following:
AMP
eToys Oxford Health Plans
Adelphia Firestone PowerAgent
Advanced Micro Food Lion Quaker/Snapple
Devices Ford Rite Aid
Bankers Trust Fruit of the Loom RJ Reynolds (Project Spa)
Barings/ING General Magic
Barneys General Motors Rubbermaid
Boo.com ImClone Saatchi & Saatchi
Boston Market Iridium Samsung Motors
Boston Red Sox Johnson & Johnson Schwinn
Bristol-Myers Squibb (Cordis) Snow Brands
Cabletron L.A. Gear Sony (Columbia Pictures)
Coca-Cola (Belgian Levi Strauss
contamination) LTCM Toro
Conseco Marks & Spencer Tyco
DaimlerChrysler Mattel Wang Labs
DeLorean Mossimo Webvan
Encyclopedia Britannica Motorola (cell phones) WorldCom
Enron Nissan
The Interview Process
When we spoke to the Hollywood executive, he was driving down Santa Monica Boulevard with the top down, telling us how sunny it was in L.A. that day.
When we talked to the former CEO who saw his company self- destruct under the watch of his successor, there was a palpable sense of anger in his voice as he gave us his account.
When we chatted with the son of the founder of a company that no longer exists, he shared stories of what it was like to live with his hyperambitious dad.
What we discovered in the interview process could not have been predicted, but stands as a fascinating side note to the entire process. For many of the key executives we spoke to, despite the fact that we were interested i call. Not all of the people we interviewed, to be sure, but a surprisingly large proportion really wanted to tell their side of the story.
Why were most of the executives who have been widely blamed for business disasters so willing to be interviewed for this book? In many cases, they believe that the very same facts that others think show their weaknesses can exonerate them. It's also because they believe that a deeper analysis, capturing more of the complexities they confronted, presents them in a more favorable light than the relatively superficial coverage they've received in newspapers and magazines. In fact, some of the leaders who presided over the worst disasters seemed almost desperate to announce that they were right all along and to blurt out information that they believed would support their case. "What makes you think the Sony acquisition of Columbia Pictures was a corporate blunder?" asked Mickey Schulhof, former president of Sony USA, despite the fact that Sony took a $3.2 billion write-off in connection with this acquisition.
While the vast majority of people we asked for an interview said yes, there were some who didn't. Those whom we did interview, however, always had a chance to review their comments and even rescind them if they wanted. That this seldom happened is another remarkable sidelight. In sum, despite a perceived risk to their reputation, many people almost felt compelled to talk to us. It made for fascinating discussions and gave us terrific insight, although one CEO finished the interview by saying, "I hope you are kind to me."
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