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TheSelf-Destructive Habits of Good Com

panies

y Ch hhotogra ou ty Image

Conquer—or prevent—the seven disastrous “addictions”

that can destroy your company

Overcome corporate denial, arrogance, complacency, “competency

dependence,” turf wars, and more

For every executive, strategist, entrepreneur, and manager

who wants to sustain success

GM. Ford. AT&T. Sears. Firestone. Krispy Kreme. Digital. Kodak.Once, they were riding high, the exemplars of business excellence. Then, disaster.

Is your company headed for the same fate? How do you know?How do you change course?

Find out. Shine a light on the dark places in your business. Uncover yourself-destructive habits before they destroy you. The blinders, culture conflicts,and corporate denial. The competitive myopia. The focus on volume, not profi ts.Root them out—all of them.

Then, instill the good habits your business needs: the habits of sustainable profi tabilityand market leadership. This book shows you how—in detail, from start to finish.

www.destructivehabits.com

Cover design by Chuti Prasertsith

Cover photography by Nick Koudis/Photodisc/Getty Images ISBN-13:ISBN-10:

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MANAGEMENT

ictions”

Why Even Great Companies Fail:Diagnose the Symptoms

and Cure Them!

Atari A&P GeneralMotors Sony Sears Motorola IBM Lenovo

Zenith FirestoneUS Air Coke

Marks and Spencer Singer Sewing Machines

Air India DeBeers AT&T Xerox Enron

Pepsi

COMPANIESGOODof

THE

...And How to Break Them

HABITSSELF- DESTRUCTI VE

JAGDISH N. SHETH

“You can read many books telling you how to make your company great. But if you succeed, remember that success is a potential poison. Thanks to Jagdish Sheth, one of the keenest observers of the business scene, you now can avoid the seven slow poisons that can undo your good work.”

— PHILIP KOTLER

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“When the going is good, it is indeed very easy for leaders tofall into the trap of success and lose sight of reality. Dr. Shethhas captured this aspect beautifully with several examplesthat make it an interesting read. What is even more impor-tant is the timing of the book. It could not have been bettertimed. For enlightened leaders, this book can serve as a goodwarning signal and provide valuable insights in managing thefuture of their business proactively.”

—Harsh Mariwala, Chairman and Managing Director,Marico Limited

“Congratulations to Jagdish Sheth for providing invaluableinsights into the self-destructive habits of good companiesthat so often lead to business failure. Every day brings newsof painful restructurings at companies once thought to beindestructible—in most cases brought on by the very habitsDr. Sheth analyzes. This book is a must-read for executivesand managers everywhere—and especially at the fast-risingglobal corporations in developing nations.”

—Azim Premji, Chairman, Wipro Ltd.

“As an advisor to many large Indian corporations and indus-trial groups, as well as a manager of traditional businesses, Ihave seen up-close many of the bad habits Dr. Sheth so bril-liantly analyzes. Yet Dr. Sheth goes further than merelypointing out these destructive habits; he clearly articulatesstrategies for avoiding and/or breaking them. Since I’m con-vinced that leadership is all about discerning such problemsearly and intervening to make the necessary changes, I findthis aspect of Dr. Sheth’s remarkable book to be especiallyvaluable.”

—Dr. Bharat K. Singh, Managing Director, Aditya Birla Nuvo Ltd.; Director, Aditya Birla Group

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“There are many pitfalls on the road to building a global com-pany from the ground up, and, once it’s built, to keeping itrunning smoothly. Every business leader should be indebtedto Dr. Sheth for so clearly pointing out the warning signs thattell us something is amiss, that destructive behavior is in evidence, and that corrective action is called for. I wouldadvise executives and managers to ignore this book at theirown peril.”

—Arthur Blank, Co-founder, The Home Depot; Owner and President, The Atlanta Falcons

“Jag hits another home run. He literally provides a handbookon how not to fail in business.”

—W. Cliff Oxford, CEO, The Home Shoppe

“Professor Sheth is ranked amongst today’s top managementthinkers. His latest book describing how good companiesself-destroy is extremely timely and relevant to both OldEconomy as well as New Economy enterprises. ProfessorSheth’s observations and analysis are internationally relevantand serve as a timely wake-up call for managers and leaders.”

—Ashok Ganguly, Chairman, Firstsource Solutions Ltd.

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THESELF-DESTRUCTIVE HABITSof GOOD COMPANIES

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THESELF-DESTRUCTIVE HABITSof GOOD COMPANIES…And How to Break Them

j a g d i s h n . s h e t h

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Vice President, Publisher: Tim Moore

Acquisitions Editor: Martha CooleyEditorial Assistant: Pamela BolandDevelopment Editor: Russ HallAssociate Editor-in-Chief and Director of Marketing: Amy NeidlingerPublicist: Amy FandreiMarketing Coordinator: Megan ColvinCover Designer: Chuti PrasertsithManaging Editor: Gina KanouseProject Editor: Betsy HarrisCopy Editor: Gayle JohnsonIndexer: Lisa StumpfCompositor: FastpagesProofreader: Chrissy WhiteManufacturing Buyer: Dan Uhrig

© 2007 by Pearson Education, Inc.

Upper Saddle River, New Jersey 07458

in quantity for bulk purchases or special sales. For more information, please contact U.S. Corporate and Government Sales at 1-800-382-3419 or [email protected]. For sales outside the U.S., please contact International Sales at [email protected].

Company and product names mentioned herein are the trademarks or registered trademarks of their respective owners.

All rights reserved. No part of this book may be reproduced, in any form or by anymeans, without permission in writing from the publisher.

Printed in the United States of America

First Printing April, 2007

Pearson Education LTD.Pearson Education Australia PTY, Limited.Pearson Education Singapore, Pte. Ltd.Pearson Education North Asia, Ltd.Pearson Education Canada, Ltd.Pearson Educatión de Mexico, S.A. de C.V.Pearson Education—JapanPearson Education Malaysia, Pte. Ltd.

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Editor: Yoram (Jerry) Wind

Publishing as Prentice Hall

Prentice Hall offers excellent discounts on this book when ordered

ISBN 0-13-611741-4

Library of Congress Cataloging-in-Publication Data is on file.

This product is printed digitally on demand. This book is the paperback versionof an original hardcover book.

I would like to thank Duane Ackerman, CEO of BellSouth, who

years ago asked me the question: Why do good companies fail?

This thought-provoking inquiry launched the journey of

investigation that culminated in this book.

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FOREWORD xxi

PREFACE xxiii

CHAPTER 1 WHY DO GOOD COMPANIES GO BAD? 1

CHAPTER 2 DENIAL: THE COCOON OF MYTH, RITUAL, AND ORTHODOXY 19

CHAPTER 3 ARROGANCE: PRIDE BEFORE THE FALL 45

CHAPTER 4 COMPLACENCY: SUCCESS BREEDS FAILURE 75

CHAPTER 5 COMPETENCY DEPENDENCE:THE CURSE OF INCUMBENCY 105

CHAPTER 6 COMPETITIVE MYOPIA: A NEARSIGHTED VIEW OF COMPETITION 133

CHAPTER 7 VOLUME OBSESSION: RISING COSTS AND FALLING MARGINS 165

CHAPTER 8 THE TERRITORIAL IMPULSE: CULTURE CONFLICTS AND TURF WARS 199

CHAPTER 9 THE BEST CURE IS NO CURE AT ALL 231

ENDNOTES 249

CONTENTS AT A GLANCE

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FOREWORD xxi

PREFACE xxiii

CHAPTER 1 WHY DO GOOD COMPANIES GO BAD? 1Digital 4IBM 8Intel 12

It’s All About Leadership 14

CHAPTER 2 DENIAL: THE COCOON OF MYTH, RITUAL, AND ORTHODOXY 19

Being There 19

Denial of Emerging Technologies 23Xerox: Trying to Copy Its Own Success 24

Denial of Changing Consumer Tastes 28A&P: Retail Pioneer in Peril 28

Denial of the New Global Environment 31General Motors: Auto Giant in the (Gas) Tank 31

The Warning Signs of Denial 39The “I Am Different” Syndrome 39The “Not Invented Here” Syndrome 39The “Looking for Answers in All the

Wrong Places” Syndrome 40

CONTENTS

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How to Break the Habit of Denial 41Look for It 41Admit It 41Assess It 42Change It 42

CHAPTER 3 ARROGANCE: PRIDE BEFORE THE FALL 45When Exceptional Achievement in the Past Warps Your

Perception of Present Reality 45General Motors 46Boeing 49

When David Conquers Goliath 52Microsoft 53Enron and Worldcom 56

When You Pioneer a Product or Service Nobody Can Duplicate 58Sony 58

When You’re Smarter Than the Other Guys 61Merck 61Motorola 66

The Warning Signs of Arrogance 68You Stop Listening 68You Flaunt It 69You Browbeat Others 69You’re High-Handed 69You Curry Approval 69You Exhibit the NIH Syndrome 69

How to Break the Arrogance Habit 70Rotate Management to New Challenges 70Implement Nontraditional Succession Planning 70Diversify the Talent Pool by Recruiting from a Variety of

Educational Institutions, Countries, and Demographics 70Encourage Outside Perspectives Through Leadership Institutes 71Change Your Leadership 71

CHAPTER 4 COMPLACENCY: SUCCESS BREEDS FAILURE 75When Your Past Success Came Via a Regulated Monopoly 76

AT&T 76Airlines in Freefall 83

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When Your Past Success Was Based on a Distribution Monopoly 85De Beers: The Ice King 86

When You Have Been “Chosen” for Success by the Government 89Japan, Inc. 89Fiat: The European Version 91

When the Government Owns or Controls the Business 94Air India 95

The Warning Signs of Complacency 97You Are In No Hurry to Make Decisions 97Your Processes Are Overly Bureaucratic 98You Have a Bottom-Up, Decentralized, Consensus-Based Culture 98Your Cost Structure Is High 99Your Company Structure Is Complete Vertical Integration 99You Have Enormous Cross-Subsidies by Functions, by

Products, by Markets, and by Customers 100

How to Break the Complacency Habit 101Reengineer 101Reorganize 101Divest Non-Core Businesses 102Outsource Non-Core Functions 102Reenergize the Company 103

CHAPTER 5 COMPETENCY DEPENDENCE: THE CURSE OF INCUMBENCY 105

Singer Sewing Machines 106Encyclopaedia Brittanica 107

R&D Dependence 109Tempest in a Sugar Bowl 110

Design Dependence 113Lego 113

Sales Dependence 115Avon 116

Service Dependence 119Travel Agents 119

The Warning Signs of Competency Dependence 121Your Efforts to Transform the Company Have Been Futile 121The Thrill Is Gone 121Stakeholders Are Jumping Ship 121

CONTENTS xiii

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How to Break the Habit of Competency Dependence 122Find New Applications 122Find New Markets 124Move Upstream, Move Downstream 126Develop a New Competency 127Refocus Your Resources 129

CHAPTER 6 COMPETITIVE MYOPIA: A NEARSIGHTED VIEW OF COMPETITION 133

The Natural Evolution of the Industry 134Firestone: When the Rubber Left the Road 134From Zenith to Nadir 137

The Clustering Phenomenon 139

When No. 1 Is Also the Pioneer 140Burger Wars 140

The Opposite Scenario: When No. 2 Chases No. 1 144Trying Harder 144

The Warning Signs of Competitive Myopia 146You Allow Small Niche Players to Coexist with You 146Your Supplier’s Loyalty Is Won by a Nontraditional Competitor 148Your Customer’s (or Channel Partner’s) Strategy Shifts

From Buy to Make 151You Underestimate New Entrants, Especially from Emerging

Economies 153When You Have Become Helpless Against a Substitute

Technology 156

How to Break the Competitive Myopia Habit 157Redefine the Competitive Landscape 157Broaden the Scope of Your Product or Market 158Consolidate to Squeeze Out Excess Capacity 160Counterattack the Nontraditional Competitors 160Refocus on the Core Business 161

CHAPTER 7 VOLUME OBSESSION: RISING COSTS AND FALLING MARGINS 165

The High-Margin Pioneer 166IBM Versus Lenovo 167

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The Fast-Growth Phenom 169Glazed and Dazed 171

The Paradox of Scale 175

The Ball and Chain of Unintended Obligations 177

Uncle Sam’s Cut 179

The Warning Signs of Volume Obsession 181Guideline-Free, Ad Hoc Spending 181Functional-Level Cost Centers 182A Culture of Cross-Subsidies 183Truth in Numbers 184

How to Break the Volume Obsession Habit 185Identify Where Your Costs Are 185Convert Cost Centers into Revenue Centers or Profit Centers 186Decentralize Profit and Loss to More and Smaller Business Units 188Move from Vertical Integration to “Virtual Integration” 189Outsource Non-Core Functions 190Downsize (or Rightsize) the Company’s Management 191Reengineer Your Processes 192Move Toward “Mass Customization” 193Implement Target Costing 194Become a World-Class Customer 195

CHAPTER 8 THE TERRITORIAL IMPULSE: CULTURE CONFLICTS AND TURF WARS 199

The Corporate Ivory Tower 200

When Growth Requires the Institution of Formal Policies and Procedures 204

When the Founder’s Culture Is Subsumed within a Larger Corporate Culture 206

Wire and Plastic Products 206

When a Company’s Culture Is Dominated by One Functional Specialty 210

Brainy Motorola 212

The Warning Signs of the Territorial Impulse 214Dissension 214Indecision 214Confusion 215Malaise 215

CONTENTS xv

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How to Break the Territorial Habit 216Engage in Effective Internal Marketing 216Push Your Managers Out of the Ivory Tower 218Create Permanent Cross-Functional Teams 219Reorganize Around Customers or Products, Rather Than

Around Function or Geography 221Automate and Integrate 225

CHAPTER 9 THE BEST CURE IS NO CURE AT ALL 231Denial 234

Arrogance 236

Complacency 238

Competency Dependence 239

Competitive Myopia 241

Volume Obsession 243

Territorial Impulse 244

Final Thoughts 246

ENDNOTES 249

INDEX 263

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ACKNOWLEDGMENTS xvii

AcknowledgmentsThis book’s thoroughness and readability would not have been pos-sible without the assistance of John Yow. This is the second book hehas helped me complete, and again his in-depth research anduncanny knack for shaping ideas and concepts into a highly read-able and entertaining tome were an important element of the finalmanuscript. John is the consummate Southern gentleman. Workingwith him was a pleasure, on both a professional and personal basis.I look forward to collaborating with him on future books.

Mark Hutcheson also provided key assistance in moving this bookto a final manuscript. He provided additional research on compa-nies, offered editorial comments and suggestions, and contributedto a number of passages. He also worked diligently to manage themanuscript process and to coordinate efforts with the publisher.

I would also like to thank my longtime assistant, Beth Robinson,for her devotion and for keeping me on track during the hectictimes that surrounded the writing of this book. Not only does shemanage a constant flood of e-mails, phone calls, appointments,and business travel planning with professionalism and calm, she isalso a great sounding board.

This book would not have been written, or at least would not havebeen written as quickly, without enthusiastic encouragement from

great companies, he was insistent that I move forward with a man-

enthusiasm and excitement were infectious and were a major rea-son why you’re reading this book. I also received similar enthusi-

And finally, I would like to express my gratitude to everyone at

review and production. This goes especially to Paula Sinnott, whowas a pleasure to work with and who kept the publication processon track, and to Russ Hall, who provided valuable editorial polishto the final manuscript.

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Yoram (Jerry) Wind, editor at Prentice Hall. As soon asI explained to him how these self-destructive habits destroy

uscript and bring the project to Prentice Hall. His

astic support from Prentice Hall’s executive editor, Tim Moore.

Prentice Hall who was involved with this book’s

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About the AuthorDr. Jagdish (Jag) N. Sheth is the Charles H. Kellstadt Professor ofMarketing in the Goizueta Business School at Emory University.Prior to his present position, he was at the University of SouthernCalifornia (7 years); at the University of Illinois (15 years); and onthe faculty of Columbia University (5 years), as well as theMassachusetts Institute of Technology (2 years). Dr. Sheth is wellknown for his scholarly contributions in consumer behavior, rela-tionship marketing, competitive strategy, and geopolitical analysis.

Professor Sheth is highly sought out as a keynote speaker at manyindustry, academic, and public forums. He has worked for numer-ous industries and companies in the United States, Europe, andAsia, both as an advisor and as a seminar leader. His clientsinclude AT&T, BellSouth, Cox Communications, Delta, Ernst &Young, Ford, GE, Lucent Technologies, Motorola, Nortel, Pillsbury,Sprint, Square D, 3M, Whirlpool, Wipro, Alcatel, Ericsson,Siemens, General Foods, Unilever, Philips, Thysson-Krupp, ABG,Tata Group, Marico, General Mills, and many more. He has offeredmore than a thousand presentations in at least twenty countries.Dr. Sheth is frequently quoted and interviewed by the Wall StreetJournal, New York Times, Fortune, Financial Times, EconomicTimes, and radio shows and television networks such as CNN,CNBC (India), and BBC. He is also on the Board of Directors ofseveral public companies, including Cryo Cell International (NAS-DAQ), Wipro Limited (NYSE), and Shasun Chemicals.

In 1989, Dr. Sheth was given the Outstanding Marketing Educatoraward by the Academy of Marketing Science. In 1991 and again in1999, he was given the Outstanding Educator Award by the Salesand Marketing Executives International (SMEI). Dr. Sheth was alsoawarded the P.D. Converse Award for his outstanding contribu-tions to theory in marketing in 1992 by the American MarketingAssociation. In 1996, Dr. Sheth was selected as the DistinguishedFellow of the Academy of Marketing Science. In 1997, Dr. Shethwas awarded the Distinguished Fellow award from the

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International Engineering Consortium. Dr. Sheth is also a Fellowof the American Psychological Association (APA). 2004 marked astellar year for Dr. Sheth as he was awarded both the Richard D.Irwin Distinguished Marketing Educator and the Charles CoolidgeParlin Awards, which are the two highest awards given by theAmerican Marketing Association. In 2005, he was recognized asthe Society for Marketing Advances’s 2005 Elsevier DistinguishedProfessor, and in 2006 he received the RHR International Awardfor Excellence in Consultation from the American PsychologicalAssociation. Dr. Sheth was named the Emory University FacultyLecturer for 2007, the first time a business school professor hasbeen given this honor.

A prolific author, in 2000 Dr. Sheth and Andrew Sobel published abest seller, Clients for Life (Simon & Schuster). His book, The Ruleof Three (Free Press), coauthored with Dr. Rajendra Sisodia,altered the current notions on competition in business. It was pub-lished in 2002 and has been translated into German, Italian,Polish, Japanese, and Chinese. It was the subject of a seven-parttelevision series by CNBC (India) and was a finalist for the 2004Best Marketing Book Award from the American MarketingAssociation. His most recent book, Firms of Endearment: HowWorld-Class Companies Profit from Passion and Purpose, was

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published in 2007 by Prentice Hall.

ForewordI am surprised and flattered that my close friend and distinguishedcolleague chose to dedicate his new book to me. I am especiallypleased that my question to Dr. Jagdish Sheth all those years agoproved to be the impetus for The Self-Destructive Habits of GoodCompanies—one of the most insightful business books to appearin some time.

My friendship with Jag (as he is known to all) goes back manyyears, as does my debt to his wise counsel. Jag was a trusted confidant of mine, and of BellSouth’s, during years of considerableturmoil in the telecommunications industry, and he helped uschallenge the status quo business beliefs that followed our compa-ny as we exited our monopoly ancestry. Jag helped us challengethe thinking of senior leaders as well as middle managers and thatwork influenced the culture that emerged in a competitiveBellSouth.

Of course, BellSouth is but one of many companies for whom Jaghas provided his invaluable expertise. The list of distinguishedcompanies that have called upon his help is a long one and spansthree continents—North America, Europe, and Asia. I’m constant-ly amazed at his frenetic consulting and speaking schedule, yet hestill finds time to teach some of the most popular courses at EmoryUniversity’s Goizueta Business School, where he holds the CharlesH. Kellstadt chair. The university and the community were fortu-nate when Jag decided to make Atlanta his home.

This new book (the latest of several, by the way) quickly revealsthe breadth of Jag’s expertise and the depth of his insights. Forobvious reasons, I was particularly interested in the chapter enti-tled “Complacency: Success Breeds Failure,” especially about thecomplacency that results “when your past success came via a reg-ulated monopoly.” Reading again about the forced break-up ofAT&T in 1984 reminded me of the painful lessons that companiesin many industries were forced to learn thanks to deregulation—lessons which Jag spells out in no uncertain terms. I must say I

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had to laugh when Jag’s account reminded me that, after thebreak-up, AT&T at first wanted to rename itself American BellInternational, until Judge Harold Greene intervened. Jag writesthat he still has the tie that Randall Tobias gave him with the newABI logo on it. “Hold onto it,” Tobias told Jag. “It’ll be a keepsakeone day.”

I also particularly enjoyed the chapter, “The Territorial Impulse:Culture Conflicts and Turf Wars.” It’s no secret that teamwork hasalways been a mantra of mine, and Jag’s metaphor of the compa-ny structured as “a complex of 50-story office towers, connectedonly by common areas at the bottom and the top” speaks volumesabout the way many businesses are run today.

So it is in chapter after chapter that Jag analyzes companies likeDigital Equipment, GM, Firestone, and Zenith. Jag’s dozens ofillustrations are always incisive, but the book wouldn’t be com-plete without, at the end of each chapter, his “warning signs” ofeach bad habit and, most helpful, his step-by-step approach tobreaking each habit before it does its damage.

The Self-Destructive Habits of Good Companies is entertaining,instructive, and tremendously valuable. I could not recommend itmore strongly.

—F. Duane Ackerman, Chairman Emeritus, BellSouth Corporation

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PrefaceI trace this book’s origins to one of the most insightful questions I have ever been asked by a corporate executive: Why do good companies fail? The CEO who posed this riddle had been a greatfan of the 1980s business best seller In Search of Excellence byTom Peters and Robert Waterman. However, as time went by, hewas struck by how many of the companies cited as exemplars ofworld-class corporations were either struggling or no longer inexistence. This included such icons of U.S. business as Sears, DanaCorporation, AT&T, Xerox, IBM, and Kodak.

The more I pondered the CEO’s question, the more curious Ibecame as to why companies that seem to be doing so well andthat are at the top of their industry, can almost overnight spiraldownward into survival mode. The companies I’m talking aboutare not government-protected monopolies that have suddenlybeen cast into the churning seas of competition. I’m referring toworld-class businesses that appear to have top managers, a proventrack record of success, inventive products, and a seemingly unas-sailable competitive position. Why do these companies go bad?

My journey toward an answer began with archival research toidentify companies that were great in their time and that had sub-sequently faded away. During this process I tried to understandthe reasons for their downfall. The message that came out of theresearch was simple: Good companies fail when they are unableor, more curiously, unwilling to change when their external envi-ronment changes significantly.

Underlying this inability or unwillingness to change, I discoveredthe self-destructive habits successful companies acquire on theirway to greatness. As my research progressed, I began to give pre-sentations to professional managers and MBA students on my find-ings, and I would talk about self-destructive habits such as denial,complacency, or cost-inefficiency. I would often joke that I shouldwrite a book called The Self-Destructive Habits of Good Companies.Instead of making a joke of it, more and more people suggested thatI write the book.

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I have written about seven self-destructive habits in this book.Although I could have included an eighth or ninth habit, my pur-pose is not to present an exhaustive list of self-destructive habitsbut to identify those that are the most crucial to avoid. And ifforced to narrow down this list even further, I would have to saythat denial of the new reality (Chapter 2) and the territorialimpulse, or internal turf wars (Chapter 8), are the two most dan-gerous habits.

There are three conflicting theories as to why companies die. Oneis population ecology or “survival of the fittest” theory: Companiesdie because bigger and better companies will come along and takeaway their business. In other words, you die by being systemicallyweeded out by the competition.

The second is the inevitability or “birth and death” theory. Justlike the human life cycle, this theory suggests that a cycle of birthand death is inevitable for all companies. There is nothing you cando about your company’s eventual demise—it’s just a matter oftime before fate runs its course.

My view, however, is that most companies can survive forever ifthey recognize and take steps to counter self-destructive habits orset up processes to keep them from arising in the first place. I feltthis was possible because habits are learned behaviors, notinevitabilities. Therefore, it is important that I not only show youhow to identify self-destructive habits, but also suggest prescrip-tive measures for curing them, and I have done so in each chapter.And while curing self-destructive habits is an admirable achieve-ment for the afflicted, an even more sound approach is to devisepreventive programs to avoid them in the first place (Chapter 9).

An underlying theme of this book is that great leadership is crucialfor helping a company avoid or break self-destructive habits. Goodleaders provide vision for the company. However, great leaders, inaddition to being visionaries, must be grounded in the reality ofcurrent and potential vulnerabilities posed by a hostile and con-stantly changing external environment. Great leaders are con-stantly looking out for self-destructive habits that will get in theway of the exciting vision.

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I hope to generate dialog from the readers of this book. I encour-age you to provide stories you have encountered about any of theself-destructive habits. The Web site www.destructivehabits.comhas been set up for you to post examples of companies that havebeen afflicted with self-destructive habits, as well as companiesthat have done a good job of correcting or avoiding them. I alsoplan to have a blog that will provide updates and commentaryabout the companies mentioned in this book and the companiessuggested by readers. With your help, I might be able to offer arevised version of this book in the near future.

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Why do good companies go bad? Honestly, I hadn’tthought too much about this question. Then a CEOfriend of mine brought up the 62 “excellent” companiespraised by Tom Peters and Robert Waterman in theirearly 1980s bestseller In Search of Excellence. A greatmany of them—including such stalwarts as Sears,Xerox, IBM, and Kodak—had faced serious hardships inthe 20-odd years since. Some of them recovered. Some,as I write, are struggling mightily to recover. Some aredead or, in all likelihood, soon will be.

So why do good companies go bad? This heartfelt andinsightful question launched me on a journey of discov-ery. I started by conducting archival research on com-panies that had failed during the past several decades,interviewed people from some of the failed companies,and eventually came to the conclusions presented here.

Although it is commonly believed that institutions are(at least potentially) immortal and humans are mortal, Ifound that the average life span of corporations isdeclining, even as that of humans is rising. Others havecome to similar conclusions. In the best-known work in

C H A P T E R

1Why Do Good Companies

Go Bad?

1

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this area, The Living Company, Arie de Geus found that one-thirdof the companies listed in the 1970 Fortune 500 had vanished by1983, either through acquisition, merger, or being broken up. DeGeus quoted a Dutch survey showing that the average corporatelife expectancy in Japan and Europe was 12.5 years. Anotherstudy found declining corporate life expectancy across the majorEuropean economies: from 45 to 18 years in Germany, from 13 tonine years in France, and from ten to four years in Great Britain.

Much of the decline in corporate life expectancy is the result of aheightened level of merger and acquisition activity in recentdecades. However, most of this activity is due to distress sellingrather than strategic buying because so many companies are introuble.

Let me say at once that I have no intention of discounting the needto learn the underlying causes of success—the “good habits” ofgood companies. Nor will I second-guess de Geus or Peters andWaterman or others, like Jim Collins. For very good reasons, theysingled out certain companies as models of success—companiesthat, for very different reasons, have since fallen on hard times. Mypurpose is not to reexamine why these companies were consid-ered “excellent” or “visionary” in the first place. I am interested inwhat happened to them afterward—why they fell, why they failed,why they lost the magic touch. What happened?

In my view, when companies rise to excellence, they often unwit-tingly develop self-destructive habits that eventually underminetheir success. As with people, these self-destructive habits arelearned, not innate, and we can watch as companies adopt pat-terns of behavior that are self-destructive. Sometimes these habitsget worse over time and become, in effect, addictions. But self-destructive habits can also be broken and overcome, and compa-nies can be put back on the road to improved health.

Often the turnaround is precipitated by a crisis. Our self-destruc-tive habits creep up on us, if you will. We overeat, fail to exercise,maybe even smoke, but we think we’re still doing okay—until wehave that minor heart attack, that potent reminder of mortality.Suddenly our self-destructive habits are gone, and we’re eating sal-ads and walking five miles a day. In the case of corporations, the

2 THE SELF-DESTRUCTIVE HABITS OF GOOD COMPANIES

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crisis might take the form of an emerging competitor, a suddenerosion of market share, or a technological advance that threatensto leave the company behind. Such developments can spell doom,or they can serve to shake companies out of their destructivebehavior patterns.

CHAPTER 1 • WHY DO GOOD COMPANIES GO BAD? 33

VOLUMEOBSESSION(Rising Costs andFalling Margins)

DENIAL(Cocoon of Myth,

Ritual, and Orthodoxy)

ARROGANCE(Pride Before the Fall)

COMPLACENCY(Success Breeds Failure)

COMPETENCYDEPENDENCE(Curse of Incumbency)

COMPETITIVEMYOPIA

(Nearsighted View ofCompetition)

TERRITORIALIMPULSE

(Culture Conflicts andTurf Wars)

FFiigguurree 11--11 Self-destructive habits of good companies

We’ll see plenty of examples of companies that are actively work-ing to curb their self-destructive habits, to change their behavior,as well as companies that have already done so and are “in recov-ery.” Our message is positive: if you’re willing to examine yourselfhonestly enough to discover your weaknesses, you can ultimatelytransform yourself.

So what are these self-destructive habits? We’ll enumerate themone by one in the following chapters (and they’re summarized inFigure 1-1). But first, let’s see them in action by examining threecompanies in the technology sector.

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DIGITALIt’s one of the great success stories in the annals of American busi-ness. In 1957 Kenneth Olsen, a 31-year-old engineer at MIT’sLincoln Laboratory, asked for $70,000 from American Research &Development to start a new firm he wanted to call DigitalComputer Corp. He got the money, but the venture capitalistsmade him change the name. They pointed out that too many bigcompanies, like RCA and General Electric, were losing money inthe computer business.

So Digital Equipment Corp. set up shop in an old wool mill inMaynard, Massachusetts, and Ken Olsen set about to pursue hisdream: to revolutionize the computer industry with the introduc-tion of the “minicomputer”—a smaller, simpler, more useful, andfar cheaper device than the bulky mainframes that were the indus-try standard.

In its first year, Digital had sales of $94,000. Five years later thatnumber reached $6.5 million. In 1977, the company hit the $1 bil-lion mark. Digital found itself leading an industry boom ripplingfrom the Boston area that created so many high-paying jobs itcame to be called the Massachusetts Miracle. At the same time, thereputation of its founder grew. He was brilliant and eccentric. Heprotected his innovative engineers. He instituted a no-layoff pol-icy. Digital was known as “a fun place to work.”

No wonder that when Tom Peters and Bob Waterman went “insearch of excellence” for what became their 1982 bestseller, Digitalnot only made the list of excellent companies but was also consid-ered one of the 15 “exemplars” that basically did everything right.It was one of the companies that represented “especially well bothsound performance and the eight traits [of excellence]” the authorsidentified. Such high accolades appeared to be borne out whenFortune magazine, in 1986, declared Olsen “arguably the most suc-cessful entrepreneur in the history of American business.”

Let’s jump ahead to the end of that decade. In January 1989,Digital announced it would introduce a range of personal comput-ers, along with their more powerful cousins, workstations. Thequestion was, had Olsen already waited too long? One thing wascertain: the stock was trading at $98, down from $199 just a year


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and a half earlier. Another certainty was that the minicomputer,the radical innovation on which Olsen had staked his company,was rapidly becoming a high-tech dinosaur. Today it’s clear thatthe writing was on the wall. But Olsen had erased it and scrawledhis own message: “The personal computer will fall flat on its facein business.” Now his company appeared to be acknowledging itsfailure to see the future.1

Despite the eleventh-hour about-face, the hemorrhaging at Digitalcontinued through 1991. Top executives were fleeing, and thecompany that abhorred layoffs was in the process of cutting10,000 employees from the payroll. By then, Olsen had been incharge for 34 years and still entertained no thoughts of retirement.Instead, he used the annual shareholders’ meeting that year tointroduce the company’s next-generation “Alpha” computer chip,which Olsen claimed was four times faster than the top-of-the-linechip from Intel. But the shareholders probably weren’t heartenedbecause the stock was now trading at $59 a share.

In the spring of 1992, the company flabbergasted Wall Street withthe news that it had lost $294 million in the quarter that had justended, only the second time in its history that Digital had reporteda loss. Olsen responded with a massive restructuring of top-levelmanagement. It didn’t help. By the end of April, the stock had fallento $46, its lowest price since 1985, and takeover rumors were circulating.

That same spring, the Wall Street Journal seemed to be workingon its first draft of Olsen’s obituary. The Journal noted that asecret meeting between Olsen and Apple’s John Sculley—a meet-ing that might have produced an alliance with much potential forDigital—had come to nothing. Instead, Apple had shocked theindustry by inking a broad technology-sharing agreement witharchenemy IBM.

The Journal described this as another opportunity apparently lostto Digital and Olsen. His persistent doubts about the PC—“he usedto call it a ‘toy’”—had crippled the nation’s second-largest com-puter maker when the market turned to PCs. The Journal alsonoted that Olsen’s resistance to another major trend of the lastdecade—so-called “open” systems that use standard operatingsoftware—had similarly impeded the company’s performance.


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Digital was now faced with the danger of being left behind by theindustry it was instrumental in creating. As it struggled with hugelosses on declining sales, repeated restructurings, and the exodusof key executives who questioned Olsen’s decisions, the companywatched its value plummet, with shares trading at one-fourth oftheir 1987 high.

At the same time, Olsen’s autocratic style was drawing widespreadcriticism. John Rose, who a month earlier had resigned as man-ager of Digital’s PC unit, told the Journal that the company “haseverything it needs to turn around—good people, good productsand great service—but it won’t happen while he’s still in charge.”And one of Digital’s former computer designers described Olsen asthe Fidel Castro of the computer industry, adding that he’s “out oftouch, and anyone who disagrees with him is sent into exile.”

One who had fallen into disfavor amid the recent turmoil wasDigital’s chief engineer William Strecker, who had opposed a main-frame project that Olsen backed, despite the fact that it was prov-ing a costly failure. The disbanding of Strecker’s group was viewedas an especially strong signal of disarray in the executive suite. Aformer Digital manager told the Journal that it was a “criminalshame,” because Strecker was the only member of the inner circlewho could develop a coherent product strategy.

The Journal suggested that Olsen’s support of the ill-fated VAX9000 mainframe, which cost $1 billion to bring to market butattracted few buyers, was partly responsible for Olsen’s failure towork out a deal with Apple. Roger Heinen, an Apple senior vicepresident who was privy to the meeting, blamed the stalemate onOlsen’s disinterest and lack of understanding of the importance ofthe personal computer industry. The Journal concluded thatOlsen’s vision of the computer industry was lacking and that hischoices were leaving the company at a disadvantage in a marketthat was rapidly transforming.2

Just two months later, in July 1992, Digital announced that Olsenwould retire as president and CEO, effective October 1. Olsenquickly followed with his own announcement that he would alsovacate his seat on the board at that time, thus severing all formal


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ties to the company he had led since its inception. His resignationwould also give a free hand to his successor, Robert Palmer, whofaced the unenviable task of rescuing a company that had reporteda loss of $2.79 billion in fiscal 1992.

Would the seven-year Digital veteran prove up to the challenge?He certainly seemed to be giving it his best shot. After six monthson the job, Palmer had reorganized, slashed costs as well as jobs,recruited a new management team from outside, changed thecolor of the Digital logo, and, most radically, sold the old mill, thecompany’s first and only home base. Palmer also announced a fun-damental change in philosophy: a 19 percent spending cut onproduct development and engineering. No longer would Digital putcompeting teams to work on the same or similar problems (a prac-tice highly praised in In Search of Excellence). “We have to ration-alize our spending, have less redundancy in hardware and softwaredesign,” Palmer told the business press.3

Early results were promising. In July 1993, the companyannounced quarterly earnings of $113 million. The stock price wasrising back into the mid-40s. Even more important in many ana-lysts’ minds, wrote the Washington Post, was that “under Palmerthe company is no longer in denial.”4

Too little, too late. Ultimately, Palmer couldn’t stop the bleeding.In January 1998, the crippled giant was acquired by Compaq—ironically, the world’s largest maker of PCs—for $9.15 billion. Thegreat Digital was dead.

All the postmortems agreed that, in the last analysis, the visionary’svision had failed: the company blinked and missed the PC revolu-tion; blinked again and missed the change to open, rather than pro-prietary, systems; and, in classic denial, continued through theearly ’90s to pour money into developing a new mainframe.

As C. Gordon Bell, one of the chief engineers in Digital’s earlydays, told the Boston Globe, the company’s success bred its fail-ure. “The VAX [minicomputer] took over the company, and whatit allowed them to do was not think. No one had to think from1981 until 1987 or ’88 because the VAX was so dominant.”5


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IBMDigital was not the only giant computer company that found itselfstruggling in the early 1990s. Big Blue, IBM itself, was also on theropes. What happened there makes for an interesting contrast. Butfirst let’s back up.

IBM’s roots go back to 1911, when two small companies specializ-ing in measuring scales, time clocks, and tabulating machines forclerks and accountants merged to form the Computing, Tabulat-ing, and Recording Company. The new company floundered forthree years, and its board seriously discussed liquidation. Instead,they hired Tom Watson Sr. away from National Cash Register in1914. Under Watson’s leadership, the company’s health graduallyimproved, and by 1930 it had become the market leader in tabu-lating machines. Watson’s far-reaching vision for the company wasin evidence when in 1925 he changed the company’s name toInternational Business Machines.

Watson Sr.’s success, and that of his company, is often attributedto his fierce adherence to what he called his “three basic beliefs”:give full consideration to the individual employee, spend a lot oftime making customers happy, and go the last mile to do thingsright and seek superiority in all that we undertake. Watson Sr. alsoconsciously created a culture to embody and promulgate thesebeliefs—“an organization of dedicated zealots,” as Jim Collins andJerry Porras called it in Built to Last. IBM’s process of institution-alization and indoctrination encompassed appearance (darksuits), behavior (no drinking), and attitudes (high and mighty). Inthe words of Watson Sr., “You cannot be a success in any businesswithout believing that it is the greatest business in the world.”6

Guided by its core beliefs and proud of its unique culture, IBMevolved from the leader in tabulating machines to the dominantplayer in the computer industry, a position it has held for decades.Not surprisingly, IBM was not only hailed as one of the 15 “exem-plars” in In Search of Excellence; it was also one of the 18 “vision-ary” companies profiled in Collins and Porras’s influential study,published in 1994.

To attain “visionary” status, say Collins and Porras, a company mustbe willing to take the big risk (much as Digital did by developing the


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minicomputer). A company must be willing to pursue what theauthors call a “Big Hairy Ambitious Goal.” In IBM’s case, the BHAGwas to reshape the computer industry in the early 1960s with an all-or-nothing investment in a new computer—the IBM 360. Accordingto the authors, when IBM rolled the dice on the 360, it was thelargest privately financed commercial project ever attempted, and itused more resources than the United States did to develop the firstatomic bomb. Tom Watson Jr., who succeeded his father as CEO,described it as the biggest and riskiest decision he had ever made.7

The gamble paid off, to say the least. The company soared on thesuccess of the 360, and its position of industry leader was furthersolidified—that is, until the company began to slip in the late1980s and early 1990s. In 1992 IBM suffered its worst year in his-tory, posting a nearly $5 billion net loss. Its stock was down 70 per-cent from its all-time high, wiping out more than $70 billion inshareholder value. What had happened?

In the case of Digital, Ken Olsen was in denial; he refused tochange. In contrast, IBM knew it needed to change but simplycouldn’t. Presiding CEO John Akers was no Ken Olsen, and helamented his inability to bring about the necessary transforma-tion. He couldn’t make the ocean liner change direction. IBM’s cul-ture was too ingrained, and its DNA seemed inalterable. Thecompany was trapped by its own competency, victimized by whatI call the “expertise paradox.” Plus, it had been doing so well forso long that it had become complacent. Ironically, IBM had origi-nated the concept of the home computer in the early 1980s. Butits position in mainframes was so dominant and so secure that itcontinued to set the company’s direction while the PC market wasinundated by less-expensive IBM clones. Lou Gerstner, formerCEO at IBM, hit on an appropriate metaphor in the title of hisautobiography: Who Says Elephants Can’t Dance?

Collins and Porras say that IBM began to lose its stature as avisionary company in the late ’80s and early ’90s because it lostsight of Watson Sr.’s core beliefs. There was too much emphasis onthe trappings of its vaunted culture—blue suits, white shirts, andeven computers—and not enough on real core values. “IBM shouldhave much more vigorously changed everything about itselfexcept its core values,” write the authors. “Instead, it stuck too


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long to strategic and operating practices and cultural manifesta-tions of the core values.”8

Collins and Porras go on to say that visionary companies have anextraordinary resiliency and the ability to rebound from adversity.But, interestingly, they looked with disapproval at IBM’s overturestoward Lou Gerstner, who was being offered IBM’s top post even asthey were writing. “What should one make of IBM’s 1993 decisionto replace its internally grown CEO with Gerstner—an outsiderfrom R.J. Reynolds with no industry experience? How does thismassive anomaly fit with what we’ve seen in our other visionarycompanies? It doesn’t fit. IBM’s decision simply doesn’t make any sense to us—at least not in the context of the seventeen hun-dred cumulative years of history we examined in the visionarycompanies.”

If the IBM board was looking for drastic change, the authors write,“With Mr. Gerstner, they’ll probably get it. But the real question forIBM—indeed, the pivotal issue over the next decade—is: CanGerstner preserve the core ideals of IBM while simultaneouslybringing about this momentous change?”9

They were not the only ones asking such questions in 1993. BeforeGerstner’s ascension, IBM had had only six chief executives in itslong history—all career Big Blue men. The new chief would notonly have to master a new industry, he would somehow have totransform an entrenched corporate culture. At the same time, hehad to tackle the fundamental task of rebuilding shareholder valueand reenergizing IBM’s huge workforce. Frankly, there weren’tmany believers. As soon as word of Gerstner’s selection got out,the company’s stock fell more than three dollars.

But within just a few months, the doomsayers were recanting.Gerstner was being widely praised for listening to and acting onthe recommendations of his 200 top customers, rather than on theadvice of his internal management team. It seemed he had stifledthe turf wars among competing functions and product lines bygoing straight to customers and finding out what their needs were.Collins and Porras, no doubt, would have also applauded becausein so doing Gerstner was surely getting back to Watson Sr.’s basicbeliefs—particularly number 2: “Spend a lot of time making cus-tomers happy.”


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In two short years, the Gerstner turnaround was well under way.He had cut the workforce; sold assets, including real estate and a300-piece art collection; and cut the dividend on the company’scommon stock. Costs were down, and profit margins were rising.The company was already back in the black by 1994; then itreported record profits in the first quarter of 1995, far exceedinganalyst forecasts. Shares were back up to $90, more than doubletheir 1993 low. The company even began to act like its old “impe-rial” self again—moving to acquire Lotus Corp. for $3.5 billion.

By 1998, Gerstner’s work was complete. As the San FranciscoChronicle rhapsodized, “Given up for dead by many people justfive years ago, Big Blue has enjoyed under Lou Gerstner one of thegreat turnarounds in the annals of U.S. business.” IBM’s recordsales and profits in 1997 and soaring stock price were signs thatIBM had regained its throne atop the computing world.

But it’s not enough to say that IBM had returned to its old self;more accurately, the company, under Gerstner, had managed toreinvent itself. The Chronicle noted that what had really drivenIBM’s prosperity was its ability to help businesses enter the Inter-net age by working with them to develop, implement, and main-tain their computer systems. This included their networks,intranets, and electronic commerce Web sites. IBM not only sup-plied the equipment—whether its own or other companies’—italso serviced the systems. Such services now account for morethan 50 percent of IBM’s sales.

The transformation has been quite remarkable. Golf fans watchingthe 2005 Masters Tournament, for example, saw dozens of commer-cials touting “IBM Global Services,” which basically continues the“Solutions for a Small Planet” and “e-business” campaigns thatbegan back in 1997 and 1998. With the help of those ads, IBM wastrying to acquire a reputation as the company that others turn to fortheir technology needs. It was much more successful in promotingthat image than its nearest competitor, Hewlett-Packard (HP).10

In the last analysis, Gerstner not only changed the fortunes ofIBM; he changed its image. The focus on services and the adver-tising supporting it gave the company a new personality. “Fiveyears ago, people would say that IBM has an incredible brain, butnot a heart,” says Ogilvy Mather’s Shelly Lazarus, whose company


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created the “Solutions” campaign. “Today, it...also has a heart anda soul and a sense of humor.”11

INTELIn 1968, Andy Grove and Gordon Moore built a factory to manu-facture chips for video game makers such as Atari. It was a goodidea, and their company, Intel Corp., had promise—until the videogame industry was overwhelmed by Nintendo, which preferred tobuy chips made in Japan. Suddenly Intel had more chips than buy-ers. About that time, though, IBM began to develop the PC, forwhich it would need just the sort of microchips that Intel was pro-ducing in abundance. It was a match made in high-tech heaven.Intel quickly became the world’s number-one chip maker, a posi-tion it has maintained ever since.

But technology, as we have seen, continues to develop. What hap-pened to the mainframe, and what subsequently happened to theminicomputer, is now happening to the PC. Cell phones, handheldcomputers, and other gadgets are eroding the demand for PCs.Now it is Intel’s turn to adjust to a changing marketplace. Let’stake a quick look at how the company has been doing.

At the end of 2000, Intel announced that its two-year partnershipwith Analog Devices was about to yield fruit. The company wasready to bring to market a new chip—the high-performance digi-tal signal processor (DSP) for use in “third-generation” wirelessdevices such as advanced cell phones and palm-size computers.The problem, though, as we saw with Digital, was that Intel wasfollowing, not leading, the market. Indispensable components ofelectronic gadgets like modems, CD players, and cell phones, DSPshad for some time been the fastest-growing segment of themicrochip market.

Intel’s job, then, was not only to produce the DSP, but also to oustthe market leader, Texas Instruments. (It’s worth noting that TIshowed considerable prescience in making the leap to DSP. Itcould have continued to make PC chips, but, realizing that Intelhad already won that battle, it looked over the horizon. There itsaw the future in “best-access” gadgets like the then-emerging cell


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phone, and it concluded that the DSP was the direction to take.)For its part, Intel realized, correctly, that its PC chip business wastied to slowing growth in PC sales, but the realization came laterrather than sooner. TI had already tied up a 60 percent share ofthe digital wireless phone business, and Mike McMahan, the com-pany’s head of R&D, told the Boston Globe that he was confidentof their position in the market.12

Like Digital and IBM, Intel’s story illustrates that when you’retotally dominant in your chosen arena, it’s hard to pay muchattention to what’s happening outside that arena. It’s too easy,also, to ignore competition. If that was the case with the DSP in2000, it happened to Intel again in 2003, when Advanced MicroDevices (AMD) beat Intel to the market with a product it calledOpteron—a chip that offered advanced 64-bit computing powerwhile retaining the ability to run thousands of 32-bit Windows-compatible programs. According to one account, Intel and othersinside the industry scoffed at the new chip from AMD, but withina year its customer list included IBM, Sun Microsystems, and HP.Then Intel had to play catch-up again. In early 2004, the companyannounced that it would add 64-bit capacity to its 32-bit Xeonserver chips.

The story’s amusing twist is that, a decade earlier, Intel’s then-CEO Andy Grove had derided AMD as “the Milli Vanilli of semi-conductors,” taunting the smaller company for mimicking Intelchip designs rather than creating its own processors from scratch.Fred Weber, AMD’s chief technology officer, admitted to feeling“some emotional satisfaction” from seeing the tables turned. Hecredited AMD’s success not to chance but to a five-to-seven-yearstrategy of “innovating in places where they were not.”

Has Intel’s dominant position also allowed it to take its customersfor granted? An executive at Boxx Technologies, an AMD cus-tomer, points out that AMD keeps Intel honest and that competi-tion is critical. “If you took AMD out of the picture,” he says, “Intelwould really slow down to maximize its return on investment.”AMD’s Weber puts it more forcefully: “Intel has an arrogance outof being a near monopolist.... Its respect for the customer is cre-ated by customers yelling at it.”13


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Whether Intel will be able to shed its perceived arrogance andcomplacency, stay abreast of its competitors, and respond to theevolving demands of the marketplace is a question now facing itsnewly appointed CEO, Paul Otellini, a company veteran whoascended through the marketing, rather than engineering, ranks.Will Otellini be able to reinvent Intel as Gerstner reinvented IBMand find a new direction for the company in the face of a largelysaturated PC market? Based on his advocacy of the “right-handturn”—a sharp break from the “cherished belief” that nothingmatters more than ever-faster, more powerful computer chips—Otellini may be the right man for the job. He appears to be push-ing the company toward the realization that, in addition to speed,customers now want things like built-in security features, wirelessconnectivity to the Internet, and better graphics and audio. Withhis marketing background, maybe he’ll be able to shake up thecompany’s elitist, high-tech engineering culture.

IT’S ALL ABOUT LEADERSHIPSo what “self-destructive habits” do you find in the interconnectedstories of these three companies? Denial? Arrogance?Complacency? Check. Check. Check. How about “competencydependence” and “competitive myopia”? Check, check. Given aslightly different slant, these stories could also illustrate our finaltwo self-destructive habits, “territoriality” (internal turf wars) and“volume obsession” (too-high cost structures). But I have lotsmore stories to tell. The following chapters spell out, define, andillustrate all seven of the self-destructive habits, examine othercompanies that have exhibited them, and look at how they cor-rected them—or failed to. The discussion, I hope, will show youways to identify such behavior in your own business and ulti-mately point the way back toward health and longevity.

First, though, let’s define our terms a little further. For our pur-poses, let’s consider two aspects, or connotations, of “bad.” Thefirst is the more obvious and direct: bad means unhealthy, notgood for you, contrary to your self-interest, or destructive.Behavior that makes your customers or suppliers resent you, thatmakes them seek out other business partners, seems clearly “bad”


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in this sense. Arrogance or abuse of stakeholders would seem to begood examples. But “bad” in the business arena can also suggest“lost opportunity.” Here, perhaps complacency, or underestima-tion of the competition, causes you to fail to maximize your poten-tial. Your behavior may not be “actively” bad, nor are you reviledby others in your community. But your vision has failed, and youhave lost, or are about to lose, your chance.

Finally, a word about leadership. Sometimes CEOs are directlyresponsible for the self-destructive habits their companiesdevelop. This is most likely to be the case with founding CEOs, orCEOs who refuse to retire, or who “clone” their successor, orwhose directors have been handpicked. Family-run businesses,where the “genetic influence” is strong, are similarly likely to fallinto self-destructive habits.

However, whether or not the CEO is responsible for the company’sself-destructive habits, it is definitely his or her job to break them.When proactive intervention is necessary, it can only come fromthe top. Sometimes, especially when the crisis is severe, when thehabits have become addictions, a new leader must be brought in.We saw this in the case of IBM, and you will see other examples inthe chapters to come.

Consider the performance of GE under Jack Welch. When Welchbecame CEO in the early ’80s, analysts regarded the company asa solid but staid performer, growing at the same rate as the grossnational product. Welch disagreed, and he soon threw GE into tur-moil by declaring it had to radically transform itself. He launcheda major restructuring under a strategy called “No. 1, No. 2,” whichmandated “fixing, closing, or selling” every business that was notfirst or second in worldwide market share and that did not offermajor global growth opportunities. In implementing this strategy,GE eventually sold 400 businesses and product lines—includinghousewares and mining operations—worth $15 billion andacquired 600 others worth $26 billion. By 1988, GE was organizedinto 14 major high-tech or service businesses that Welch believedhad tremendous global growth potential.

GE is a prime practitioner of anticipatory management, a proac-tive approach to controlling one’s destiny in a changing market.


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Anticipatory management is most needed and works best whenthe external environment is undergoing rapid and discontinuouschange. Anticipatory management gives organizations a majorcompetitive advantage. Trends that are anticipated can be plannedfor, and competitive advantage accrues for firms that do so betterand earlier than their competitors.

As shown in the following figure, when a company continues topractice “status quo” management and look inside-out rather thanoutside-in when the environment is changing, it begins a slipperydownward spiral. These companies die a slow death, as if inflictedwith a chronic disease.


LEADERSHIPSTYLE

CULTURE

PROCESSES

SYSTEMS

STRUCTURE

REGULATION

LEADERSHIP(OUTSIDE IN)

LEADERSHIP

(SHORT TERM)

LEADERSHIP(INSIDE OUT)

OPPORTUNITYMANAGEMENT

THREATDRIVEN

TODAY FUTURE

CURRENTLEADERSHIP

ANTICIPATORYMANAGEMENT

SURVIVALMANAGEMENT

STATUS QUOMANAGEMENT

FFiigguurree 11--22 Leadership styles

If the company confronts a sudden threat, it goes into crisis man-agement as a survival necessity. For example, if an investmentbank suddenly loses important customers because it has takenthem for granted, it can immediately undertake a campaign toassess how its remaining customers view the company and focusmore attention on relationship management. Such threat-driven

01_0131791133_ch01.qxd 3/19/07 1:02 PM Page 16

changes can prolong survival, but they don’t ensure growth orprosperity in the long run.

Leaders must anticipate environmental changes and proactivelyposition their companies to be even more successful than theywere under the status quo. They must intervene and transform thecompany’s culture, processes, structure, and systems internally.They also must alter the regulation externally to safely positionthe company’s future in a changing world of technology, competi-tion, capital markets, regulation, globalization, and marketneeds.14

Leadership is about shaping expectations; management is aboutdelivering expectations. Management is perfectly capable of sus-taining habits, whether good or bad. Real change is likely to comeonly from an executive with the power to initiate it.

Now, let’s look at those self-destructive habits.


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01_0131791133_ch01.qxd 11/26/2006 10:14 AM Page 18

AABG (Aditya Birla Group), 161ad hoc spending, 181Agnelli, Giovanni, 92–93Air France, 160Air India, 95–96Airbus, 51–52airlines

Air India, 95-96Boeing, 49–52complacency

distribution monopolies, success via, 86–89

regulated monopolies, successvia, 83

Continental Airlines, 83Jet Airways, 96Singapore Airlines, 96Southwest Airlines, 84, 245

Akers, John, 9Alexander, Robert, 26Allaire, Paul, 25Allen, Paul, 53American Airlines, 83American Express, 151–152American Telephone and Telegraph.

See AT&TAmway, 125Apple, 54Argyle Diamond mine, 87Arm & Hammer, 123, 240Armani, Giorgio, 93Armstrong, Michael, 80–82

263

arrogancebreaking the habit, 70–72defined, 45past achievements warp percep-

tion of present reality, 45–52pioneering products or services

nobody can duplicate, 58–61preventing, 236–238, 247warning signs of, 68-69when David conquers Goliath,

52–58when you’re smarter than the

other guys, 61–68aspartame, 110AT&T

complacency, 76-83Long Distance, identifying

costs, 186Auletta, Ken, 55automation

breaking territorial impulses,225–229

integration and, 193Avis, 144-146Avon, 116-119, 240

BBaby Bells, 82, 157bad, defined, 14Baldrige, Malcolm, 195Beatrice Foods, 171Bell system, 182

INDEX

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Bell, Alexander Graham, 76Bell, Gordon, 7BellSouth, 129–130benchmarks, 184BF Goodrich, 137, 134BHAG (Big Hairy Ambitious Goal), 9Bicoastal, 107Big Blue, 157Bilzerian, Paul, 107Bluestone, Irving, 47Boeing, 49–52Boeing, Bill, 49Bowles, Erskine, 173BP Exploration, 221Bradshaw, Thornton, 138brand management, 244branding, 99breaking bad habits

arrogance, 70–72becoming a world-class customer,

195–196competency dependence, 122–131competitive myopia, 157–161complacency, 101–102cost centers, 186–188decentralizing profit and loss, 188–189denial, 41-42downsizing management, 191–192identifying costs, 185–186mass customization, 193–194moving from vertical integration to virtual

integration, 189–190outsourcing, 190–191reengineering processes, 192–193target costing, 194territorial impulse, 216–229volume obsession, 185

Breen, Joe, 54Bridgestone/Firestone, 136Britannica.com, 108British Airways, 160British Telecom, 81broadening scope of markets and products,

158–159Brown, Charlie, 79Budget, 144bureaucracy, complacency, 98Burger King, 140, 143

CCanada Cement, 155Cantarella, Paolo, 93car rental industry, 144–146Carlson, Chester, 24Caston, Art, 21


Caterpillar, 194CEMEX, 155Central Selling Organization (CSO), 86chain stores, 29changing

consumer tastes, denial, 28-30leadership, 71

Chick-fil-A, 141Chongqing Cement, 155Christensen, Clayton, 109, 242Christiansen, Ole Kirk, 113Church, Dr. Austin, 123Cingular Wireless, 130Cisco Systems, 189, 241Clark, Richard, 65clustering, 139–140Coca-Cola Company, 238Collins, Jim, 30Compaq, 7comparing corporate behavior to human

behavior, 231–234competencies

core functional areas, 108developing new competencies, 127expanding range of, 126

competency dependence, 105, 108breaking the habit, 122–131design dependence, 113-115Encyclopaedia Britannica, 107–108preventing, 239–241, 248R&D

pharmaceuticals, 109-110Sweet ’N Low, 110–112

sales dependence, 115–119service dependence, 119-120Singer, 106–107warning signs of, 121–122

competitive force, 149competitive landscape, redefining, 157–158competitive myopia

breaking habits, 157broadening the scope of your product

or market, 158–159consolidating, 160counterattacking nontraditional

competitors, 160–161redefining landscape, 157–158refocusing on core business, 161–162

clustering, 139–140defined, 133McDonald’s, 140–143natural evolution of an industry, 134–137preventing, 241–243, 248television industry, 137–139warning signs

allowing small niche players to coexistwith you, 146–148

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when customer’s strategy shifts frombuy to make, 151–153

when supplier’s loyalty is won by non-traditional competitors, 148–151

when you become helpless against substitute technology, 156–157

when you underestimate new entrants,153–155

when No. 2 chases No. 1, 144-146complacency, 75

breaking the habit, 101–102culture, 98distribution monopolies, success via,

85–89government ownership or selection of

business, 89–96outsourcing, 102preventing, 238–239, 247regulated monopolies, success via, 76-85warning signs of, 97–100

Compton’s Encyclopedia, 107Computing, Tabulating, and Recording

Company, 8Condit, Phil, 50confusion, 215consolidation, 160Continental Airlines, 83Convis, Gary, 219core functional areas, competency, 108core technology, expanding, 240corporations, life span of, 1cost centers, 182–183, 186-188cost inefficiency. See volume obsessioncounterattacking nontraditional

competitors, 160–161credit card business, 152CRM (customer relationship

management), 226cross-functional teams, 219–221cross-subsidization, 84, 100, 183–184CSO (Central Selling Organization), 86culture

complacency, 98domination by functional specialty,

210–211subsuming within larger corporate

culture, 206-209customers, reorganizing around, 221–225

DDaimler-Benz, 20Daimler-Chrysler, 20de Beneditti, Carlo, 93decentralizing profit and loss, 188–189Dell Computer, 177, 227-228, 245

INDEX 265

Dell, Michael, 227DeLong, Thomas, 237Delta Airlines, 83denial

breaking the habit of, 41–42changing consumer tastes, 28-30defined, 19of emerging technologies, 23-28new global environment, 31-39preventing, 234–236, 247technological change, 22–23warning signs of, 39–41

design dependence, 113-115designing information technology

infrastructure, 99developing new competency, 127Digital Equipment Corp., 4–7disruptive technologies, 21, 242dissension, 214diversifying talent pool, 70doughnut theater, 171downsizing management, 191–192Drake International, 125Drucker, Peter, 191DSP (digital signal processor), 12DuPont, 123Durant, William, 38

EEastman Kodak, 208easyJet, 51Ebbers, Bernie, 57–58Ecco, 125Eichenwald, Kurt, 56Eisenstadt, Benjamin, 110Eisenstadt, Marvin, 110Electrolux, 161Eli Lilly, 109emerging technologies, 23-28encouraging outside perspectives, 71Encyclopaedia Britannica, 107–108energizing the company, 103Enron, 56–57Enterprise, 145Equal, 111evolution of industries, 134-137executive coaching, 237expansion

core technology, 240fast-growth companies, 169–175range of competencies, 126

expertise paradox, 9

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Ffactory forward, 192factory stores, 171fast-growth companies, 169–175Fastow, Andrew, 56FedEx, 85Fiat, 91-94finding new markets, 124Firestone, 134–137Firestone, Harvey, 135Fisher, George, 67Flavin, Joseph, 106focusing

on core business, 161–162resources, 129

Ford, Henry, 135franchising, 140, 174Franklin, Benjamin, 107Friedman, Thomas, 55functional silos, 199functional-level cost centers, 182

GGalvin, Chris, 213, 67Galvin, Paul, 213, 66Gates, Bill, 53–54GE (General Electric), 15, 127General Motors

arrogance, 46-48cost centers, 188global environment, 31-39pensions, 36

General Portland, 155Gerstner, Louis V., 10, 103Gibney, Alex, 56Gilmartin, Raymond, 63global environment, 31-39Gmail, 56Goeken, Jack, 78Goodyear, 134Google, 56Gordon, John Steele, 78Great American Tea Company, The, 28Great Atlantic and Pacific Tea Company,

28–30Grove, Andy, 12growth, strategies for, 241

H–IHaloid Co., 24Hammer, Mike, 101Hartford, George, 29


Heinen, Roger, 6Hertz, 144-145Hindustan Fertilizer Corporation, 95Hitler, Adolf, 20Home Depot, 103Honda, 47, 91HSBC (Hong Kong & Shanghai Banking

Corporation), 159Huxley, Thomas, 107

“I Am Different” syndrome, 39Iacocca, Lee, 59IBM, 8–11, 53, 126

competitive myopia, 151Lenovo versus, 167–169redefining competitive landscape, 158

Idei, Nobuyuki, 60Immelt, Jeff, 180implementing nontraditional succession

planning, 70inbreeding, 40indecision, 214India

Air India, 95-96diamond cutting, 88pharmaceuticals, 109

information technology infrastructure,designing, 99

integration, 225–229Intel Corp., 12–4, 151, 176internal marketing, 216–217Internet, Microsoft and, 54interventions, 233ivory tower

pushing managers out of breaking territorial impulse, 218–219

territorial impulse, 200–205

J–KJapan, 89–91JD Power, 195Jellinek, Emil, 20Jet Airways, 96JetBlue, 51Jones, Reginald, 102, 180Jung, Andrea, 118JWT (J. Walter Thompson), 206

Kahn, Alfred, 84–85Kaizaki, Yoichiro, 137Kay, Alan, 24Kedrosky, Paul, 27keiretsu, 90Kiley, David, 36Kim, Eric, 154Kodak, 127–128, 156

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Koizumi, Junichiro, 91Korn/Ferry, 125Krispy Kreme, 171–175Kristiansen, Kjeld Kirk, 114Kroger, 30

LLafarge S.A., 155Lafley, Alan, 186, 225Lay, Ken, 56Lazarus, Shelly, 11LBO (leveraged buyout), 171leadership, 15–17, 71Lego, 113–115Lenovo versus IBM, 167–169Leviev, Lev, 87Lezama, Fernando, 117licenses, volume obsession, 179–180life span of corporations, 1limiting personal publicity, 237Livengood, Scott, 172Locke, John, 107“Looking for Answers in All the Wrong

Places” syndrome, 40–41losing stakeholders, 121loss, decentralizing, 188–189lost opportunity, 15Lufthansa, 160Lugar, Richard, 215Lutz, Bob, 37

MMagnavox, 137Mahindra & Mahindra, 162malaise, 215Maloney, William, 120management

downsizing, 191–192pushing out of ivory tower, 218–219

Mandl, Alex, 80Marchionne, Sergio, 94marketing (internal), 216–217markets

broadening scope of, 158–159finding new markets, 124

Markham, Richard, 62mass customization, 193–194MasterCard, 152Matsushita, 138Maxwell, James Clerk, 107McAleer, Mack, 171McCaw Cellular Communications, 80McColough, Peter, 26McConnell, David, 116

INDEX 267

McDonald’s, 140–143McDonnell, Douglas, 49McGowan, William, 79MCI, 78–79McInerney, Jim, 103McMahan, Mike, 13McNeil Nutritionals, 111MediaOne Group, 80Merck, 61–65Merck, George, 61Meyer, Jerome, 28Michelin, 135Microsoft, 236

arrogance, 53–56competitive myopia, 151Internet and, 54

Miriam-Webster, 108MITI (Ministry of International Trade and

Industry), 90modus operandi, 154Monsanto Chemical Works, 124Moore, Gordon, 12, 176, 239Morito, Akio, 58Motorola, 66–68, 101, 176

mass customization, 193territorial impulses, 212–214

Mulcahy, Anne, 27

NNacchio, Joe, 80NCR, 80Neil, Dan, 37Netscape, 54Nevin, John, 136Nike, 239Nokia, 212nonoperating costs, 179–180nontraditional succession planning, 70Northwest Airlines, 83“Not Invented Here” syndrome, 39–40numbers (truth in), 184NUMMI (New United Motor Manufacturing,

Inc.), 219NutraSweet, 111–112

O–PObama, Barack, 215obligations (unintended), 177–179Ohga, Norio, 60oil industry, 234–235Ollila, Jorma, 213Olsen, Kenneth, 4–6Orton, William, 21

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Otellini, Paul, 14outsourcing

complacency, 102non-core functions, 190-191

Owen, David, 24

P&G, 244Palmer, Robert, 7Pan Am Airlines, 84Panke, Helmut, 37paradigm shifters, 242Pearce, Terry, 237Pearlman, Jerry, 138pensions, 36Pepsi, 110permits, volume obsession, 179–180Perot, Ross, 35personal publicity, limiting, 237pharmaceuticals, R&D, 109–110Philips Electronics, 138pioneers, volume obsession, 166–169Pirelli, 136Plougmann, Poul, 114Porter, Michael, 241Pottruck, David, 237Premji, Azim, 129Premji, Hasham, 128prescription drugs, 233preventing, 234

arrogance, 236–238competency dependence, 239–241, 248competitive myopia, 241–243, 248complacency, 238–239, 247denial, 234–236, 247territorial impulse, 244–248volume obsession, 243–244, 248

Pritchett, Lou, 223proactive migration, 239processes, reengineering, 192-193Procter & Gamble, 186

competitive myopia, 149–50outsourcing, 191reorganization, 223-225

productsbroadening scope of, 158–159reorganizing around, 221–225

profits, decentralizing, 188–189publicity (personal), limiting, 237Pulsar, 22Purdue University, 70

Q–RQueeny, John, 124Qwest, 156


R&D (research and development), 108pharmaceuticals, 109–110Sweet ’N Low, 110–112

Rao, P. V. Narasimha, 95RCA, 137Reagan, Ronald, 180Reddig, Edward, 160reenergizing companies, 103reengineering processes, 192–193refocusing resources, 129Rentschler, Frederick, 49reorganizing

around customers or products, 221–225complacency, 101

resources, refocusing, 129reward systems for sales forces, 243Rhodes, Cecil, 86Richardson-Vicks, 208Robinson-Patman Act, 29Rose, John, 6rotating management, 70Rudolph, Vernon, 171Russo, Patricia, 223

SSalerno, Robert, 144sales dependence, 115–119sales forces, reward systems for, 243Samsonite Luggage, 114Samsung, 155Sarnoff, David, 137SBC, 83, 130scale, volume obsession, 175–177Schacht, Henry, 222Schulhof, Michael, 59Schumpeter, Joseph, 21SCM (supply chain management), 226Sculley, John, 5Sears

competitive myopia, 146-148tires, 135

Sears, Michael, 50Seiko, 23self-destructive habits, 2–3, 231–234. See

also arrogance; competency depend-ence; competitive myopia; compal-cency; denial; territorial impulses;volume obsession

Semi-Tech Microelectronics, 106service dependence, 119-120Shell Company, 235Singapore Airlines, 96Singer Sewing Machine Company (SSMC),

106-107Singer, I. M., 106

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Sisodia, Rajendra S., 234Skilling, Jeffrey, 57Sloan, Alfred, 33Smale, John, 34–35SMEs (small and medium-sized

enterprises), 228Smith, Douglas K., 26Smith, Jack, 31, 34, 41Smith, Roger, 34Sobel, Robert, 84, 138Sony

arrogance, 58–61competitive myopia, 155

Sorrell, Martin, 206Southwest Airlines, 84, 245specialization, 239spending (ad hoc), 181Splenda, 111–112SSMC (Singer Sewing Machine Company),

106-107stakeholders, losing, 121Stead, Jerre, 80Stempel, Robert, 34Stonecipher, Harry, 52strategies for growth, 241Stratton, 68Strecker, William, 6Stringer, Howard, 61succession, 70supply chain management (SCM), 226Sweet ’N Low, R&D, 110–112SweetMate, 111

TTakenaka, Heizo, 91Talbot, Steve, 35talent pool, diversifying, 70Tapscott, Don, 21target costing, 194Tata, J. R. D., 95Tate & Lyle, 111taxes, 179–180Taylor III, Alex, 31, 38TCI (Tele-Communications Inc.), 80TCS (Tata Consultancy Services), 157technological change, 22–23technology

core technology, expanding, 240disruptive technologies, 242

Tektronix Inc., 25, 28television industry, 23, 137-139territorial impulses, 199–200

breaking habitsautomate and integrate, 225–229internal marketing, 216–217

INDEX 269

permanent cross-functional teams,219–221

pushing managers out of ivory tower,218–219

reorganization, 221–225corporate ivory tower, 200–204culture dominated by functional

specialty, 210–211culture subsumed within larger corporate

culture, 206-209Motorola, 212–214preventing, 244–248warning signs, 214-215

territoriality, 14territories, 200Texas Instruments, 12The Limited, 147Thoman, Rick, 253M, 103Timex, 22–23Ting, James, 106tire industry

Firestone, 134–137Sears, 135

Tobias, Randall, 79Toyota, 47, 221Traf-O-Data, 53travel agents, 119–120TRICON, 142truth speakers, 237

U–Vunderestimating new entrants in the

market, 153–155United Airlines, 83United States Postal Service, 85UPS (United Parcel Service), 85Upton Machine Company, 20Upton, Fred, 21Upton, Lou, 21

Vagelos, Roy, 62Vail, Theodore, 76vertical integration, 100virtual integration, 189–190Visa, 152visionary companies, 10visioning, 99volume obsession, 14, 165-166

breaking habits, 185becoming a world-class customer,

195–196cost centers, 186–188decentralizing profit and loss, 188–189downsizing management, 191–192identifiying costs, 185–186

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mass customization, 193–194outsourcing non-core functions,

190–191reengineering processes, 192–193target costing, 194vertical integration to virtual

integration, 189–190fast-growth companies, 169–175government costs, 179–180pioneers, 166–169preventing, 243–244, 248scale, 175–177unintended obligations, 177–179warning signs of, 181–185

WWack, Pierre, 235Wagoner, Rick, 32, 36Wal-Mart

competitive myopia, 149–150reorganization, 223-225

Walter, John, 80Walton, Sam, 223warning signs

of competency dependence, 121–122of competitive myopia, 146–157of complacency, 97–100of denial, 39–41of territorial impulse, 214-215of volume obsession, 181–185

watch industry, 22–23Waterbury Clock Company, 22Watson, Tom Jr., 9Watson, Tom Sr., 8Weber, Fred, 13Weiser, Philip, 82Welch, Jack, 15, 180Wendy’s, 140Western Electric, 77Western Union, 21WestPoint Stevens, 121Wexner, Leslie, 147Whirlpool, 21, 70, 161White Sewing Maching Co., 160Wilson, Joe, 24-26Wipro GE Medical Systems, 129Wipro Limited, 128Wire and Plastic Products, 206-209Woerth, Duane E., 84world-class customers, 195–196WorldCom, arrogance, 57–58Wygod, Martin, 63


X–ZXerox, 24–28

Yergin, Daniel, 95Young & Rubicam, 207Yum! Brands, 142

zaibatsu, 89Zander, Edward, 68, 213Zenith, 138Zocor, 65

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