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  • 1. HBR FROM THE HARVARD BUSINESS REVIEW OnPoint A R T I C L E Why do some of the best companies languish Why Good Companies when markets change? Go Bad Because they insist on by Donald N. Sull doing only what has worked in the past. New sections to guide you through the article: • The Idea in Brief • The Idea at Work • Exploring Further. . . PRODUCT NUMBER 4320
  • 2. T H E I D E A I N B R I E F Why Good Companies Go Bad M a n y leading companies plummet from the pinnacle of success to the depths of failure same formulas become rigid and no longer work when the market changes significantly. when market conditions change. Because When companies understand that action can they’re paralyzed? To the contrary, because they be the enemy, they are less likely to join the engage in too much activity—activity of the ranks of the fallen. Before asking, “What should wrong kind. Suffering from active inertia, they we do?” and rushing into action, managers get stuck in their tried-and-true activities, even should ask, “What hinders us?” They should in the face of dramatic shifts in the environ- look deeply at the assumptions they make ment. Instead of digging themselves out of the about their business and industry. And they hole, they dig themselves in deeper. should pay particular attention to hallmarks of Such companies are victims of their own suc- active inertia: strategic frames becoming blind- cess: they’ve been so successful, they assume ers, processes hardening into routines, relation- they’ve found the winning formulas. But these ships becoming shackles, and values hardening into dogmas. T H E I D E A AT W O R K T h e following examples demonstrate the disastrous effects of active inertia: • Relationships become shackles. Every company needs strong relationships with its constituencies—customers, suppliers, • Strategic frames become blinders. Strate- employees. When conditions change, gic frames shape how managers view their however, these relationships can restrict business; they help managers stay focused. flexibility. But these frames can also blind managers to new options and opportunities. EXAMPLE: Apple’s vision of technically elegant computers EXAMPLE: and its freewheeling culture attracted the world’s After seven decades of uninterrupted growth, most creative engineers. Once computers became Firestone reigned supreme in the U.S. tire industry commodities, however, the company’s health in the 1970s. Then Michelin introduced the safer depended on cutting costs and speeding up pro- and more economical radial tire. Firestone com- duction time. But Apple’s engineers refused to peted with Michelin head-to-head in Europe, but change, and the company’s relationship with its was blind to the threat to its core U.S. market, and “star” employees damaged its ability to respond to so continued to produce conventional tires only. market changes. Firestone lost significant market share and was acquired a decade later. • Values harden into dogmas. A company’s vibrant values unify and inspire its people. • Processes harden into routines. Established Over time, however, they can harden into processes can become ends in themselves, rigid, self-defeating rules and regulations. even when they’re no longer effective. People overlook better ways of working. EXAMPLE: Polaroid placed very high value on cutting-edge EXAMPLE: research—to the point of defining itself by that McDonald’s built its success on standardized research. Eventually, that value turned into dog- processes, all dictated by headquarters. By rigidly matic disdain for marketing, finance, and even cus- following these procedures into the 1990s, tomer preferences. The company’s single-minded- McDonald’s lost market share to Burger King and ness nearly destroyed it. Taco Bell, who were much quicker to meet cus- tomers’ changing desires for healthier foods. HBR OnPoint © 2000 by Harvard Business School Publishing Corporation. All rights reserved.
  • 3. THINKING ABOUT… W h y Good C o m pa n i e s Go Bad by Donald N. Sull When business conditions change, the most successful companies are often the slowest to adapt. To avoid being left behind, executives must understand the true sources of corporate inertia. ne of the most common proverbial deer in the headlights. But O business phenomena is also one of the most perplexing: when successful companies face big that explanation doesn’t fit the facts. In studying once-thriving companies that have struggled in the face of changes in their environment, they change, I’ve found little evidence often fail to respond effectively. Un- of paralysis. Quite the contrary. The able to defend themselves against managers of besieged companies competitors armed with new prod- usually recognize the threat early, ucts, technologies, or strategies, they carefully analyze its implications for watch their sales and profits erode, their business, and unleash a flurry their best people leave, and their of initiatives in response. For all the stock valuations tumble. Some ulti- activity, though, the companies still mately manage to recover – usually falter. after painful rounds of downsizing The problem is not an inability to and restructuring – but many don’t. take action but an inability to take Why do good companies go bad? appropriate action. There can be It’s often assumed that the problem many reasons for the problem – rang- is paralysis. Confronted with a dis- ing from managerial stubbornness ruption in business conditions, com- to sheer incompetence – but one of panies freeze; they’re caught like the the most common is a condition that I call active inertia. Inertia is Donald N. Sull is an assistant pro- usually associated with inaction – fessor of strategic and international picture a billiard ball at rest on a management at London Business table – but physicists also use the School. term to describe a moving object’s Copyright © 1999 by the President and Fellows of Harvard College. All rights reserved. art work by edwina white
  • 4. THINKING ABOUT… tendency to persist in its current tra- cantly reduce the odds of joining the jectory. Active inertia is an organi- ranks of fallen leaders. zation’s tendency to follow estab- lished patterns of behavior – even in Victims of Active Inertia response to dramatic environmental To see the destructive potential of shifts. Stuck in the modes of think- active inertia, consider the exam- ing and working that brought success ples of Firestone Tire & Rubber and in the past, market leaders simply Laura Ashley. Both companies were accelerate all their tried-and-true ac- leading players in their industries, tivities. In trying to dig themselves and both failed to meet the chal- out of a hole, they just deepen it. lenge of change – not because they Because active inertia is so com- didn’t act but because they didn’t mon, it’s important to understand act appropriately. its sources and symptoms. After all, As Firestone entered the 1970s, it if executives assume that the enemy was enjoying seven decades of un- is paralysis, they will automatically interrupted growth. It sat atop the conclude that the best defense is ac- thriving U.S. tire industry, alongside tion. But if they see that action itself Goodyear, its crosstown rival in can be the enemy, they will look Akron, Ohio. Firestone’s managers more deeply into all their assump- had a clear vision of their company’s tions before acting. They will, as a positioning and strategy. They saw result, gain a clearer view of what the Big Three Detroit automakers really needs to be done and, equally as their key customers, they saw important, what may prevent them Goodyear and the other leading U.S. from doing it. And they will signifi- tire makers as their competitors, and
  • 5. THINKING ABOUT… w h y g o o d c o m pa n i e s g o b a d they saw their challenge as simply Firestone was not taken by surprise The women’s apparel maker Laura keeping up with the steadily increas- by the arrival of radials. Through its Ashley also fell victim to active in- ing demand for tires. large operations in Europe, it had ertia. The company’s eponymous The company had become a mon- witnessed firsthand the European founder spent her youth in Wales, ument to its own success. Its culture markets’ quick embrace of radial and she started the business with and operations reflected the vision tires during the 1960s. And it had her husband, Bernard, in 1953 as a of its founder, Harvey Firestone, Sr., developed forecasts that clearly indi- way to re-create the mood of the who insisted on treating customers cated that radials would be rapidly British countryside. The company’s and employees as part of the “Fire- accepted by U.S. automakers and garments, designed to evoke a ro- stone family.” The Firestone coun- consumers as well. Firestone saw mantic vision of English ladies tend- try club was open to all employees, radials coming, and it swiftly took ing roses at their country manors, regardless of rank, and Harvey him- action: it invested nearly $400 mil- struck a chord with many women in self maintained close friendships lion – more than $1 billion in today’s the 1970s. The business grew quickly with the top executives of the big dollars – in radial production, build- from a single silk-screen press in carmakers. (In fact, his grand- ing a new plant dedicated to radial Laura and Bernard’s London flat to daughter married tires and converting several existing a major retailer with a network of The fresh thinking t Henry Ford’s factories. 500 shops and a powerful brand the grandson.) ha Although Firestone’s response world over. Firestone creat- t le dt was quick, it was far from effective. Laura Ashley expanded her tiny ed fiercely loyal man- o Even as it invested in the new operation not to maximize profits agers, steeping them in ac product, it clung to its old ways of but to defend and promote tradi- om the company’s family values tional British values, which she felt pa working. Rather than redesign its and in its Akron-centered ny production processes, it just tin- were under siege from sex, drugs, worldview. 's kered with them – even though and miniskirts in the 1960s. From The company’s operating and in the beginning, she and Bernard o. iti the manufacture of radial qu capital allocation processes were al exercised tight control s su tires required much atu designed to exploit the booming de- cce higher quality over all aspects h e st mand for tires by quickly bringing ss of the to t is o tion new production capacity on line. In standards. f te n devo business, the capital-budgeting process, for In addition, replaced by a rigid keeping design, example, frontline employees iden- the company delayed manufacturing, distri- tified market opportunities and closing many of its factories that bution, and retailing in-house. The translated them into proposals for produced bias tires, despite clear couple opened a central manufactur- investing in additional capacity. indications of their impending ing and distribution center in Wales, Middle managers then selected the obsolescence. Active inertia had and they proudly labeled their gar- most promising proposals and pre- taken hold. ments “Made in Wales.” They pro- sented them to top executives, who By 1979, Firestone was in deep vided generous wages and benefits to tended to speedily approve the mid- trouble. Its plants were running at their employees, thereby avoiding dle managers’ recommendations. an anemic 59% of capacity, it was the labor unrest that crippled many Firestone’s long-standing success renting warehouses to store unsold British industries throughout the gave the company a strong, unified tires, it was plagued by costly and 1970s. They also established close sense of its strategies and values, its embar rassing product recalls, relationships with their franchisees relationships with customers and and its domestic tire business had and customers, who grew fiercely employees, and its operating and in- burned more than $200 million in loyal to the company’s products and vestment processes. The company cash. Although overall U.S. tire the values they embodied. had, in short, a clear formula for suc- sales were plateauing, largely be- When Laura died in 1985, Bernard cess, which had served it well since cause radials last twice as long as kept the company on the course his the turn of the century. bias tires, Firestone’s CEO clung wife had set. Fashion, however, Then, almost overnight, every- to the assumption of ever-growing changed. As more women entered thing changed. A French company, demand, telling the board that he the workforce, they increasingly Michelin, introduced the radial tire saw no need to start closing plants. chose practical, professional attire to the U.S. market. Based on a break- In the end, all of Firestone’s intense over Laura Ashley’s romantic garb. through in design, radials were safer, analysis and action was for naught. Competitors publicly dismissed the longer-lasting, and more economical The company surrendered much of Laura Ashley style as better suited to than traditional bias tires. They had its share of the U.S. market to for- milkmaids in the 1880s than CEOs already come to dominate European eign corporations, and it suffered in the 1980s. At the same time, ap- markets, and when Ford declared in through two hostile takeover bids parel manufacturing was undergoing 1972 that all its new cars would have before finally being acquired by a transformation. With trade barri- radials, it was clear that they would Bridgestone, a Japanese company, ers falling, fashion houses were dominate the U.S. market, too. in 1988. rushing to move production offshore 4 harvard business review July–August 1999
  • 6. w h y g o o d c o m pa n i e s g o b a d THINKING ABOUT… or to outsource it entirely, dramati- Frequently, though, the system as a serious competitor in their core cally reducing their operating costs. begins to harden. The fresh thinking domestic market. As a strategic frame Laura Ashley, in contrast, continued that led to a company’s initial suc- grows more rigid, managers often to pursue the outdated designs and cess is replaced by a rigid devotion to force surprising information into ex- the expensive manufacturing pro- the status quo. And when changes isting schema or ignore it altogether. cesses that had served it so well in occur in the company’s markets, the Laura Ashley’s managers repeatedly the past. formula that had brought success in- dismissed sales declines as tempo- The company did not, however, stead brings failure. (See the exhibit rary fluctuations rather than as in- suffer from paralysis. By the late “The Dynamic of Failure.”) In par- dicators of basic shifts in women’s 1980s, an outside consultant had ticular, four things happen: fashion. identified the major challenges fac- Strategic frames become blinders. Sadly, the transformation of stra- ing Laura Ashley and had outlined Strategic frames are the mental tegic frames into blinders is the rule, remedial actions. Recognizing the models – the mind-sets – that shape not the exception, in most human need to act, the board of directors, how managers see the world. The affairs. Consider the disastrous evo- chaired by Bernard, brought in a se- frames provide the answers to key lution of France’s military strategy ries of new CEOs, asking each to strategic questions: What business during the first half of this century. develop and carry out a restructur- are we in? How do we create value? At the turn of the century, French ing plan that would increase sales Who are our competitors? Which military doctrine glorified attack, and cut costs. The new plans set off customers are crucial, and which can reflecting a belief that élan vital flurries of activity, but none of them we safely ignore? And they concen- would prevail over all odds. But the went far enough in recasting the trate managers’ attention on what attack-at-all-costs strategy proved company’s strategy. It remained un- is important among the jumble of disastrous in the trenches of World clear whether Laura Ashley was a raw data that crosses their desks and War I. As a result, the country’s mili- brand, a manufacturer, a retailer, or computer screens every day. The tary changed its strategic frame and an integrated fashion company. Nor strategic frames of Firestone’s man- adopted a purely defensive posture, did the plans refresh the company’s agers, for example, focused their which took concrete form in the traditional values to bring them in eyes on their competitors around Maginot Line, a series of fixed for- line with the marketplace. Afflicted Akron and their customers in De- tifications erected to protect France’s with active inertia, Laura Ashley troit. The frames also help managers borders from German invasion. These went through seven CEOs in a de- see patterns in complex data by fit- fixed defenses, however, proved cade, but the company’s decline con- ting the information into an estab- worthless in halting blitzkrieg tinued. American televangelist Pat lished model. In Laura Robertson recently joined the board Ashley’s heyday, its stra- as an outside director, leading one fi- tegic frames enabled its nancial journal to conclude that the executives to quickly The Dynamic of Failure company sought divine inspiration judge potential product for its earthly problems. extensions based on Leading companies can become stuck in the modes of their fit with traditional thinking and working that brought them their initial The Four Hallmarks English style. success. When business conditions change, their once- of Active Inertia But while frames help winning formulas instead bring failure. To understand why successful com- managers to see, they panies like Firestone and Laura Ash- can also blind them. By ley fail, it is necessary to examine focusing managers’ at- Strategic Frames Blinders the origins of their success. Most tention repeatedly on The set of assumptions leading businesses owe their pros- certain things, frames that determine how managers perity to a fresh competitive for- can seduce them into be- view the business mula – a distinctive combination of lieving that these are the strategies, processes, relationships, only things that matter. Processes Routines and values that sets them apart from In effect, frames can con- The way things are done the crowd. As the formula succeeds, strict peripheral vision, customers multiply, talented work- preventing people from ers flock to apply, investors bid up noticing new options Relationships Shackles The ties to employees, the stock, and competitors respond and opportunities. Al- customers, suppliers, distributors, with the sincerest form of flattery – though Firestone com- and shareholders imitation. All this positive feedback peted head-to-head with reinforces managers’ confidence Michelin in Europe and that they have found the one best had witnessed the rapid Values Dogmas The set of shared beliefs way, and it emboldens them to focus rise of radial tires there, that determine corporate culture their energies on refining and ex- its leaders still couldn’t tending their winning system. see the French company harvard business review July–August 1999 5
  • 7. THINKING ABOUT… w h y g o o d c o m pa n i e s g o b a d Processes harden into routines. When a company decides to do something new, employees usually try several different ways of carry- ing out the activity. But once they have found a way that works par- ticularly well, they have strong incentives to lock into the chosen process and stop searching for alter- natives. Fixing on a single process frees people’s time and energy for other tasks. It leads to increased productivity, as employees gain ex- perience performing the process. And it also provides the operational predictability necessary to coor- dinate the activities of a complex organization. But just as with strategic frames, established processes often take on a life of their own. They cease to be means to an end and become ends in themselves. People follow the processes not because they’re effec- tive or efficient but because they’re well known and comfortable. They are simply “the way things are done.” Once a process becomes a routine, it prevents employees from considering new ways of working. Alternative processes never get con- sidered, much less tried. Active iner- tia sets in. At Firestone, the routinization of processes was one of the major im- As a strategic frame grows more rigid, managers often force surprising information pediments to an effective response into existing schema or ignore it altogether. to radial technology. The company attacks. The hard-won lesson from Once Xerox’s management recog- ran into manufacturing and quality the First World War became a tragic nized the magnitude of the threat problems because it tried to accom- blinder during the Second. from the new entrants, it belatedly modate radial production by just When strategic frames grow rigid, but aggressively launched a series of tweaking its existing processes. Fire- companies, like nations, tend to keep quality programs designed to beat stone produced tires that no one fighting the last war. When Xerox’s the Japanese at their own game. wanted because its capital-budget- management surveyed the competi- These initiatives did stem Xerox’s ing process promoted unnecessary tive battlefield in the 1970s, it saw share loss, and the company’s victory investments in capacity – the capital IBM and Kodak as the enemy, its over the Japanese was trumpeted in outlays were driven by frontline 40,000 sales and service representa- books with titles like Xerox: Ameri- managers who, quite understand- tives as its troops, and its patented can Samurai. The focus on beating ably, were not keen to volunteer technologies as its insurmountable the Japanese, however, distracted their own plants for closure. And it defenses. Xerox’s frames enabled the Xerox’s management from the failed to bring in people with fresh company to fight off traditional foes emerging battle for the personal viewpoints because its executive re- using established tactics and to re- computer. At the time, Xerox’s Palo cruitment and promotion processes buff repeated attempts by IBM and Alto Research Center was pioneer- concentrated on building loyalty Kodak to attack its core market. But ing several of the technologies that and instilling a uniform mind-set. the strategic frames blinded Xerox sparked the personal computer revo- Even as the company struggled with to the new threat posed by guerrilla lution, including the graphical user change, it continued to hire and pro- warriors such as Canon and Ricoh, interface and the mouse. But Xerox mote “people like us.” In 1972, all of which were targeting individuals was unable to capitalize on the new Firestone’s top managers had spent and small companies for their high- opportunities because they lay out- their entire careers with the com- quality compact copiers. side its strategic frames. pany, two-thirds had been born and 6 harvard business review July–August 1999
  • 8. w h y g o o d c o m pa n i e s g o b a d THINKING ABOUT… raised in Akron, and one-third had When conditions shift, however, followed in their fathers’ footsteps companies often find that their rela- as Firestone executives. McDonald’s is another example tionships have turned into shackles, limiting their flexibility and leading Are You Suffering of a company whose routines have them into active inertia. The need to from Active Inertia? dulled its response to shifting mar- maintain existing relationships with ket conditions. In the early 1990s, customers can hinder companies in Active inertia is insidious by nature. the fast-food giant’s operations man- developing new products or focusing Because it grows out of success, it ual comprised 750 pages detailing on new markets. Kirin Brewery, for 1 often spreads unnoticed in corpora- every aspect of a restaurant’s busi- example, gained control of a daunt- tions. Sometimes, in fact, what man- ness. For years, the company’s re- ing 60% share of the postwar Japa- agers consider to be their company’s lentless focus on standardized pro- nese beer market by building strong strengths are actually signs of weak- cesses, all dictated by headquarters, relationships with businessmen, ness. If many of the following state- had allowed it to rapidly roll out its many of whom had received the ments ring true for your company, winning formula in market after company’s lager as part of their ra- you may want to take a fresh look market, ensuring the consistency tions in the army. In the 1980s, Kirin at your strategic frames, processes, and efficiency that attracted cus- was reluctant to alienate its core relationships, and values. tomers and dismayed rivals. customers by offering the trendy dry “We know our competitors By the 1990s, however, McDon- beer favored by younger drinkers. inside out.” ald’s was in a rut. Consumers were Kirin’s slow response allowed Asahi looking for different and healthier Breweries to catch up and then sur- “Our top priority is keeping our existing customers foods, and competitors such as Burger pass it as the industry leader. happy.” King and Taco Bell were capitalizing Managers can also find them- on the shift in taste by launching selves constrained by their rela- “We’re not the world’s greatest new menu items. McDonald’s, how- tionships with employees, as innovators, but we run a tight ship.” ever, was slow to respond to the the saga of Apple Computer “Our processes are so well tuned that the changes. Its historical strength – a vividly illustrates. Apple’s company could practically run itself.” single-minded focus on refining its vision of technically elegant “We focus R&D on product refinements mass-production processes – turned computers and its free- and extensions, not on product break- into a weakness. By requiring menu wheeling corporate culture throughs.” decisions to pass through headquar- attracted some of the most ters, the company stifled innovation creative engineers in the “We’re skeptics. In our view, the leading and delayed action. Its central devel- world, who went on to de- edge is the bleeding edge.” opment kitchen, removed from the velop a string of smash “We can’t allow ourselves to get distracted actual restaurants and their cus- products including the Ap- by all the new fads in the marketplace.” tomers, churned out a series of prod- ple II, the Macintosh, and “We have a very stable top-management ucts, such as the McPizza, McLean, the PowerBook. As com- team.” and Arch Deluxe, but they all failed puters became commodi- to entice diners. ties, Apple knew that its “We have a well-entrenched corporate Relationships become shackles. In continued health depended culture.” order to succeed, every company on its ability to cut costs and “We will never relinquish our core must build strong relationships – speed up time to market. Im- competency.” with employees, customers, suppli- posing the necessary disci- “Our processes are world class, and we ers, lenders, and investors. Laura and pline, however, ran counter follow them religiously.” Bernard Ashley worked diligently to the Apple culture, and top to win the hearts of new customers, management found itself frus- “If it ain’t broke, we don’t fix it.” franchisees, and investors at every trated whenever it tried to exert “We have high levels of employee step of their company’s expansion. more control. The engineers loyalty, but when we bring in talented Harvey Firestone, Sr., maintained simply refused to change their new people, they often get frustrated close friendships with his custom- ways. The relationships with and leave.” ers, provided loans out of his own creative employees that enabled “We’ve carved out an enduring lead- pocket to struggling tire dealers dur- Apple’s early growth ultimately ership position in our industry.” ing the Great Depression, and social- hindered it from responding to en- ized with many of his company’s top vironmental changes. “We view our current distributors as key strategic partners. We don’t executives. Firestone and the Ash- Banc One is another company want to alienate them by rushing leys, like many successful execu- that was hamstrung by its relation- into new channels.” tives, wove the warp of economic ships with employees – in particular, transactions with the woof of social its managers. Growing from humble “Our corporate values are sacred; relationships to strengthen the fab- beginnings, Banc One became the we’ll never change them.” ric of their companies. most profitable U.S. bank in the early harvard business review July–August 1999 7
  • 9. THINKING ABOUT… w h y g o o d c o m pa n i e s g o b a d 1990s, with a market capitalization the company’s traditional values, Renewal, Not Revolution that topped that of American Ex- helping to create a strong brand iden- press and J.P. Morgan. Its formula for tity around the world. Success breeds active inertia, and success was to acquire healthy local As companies mature, however, active inertia breeds failure. But is banks, retain their incumbent man- their values often harden into rigid failure an inevitable consequence agers, and grant those managers con- rules and regulations that have legit- of success? In business, at least, the siderable autonomy in running their imacy simply because they’re en- answer is no. While Firestone floun- businesses. These “uncommon part- shrined in precedent. Like a petrify- dered, Goodyear made a smooth tran- nerships,” as Banc One dubbed the ing tree, the once-living values are sition to radial tires, emerging as one relationships, motivated the man- slowly replaced by the cold stone of of the three global powers in the tire agers to act as entrepreneurs and re- dogma. As this happens, the values industry. While Laura Ashley con- spond to local market conditions. no longer inspire, and their unifying tinued its downward drift, Gucci But as consolidation and deregula- power degenerates into a reactionary righted itself after a brief stumble. tion changed the banking industry, tendency to circle the wagons in the History reveals many such pairs of Banc One began to struggle. Many of face of threats. The result, again, is industry leaders whose fates diverged its best customers were being stolen active inertia. when they were forced to respond by aggressive new competitors like Polaroid’s steady decline illus- to environmental changes. Think of Fidelity Investments, and the high trates how once-vibrant values can General Electric and Westinghouse, cost of its decentralized, locally fo- ossify. Founded by inventor Edwin Volkswagen and Renault, Samsung cused operations put it at a disadvan- Land, Polaroid rose to prominence and the Hanjin Group, Southwest tage to more efficient rivals like First by pioneering a series of exciting Airlines and People Express. Union and NationsBank. Banc One technologies like instant photog- Successful companies can avoid – was slow to standardize its products raphy, and its employees prided or at least overcome – active inertia. and centralize its back-office oper- themselves on the company’s R&D First, though, they have to break free ations because it knew that such leadership. But over time, Polaroid’s from the assumption that their worst moves would curb the autonomy of devotion to excellent research turned enemy is paralysis. They need to re- the local bank managers. It regained into a disdain for other business ac- alize that action alone solves noth- its upward momentum only after its tivities. Marketing and finance, in ing. In fact, it often makes matters CEO, John B. McCoy, decided to particular, were considered relatively worse. Instead of rushing to ask, abandon the cherished uncommon unimportant so long as the company “What should we do?” managers partnerships altogether. had cutting-edge technology. Valu- should pause to ask, “What hinders Relationships with distributors ing technological breakthroughs us?” That question focuses attention can also turn into shackles. Dell above all else, Polaroid’s managers on the proper things: the strategic Computer has surged ahead of rival continued to invest heavily in re- frames, processes, relationships, and PC makers by selling directly to cus- search without adequately consider- values that can subvert action by tomers. Incumbents like Hewlett- ing how customers would respond. channeling it in the wrong direction. Packard and IBM have been slow to Not surprisingly, sales stagnated. Most struggling companies have copy Dell’s model, fearing a backlash Today the company is worth only a good sense of what they need to do. from the resellers who currently ac- one-third of what a bidder offered in They have stacks of reports from count for the vast majority of their an acquisition attempt in 1989. inside analysts and outside consul- sales. Airlines like Lufthansa, British Royal Dutch/Shell is another tants, all filled with the same kinds Airways, and KLM face a similar company whose values became a of recommendations. Firestone’s dilemma. They’ve been slow to pro- hindrance. During the 1930s, Shell leaders were well aware of the supe- mote direct sales – over the Internet, was dominated by Henri Deterding, riority of the radial tire, and Laura for example –because they don’t want who was a strong leader and a Nazi Ashley’s executives knew that more to antagonize the travel agents they sympathizer. Shell’s other execu- and more women were joining the rely on for filling seats. tives finally forced Deterding out, workforce. Their problem was that Values harden into dogmas. A and the painful episode imprinted on they lacked a clear understanding of company’s values are the set of the company a distaste for central how their old formulas for success deeply held beliefs that unify and in- control –a value that came to perme- would hinder them in responding to spire its people. Values define how ate its culture and led to the estab- the changes. employees see both themselves and lishment of fiercely independent Even after a company has come their employers. The “Firestone country managers. The decentral- to understand the obstacles it faces, man,” for example, exemplified loy- ized structure enabled Shell to seize it should resist the impulse to rush alty to the company and a deep com- growth opportunities around the forward. Some business gurus exhort mitment to the community. Values world. But when oil prices fell dur- managers to change every aspect of also provide the centripetal force ing the 1990s, the belief in decentral- their companies simultaneously, to that holds together a company’s far- ized authority prevented the com- foment revolution within their orga- flung operations. Laura Ashley fran- pany from quickly rationalizing its nizations. The assumption is that chisees rallied around the banner of operations and cutting costs. the old formulas need to be thrown 8 harvard business review July–August 1999
  • 10. w h y g o o d c o m pa n i e s g o b a d THINKING ABOUT… to the wind – and the sooner, the bet- new chief executive wasted no time. soned insiders that the company’s ter. But the veterans of change pro- He closed five of the company’s 14 tire stores had never been profitable. grams whom I’ve talked to argue domestic plants, severed its long- Firestone’s days as an independent against that approach. They say that standing relationships with several company were numbered. by trying to change everything all at customers, replaced the bottom-up Goodyear, by contrast, took a very once, managers often destroy crucial capital-budgeting process with a different path. Respectful of its cor- competencies, tear the fabric of so- strict top-down approach, and filled porate heritage but not beholden to cial relationships that took years to key management posts with a crew it, Goodyear adapted to the new weave, and disorient customers and of outsiders. (See the insert “The In- competitive environment through employees alike. A revolution pro- side-Outsider as Change Leader.”) a series of carefully staged changes, vides a shock to the system, but the The new CEO’s revolution saved avoiding the need for a revolution. shock sometimes proves fatal. Firestone from bankruptcy, but it The company cut its production ca- Look at what happened when Fire- left the company poorly positioned pacity for traditional tires in a way stone finally recognized the obsta- for future growth. The team of out- that showed respect for its long- cles that were preventing it from side managers disposed of several of standing commitments to workers succeeding. In 1980, Firestone’s board Firestone’s most promising busi- and communities. Wherever possi- brought in a CEO known for his nesses and invested heavily in tire ble, it converted existing factories to prowess as a turnaround artist. The retailing, despite warnings from sea- radial production or built new radial The Inside-Outsider as Change Leader Guiding a company through big year in the company’s interna- Finally, inside managers can changes requires a difficult bal- tional division, where he had break free of their old formulas ancing act. The company’s her- watched the rapid spread of radi- by imagining themselves as out- itage has to be respected even as als in Europe. He understood the siders, as Intel’s executives did in it’s being resisted. It’s often as- company’s heritage, but he could deciding to abandon the memory sumed that outside managers are see it from the objective view- business. Intel had pioneered the best suited to lead such an effort, point of an outsider. market for memory chips, and for since they’re not bound by the Inside-outsiders have led many most of its executives, employ- company’s historical formula. of the most dramatic corporate ees, and customers, Intel meant Lou Gerstner’s success in turning transformations in recent times: memory. As new competitors en- IBM around is frequently held up Jack Welch spent most of his tered the market, however, Intel as evidence of the need for an out- career in GE’s plastics business; saw its share of the memory busi- sider. I would argue, though, that Jürgen Schrempp was posted in ness dwindle from more than 90% Gerstner should be viewed more South Africa before returning to in the early 1970s to about 5% a as an exception than an example. run Daimler-Benz, now Daimler- decade later. At the same time, in- Typically, outsiders are so quick Chrysler; and Domenico De Sole creasing industry capacity was sti- to throw out all the old ways of served as the Gucci Group’s legal fling prices. working that they end up doing counsel before leading that com- Although Intel had built an at- more harm than good. pany’s dramatic rejuvenation. tractive microprocessor business The approach I recommend is to Another alternative is to as- during this time, it clung to the look for new leaders from within semble management teams that memory business until its chair- the company but from outside the leverage the strengths of both in- man, Gordon Moore, and its pres- core business. These managers, siders and outsiders. When Gerst- ident, Andy Grove, sat down whom I call inside-outsiders, can ner took over at IBM, he didn’t and deliberately imagined what be drawn from the company’s force out all the old guard. Most would happen if they were re- smaller divisions, from interna- operating positions continued to placed with outsiders. They agreed tional operations, or from staff be staffed by IBM veterans with that outsiders would get out of functions. Charles Pilliod, for ex- decades of experience, but they the memory business – and that’s ample, the CEO who led Good- were supported by outsiders in exactly what Moore and Grove year into the radial age, was born key staff slots and marketing did. While a company’s competi- and raised in Akron and worked roles. The combination of per- tive formula exerts a tremendous his entire career with Goodyear. spectives has allowed IBM to use gravitational pull, thinking like But he had spent 29 of his 31 years old strengths to fuel its passage outsiders can help insiders to prior to taking the helm at Good- down an entirely new course. break free. harvard business review July–August 1999 9
  • 11. THINKING ABOUT… w h y g o o d c o m pa n i e s g o b a d facilities adjacent to closed plants, Valley companies, Gerstner empha- tia exists because the pull of the past retaining most employees and thus sized IBM’s reputation for stability is so strong. Trying to break that pull mitigating the disruption to the and responsibility. He reassured cor- through a radical act of organiza- communities. And whereas Fire- porate customers that they could tional revolution leaves people dis- stone radically reduced its level of rely on Big Blue to help them move oriented and disenfranchised, cut off customer service, Goodyear contin- into the world of networked com- from the past but unprepared to ued to invest in its customer rela- puters. Instead of abandoning IBM’s enter the future. It’s better for man- tionships, establishing a basis for mainframe business, Gerstner ex- agers to respect the company’s heri- future growth. panded services and acquired soft- tage. They should build on the foun- If ever there appeared to be a can- ware that complemented IBM’s dations of the past even as they didate for revolution it was IBM in heavy metal, enabling the company teach employees that old strategic 1993. When Lou Gerstner left RJR to offer “total solutions” to custom- frames, processes, relationships, and Nabisco to take the helm at IBM, he ers’ information technology needs. values need to be recast to meet new entered a company that had lost Gerstner’s strategy of transforming challenges. more than $16 billion in three years, IBM through renewal rather than had been singled out as a dinosaur revolution has succeeded beyond 1. For a discussion of how relationships with customers can prevent a company from inno- by Fortune, and was in the process of anyone’s expectations, leading to a vating, see Joseph L. Bower and Clayton M. being carved into 13 divisions that more than fourfold increase in the Christensen, “Disruptive Technologies: Catching the Wave,” HBR January–February could be sold off in chunks. Gerstner company’s share price and position- 1995. shook up the hidebound IBM culture ing it to continue as an industry and slashed costs, but he also pre- leader into the next century. Product no. 4320 served and nurtured many of IBM’s IBM’s turnaround offers an impor- To place an order, call 1-800-988-0886. traditional strengths. Rather than tant lesson to any successful com- ape the freewheeling style of Silicon pany facing big changes. Active iner- 10 harvard business review July–August 1999
  • 12. E X P L O R I N G F U R T H E R . . . Why Good Companies Go Bad ARTICLES “The Reinvention Roller Coaster: Risking the “Leading Change: Why Transformation Present for a Powerful Future” by Tracy Goss, Efforts Fail” by John P. Kotter (Harvard Richard Pascale, and Anthony Athos Business Review, March–April 1995, Product (Harvard Business Review, November– no. 4231) December 1993, Product no. 93603) For companies who’ve recognized the need to Like Sull, these authors look at the costs of change in response to new market conditions, acting on the basis of outmoded assumptions this article by Kotter provides a rational and premises. Change programs usually sequence for working through the change promise incremental progress rooted in the process. Kotter bases his insights on the company’s previous experience. Many organi- transformation efforts he witnessed at more zations, however, require a complete reinven- than 100 companies over ten years. His first tion, not marginal improvement. Reinvention major lesson is that a change process goes is not changing what already is, but creating through a series of phases that usually require what isn’t. By conceiving a new context that considerable time. His second lesson is that leads to a break with limiting beliefs from the serious mistakes in any of the phases can past, the process of reinvention creates open- have a devastating impact on the process as a ness to a new, seemingly impossible future. whole. To help companies avoid that, Kotter examines eight big errors that block success- “Evolution and Revolution as Organizations ful renewal, from failing to establish a sense Grow” by Larry E. Greiner (Harvard Business of urgency to not anchoring changes in the Review, May–June 1998, Product no. 98308) corporation’s culture. In their haste to leap into the future, man- agers fail to consider historical context—the way history can serve as a guide to the future. Companies pass through a series of develop- mental stages, each stage beginning with a period of evolution that is marked by steady growth, and ending with a period of revolu- tion that is marked by turmoil. By knowing where they are in the company’s developmen- tal sequence, managers can learn to identify appropriate actions and solutions. The criti- cal task during the revolutionary periods is to find a new set of organizational practices that will carry the organization into its next phase of evolutionary growth. Visit us on the Web at: U.S. and Canada: 800-988-0886 617-783-7500 • Fax: 617-783-7555