2. Why good companies go bad
When business condition changes, the most successful companies are
often the slowest to adapt,
Donald N Sull
3. Why Good Companies Go Bad
One of the most common business phenomena is also one of the
most perplexing when successful companies face big changes in their
environment, they often fail to respond effectively.
The problem is not an inability to take action but an inability to take
appropriate action. There can be many reasons for the problem, that
the managers are either resistant to change or incompetent to
respond effectively, but one of the most common condition is
called active inertia.
Active Inertia:
Inertia is usually associated with inaction, active inertia is an
organization’ is tendency to follow established patterns of behavior
even in response to dramatic environmental shifts.
5. Why Good Companies Go Bad
Victims of Active Inertia
To see the destructive potential of active inertia, consider the examples of
“Firestone Tire & Rubber” and “Laura Ashley”. Both companies were leading
players in their industries, and both failed to meet the challenge of change
not because they didn’t act but because they didn’t act appropriately.
Firestone Tire & Rubber
As Firestone entered the 1970s, it was enjoying seven decades of
uninterrupted growth in tire market. Its culture and operations reflected the
vision of its founder, Harvey Firestone, who insisted on treating customers
and employees as part of the “Firestone family.” The Firestone country club
was open to all employees, regardless of rank. Fire Stones keep close
relation with automakers and later married her grand daughter with ford
grandson (Leading car marker in US)
6. Why Good Companies Go Bad
Then, almost overnight, everything changed. A French company, Michelin,
introduced the radial tire to the U.S. market after success in Europe in 60s.
Ford also declared in 1972 that all its new cars would have radials, it was clear
that they would dominate the U.S. market, too.
Firestone saw radials coming, and it swiftly took action and invested nearly
$400 million in radial production, by building new plant to radial tires and
converting several existing factories. Although Firestone’s response was quick
but it was far from effective. Because they invest in new product but using old
techniques rather then redesign production process. Because radial tire
needed much more high quality standard and techniques.
7. Why Good Companies Go Bad
By 1979, Firestone was in deep trouble, Its plants were running
at an anemic 59% of capacity, they recall 6 million tires from the
market and renting warehouses to store unsold tires because of
its high prices and useless product its domestic tire business had
burned more than $200 million in cash.
In last company surrender its shares in stock market and after
bidding twice it was finally acquire by the Japanese company
Bridgestone in 1988
8. Why Good Companies Go Bad
Laura Ashley:
• Now we see the other company Laura Ashley the victim of active inertia.
She started her garment business with her husband Burned in 1953 to
attract the ladies of British with her romantic designs of garments. The
business grew rapidly from a single silk screen press of flat to a major 500
retail shop across the world.
The purpose of the business is not to maximize profit but to promote
traditional British values which she felt were under control from sex, drugs,
and miniskirts in the 1960s.
From the beginning, she and Bernard exercised tight control over all aspects
of the business, keeping design, manufacturing, distribution, and retailing
in-house. The couple opened a central manufacturing and distribution
center in Wales, and they proudly labeled their garments “Made in Wales.”
10. Why Good Companies Go Bad
When Laura died in 1985, Bernard kept the company on the course his wife
had set. Fashion, however, changed and more competitors entered in the
industry and they chose practical, professional attire over Laura Ashley’s
romantic garb, Laura Ashley continued to pursue the outdated designs and
the expensive manufacturing processes that had served it so well in the
past.
By the late 1980s, an outside consultant had identified the major challenges
facing Laura Ashley and had outlined remedial actions. The bernard chaired
the meeting with new CEO to overcome the losses and regain the old
status. The new plans set off flurries of activity, but none of them went far
enough in recasting the company’s strategy. It remained unclear whether
Laura Ashley was a brand, a manufacturer, a retailer, or an integrated
fashion company
11. Why Good Companies Go Bad
Hallmarks of Active Inertia:
The fresh thinking that led to a company’s initial success is often replaced
by a rigid devotion to the status quo.
Strategic frames become blinders.
Processes harden into routines.
Relationships become shackles.
Values harden into dogmas.
12. Why Good Companies Go Bad
Strategic frames become blinders
Strategy frame are mind set of the manager that how they see the business.
Firestone managers only focus on their US competitors and become blind
that an outsider Europium company “Michelin” will change the whole
game.
Laura Ashley manager being blind and see its declining sales as normal
fluctuation rather then fashion change
13. Why Good Companies Go Bad
Processes harden into routines
The way things are done became a routine process. Company do not go for
alternate processes and Active inertia happens.
At Fire stone they stuck in old process of bias tire and on the basis of those
processes they develop Radial tire which became huge disaster for the
company.
Firestone failed to bring in people with fresh viewpoints, all top managers
had spend their entire career with Firestone, majority of the employee
belong to Akron and remaining are those who followed their father foot
steps because the company recruitment and promotion process
concentrate on building loyalty.
14. Why Good Companies Go Bad
Relationships become shackles
The ties between company and stake holder are very important in every
business, but when the condition shifts companies find that their
relationship have turned into shackles, The existing relationship with
customer can hinder companies to develop new product or open its market
into new demographic marker.
Firestone build close relationship their stake holder which bound them to
make any modification in their product., they were aware of radial tire but
ignore it completely.
Laura Ashley worked diligently to win hearts of their customers, franchisees
and investor at every step of company expansion, but they ignore that the
market trend is shifting and new competitors entering in the market with
more great fashion ideas. They stick to their old fashion.
15. Why Good Companies Go Bad
Values harden into dogmas
A company value is set of their beliefs which shows their corporate
culture. As company mature their values became rigid rules which are
hard to follow and when it happens it no longer inspire.
Firestone values are based on loyalty, their recruitment and promotion
system revolving around the Akron city, they didn’t hire new mind to
their company and stick to old believes.
Laura Ashley franchises values are based upon tradition which help
them to create strong brand identity in the world. They continuously
ignore that the fashion is changing and keep producing their traditional
outfits which are old fashioned.
Editor's Notes
Perplexing: hard to understand
It remained unclear whether Laura Ashley was a brand, a manufacturer, a retailer, or an integrated fashion company
Firestone competed head-to-head with Michelin in Europe and had witnessed the rapid rise of radial tires there
Stakeholder: (employee, customer, suppliers, distributors and share holders)
Values define how company see both themselves and their employers
Akron( headquater of Firestone)
