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Cautionary tales of corporate confusion

AUTHOR: Deborah Tarrant   DATE: 08.12.05   ISSUE 3, 2005

Even the world’s smartest executives can fall victim to prevalent tendencies such as over-confidence, poor communication, making incorrect assumptions and heading in the wrong direction, frequently with fatal consequences for their organisations.

People often blame externally driven reasons for failure. The truth is they chose not to cope and didn't face reality.

Illustration: Gregory Baldwin

Oddly enough, business leaders who blunder spectacularly are often exceptionally capable and talented people. “They have a great track record and are strong managers for a long period of time – and then something happens,” says Professor Sydney Finkelstein, the Steven Roth Professor of Management at Dartmouth’s Amos Tuck School of Business Administration in the United States.

Finkelstein and a team of researchers determined human error was responsible for corporate collapse following more than 200 interviews with insiders at some of the world’s top companies. The results of the six year research project on leadership failure have been published in Finkelstein’s best-selling book, Why Smart Executives Fail.

The professor’s cautionary tales of companies gone awry engaged an audience of top-level Australian business leaders, including Westfield chairman Frank Lowy AC and the Chancellor of the University of NSW and prominent company director, David Gonski AO, in the first of AGSM’s Meet the Author events in the Frank Lowy Library.

Photo: David Smyth

Finkelstein outlined for the group his team’s research on the mixed fortunes of 51 companies, which concluded top executives fail because they:

• Choose not to cope with innovation and change
• Misread the competition
• Pursue the wrong vision
• Hold an inaccurate view of reality
• Ignore or don’t receive vital information
• Identify too closely with the company

In explaining the research findings, Professor Finkelstein used archetypal case studies.

UNSW Chancellor David Gonski AO addressing an audience of business leaders at an AGSM reception held in honour of Frank Lowy AC

Photo: David Smyth

Motorola’s reality check

Executives at Motorola, the world leader in analogue mobile phones in the mid ’90s, were slow to pursue the digital trend because the highly successful managers in the cell phone division had grown their careers in the analogue business.

Motorola owned several digital patents, but rather than making their own digital mobile phones, the company’s executives decided instead to licence the technology to competitors. While the trend lines for digital mobiles were going vertical, the company relied on an internal measure, a sophisticated computer-driven algorithm, for forecasting.

“The lesson from Motorola is quite broad,” Professor Finkelstein explained. “People often blame externally driven reasons for failure.” However, the Motorola example was typical of all the 51 companies studied, in every case people knew what was going on, but decided not to do anything about it. “The truth is they chose not to cope and didn’t face reality,” he says.

Professor Finkelstein and a team of researchers determined human error was responsible for corporate collapse following more than 200 interviews with insiders at some of the world’s top companies

Wang’s wrong call

Executive mindset failure was the cause of Wang Laboratories, a hugely successful manufacturer of word processors in the 1970s, late entry to the personal computer (PC) market. In the early days of his business, Dr An Wang, an exceptionally clever Taiwanese-born businessman who had built his US$2 billion company from scratch, was sued by computer giant IBM over a patent infringement. He developed a deep loathing for IBM that became an obsession, clouding his judgment, according to Professor Finkelstein who received considerable insights for his research from the founder’s son, Fred Wang.

When IBM moved to dominate the PC market, Dr Wang initially declined to take his company down the same path. The once brilliant businessman chose the wrong strategy due to a mindset failure that allowed emotions to cloud his normally clear thinking. Although subsequently Wang would market a personal computer that rated highly in comparative technical tests, it ran on a proprietary – not IBM-compatible – operating system and potential buyers had difficulty buying software for it.

“In most instances, executive mindset failure happens because senior executives made incorrect assumptions,” reports Finkelstein. “Few companies spend much time focussing on the underlying assumptions of strategic initiatives.”

Rubbermaid’s innovative assumption

Multi-billion dollar company Rubbermaid’s strategy was to be super-innovative, releasing new rubber products almost daily. In the mid-late 1990s, with the rise of the big retailer, executives at the market leading rubber manufacturer were shocked to be told their company needed to fall in line with WalMart’s warehousing and distribution systems and demands for lower pricing. Turmoil ensued, resulting in a high turnover at executive levels and, ultimately, in the company making a poor response.

“Rubbermaid didn’t revisit its assumption that it could keep winning by being the most innovative company,” explains Professor Finkelstein. “While the assumption worked for a long time, it didn’t hold and actually distracted the executives from making important changes to pricing, logistics and distribution.”

Enron’s delusional dreaming

Becoming over-confident is a common pitfall for very successful people who work for highly successful organizations. “They believe they have it all figured out and, as a result, start to shut down alternative points of view,” observes Professor Finkelstein.

He cited the exemplary anecdote of Fortune magazine senior writer, Bethany McLean who co-authored ''The Smartest Guys in the Room: The Amazing Rise and Scandalous Fall of Enron’. McLean's March 2001 article in Fortune titled, ‘Is Enron Overpriced?’ was the first in a national publication to openly question the company's dealings.

Prior to its publication, McLean flew to Enron headquarters in Houston to seek a rebuttal of her story of off-balance sheet partnerships and irregular accounting at Enron, but was quickly sent packing by Enron CEO Ken Lay who instructed senior executives to stymie the story. Following publication, Lay approached the chairman of AOL Time Warner, Fortune’s publisher, demanding McLean be fired. However, the writer was backed by editors and senior executives, and Enron’s story continues today as an ongoing saga of corporate debacles.

Discounting contrary viewpoints displays delusionary attitudes that endanger organizations, according to Finkelstein. “In companies where this form of over-confidence exists eventually no one can say what they are truly thinking because they fear the implications and ramifications of open debate,” he says.

Where information lands

Information management systems also can provide potentially fatal flaws. The vital importance of ensuring communications are received by the right people also emerged as a significant finding in the leadership failure research.

“The impact of getting information wrong can be dramatic,” says Professor Finkelstein who points to broader examples in the failure to heed intelligence received prior to the terrorist attacks on New York’s World Trade Centre on September 11, 2001, and the Madrid train bombings of March 11, 2004.

An important question for executives is: What happens when information goes to a person who isn’t motivated to share it with someone else? If the information is dropped or confused, then critical clues will not be captured or acted upon. “In business, all kinds of critical information are held by others, and this may be further confused because those people don’t always stay the same,” he says.

A salutary anecdote involves the ultimate case of customer feedback received by Bill George, then CEO of medical device maker, Medtronics. In the course of observing a surgical procedure, Mr George reportedly had a broken catheter thrown at his head by an angry surgeon. Mr George’s urgent enquiries revealed that the company’s sales people had delivered feedback of faulty devices on several occasions, but because four layers of management existed between sales and the then Medtronics’ design department, the message had not been accurately passed on. By the time the news reached the designers, onus for the fault had shifted to the doctors.

Develop early warning systems

CEOs and other senior executives need to be alert to the early warning signs of leadership failure, Professor Finkelstein told the group. “If the symptoms exist, then pay attention,” he advised.

Professor Finkelstein is following on with his work by helping companies to develop these early warning systems. In the course of examining leadership pathology, he suggests senior executives keep an eye out for the Seven Habits of Spectacularly Unsuccessful people. Some of these habits can be good in moderation, but toxic in large doses, Finkelstein warns.

1. The illusion of personal pre-eminence.
2. The attitude that the company is mine. This encompasses identifying too strongly with the company or thinking that the company works for you.
3. Having all the answers in every situation.
4. My way or the highway – that is, refusing to countenance contrary viewpoints.
5. Allowing image or public relations to override operational importance.
6. Failing to overcome obstacles by thinking there’s nothing that can’t be beaten.
7. Inability or unwillingness to learn. Sticking to what you did last time just because it worked before won’t always work.

*Professor Sydney Finkelstein conducts courses in strategic leadership in the AGSM open enrolment Executive Education program.