Financial Times, October 3, 2005, p.

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Ingrained Success Breeds Failure

Donald Sull
Management gurus exhort companies to
go from good to great. Regrettably, most
move in the opposite direction.
Sainsburys, Parmalat and Lego are recent
examples. Even Microsoft, for years the
gold standard of corporate excellence,
stands accused of slipping into
mediocrity.

complacency and arrogance. But there

is a more fundamental link between
early success and subsequent failure.
Clear commitments are required for
initial success, but these harden with
time and ultimately constrain a
companys ability to adapt when its
competitive environment shifts. This
dynamic can lead good companies to go
bad, even when executives avoid
arrogance and complacency.

Why do good companies go bad?

Managers usually take the blame.
Common explanations include executives
who are too ignorant to notice big changes
in their market, freeze like deer in
headlights when the market shifts, or
simply plunder the corporate coffers.

To win in the market, executives must

make a set of commitments that
constitute the organisations success
formula. A distinctive success formula
focuses employees, confers efficiency,
attracts resources and differentiates the
company from rivals.

Unfortunately, none of these explanations

fits the facts. In the majority of failures,
senior executives saw market changes
coming and responded aggressively. They
were capable managers - indeed many led
the companies to the top - trying to do the
right thing.

Initial success reinforces managements

belief that they should fortify their
success formula. The individual
components of the success formula
grow less flexible: strategic frames
become blinkers, resources harden into
millstones hanging around a companys
neck, processes settle into routines,
relationships become shackles and
values become dogmas.

If these familiar explanations do not

account for corporate failure, what does?
My research suggests that companies fall
prey to active inertia - responding to
even the most disruptive market shifts by
accelerating activities that succeeded in
the past.

An ingrained success formula is fine, as

long as the context remains stable.
When the environment shifts, however,
a gap can grow between what the
market demands and what the company
does. Managers see the gap, often at an
early stage, and respond aggressively.
But their hardened commitments
channel their responses into well-worn
ruts. The harder they work, the wider
the gap becomes. Five categories of
commitments are particularly prone to
this problem.

When the world changes, organisations

trapped in active inertia do more of the
same. They resemble a car with its back
wheels stuck in a rut. Managers step on
the accelerator. But rather than escape the
rut, they only dig themselves in deeper.
Companies get in the rut in the first place
because of the very commitments that
enabled a companys initial success.
Everyone knows that success often breeds
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routines made quality the priority,

sacrificing speed and thrift to get the
product specifications 100 per cent
right. Compaqs quality-at-any-price
processes served the company well in
the early days of the PC industry when
customers worried about the products
usability. As PCs became commodities
and nimble rivals like Dell rose to the
fore, competition shifted to value for
money. Compaq relied on its wellhoned processes to churn out goldplated products priced to gather dust on
dealers shelves.

First, strategic frames: what we see when

we look at the world, including definition
of industry, relevant competitors and how
to create value. Strategic frames provide
focus and fit new information into a
broader pattern. By continually focusing
on the same aspects, frames can constrict
managers peripheral vision, blinding
them to novel opportunities and threats.
As their strategic frames grow more rigid,
managers often shoe-horn surprising
information into existing frames or ignore
it altogether.
At its foundation, executives at National
Westminster Bank committed to a clear
set of strategic frames - retail banking was
stagnant and the UK was suffering
irreversible decline. The bank diversified
into the US, Europe, Asia and the Soviet
Union and expanded into new financial
services. When the Big Bang deregulation
heightened competition, rivals such as
Lloyds TSB refocused on their domestic
retail business. NatWest, in contrast,
responded by accelerating geographic and
product diversification. Critics blasted the
bank throughout the 1990s for waiting too
long to divest money-losing distractions
until the Royal Bank of Scotland acquired
NatWest in 2000.

Third,
resources:
tangible
and
intangible assets that we control and
which help us compete, such as brand,
technology, property and expertise.
Specialised resources build competitive
advantage that rivals cannot easily
replicate. Shifts in the competitive
environment, however, can devalue
established resources. Large airlines
historically competed on the strength of
their hub-and-spoke systems in which
the carriers controlled valuable real
estate at hub airports and a fleet
optimised for this business model. The
rise of low-cost upstarts such as
Southwest and Ryanair depressed
industry
pricing
and
poached
customers. Traditional carriers could
not easily redeploy their hubs and
planes to compete cost-effectively
against new entrants.

Second, processes: what formal and

informal routines are put in place to get
things done.
Established processes confer efficiency
and facilitate co-ordination across
functional and geographic units. Over
time, these routines block change:
processes become second nature, people
stop thinking of them as a means to an
end, if they think of them at all. When the
environment
shifts,
managers
commitments to existing processes trigger
active inertia.

Fourth, relationships: established links

with external stakeholders, including
investors, technology partners or
distributors.
Managers
commit
to
external
relationships by investing in specialised
facilities to serve a key customer, for
example, or writing long-term service
contracts. These relationships can make
or break a company - think of
Microsoft and Intel or Wal-Mart and
Procter & Gamble. Over time, however,

Compaq grew to sales of Dollars 3.6bn

(Pounds 2bn) in its first eight years based
on processes that consistently produced
high quality products. Manufacturing
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established relationships can turn into

shackles that limit flexibility.

however, their values often harden into

outdated dogmas, that oppress rather
than inspire.

At its peak, the Daewoo Group made

almost $20bn in revenues, employed
200,000 people worldwide and was active
in 110 countries, ranging from
construction operations in Libya to car
factories in Uzbekistan.

Consider Laura Ashley, who founded

her eponymous company to defend
traditional values under siege from
miniskirts. Frilly frocks embodying her
commitment to traditional values of
modesty initially appealed to many
customers but lost their attraction as
more women entered the workforce.
Sales plummeted and the brand was
significantly weakened. The company,
however, continued to pursue the
outdated designs that embodied an
inflexible view of its core values.

Daewoo owed much of its growth to cozy

relationships with South Koreas General
Park, who ruled the country for nearly two
decades. General Park supported Daewoo
through financing and tariffs.
When subsequent governments ended
such
policies,
Kim
Woo-choong,
Daewoos chairman, tightened links with
remaining friendly Korean politicians and
forged bonds with politicians in emerging
markets to replicate cozy relationships at
home. But Daewoos reckless expansion
could not be smoothed by schmoozing a
political old guard. Daewoo became one
of the worlds biggest bankruptcies.
Finally, values: beliefs that inspire, unify
and identify.

Managers can avoid active inertia by

regularly reviewing their companys
strategic
frames,
processes,
relationships, routines and values to
identify hardened commitments and
help them adapt to market changes.
Success need not breed failure if
executives actively manage the
organisations various commitments.
Donald N. Sull, associate professor of
management practice at London Business
School, is author of Why good companies
go bad and how great managers remake
them (Harvard Business School Press,
2005).

Strong values can elicit fierce loyalty

from employees, strengthen the bonds
between a company and its customers,
attract like-minded partners, and hold
together
a
companys
far-flung
operations. As companies mature,

THE RISK OF ACTIVE INERTIA: HOW COMPANIES CAN SPOT THE

DANGER SIGNS
Your chief executive appears on the cover of a leading business magazine. Praise
from the business press reinforces attachment to the success formula. By the time a
company has attracted acclaim, managers should be rethinking their success formula.
Management gurus praise your company. Few companies survive guru praise for
long. Consider the fall of most companies praised in In Search of Excellence. The
problem is not sloppy research. Rather, guru praise reinforces confidence in the
success formula.
Your CEO writes a book on the secret of your companys success. A book publicly
links a CEO to a success formula, making it harder for him to later change those
commitments.
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