Self-Destructive Habits Of Good Companies

Published by:

Wharton School Publishing, 2007

By Jagdish N. Sheth

Bad habits have a tendency to accumulate and slowly engulf a corporation, eventually mutilating it, demolishing its profitability and minimising the company’s effectiveness.

The author of this book, Jagdish N. Sheth, has identified seven self-destructive habits common to a wide range of well known companies that were once shining examples of corporate success, only to be reduced to embarrassing failures.

These companies include General Motors, Ford, AT&T Sears, Firestone, Kodak, Xerox, Euron, Sony, WorldCom and many others.

Jagdish Sheth breaks each chapter into three sections:

i)      The bad habit

ii)    Warning signs

iii)   How to break the bad habit

The seven destructive habits that the author has identified are:

1. Denial
2. Arrogance
3. Complacency
4. Competency dependency
5. Competitive myopia
6. Volume obsession
7. The territorial impulse

1. DENIAL:  The Cocoon Of Myth, Ritual And Orthodoxy

The process of denial begins when leaders begin to create a mythology about their company’s greatness.  The truth about most successful corporations is that luck invariably plays a significant part in their success.  They had the good fortune to be at the right place at the right time.

Consider for example the rise of Daimler-Benz.  The company started in the late 1880’s when two Germans, Carl Benz and Gottlieb Daimler, began developing combustion motor vehicles.

The initial lucky break occurred when an Austrian dealer (Emil Jellinek) won a race with a Daimler car and proceeded to place the first substantial order for Daimler automobiles.  Jellinek imposed two conditions on his large order:

i)       to be granted an exclusive franchise for Austria, Hungary, France and Belgium; and

ii)     to be allowed to call the cars Mercedes after his daughter’s name.

The second fortunate event occurred when a Mercedes was involved in a head-on collision.  The occupant was impressed by the safety features of his vehicle.  His name was Adolf Hitler.  After the accident Hitler declared that Mercedes-Benz becomes the official car of the German government and that Daimler Benz manufactures all military and state vehicles.  In a short space of time this motor manufacturer became the largest corporation in Germany.

The problem of denial occurs when leaders forget the company’s origins and breaks, and begin to think that corporate greatness is founded on their superior abilities.

There are three warning signs that reveal the self-destructive habit of denial

• “I am different.”  This syndrome is seen in behaviours that deny reality.  The mindset is that, “What happened to others can’t happen to us:  we are too big, too strong, and too powerful.  We are different”.

• “Not invented here.”  This occurs when leaders cannot admit that someone else is capable of a better way.  If something is ‘not invented here’ it must be inferior.  This form of denial is endemic in the technology sector.

• “Looking for answers in all the wrong places.”  The signs are there:  loss of market share, increasing staff turnover, minor animosity, delayed product release, etc.  The initial response is to ignore the symptoms, then rationalise then.

Breaking the habit of denial

To break the self-destructive habit of denial:   look for it, admit it, measure and assess it, and change it.

2. ARROGANCE:  Pride Before The Fall

Arrogance is defined as an offensive display of superiority or self-importance, haughtiness, hubris.

Arrogance often arises from exceptional achievement.  A good example of arrogance is found in the rise and fall of Euron.  This company transformed itself from the obscure gas pipeline operator to the world’s largest energy trader, with 21 000 employees.  During its phenomenal accent, Euron’s executives treated people with contempt, especially those who had the temerity to question its operation.  On one occasion an analyst asked Euron’s Chief Executive, Jeff Skilling, to explain the company’s financial results.  Skilling deflected the question and then tried to humiliate the analyst by calling him an “asshole”.

There are six warning signs of arrogance.  Arrogance occurs when managers:

• flaunt privileges and status symbols (such as offices, perks, luxury vehicles, etc)
• browbeat and humiliate others
• are high-handed (refuse to adhere to regulating or behaviours that are expected of the rest)
• carry approval (bring in paid consultants or advisors to validate the status quo or inflate ego)
• exhibit the NIH syndrome  (if its “not invented here” it’s not any good)

Breaking the arrogance habit

Arrogance breeds in a lack of transparency or openness.  To overcome this problem, the leaders must change the culture to one of looking, listening and learning.  Managers also need to practice humility and care about the views and opinions of others.

3. COMPLACENCY:  Success Breeds Failure

Complacency is the belief that the success a company has enjoyed will continue indefinitely.  It breeds the assumption that size and scale provide protection against adversity and competition.

Complacency rests on three pillars:

i)      past success

ii)    the future is predictable

iii)   size and market dominance will overcome any setback

The warning signs of complacency are:

• slow decision-making
  • a great deal of red tape and bureaucracy
  • high level of overheads that are costly to maintain
  • self-sufficiency.  Things are done internally that could be more effectively outsourced
  • extensive cross-subsidies by functions, products, markets and customers.  Average costing and pricing prevail throughout the company

Breaking the complacency habit

To break the complacency habit:

• Reengineer to eliminate waste, minimise bureaucracy and curb inefficiency
• Re-organise by creating business units around products and decentralise geographically
• Outsource non-core functions
• Re-energise the company with strong, visionary and dynamic leadership that transforms the company’s complacent culture

4. COMPTENCY DEPENDENCE:  The Curse Of Incumbency

Centering a company’s success on a core competency becomes self-destructive when it limits vision and blinds leaders to seeking new opportunities.

One example of the competency dependence occurred in the travel industry.  In the past people booked flights and vacations through travel agents.  However, with the advent of the internet, people could make their own bookings and save money in the process.  The outcome was that the traditional core competency of travel agencies fast became obsolete.

To survive, the services offered by travel agencies needed transformation.  Those that were unable to adapt went out of business.  Others provided more specialised services with offerings that did not duplicate facilities on the internet.  One such business even changed its name from travel agent to “vacation planning consultant” and “corporate events consultant.”

The warning signs of competency dependence are:

• efforts to reorganise and restructure have proved futile
• the thrill is gone
• stakeholder loyalty has evaporated

Breaking the habit of competency dependency

• Find new applications where the same competency yields new value
  • Find new markets
  • Expand the range of competencies by moving up or down the value chain
  • Refocus resources to areas with greater growth and profit potential

5. COMPETITIVE MYOPIA:  A Nearsighted View of Competition

Competitive Myopia occurs when the market, and competitors, are defined too narrowly.  This results in ignoring peripheral challenges to the industry; there is a failure to acknowledge and adapt to the full range of forces shaping the industry’s landscape.

The warning signs of competitive myopia are:

• allowing small niche players to co-exist
  • failing to realise that a supplier may become a competitor
  • understanding new entrants
  • being overtaken by a substitute technology

Breaking the habit of competitive myopia

• Evaluate the entire competitive landscape to reveal vulnerabilities
  • Broaden the scope of market of products
  • Remove excess capacity from the industry by decreasing buyer’s bargaining power (e.g.  by acquisitions and merges)
  • Concentrate resources on successful and high potential areas

6. VOLUME OBSESSIONS:  Rising Costs And Falling Margins

This habit is frequently the by-product of strong growth.  Athletes offer an excellent example of this obsession.  During their active careers sport’s stars are paragons of health.  They consume volumes of calories, but burn them off to achieve peak performance.  However, when they retire, some athletes continue to consume excess calories but no longer burn them.  What had been a necessary component in an efficient strategy for peak performance has become a self-destructive habit.

The syndrome is the same of a mature corporation consuming too much and producing too little.  This unhealthy unbalance between costs and revenue is a widespread problem.

Warning signs of volume obsession are:

• guideline free, adhoc spending
• cross-subsidization – allowing the success of one business unit to conceal the failure of another
• numerical myopia – rationalising or excusing poor results or bad numbers

Breaking the habit of volume obsession

To break this self-destructive habit:

• Identify where costs occur
• Convert cost centres into revenue or profit centres
• Move vertical integration to “virtual integration”.  Concentrate on the things the company does best
• Outsource non-core functions
• Automate and integrate to achieve cost efficiencies
• Nail down unnecessary costs and waste and keep them to a minimum
• Make suppliers lifelong cost effective partners

7. THE TERRITORIAL IMPULSE:  Culture Conflicts and Turf Wars

As companies grow and become successful they tend to organise themselves into ‘functional silos’.  These silos or units do not always get along with one another, often competing and working at cross purposes.

There are four warning signs of territorial impulse:

• dissention amongst senior people
  • indecision.  It is difficult to get important decisions made
  • confusion.  Departments and units don’t really know what one another are doing
  • low morale

Breaking the territorial habit

• Engage in effective internal marketing
  • Senior managers regularly meet with one another to discuss common issues
  • Establish permanent cross functional teams that include representation from all units
  • Reorganise around customers or products, rather than around function or geography
  • Create a culture in which no one function is treated as “superior” to another

CONCLUDING COMMENTS

Jagdish Sheth does a good job in exposing how some of the biggest and most powerful companies failed.  Many of these corporations no longer exist, others have lost market domination and are in serious trouble.  The common theme leading to their downfall is egotistical, self-serving leaders who were unable or unwilling to adapt to changing markets and reinvent themselves to provide added value services and products.  The author uses many case studies and examples to illustrate his points.

THE AUTHOR

Jagdish occupies the Chair of Marketing in the Goizueta Business School at Emory University.  He is a renowned scholar and world authority in the field of marketing, having published more than 200 books and research papers in different areas of marketing and business strategy.