(Written in August 2004). See the ratings of other books and more reviews here.
The cover of this book shows a well-dressed executive standing at the top of a series of steps, which is floating on thin ice. If the executive takes another step, he will fall off the steps and into the water. I don't purport to know the author's intentions, but the image strikes me as asking: How do smart people who have been successful for years (climbed the steps to reach the top) take the next step to catastrophic decisions? Why do they ignore evidence that is directly in front of them?
Finkelstein's "Why Smart Executives Fail" is an extraordinary exercise that looks at several business failures and endeavors to find the causes of failure in them. Almost all the stories were major crises in the researched companies, including many that resulted in bankruptcies. The losses were truly catastrophic, in terms of shareholder wealth destroyed and damage caused to employees. The executives had control over staggering sums of money and the mistakes were equally spectacular. The stories encompass a wide array of businesses and over a time span of several decades.
When a business venture fails, most people arrive at trivial reasons such as that the executives were stupid or unmotivated or that they did not have the necessary resources or followers. The author debunks such myths by showing obviously smart and inspired executives who had all the resources in the world to commit the mistakes they did. The author breaks down the book into three sections - The mistakes that were committed, the causes of failure and the lessons that can be learnt from those errors.
Sins of Commission - Failed Ventures: Entrepreneurial ventures are among the riskiest investments and have the highest mortality rates. Earlier successes and a great track record would seem to be insurance against failures. Yet, one case study demonstrates a great corporation like Apple Computer creating the non-delivering General Magic in the evolving PDA market. What is interesting about this failed enterprise is that among its many competitors, General Magic was the best funded, had a dream team with talent management and employees and had the strongest business relationships. Other failed ventures addressed were Samsung Motors and the Iridium project.
The circumstances of these companies were different. Yet they had one thing in common: a group of terrific executives with a previous history of accomplishment. These executives rose to a position where they had the power to gamble enormous fortunes on risky ventures, which ultimately failed because of lack of attention to the market and customers. The leader of an organization always needs to focus on strategy, capabilities, customers and competitive advantage.
The book also warns against the dangers of falling in love with one's ideas or products without validating them with those who must buy into them. The Samsung Group Chairman Kun-Hee Lee was so enamored with his baby project that he failed to see that his customers did not believe in it. Leaders must learn to accept that competitors may also have the same ideas and may implement them better. Many failures result when a leader is under the illusion that competitors would stand still while he or she dazzles the world.
Sins of Omission - Resistance to Innovation and Change: As the old cliché goes, nothing is constant, but change. Yet there are numerous examples of companies watching while they are swept aside by competition that possessed the ability to recognize new paradigms for success. In fact, it sometimes seems that success can breed failure. Success contains the seeds of complacency and arrogance. An organization that has risen to the top has the supreme confidence in its own capabilities that it sometimes fails to notice the changes in its operating environment. Some examples pointed out by the book include Johnson & Johnson (in the stent market), Rubbermaid and Motorola (in the cell phone market). Another instance I can think of is the almost disastrous delay by Microsoft in understanding and embracing the widening role of the Internet.
Organizations and individuals can be struck with inertia, preventing them from recognizing mistakes and identifying new opportunities. Instead of seeing challenges, leaders reach for stability, certainty and conformity when the fast-changing world does not offer any room for standing still. The organization tries to continue to build upon its strengths, but does not realize that these strengths no longer apply in the changed operating climate.
The author makes the point that in every single one of these organizations, the writing was on the wall, but the leaders chose not to respond or adapt. Innovation and change are the result of a culture of open-mindedness and self-introspection. Leaders who are unwilling to ask themselves hard questions, identify and manage risks and reward experimentation will find they and their organizations left behind.
Failed Mergers: Mergers and Acquisitions are generally used by organizations as a means to rapidly increase a company's size and profits. It is also one of the riskier propositions available and one that even experienced executives get wrong at times. The case studies described in the book are Quaker Oats's acquisition of Snapple Beverage Company and Sony's acquisition of Columbia Pictures.
These failures relate a tale of misunderstood synergies. Leaders need to understand when they can combine assets and resources to create more value together than when they are separate. For this, due diligence is required in understanding the company which is being acquired or merged with. A leader must have sufficient hands-on control of the process of bringing people and organizations together.
Understanding cultural issues is very critical. This is not only true for organizations in different countries, but also for organizations that may operate across the road from each other. Each organization has its own style of working that must now be tailored to the new mega organization and the leader has to prepare for the inevitable behavioral issues that crop up when change is in the air.
Implementing the Wrong Strategy: Strategy is a buzzword among executives. Organizations burn hundreds of expensive hours in meetings where company strategy is decided. But the selected strategies can be incredibly wrong if the available information is misread. Retrospectively, the actions taken would seem irrational. Companies that went to implement wrong strategies include, among others, Wang Labs (continuing its then superior word processors even after the advent of PCs) and General Motors (implementing robotics to eliminate labor costs).
During strategizing, a plan may be meaningful, even bold and brilliant. But the mistake made is that the executives remained married to the strategy long after clear, unmistakable signs appear that it is not working. The author presents the reason that people like certainty and reassurance. They are comfortable following bold leaders who present certainty in direction and action and who seem to have all the answers.
Leaders who are true believers have faithful followers, but if the vision is wrong, both leader and follower are essentially working hard to dig themselves into trouble. There is so much emotional investment in the strategy that every piece of contrary news is dismissed out of hand or misrepresented. Dissidence at any level is mocked or eliminated. When disaster finally strikes, it is often too late.
After trying to outline the general types of mistakes that executives make, the author reiterates that the real reasons behind the failures cannot be found in lack of the leader's motivation, ability to lead or execute and honesty or resource constraints. The executives in every case study reached their current positions because they had excellent skills and leadership qualities. They were motivated and their companies had the material and monetary resources to fund them. The real reasons lie elsewhere.
Brilliantly Fulfilling the Wrong Vision: Many leaders identify the vision and goals for the company and then marshal all resources into that direction. This is a noble intent, but if the goal itself is wrong, working towards it will not yield the expected results. One trap for leaders is focusing on one "magic answer" (principle or model) that would solve all their problems. But any answer, however tempting, has its share of risks and by falling for the magic answer, leaders could blind themselves to the dangers. Leaders convinced of their strategy tend to focus on the results that show improvement and ignore the metrics that may provide valuable early warnings.
It is obvious that the leaders who arrive at the (ultimately wrong) vision spent a lot of time and believed that they were doing the right thing. Things go wrong when leaders try to solve today's new problems with yesterday's right answers. If you have a hammer, every problem looks like a nail. Unsuccessful executives also look at other success stories and try to emulate them by superfluously copying the techniques without properly understanding them.
Delusions of a Dream Company: The author paints the picture of a dream company - unwavering vision, unbridled optimism, smart employees, positive self-image and unquestioning team spirit. He warns the readers about trying to emulate such an organization, calling it a "zombie company" that is a disaster waiting to happen. In a "zombie company", problems are swept under the rug so that the perceived reality is not contradicted. Out of sight, out of mind, the problems continue to grow until they are beyond control.
An organization with wrong delusions breeds arrogance (among leaders and employees), closed-mindedness (towards new ideas), disdain for competition and customers and unrealistic optimism. Constructive criticism of policies is confused with disloyalty towards the company, resulting in cover-ups of vital information. Delusional leaders strive for perfectionism in the organization's strengths and ignore the weaknesses.
Tracking Down the Lost Signals: One of the main reasons why organizations fail is that they don't act on vital information at the appropriate time. The WTC attacks could have been prevented if the FBI had acted upon information that was coming through field agents. Many organizations are equally guilty of setting up a similar culture where vital information gets lost or ignored.
Many leaders are more focused on getting things done rather than collecting metrics or information that would serve as feedback for their actions. They also fail to set up the necessary chain of command and reward structures to identify vital information that can reach the top levels. Finally and this is the most egregious mistake, many leaders only want to hear the information they like, which essentially destroys all motivation for anyone to be the bad messenger.
Habits of Unsuccessful Executives: All the executives in the case studies have admirable qualities. They only got a chance to destroy so much value after they had demonstrated a potential to create it. But some attributes of their character led them to commit these gigantic mistakes.
These executives believe in personal and corporate pre-eminence and that they control their environments and are responsible for their success. They think they have all the answers. They systematically eliminate anyone who does not completely fall in step with them. They are obsessed with the company image. They are overconfident and underestimate major obstacles. They keep relying on what has worked for them in the past.
The book consolidates the lessons learnt by emphasizing on a simple organizational structure with a leader who is both focused and open-minded. The leader must pay attention to warnings. Success of an organization is a warning sign: When an organization reaches the top, the only way is down and one can do that by inaction or wrong action.
The leader must establish a culture of openness where different ideas can be discussed without one being ridiculed. Mistakes can be brought to the attention of the bosses without personal repercussions. The organization must have a formal or informal process for learning from mistakes. The leader must understand that while mistakes are avoidable, mistakes will happen because risk is inherent in any activity.
The true leader must step up to admitting mistakes and create opportunities for others to safely provide feedback. Leaders must change their mindset to accurately reflect reality and challenge any delusions. Recognizing one's assumptions as delusions is one of the hardest tasks because the delusion presents a comfortable and reassuring view of reality, yet it must be done. Finally, leaders must recognize qualities of unsuccessful executives and strive to remove them.
The book is very focused on its purpose. The author goes out to find the reasons behind failures, identifies them and presents them in a very persuasive and logical manner. The research done is exemplary. I definitely recommend this as a very important book to read. The writing is wonderful and captivating - I literally could not put the book down and read the entire book in one afternoon.
The book left me hungering for more - more Case Studies, more Lessons Learnt and more Questionnaires to identify potential organizational and leadership problems. I would really love to see a follow up book by the author.
Copyright © 1999-2008 Krishna Kumar, All Rights Reserved.
