WHY GOOD COMPANIES GO BAD

BY DONALD N. SULL

When business conditions change, the most successful companies are often the slowest to adapt. To avoid being left behind, executives must understand the true source of corporate inertia

Successful companies big changes fail to respond effectively unable to defend themselves against competitors armed with NEW paralysis

Why they Fail ?

Problem is not an inability to take action but an inability to take appropriate action. Reason - Active Inertia Inertia - tendency of an object to resist any change in its state of motion or resty Active Inertia - An organizations tendency to follow established patterns

of behaviour- even in response to dramatic environment shifts

y Companies fail to act y Symptoms & Sources

VICTIMS OF ACTIVE INERTIAy The fresh thinking that lead to

the companies initial success is often replaced by a rigid devotion to the status quo

y FIRESTONE y LAURA ASHLEY

FIRESTONEy Tyre Industry y 7 decades of leadership in the U.S. market y Positioning & Strategy y Customers Competitors Challenges Culture y Clear formula for success

FIRESTONEy Michelin entered U. S. market y Radial Tyre y Firestone responded quickly y Invested $1 billion Radial Tyre

FIRESTONEy Problem Clung to old ways of working y No redesign y Delayed closing of factories producing normal tyres y Consequences 59% plant utilization y Active Inertia y Loss- Reduction in market share y Bridgestone took over

LAURA ASHLEYy Garment Industry y 1953 in Britain y Major retailer 500 shops y Romantic vision of English Ladies y Tradition y Good management, Generous wages, Close

relationships

LAURA ASHLEYy Problems y Change in fashion concepts y Less demand for romantic wardrobes y Transformation in apparel industry outsourcing y Laura Ashley outdated designs & expensive

manufacturing process y Active Inertia

LAURA ASHLEYy Reacted to Challenges y Restructuring plan increase sales & cut costs y 7 CEOs in a decade y Still continued to decline

FOUR HALLMARKS OF ACTIVE INERTIAy Strategic Frames

Blinders

Assumptions how managers view business

y Processes

Routines Shackles

Way things are done

y Relationships

Ties to employees, customers, supplies, distributors & shareholders.

y Values

Dogmas

Set of shared beliefs determining corporate culture.

STRATEGIC FRAMESy Mind sets of managers

BLINDERS

y Answers about business, competitors & customers y Seduce the managers y Managers fail to see new options and opportunities y Examples:

Frances Military Strategy Xerox Management

PROCESSES

ROUTINES

y Once we find a way, we stop alternatives. y Reasons:

Frees time and energy Increases productivity Operational predictabilityy Well known and Comfortable y No alternatives & active inertia sets in.

RELATIONSHIPS

SHACKLES

y Building strong relationships with lenders, investors,

customers & suppliers. y Changing conditions, limit flexibility of relationships. y Focusing on new products and markets becomes difficult. y Managers are constrained. y Examples: 1. Apple 2. DELL Computers 3. Airlines

VALUES

DOGMAS

y Values are a set of deep held beliefs that unify that unify and inspires people, defining how employees see themselves & employers.y As companies mature, values become rigid rules &

regulations- & are no longer inspiring. y Unifying power degrades leading to active inertia. Examples: 1. Polaroid 2. Shell/ Royal Dutch

INSIDE-OUTSIDER- AS CHANGE LEADERy To guide a company through changes balancing act y y y y y

required. Old ways of working cannot be thrown out immediately, as they end up doing more harm. Recommended that new leaders may be from within the company but outside core business. Inside managers break free from old- formulas & follow a new course. OR- Assemble management teams that leverage leveraging strengths of both insiders & outsiders. Combining both perspectives allowed good companies to passage along a new formula for success.

RENEWAL, NOT REVOLUTIONy Success breeds active inertia & active inertia breeds y y y y

failure. Break free from assumption that the enemy is paralysis. Instead of What we should do ask What hinders us? As obstacles are realised impulse to rush forward must be resisted. It is advocated that changes occur gradually rather than a rapid change.

y Example 1. Goodyear Tyres 2. Lou Gerstner of IBM

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