No Strategy ? Bad Strategy? Seven Key Factors                                 to Fantastic Failures and Billion Dollar Blunders

  “A wise man watches his faults more closely than his virtues; fools reverse the     order.” -- Napoleon Hill
 

    Contents

         I.  No Strategy, Bad Strategy

        II.  Fantastic Failures

        III. Why Smart Executives Fail

            A. Seven Common Misconceptions

            B. The Seven Real Reasons

            C. Consulting Excesses - A Case Study

        IV. Learning from Strategy and Leadership Failure

            1) Repeating Old Successes?

            2) Best Practices - three examples

        Subpage - Two Fantastic Failures, One Old German & One New American

         1) The Perfect Storm (in German, eine Einleitung)

            2) Then: The Stinnes Imperium

            3) Now: The CFS Story and the Billionaire Coach

I. No Strategy, Bad Strategy

     1) No Strategy

     A number of companies have no explicit strategy, a strategy that is kept secret, or follow what we refer to as the Alfred E. Neuman of Mad Magazine, "What, me worry?" strategy. Freek Vermeulan has written an excellent two page article on this point:  "So You Think You Have a Strategy?"   in the London BusinesS School BSR (Business Strategy Review), June 25th, 2012. Bridges adjures you to click on the title to read it!

     1.1) No consulting or coaching?

     No problem. Many great companies have done just fine without.

    2) Bad Strategy

    No tactics is the flip side of no strategy: "Vision without execution is hallucination." (Thomas Edison) Hallucinations in turn easily lead to bad strategy: "There is nothing quite so useless as doing with great efficiency what should not be done at all." (Peter Drucker) A second recommendation is the seven page article by UCLA professor Richard Rumelt, "The Perils of Bad Strategy," in the McKinsey Quarterly, June 2011.

    1.2) Bad consulting or coaching?

   Big problem. An example of a veritable orgy of consulting leading to almost fatal indigestion is given below at III. C - "Consulting Excesses, A Case Study." An engrossing study of consulting gone awry was written by James O'Shea and Charles Madigan, Dangerous Company - Management Consultants and the Businesses They Save and Ruin, 1997. (Its counterpart, "Executive Coaches and the CEOs They Save and Ruin" has yet to appear!)

II. Fantastic Failures

    "Fantastic failures" does not refer to mistakes that cost a company tens of millions of dollars. Neither does it refer to people who tanked a hundred million-dollar company.  It refers to people responsible for losing, destroying, pulverizing a billion* dollars and more of assets. The "billion dollar blunder" leaders are hence renamed here "Bleaders."

    The failure drivers which follow are adapted from Sydney Finkelstein's "Seven Habits of Spectacularly Unsuccessful People," in his landmark book Why Smart Executives Fail and What You Can Learn From Their Mistakes, Penguin, 2003. Sydney Finkelstein is a professor at Tuck´s School of Business at Dartmouth (one of the eight Ivy League universities, of which Yale, Harvard and Princeton are the best known). His reasons for failure are synthesized and tempered by Bridges own extensive experience with management disasters, albeit on a smaller scale, in the U.S., Europe, Africa, Asia and South America. 

*A billion in the U.S. is 10 to the 9th, but in the U.K. and Germany it is 10 to the 12th. Therefore a European´s billion pounds or Euro (1,000,000,000,000 €) is a thousand times greater than an American´s paltry billion dollars ($1,000,000,000), even in the unlikely event of a one to one exchange rate.

    The ideal scenario for catastrophic failure, "the perfect storm," may be summarized in German as: Marktbrüche setzen sich plötzlich ein. Wettbewerber verwandeln sich in mörderische Bestien, die mitgerissene Kundschaft in ihren Klauen, während ihre Reißzähne die veraltete Technologie zerfetzen.

    Der adlige Geschäftsführer, gekennzeichnet durch ein Backpfeifengesicht und zunehmenden Kummerspeck, verharrt sich unschlüssig. Trotz verheerender Nachrichten. . . Der perfekte Sturm wird auf der Unterseite "Two Failures" fortgesetzt.

III. Why Smart Executives Fail

A. Seven Common Misconceptions 

    In Why Smart Executives Fail and What You Can Learn From Their Mistakes  Sydney Finkelstein presents seven "urban legends" about failure on pages two through eight. He presents his conclusion about the seven real reasons for failure on page 238. A summary of the "urban legend seven" follows, with each category greatly abbreviated to describe a counterpoint example with only a sentence or two. (His primary research was extensive, including 197 interviews with CEOs, CxOs, and some middle managers as well.) 

    1. Stupid Executives
    An Wang was an Ivy League Ph.D., had several patents and had built Wang Labs into a billion dollar company before it headed south. There was certainly no lack of intelligence there.

    2. Unlucky Executives: They Couldn't Have Seen What Was Coming 
    Motorola knew all about the digital cell phones that would make its analog phones obsolete. In fact, it was collecting royalties on digital phones!

    3. Bad Tactics
    Many businesses with huge losses brillantly performed all kinds of operations.

    4. Lazy Executives
    Many worked incredible hours. As troubles mounted, they put their work ahead of everything else. They were sacrificing their health and their marriages.

    5. Marshmallow Executives: They Couldn't Lead
    Jeffery Skilling, the former CEO of Enron, was a dynamic, visionary leader who empowered his team to reach laufty goals. Furthermore he created an environment which encouraged excellence, rewarding it highly. 

    6. The Company Didn't Have Enough Money
    The companies studied were able to lose HUGE amounts of money precisely because they had huge amounts of money to lose.

    7. Dishonest Executives: They Were Crooks 
    The clear majority of the CEOs in the book who presided over gargantuan business disasters were scrupulously honest.  

    These seven reasons are not the causes of major failures. Applying them in a "trickle down" fashion to smaller disasters is not valid either.

B. The Seven Real Reasons

    Key failure drivers may be placed in two categories. The first category has four elements, the second three.

Category I Failure Drivers

    1. The marketplace is not properly understood: red oceans, blue oceans, turbulence and technology. Above all, there are fundamental misconceptions about the behavior of customers. 

    2. The above misunderstanding leads to poor strategy formation and ineffective strategy execution. In other words, it leads to strategies that are just plain bad.

    3. The corporate culture does not just resist change; it is set in concrete.

    4. The CEO and the CxOs share a leadership style with built in failure genes. These are elaborated upon in the three Category II Failure drivers, which follow.   

Category II Failure Drivers

    The single key failure driver is the attitude of "L´État c´est moi." This saying is apocryphally attributed to Louis XIV of France (1638 - 1715), the Sun King. The royal "we" applies. The Bleader views his company and himself as an entity. The company´s interests are his interests and vice-versa. The consequences of this royal perspective lead to the final three failure drivers.

    5. Creating and maintaining an image is a priority for Bleaders. Granted, branding is important. However the Bleaders devote an inordinate amount of time to their images, PR, the media, etc. Their attitude is the corporate equivalent of Alexander the Great, Louis XIV of France, or Napoleon.

    6. Like many an absolute monarch, the tolerance for heretics, naysayers, dissenters and even doubters is zero. Such persons are rapidly and ruthlessly eliminated.

    7. Bleaders view themselves as in control of their enviroment, indeed, as dominating it. However the strength of acting rapidly, decisively, and with complete conviction can turn into a catastrophic weakness when major challenges are underestimated as trivial. The greater the challenges become, the more likely the Bleader is to mutate into an interesting oxymoron, "the inflexible innovator". In other words, he persists in the strategy, sometimes even in its tactics (i.e. how it is done), that had originally catapulted him to success. He persists in the face of all odds, oblivious to the environment.  

    The triad of five through seven leads to a corporate culture of "reality distortion." Managers become extremely selective in reporting information that is not "politically correct," i.e. does not reflect the CEO´s view of the world. The role models from politics such as Potemkin villages are applied in microcosm to the corporation.* In extreme cases the Potemkin villages exist only as fragmented figments of a Kubla Khan vision. That "vision in a dream" by Samuel Cooridge applies all to well to some investments in management ego: "In Xanadu did Kubla Khan, A stately pleasure-dome decree. . ."  Some relevant stanzas are given in the subpage "Kubla Khan."

    Interesting to note is that Alexander the Great exhibited Bleader habits, albeit with one striking exception. That is the habit of relying on old strategies and tactics. Alexander remained brilliantly innovative until his death. Admittedly he died very young, at only 32 or 33. His "failure" was one common to many CEO´s. The CEO is not able to build an organization to continue his success after his tenure. On a far grander scale, Alexander died too young to have been able to set in place a means to ensure his empire´s continuation.

 * Potemkin villages are named after the Russian statesman Grigori Potemkin, who died in 1791. He once had impressive fake villages built along a route Catherine the Great was to travel. He wanted to convince her that all was well with the peasants. "Model villages" were also built to show off to Westerners when Russia was under Communism.

    In China, local bureaucrats apparently did something similar with Mao. He emphasized steel production and turned the subsistence farms into collectives. Agricultural production fell by two thirds, and the black market price of rice went to 15 times, eventually 30 times, the official price.

    Mao did not want to hear about any problems his policies were causing; acknowledgement of error was not an option. Therefore "well fed contentment" was presented to him when he did travel. Between 1959 and 1961, according to the official Chinese statistic released in 1988, at least 20 million (actually probably double that) subsistence farmers did not subsist. They starved to death. (Source - Das Schwarze Buch des Kommunismus, Piper Verlag, 2000, p. 546 originally in French, 1997, by Stéphane Courtois, Nicolas Werth, Jean-Louis Panné, Andrzej Paczkowski, Karel Bartosek and Jean-Louis Margolin.)

C. Consulting Excesses - A Case Study

Scott Paper

    Scott Paper is an interesting case of consulting metastasis contributing to strategic failure. It is explained by Albert J. Dunlap in his book, written with Bob Andelman, Mean Business, How I Save Bad Companies and Make Good Companies Great.¹ Two brothers founded the company in Philadelphia in 1879. In 1994 it was the 8th largest paper company in the U.S. and No. 1 in the world in tissue paper, with a 15 percent market share.

    Over time, Scott Paper had developed a culture in which consulting was leaned upon heavily. The company was spending $30 million a year on a multitude of consultants. This example is by no means isolated. The telephone giant AT&T has also had periods since 2000 when it has spent extraordinary sums on consulting. It is hardly alone in exhibiting some of the same symptoms as described below for Scott Paper.

    Consultants were being used as a source of credibility at all levels of the corporation. The CEO was using them to support actions to the board. At lower levels, highly competent managers were using them to "sell" their own ideas to senior management, which would not otherwise accept them. As this process became inherent to a culture otherwise resistant to change, the usage of consultants ballooned.

    The consulting engagements, individually often (but not always) well run, where not aligned with one another, or with a coherent strategy. The sum of the parts for several independent engagements was not greater than the whole, but less. Each engagement achieved an isolated result without significantly contributing to cumulative improvement. Frequently one engagement was in conflict with another. Negative synergy became the order of the day and operations suffered.

    In fact, they suffered so badly that in 1994 the company was considering filing for bankruptcy. As a last, desperate alternative, it brought in a turnaround CEO, Albert J. Dunlap. He fired 70 percent of upper management and cut back the work force by 17,000. (About 11,000 people were "terminated" and another 6,000 people worked at companies and divisions that were sold.)

    From the perspective of the 20,000 people who kept their jobs, the turnaround was successful. From the perspective of Wall St., it was brilliant. The stock market loved it. The shares went from a rapidly sliding $38 to $89 and rising in the year of the bloodletting. 

    Albert J. Dunlap completed the turnaround in twenty months, receiving total compensation of $100 million ($80 million as a result of stock options). However many did not view the turnaround as having a "happy ending." Within a couple of years Scott Paper had been acquired by its archrival Kimberly Clark. It ceased to exist as an independent company.    

    Albert Dunlap is also not universally admired in his own right either. Although he has been referred to as "America's premier turnaround artist" and "Rambo in Pinstripes," he is more commonly known as "Chainsaw Al." He is the ultimate "no-nonsense" business executive. He writes that a real chief executive says, "Here's what we're going to do, here's how we're going do it, here's when we're gonna do it. And I'm accountable."² No "touchy-feely" consensus, bottom-up management here, no, no.

     Interesting is that as tough as he is, Albert J. Dunlap did have one long-term (15 years) advisory relationship with C. Don Burnett, a partner at the accounting firm of Coopers & Lybrand. Albert Dunlap referred to him as someone he respected for being efficient and cost-sensitive, and as one of the few outsiders who could influence him: "He gives me extra eyes, extra ears."

1 Albert J. Dunlap, with Bob Andelman, Mean Business, How I Save Bad Companies and Make Good Companies Great, Fireside, 1966. Scott Paper is discussed here and again throughout the book, and particularly on pp. 3-12; 17 - 23; 91 - 97; 153 - 155; and 170-179.

2 op.cit. p. 154.

IV. Learning from Strategy and Leadership Failure

    1) Repeating Old Successes?

    As an example of how difficult it is to repeat success, let us consider a low technology business, viz. dance instruction.  It delivers pretty much the same service today as that which was offered 50 or 100 years ago. Arthur Murray (born in Austria-Hungary in 1895, deceased in the U.S. 1991) began teaching people how to dance in New York City in 1912.

    Before the advent of World War I, he had the idea of teaching dance steps with simple footprint diagrams. Within a couple of years he sold over 500,000 dance courses by mail order. In 1925 he started one of the very first franchise systems for a service business in the U.S. (Today the initial franchise fee ranges from ca. $15,000 to over $100,000.) He eventually employed 200 dance teachers in New York City alone, 1,500 in the U.S. Arthur Murray was earning $5,000,000 a year in the days when a single dollar would buy a meal at a decent restaurant and when taxes were a fraction of what they are today.

    A popular Latin dance nowadays is Salsa. Munich has an active dance scene, including 15 different Salsa studios. (In 2010 the Arthur Murray web site opened with music from Salsa. The updated 2011 website, although much flashier, is also quieter -- no more Salsa music.) Yet none of the three largest Munich Salsa studios has even a half-dozen dance teachers. Most of the other studios are run by a dance couple or are one-person operations. Talk to any one of the owners about how Arthur Murray built his business and his brilliant marketing, and they would immediately blurt out the absolutely legitimate objections: "Why the man started out with no website at all. He did not even have a mobile phone, let alone a smart phone. How can you build a business like that nowadays?"

     2) Best Practices

    CEOs and their boards and management teams, their advisors and consultants focus on success.  They study best practices and discuss at length the competitors viewed as most vigorous, the most dangerous potential threats.  Post-mortem meetings about failures are few and far between. There is a perception that such meetings rapidly deteriorate  into a search for the guilty, "scapegoating," rather than a search for "what can we learn from our mistakes here", "what can we do better next time". This tendency, looking for someone to blame, appears even more predominate in the German business culture than in the U.S. 
    Three notable exceptions are mentioned in the previously cited work by Sydney Finkelstein.  

    • The U.S. Air Force follows a strict procedure for the mandatory debriefings after a mission. Names and ranks are replaced with "Number One", "Number Two", etc. Errors are discussed in detail and there is group pressure to be frank. There are no repercussions as a result of statements made in the debriefings.

    • Boeing has a procedure termed "Process Councils" to see where things went wrong in manufacture.

    • IBM's traditional reaction to losing a customer for mainframes was immediately to put together a team to analyze the loss in detail.

    Meetings about strategies gone awry are, however, rare indeed. When was the last time a senior partner at a blue-chip management consultant firm arranged a series of meetings with a CEO to consider why the large-scale strategy engagement had led to such disappointing results? When was the last time a sector chief arranged a meeting with the CEO and the board to discuss his recent failure with that expensive acquisition, which eventually was sold at a lost?  Or about that vaunted new product, "best in class," everyone loved so much, except the customers, who were too stupid to buy it? 
    In the first chapter of Why Smart Executives Fail Sydney Finkelstein presents seven "urban legends" -- why people think executives fail. None of them are accurate, as previously explained. The book also demonstrates an important advantage of the coach. Individuals who have made mistakes, especially horrendous ones, are often unwilling, even unable, to acknowledge them at the time. They are in denial. They are far more likely to be willing to talk about their decisions rationally after they no longer hold that responsibility or are no longer active with that company. 
    Coaches typically have achieved a certain distance from past accomplishments, and from past mistakes as well. Senescence entails losing some of the emotional involvement associated with an event as it occurred. The passage of time enables a more rational, logical review of it.

    With the benefit of hindsight, reflects the coach, he just might have handled that situation a little differently. His sharing of that hindsight with the executive is one of his most valuable contributions. This down-to-earth, realistic assessment of past performance is inherent to effective executive coaching. 
    Perhaps that in part reflects an unconscious influence from the coaches of sports. Not too many of them have had a team, or a player, who won every time out with metronomic regularity. At the mid-point of his career Boris Becker made an interesting comment in an interview. His championship performance at Wimbledon was compared to that of Stefi Graf.

     He immediately protested that he was not like Stefi at all. He had to battle hard and struggle fiercely to win matches. With Stefi, he said, it was completely different. For her winning a match was like getting up and eating breakfast. Yet she too had her share of losses, even at the very peak of her game.  
    Sports coaches study losses, and study them intensely, both those of others, and their own. In contrast, not too many partners at an accounting, law, or consulting firm are going to sit down with their clients to talk about what can be learned from their engagement failures, i.e. their "losses". In fact, not uncommon is for a senior partner stoutly to allege that he and his team have "won" all of their engagements, never had a loss, never a failure. (If pushed, a management consultant might grudgingly concede that the client had failed with the implementation of the consultancy´s recommendations.)
    Most of the rest of us are not quite so fortunate as to have perfect track records. How we react to the inevitable  setbacks and how we learn from them (the company as a learning organization) is a major determinant of long term success. A critical part of that process is communication.  Any manager receives good news quickly. A distinguishing characteristic of the effective manager is how fast he receives the bad news -- to nip problems in the bud, to note and rapidly respond to early warning signs. 

______________________________

1 "The Bridge on the River Drina" at the town Visegrad © J. Budissin (Julian Nitzsche), 20.08.2007, GNU 1.2, CCASA 3.0 

    The novel of the same name as the begining quoted phrase was published in 1945 by the Yugoslavian writer Ivo Andric. It is the main reason he won the Nobel Prize in Literature (1961). The novel focuses on the Muslims and Christians of Bosnia, covering four centuries during the Ottoman and Austrian rule of the region. The bridge, which was built by an Ottoman vizier in 1571, occurs as a leitmotiv in the novel. (Wikpedia, 2011)

    The town and bridge today are best known, correction, vaguely recollected, as the site of the Visegrad Massacre.  In 1992 at the beginning of the Bosnian war, the Bosnian Serb army burned hundreds of Muslims alive in their homes. Others were shot on the bridge and thrown off of it. These kinds of atrocities are more often than not reported in the press as "unfortunate cultural misunderstandings," "political disagreements," or "collateral damage." (The politically correct attitude common among "the enlightened," both Christian and Muslim, is that: "Cultures are not right or wrong. They are just different.") Atrocities by both sides quickly become yesterday's news and are forgotten, no lessons learned. 

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