Go Bad When business conditions change, the most successful companies are often the slowest to adapt. To avoid being left behind, executives must understand the true sources of corporate inertia. o ne of the most common business phenomena is also one of the most perplexing: when successful companies face big changes in their environment, they often fail to respond effectively.
Unable to defend themselves against competitors armed with new products, technologies, or strategies, they watch their sales and profits erode, heir best people leave, and their stock valuations tumble. Some ultimately manage to recover – usually after painful rounds of downsizing and restructuring – but many don’t. Why do good companies go bad? It’s often assumed that the problem is paralysis. Confronted with a disruption in business conditions, companies freeze; they’re caught like the Donald N. Sull is an assistant professor of strategic and international management at London Business School. roverbial deer in the headlights. But that explanation doesn’t fit the facts. In studying once-thriving companies that have struggled in the face of change, IVe ound little evidence of paralysis. Quite the contrary. The managers of besieged companies usually recognize the threat early, carefully analyze its implications for their business, and unleash a flurry of initiatives in response. For all the activity, though, the companies still falter. The problem is not an inability to take action but an inability to take appropriate action.
There can be many reasons for the problem – ranging from managerial stubbornness to sheer incompetence – but one of the most common is a condition that I call active inertia. Inertia is usually associated with naction – picture a billiard ball at rest on a table – but physicists also use the term to describe a moving object’s Copyright 1999 by the President and Fellows of Harvard College. All rights reserved. art work by edwina white tendency to persist in its current trajectory. Active inertia is an organization’s tendency to follow established patterns of behavior – even in response to dramatic environmental shifts.
Stuck in the modes of thinking and working that brought success in the past, market leaders simply accelerate all their tried-and-true activities. In trying to dig themselves out of a hole, they Just deepen it. Because active inertia is so common, it’s important to understand its sources and symptoms. After all, if executives assume that the enemy is paralysis, they will automatically conclude that the best defense is action. But if they see that action itself can be the enemy, they will look more deeply into all their assumptions before acting.
They will, as a result, gain a clearer view of what really needs to be done and, equally important, what may prevent them from doing it. And they will signifi- cantly reduce the odds of Joining the ranks of fallen leaders. Victims of Active Inertia To see the destructive potential of active inertia, consider the examples of Firestone Tire & Rubber and Laura Ashley. Both companies were leading players in their industries, and both failed to meet the challenge of change – not because they didn’t act but because they didn’t act appropriately. As Firestone entered the 1970s, it was enjoying seven decades of uninterrupted growth.
It sat atop the thriving U. S. tire industry, alongside Goodyear, its crosstown rival in Akron, Ohio. Firestone’s managers had a clear vision of their company’s positioning and strategy. They saw the Big Three Detroit automakers as their key customers, they saw Goodyear and the other leading U. S. tire makers as their competitors, and whygoodcompaniesgobad The women’s apparel maker Laura Ashley also fell victim to active inertia. The company’s eponymous founder spent her youth in Wales, and she started the business with her husband, Bernard, in 1953 as a way to re-create the mood of the British countryside.
The company’s garments, designed to evoke a romantic vision of English ladies tending roses at their country manors, struck a chord with many women in the 1970s. The business grew quickly from a single silk-screen press in Laura and Bernard’s London flat to a major retailer with a network of 500 shops and a powerful brand the world over. Laura Ashley expanded her tiny operation not to maximize profits but to defend and promote traditional British values, which she felt were under siege from sex, drugs, and miniskirts in the 1960s. From the beginning, she and Bernard o. u s exercised tight control atu over all aspects e st h of the to t tion business, devo keeping design, by a rigid manufacturing, distribution, and retailing in-house. The couple opened a central manutacturing an d distribution enter in Wales, and they proudly labeled their garments “Made in Wales. ” They provided generous wages and benefits to their employees, thereby avoiding the labor unrest that crippled many British industries throughout the 1970s. They also established close relationships with their franchisees and customers, who grew fiercely loyal to the company’s products and the values they embodied.
When Laura died in 1985, Bernard kept the company on the course his wife had set. Fashion, however, changed. As more women entered the workforce, they increasingly chose practical, professional attire over Laura Ashleys romantic garb. Competitors publicly dismissed the Laura Ashley style as better suited to milkmaids in the 1880s than CEOs in the 1980s. At the same time, apparel manufacturing was undergoing a transformation. With trade barriers falling, fashion houses were rushing to move production offshore July-August 1999 Firestone was not taken by surprise they saw their challenge as simply by the arrival of radials.
Through its keeping up with the steadily increaslarge operations in Europe, it had ing demand for tires. witnessed firsthand the European The company had become a monmarkets’ quick embrace of radial ument to its own success. Its culture tires during the 1960s. And it had and operations reflected the vision developed forecasts that clearly indiof its founder, Harvey Firestone, Sr. , cated that radials would be rapidly who insisted on treating customers accepted by U. S. automakers and and employees as part of the “Fireconsumers as well. Firestone saw stone family.
Its plants were running at tended to speedily approve the midan anemic 59% of capacity, it was dle managers’ recommendations. renting warehouses to store unsold Firestone’s long-standing success tires, it was plagued by costly and gave the company a strong, unified embar rassing product recalls, sense ot its strategies and values, i ts and its domestic tire business had relationships with customers and burned more than $200 million in mployees, and its operating and incash. Although overall U. S. tire vestment processes.
The company sales were plateauing, largely behad, in short, a clear formula for succause radials last twice as long as cess, which had served it well since bias tires, Firestone’s CEO clung the turn of the century. to the assumption of ever- growing Then, almost overnight, everydemand, telling the board that he thing changed. A French company, saw no need to start closing plants. Michelin, introduced the radial tire In the end, all of Firestone’s intense to the U. S. market. Based on a breakanalysis and action was for naught. rough in design, radials were safer, The company surrendered much of longer-lasting, and more economical its share of the U. S. market to forthan traditional bias tires. They had eign corporations, and it suffered already come to dominate European through two hostile takeover bids markets, and when Ford declared in before finally being acquired by 1972 that all its new cars would have Bridgestone, a Japanese company, radials, it was clear that they would in 1988. dominate the U. S. market, too. 4 harvard business review or to outsource it entirely, dramatically reducing their operating costs.
Laura Ashley, in contrast, continued to pursue the outdated designs and the expensive manufacturing processes that had served it so well in the past. The company did not, however, suffer from paralysis. By the late 1980s, an outside consultant had identified the major challenges facing Laura Ashley and had outlined remedial actions. Recognizing the need to act, the board of directors, chaired by Bernard, brought in a series of new CEOs, asking each to develop and carry out a restructuring plan that would increase sales and cut costs.
The new plans set off flurries of activity, but none f them went far enough in recasting the company’s strategy. It remained unclear whether Laura Ashley was a brand, a manufacturer, a retailer, or an integrated fashion company. Nor did the plans refresh the company’s traditional values to bring them in line with the marketplace. Afflicted with active inertia, Laura Ashley went through seven CEOs in a decade, but the company’s decline continued. American televangelist Pat Robertson recently Joined the board as an outside director, leading one financial Journal to conclude that the company sought divine inspiration for its earthly problems.
The Four Hallmarks of Active Inertia To understand why successful companies like Firestone and Laura Ashley fail, it is necessary to examine the origins of their success. Most leading businesses owe their prosperity to a fresh competitive formula – a distinctive combination of strategies, processes, relationships, and values that sets them apart from the crowd. As the formula succeeds, customers multiply, talented workers flock to apply, investors bid up the stock, and competitors respond witn the sincerest torm ot tlattery – imitation.
Cool places to work and why
1. Go to: https://www.crainsdetroit.com/cool or https://www.fr eep.com/business/top-workplaces/ or https://fortune.com/best-companies/ or https://www.forbes.com/lists/worlds-best-employers/#385188f61e0c
2. Pick a company of interest
3. Describe the criteria used by the “accrediting” body (Crain’s, etc) in selecting the organizations who “make the list”(20% of assignment)
4. Discuss why they are a “cool” company (30% of assignment)
5. Try to make contact with an HR person and/or operational person at the Company (document your attempts) (15% of assignment)
6. Whether you do or not, discuss what you believe to be the culture in this company and whether you would want to work there. Why or why not? (25% of assignment)
7. How do the companies benefit from being on these “lists”?
8. Papers will be graded based on covering the above material, with some analysis, clear writing, and use of proper grammar, formatting, etc (10% of assignment grade).