02 Jun 2003  Research & Ideas

Stuck in Gear: Why Managers Don’t Act

Most top executives are smart and far sighted, so why can't they change gears fast enough to meet change? Professor Donald N. Sull provides answers in a new book.

 

For want of a better idea, many companies often rely on a tried-and-true success formula. And why not? What worked before to pull their organization into profitability will surely work again, right?

Not so, according to Donald Sull, assistant professor at Harvard Business School. The sad truth is that a success formula may frequently go stale or, as he puts it, "harden," for a complex set of reasons that are, in fact, surprisingly predictable—though not easy to avoid.

"To succeed in business, every manager must make choices and take actions that may eventually hinder as well as help the organization," he writes in his new book, Revival of the Fittest: Why Good Companies Go Bad and How Great Managers Remake Them. These actions or commitments behave as double-edged swords, Sull says. They have a lifecycle, he discovered. But the good news is that they may also be re-tooled to successful and profitable strategic ends.

In Revival of the Fittest, he draws on his extensive global research in such diverse industries as personal computers, brewing, tires, and consumer banking to outline the pitfalls that managers should be aware of as they craft their strategy for the future. He also offers suggestions for avoiding the worst mistakes and gives advice for reviving your own company.

For most companies, a big jolt in the industry landscape is a pretty rare event, Sull says. The travel industry, for example, suffered such a jolt after the September 11 attacks. More common for most companies are the slow, incremental shifts that smart managers do see coming down the road. Why then aren't they better at shifting gears? According to Sull, most top managers are far sighted and methodical, active and dedicated, and bright and accomplished. But their ineffectiveness at coping with industry change is not just due to such commonly cited barriers as insufficient resources, he says.

"Managers get trapped by success, a condition that I call active inertia, or management's tendency to respond to the most disruptive changes by accelerating activities that succeeded in the past," he writes in Revival of the Fittest.

When Firestone was faltering in the tire industry after the introduction of radial technology, for instance, Firestone management responded by doing more of the same activities that had worked so well for the organization in the past. Firestone extended its existing technology, made more tires on the existing equipment, and kept the existing factories—some of them superfluous—at full throttle. In Firestone's view, it was calling on sure-fire weapons that had given the company its competitive edge in the past.

This is a common impulse of many managers facing similar threats. In the case of Firestone, Sull writes, it just dug itself into an even deeper hole. Its reaction did not make the company better able to fend off the threat of radial technology; quite the opposite. And companies don't only need to react to technological threats, Sull reminds the readers. Change also comes in the form of shifts in regulation, consumer preferences, and overall competitive dynamics.

"Managers often equate inertia with inaction—a passive phenomenon in which organizations change more slowly than their environment or fail to change altogether, like the deer in the headlights. But that rarely happens," he writes in his book, adding that the "car stuck in a rut" metaphor is more apt.

Risky business

Managers should look out for the following risk factors of active inertia, Sull says. If your company has experienced four or more of them, you should be very concerned.

Your company boasts superior performance. This means that managers get comfortable with the status quo and think that they have hit on the winning formula and don't need to seek alternatives. The generated cash flow lets them carry on without the need for outside financing; but outside financing serves as an important "check and balance," writes Sull.

Your CEO appears on the cover of a major business magazine. Beware of the "cover curse"; it could lock-in your success formula. It can also lead to hubris.

Management gurus pronounce your company as outstanding. Another potential jinx. Look what happened to Digital Equipment, Kodak, and Wang Laboratories, once lauded by business academics.

You build monuments to your success. Resist the urge to construct fancy new headquarters, a clear sign of the company's sense of victory. "It can also lock a company into a community—a double-edged sword," Sull writes.

You name monuments after your success. Renaming football stadiums, ice hockey rinks, and the like "is another red flag that sometimes signals success has gone to managers' heads."

Your CEO writes a book. The success formula becomes public and is harder to amend later.

Your top executives look alike. Look around. Your company won't stretch itself when all the managers think alike and see the business in the same way.

Your competitors all have the same zip code you do. "In some cases, not just one company but an entire community of firms latches onto the same success formula" as happened with Akron, Ohio with tires; Detroit, Michigan with automobiles; Sheffield, England with steel; and Jura, Switzerland with watches.

That's the active inertia trap, in a nutshell. So how do managers avoid steering their companies into it? An organization can overcome active inertia by explicitly committing to what Sull calls transforming commitments. If active inertia grows as a result of the company's defining commitments—its strategies, processes, resources, relationships, and values—then transforming commitments are the bold actions that make a company less likely to fall back on the status quo.

But transforming commitments are not risk-free, as Sull describes in the book. Putting them to work depends on the company's financial cushion, competitors' likely response, and management's ability to lead the transformation. Two other questions should be asked, Sull advises: "Does the change in environment threaten your company's core business?" And, "Does your company have a good alternative to the status quo?"

Think the Unthinkable: The Oticon Story

In this excerpt from Revival of the Fittest, Sull described how one CEO led his company in breaking free from active inertia. Working together, the CEO and managers applied the lessons of transforming commitments and brought a dying business back to life.

by Donald N. Sull

The Danish hearing-aid maker Oticon is a classic case of a good company gone bad. 2 For decades, Oticon led the global market in hearing aids, exporting 90 percent of its production. Then, in the 1980s, a rival introduced the first in-the-ear hearing aid, a device less conspicuous than Oticon's behind-the-ear models. Convenient and cosmetically appealing, the in-the-ear devices rapidly gained popularity—particularly after then-president Ronald Reagan started wearing one. But Oticon's engineers firmly believed in their traditional product's superior sound quality. They responded to the new technology by doing more of the same, producing and selling highly engineered behind-the-ear products through traditional distribution channels. Locked in active inertia, Oticon lost half its global market share.

In the late 1980s, the board turned outside for a new CEO and tapped Lars Kolind, who had built the third-largest consulting firm in Denmark, run the country's National Science Research Laboratory, and served as a leader in the global Boy Scouts. Kolind stanched Oticon's bleeding by cutting 15 percent of the workforce and consolidating budget approval authority from seventy-eight people to one—he personally signed every check. After saving the company from bankruptcy, Kolind surveyed the competitive landscape. The picture was bleak. The company had lost its market share and its technical lead to well-financed competitors. Siemens alone invested more in R&D of hearing-related technology than Oticon booked in annual revenues. Kolind concluded that Oticon's only alternative lay in out-innovating its larger competitors—specifically by developing and marketing new products more quickly.

Kolind selected Oticon's new product development process to anchor the transformation. 3 At the time, Oticon was organized into functional fiefdoms; R&D tossed elegant designs over to manufacturing, which tossed the finished product over to the sales force. Kolind committed to a new process in which cross-functional teams would assemble to develop a new product, collaborate for the duration of a project, and then disband. Anyone could propose and pursue a new project if she garnered support from three parties: a management champion, the top executive team for funding, and employees to staff the team. Any of the three participants could kill a project by withdrawing support.

Kolind kicked off his transformation with a memo, headed "Thinking the Unthinkable," that outlined his vision of and argument for the new process. Unlike many managers, however, Kolind recognized that one memo does not an effective transformation make. Determined to "drop a nuclear bomb" (his words) on Oticon's bureaucracy, he spent two months telling employees and middle managers that he was 100 percent committed to this change-and that they would have to commit, too, or leave the company altogether. Kolind's commitment made boosters of everyone but the middle managers, whose status was at risk. Kolind enlisted some of the resistant managers to plan the transition and encouraged the others to leave.

Kolind's subsequent bold actions demonstrated he was serious. He publicly auctioned off Oticon's old hardwood furniture and used the proceeds to purchase desks, chairs, and cabinets on wheels so that employees could roll their desks and files from one team to another. In August 1991, Kolind invited the Danish press to televise Oticon's move to its new headquarters, an abandoned Tuborg beer factory with an enormous work space and no enclosed offices. Under such press scrutiny, Oticon staff felt compelled to make the transformation work. Finally, Kolind acquired 17 percent of Oticon's stock with his own savings.

The Oticon story illustrates how managers give their transforming commitments traction. Kolind's commitments were credible because of his conspicuous public steps and financial investment. Kolind's anchor was clear, never straying from his first vivid memorandum. Finally, his actions were courageous, all clean breaks from Oticon's bureaucratic past. How can you apply the three Cs to your own transformation?

The Three Cs of Effective Transforming Commitments
Credible

Have you made hard-to-reverse investments?

Have you burned your bridges behind you?

Have you staked your personal reputation?

Have you staked your company's reputation?

Have you put your money where your mouth is?

Have you put your best people where your mouth is?

Have you put your time where your mouth is?

Have you handed over the keys?

Clear

Is your commitment simple?

Is your commitment concrete?

Can you measure progress?

Can you quantify the measure?

How frequently will you measure?

When do you select the measure?

Who will measure progress? Inside the company? Outside the company?

Have you repeated your commitment often enough?

Are you sick of repeating it? Are others?

Could employees pass a pop quiz?

Courageous

Are you breaking from the pack?

Are you ignoring the "experts"?

Is this a quantum leap or an incremental change?

Are you hedging your bets or covering your backside?

Are you undoing you predecessor's actions?

Could you do it faster or sooner?

Excerpted with permission from Revival of the Fittest: Why Good Companies Go Bad and How Great Managers Remake Them, Harvard Business School Press, 2003.

Footnotes:

2. Data for Oticon comes from Mette Morsing and Kristian Eiberg (eds.), Managing the Unmanageable for a Decade (Hellerup, Denmark: Oticon, 1998); John J. Kao, "Oticon," Case 395-144 (Boston: Harvard Business School, 1995); Bjorn Lovas and Sumantra Ghoshal, "Strategy as Guided Evolution," Strategic Management Journal 21, no. 9 (2000): 875-896; and interviews by the author with Oticon managers.

3. In his initial memo outlining his plan to transform Oticon, Kolind lists the purchasing, sales, and administration processes as targets for a shift to project-based management in addition to new product development. New product development, however, was clearly his focal process. See Lars Kolind, "How Will Oticon Look in the Future?" Oticon internal memorandum dated December 1989 in Morsing and Eiberg, Managing the Unmanageable for a Decade, 20-25. For a broader discussion of organizational transformation through a commitment to the new product development process, see Steven C. Wheelwright and Kim B. Clark, Revolutionizing New Product Development (New York: Free Press, 1992).