29 Mar 2010  Research & Ideas

Ruthlessly Realistic: How CEOs Must Overcome Denial

Even the best leaders can be in denial—about trouble inside the organization, about onrushing competitors, about changing consumer behavior. Harvard Business School professor Richard S. Tedlow looks at history and discusses how executives can acknowledge and deal with reality. Plus: Book excerpt. Key concepts include:

  • Denial is the unwillingness to acknowledge and deal with reality.
  • What is different today is that the cost of denial has become so high.
  • Being ruthlessly realistic with oneself is one of the greatest challenges for any CEO.

 

Reviewing a spectacular business failure, we often wonder why the CEO didn't see trouble coming. It was so obvious.

Why didn't Digital Equipment Corp. CEO Kenneth Olsen see the PC as a threat to minicomputers? Did Coca-Cola's Roberto Goizueta really think New Coke was a good idea? How long did Henry Ford think he could keep selling black-only Model Ts?

"Denial has always been a problem," writes Harvard Business School historian Richard S. Tedlow in a new book, Denial: Why Business Leaders Fail to Look Facts in the Face-and What to Do About It. "What is different today is that the cost of denial has become so high. We are living in a less forgiving world than we once did."

We asked Tedlow to discuss how denial can cripple a company, and what can be done about it.

Martha Lagace: What is the meaning of denial as you conceptualize it in your book?

Richard Tedlow: Denial is the unwillingness to acknowledge and deal with reality. It is the choice—sometimes willful, sometimes unconscious, often semiconscious—to enter an "as if" world, to act "as if" facts are not facts because they are difficult to face.

Sigmund Freud referred to denial as a combination of "knowing with not knowing," a phrase that has been defined as a "state of rational apprehension that does not result in appropriate action." In her brilliant study of the disastrous decision to launch the space shuttle Challenger in 1986, sociologist Diane Vaughan used a similar phrase, "seeing but not seeing."

From the consulting couch to the launch pad, denial is ubiquitous. You find it in individuals, in teams, in companies, in industries. Indeed, you find it in entire nations and economies. Look at the invasion of Iraq, or the dot-com bubble of the 1990s, or the residential housing and commercial real-estate bubble of the past few years, or the fantasy that the market for derivatives could somehow regulate itself—the consequences of all we are dealing with this very day.

Denial is not merely being wrong. Everybody makes mistakes. Denial is falling into a cognitive Bermuda Triangle. Everything is clear, yet you lose your bearings.

Q: How pernicious a problem is denial in business today?

A: Denial has always been a problem. What is different today is that the cost of denial has become so high. We are living in a less forgiving world than we once did.

Here's an example. General Motors had a dysfunctional business model for decades. Shrewd observers knew it. The company did not transform itself because it could continue to coast along, living in the reflected aura of its past glory.

GM's leadership acted in 2008 as if it were 1998 or 1988. It wasn't. And the inconceivable happened—this once-great firm went bankrupt.

Q: Given that a CEO's role is often to keep the company energy high and to stoke optimism among employees, are CEOs by virtue of their position especially prone to denial? How could they better blend optimism and realism?

A: Accentuating the positive for employees or others is not denial, as long as you yourself are fully confronting reality. In fact, there may be times when it is prudent, even necessary, to put on a brave face.

On the other hand, convincing yourself that things are better than, or different from, what they really are is never prudent, and often disastrous. So the key is to be ruthlessly realistic with oneself. As I hope the book makes clear, this is one of the greatest challenges for any CEO.

Q: The Innovator's Dilemma by HBS professor Clayton Christensen illustrated how formerly successful incumbents can be blindsided by more nimble competitors. Do you see denial as a particular risk for large, established organizations as much as for young, entrepreneurial firms? Is denial a predictable downside to success?

A: Denial is more endemic to older firms because it so often results from stubborn adherence to a once-accurate perception of reality that has gradually become obsolete. In the words of John Kenneth Galbraith, one's view of the world "remains with the comfortable and the familiar, while the world moves on."

Henry Ford saw more clearly than most the widespread hunger for inexpensive, motorized transportation. That vision made great successes of him and his company. But eventually, when sales of his breakthrough, no-frills Model T began to flag because car buyers became interested in style, not just functionality, Ford refused to face facts. He denied that the world had moved on. And his once-dominant company paid the price.

Established firms, which by definition have enjoyed some measure of success, are more likely to deny new realities because the old ones worked well for them. Young enterprises are not similarly weighed down by the dead hand of history. But that does not mean that they are immune to denial—far from it.

Q: Companies you describe as crippled by denial include the supermarket chain A&P, the retail conglomerate Sears, and the short-lived delivery experiment Webvan. How did these companies succumb to denial?

A: To paraphrase Tolstoy, every company in denial denies in its own way. To oversimplify a bit, Sears was an example of a firm leaving its market, while in A&P's case, the market left the firm. Both were like the proverbial frog being boiled in a gradually warming pot of water. By the time they realized what was happening, the opportunity for confronting the facts and doing something about them had passed.

Webvan is an example of the fact that, as noted above, being young and entrepreneurial is no safeguard against denial. Webvan's backers convinced themselves that the dot-com gold rush was a permanent new reality rather than just another bubble. They were also blind to the obvious flaws in their business model—defects that numerous outsiders noted from day one. It was a classic case of wishful thinking.

Q: How can managers without executive authority spot the warning signs of denial and help reverse the process before it's too late?

A: It is often middle managers who are best acquainted with new realities. As Andy Grove has noted, these are the people who are out on the front lines while top management is ensconced at the home office, cushioned from the daily reality of the rough-and-tumble of the marketplace. "Snow," he wrote in Only the Paranoid Survive, "melts first at the periphery." Problems, in other words, appear initially at the borders.

Unfortunately, when middle managers actually raise these problems—especially those that contradict the firm's prevailing assumptions and conventional wisdom—they are often ignored, or worse. Henry Ford, for example, fired the executive who dared "speak truth to power" about Ford's Model T myopia—and this man, Ernest Kanzler, was his relative! (He was the brother-in-law of Ford's only child, Edsel.)

A firm that deals with bad news by literally or figuratively dismissing the person who bears it is both in denial and in trouble. Not only will that news go unheard but potential truth-tellers will quickly learn to keep quiet. Or get out.

Q: What is it about IBM and Intel that saved them from the fate of other companies that fell victim to denial?

A: One key factor in IBM's 1990s turnaround (after having denied its way through the PC revolution that it helped create in the 1980s) was its decision to bring in an outsider as CEO. Lou Gerstner was able to reimagine and reshape what had become a calcified corporate culture. The fact that he was alien to that culture, and vice versa, was enormously helpful.

You don't necessarily need an outsider to provide an outside perspective, however. Occasionally a creative, clear-headed insider can break free of both his company's and his own preconceptions by adopting a novel point of view.

This was demonstrated by Andy Grove in 1985, when he and his boss, Gordon Moore, were fighting what appeared to be a losing battle against an impossible business dilemma. In the midst of their aimless wandering, Grove asked Moore, "If the board kicked us out and brought in new management, what do you think they would do?" Suddenly the answer to Intel's dilemma became clear to both men. Grove's deceptively simple question stripped the blinders of denial from their eyes. It allowed them to see the situation afresh, face it squarely, and make what had instantly become the obvious choice.

Grove's question did not make either man smarter. Both were, and are, smart enough. So were the men who had led IBM to near-disaster in the 1980s. Fighting denial is not a matter of IQ. It is a matter of point of view.

Excerpt from Denial: Why Business Leaders Fail to Look Facts in the Face—And What to Do About It

By Richard S. Tedlow

The A&P had for most of its history been the low-price-grocery leader. But this is a position you can only hold if your costs are lower than your competitors. Through its steady disinvestment in its stores, through its high-priced union contracts, through its ill-advised store-site-location practices, and through a dozen other avoidable errors the A&P lost that position. This fact it learned the hard way in 1972 when it launched a price war.

The hostilities were conducted under the banner of WEO, which was supposed to stand for "Where Economy Originates." This ugly, clumsy slogan, which sounded like "we owe," heralded a catastrophic year for the company. Sales increased but losses skyrocketed. A&P lost the price war it started, proving only that it could give away the store.

The most puzzling aspect of the price war is why A&P initiated it. During 1971, published figures—please note that everyone knew this; none of it was secret-indicated that the A&P's stores were inferior to those of the four other leading chains. Sales per employee, for example, were almost 45 percent lower than at Jewel. Sales per store were almost 60 percent lower than at Food Fair.

What did A&P's stores look like in the early 1970s? Here are the recollections of an enraged top executive who started out with the company as a part-time store clerk in the summer of 1938:

"After almost twenty years of steady decline and cutbacks, a debilitating paralysis had overtaken most stores in a growing number of divisions. The symptoms were visible and similar. These stores had few customers and did little business, but were open long hours, often seven days and six nights. These stores were obviously short of help, shelves were poorly stocked. What carriages were on hand were usually out in the parking lot. Only one of the six check stands was operating, with no bagger to help shorten the checkout wait. Advertised sales features were often missing from the shelves, dairy, produce, and meat cases. Most times, and particularly at night, no employees were available to assist customers seeking a cut of meat not on display, or to check backroom stock for sale items missing from shelves, or even to scale and price produce items or grind A&P's bean coffees. Cleanliness and courtesy standards, freshness and quality standards, shelf-stocking and checkout standards, and store employee morale all deteriorated at the same grinding steady pace."

Take a good long look at that last sentence. That "same grinding steady pace." It was the steady downward slide that made it possible year after year to deny that things were getting as bad as they became. I am old enough to remember what an A&P looked like in the early 1970s. The contrast with the mid-1950s was stark. But it had gone to pieces by degrees. Moreover, many things went wrong, not one big thing. The cumulative effects of the slow collapse were easy to deny.

The sad story of denial at the A&P leaves us with a set of questions. What if Bofinger had lived? The seeds of destruction were sown during Ralph Burger's tenure, but he was not around at harvesttime. What if it had been Bofinger rather than Burger?

Perhaps it would not have made much difference. Bofinger had a lot of operating experience that Burger did not, but he was still very much part of the company's gerontocracy. What if John Hartford had had a son who was bound and determined that he could post a better record at the company than his father did? That is what happened at IBM. Thomas J. Watson Sr. had built IBM from a motley collection of cats and dogs into a uniquely powerful firm in a growing industry. His equally ambitious son pushed the company to its limits, presiding over the creation of the IBM 360 in 1964, one of the greatest new-product introductions in American business history. In that case, things would, in all probability, have been different. One person with power—the CEO—can make a key difference in even the biggest, stodgiest of bureaucratic companies.

Why did the company not look more deeply into the quality of its sales and earnings? Why didn't it think more strategically about its reinvestment policy? Why did it pay out so much money in dividends? Why didn't it devote more attention to its executive-development program? When the company went public in 1958, it put six outside directors on its board. One of these was Donald K. David, dean emeritus of the Harvard Business School. Surely he could have designed an executive-education program that could have fast-tracked young talent.

More questions could be asked. They are not easy to answer. My own view is that the closest we will get to an answer is the quotation in the title of this chapter: "They just didn't believe these things were happening." That statement, made by a former A&P executive in 1973, captures the essence of denial. You didn't have to be a genius to see "these things." Thanks to the transparency of retailing, all you had to do was to walk into a store and try to buy a steak, try to buy broccoli, watch your child scream for Tony the Tiger when all you could buy was Ann Page cereal, wait for what seemed like ages at the checkout counter, and so on.

This answer raises another question. Why didn't they "believe these things were happening"? Because, I think, they saw everything through the lens of their history of market leadership. They felt that because they had been leaders for so long, every problem was an outlier, a blip on the screen, not a harbinger of things to come.

All over the country, grocery retailers in the 1950s and 1960s were moving faster and looking better than the A&P. But for a while, especially during the 1950s, the A&P was growing smartly as well. What the company collectively denied was that it is not okay merely to grow. If you grow in absolute terms but decline relative to other firms in your industry, you are going to sacrifice the sharpest, most ambitious executives you have. The less talented will hang around.

The A&P was not destroyed by fire. It rusted. This is the same process, but less dramatic, slower, and therefore easier to deny. "This is the way the world ends," T.S. Eliot wrote in "The Hollow Men." "Not with a bang but a whimper."

About the author

Martha Lagace is the senior editor of HBS Working Knowledge.

Reprinted with permission of Richard S. Tedlow. Copyright Richard S. Tedlow, 2010. Denial: Why Business Leaders Fail to Look Facts in the Face—And What to Do About It. New York: Portfolio, a member of the Penguin Group (USA), Inc. 2010. All rights reserved. Purchase this book.