Published: Jul 11, 2007 in Knowledge@Emory
Researchers have almost always assumed that external factors are mainly to blame when good companies fail. But what if this assumption is incorrect? Sparked by a question on company failure posed by an executive of a Fortune 500 company, Jagdish Sheth, a professor of marketing and corporate strategy at Emory University’s Goizueta Business School, spent 12 years researching the subject. The result is a new book entitledThe Self-Destructive Habits of Good Companies…And How to Break Them.In an interview withKnowledge@Emory, Sheth discussed why success too often breeds failure. As a well-known business strategist and the founder of the Center for Relationship Marketing (CRM) at Emory University, Sheth’s insightful research has resulted in numerous books and capturing two of the industry’s highest honors, including the 2004 American Marketing Association’s Charles Coolidge Parlin Award and the 2004 American Marketing Association/Irwin/McGraw-Hill Distinguished Marketing Educator Award.
Knowledge@Emory: What was the catalyst for your research?
Sheth: I trace this book’s origins to one of the most insightful questions I have ever been asked by a corporate executive: Why do good companies fail? The CEO who posed this question had been a great fan of the 1980s business best seller, In Search of Excellence, by Tom Peters and Robert Waterman. However, as time went by, the CEO was struck by how many of the companies cited as exemplars of world-class corporations were either struggling or no longer in existence. This included such icons as Sears, Dana Corporation, AT&T, Xerox, IBM and Kodak.
Knowledge@Emory: What was your understanding of why such successful businesses fail?
Sheth: I never thought that good companies fail. But my research of 12 years shows that companies are not destroyed by competition, they destroy themselves. Many economists talk about capitalism as a constructive destruction. What that means is that the forces of competition will create new competitors who are smarter and do better. However, my research suggests that successful companies destroy themselves. This is because on the road to success many companies unknowingly inherit bad habits. The Self-Destructive Habits of Good Companies looks at the dark side of companies.
Knowledge@Emory: What did you find were the causes for the failure of once highly successful companies?
Sheth: I found that there are seven major bad habits that cause companies that were once highly successful to subsequently fail. The bad habits are in no particular order, none carries more weight than another. Some of them are more universal, common across cultures and countries and not limited to America. The first bad habit is denial, in particular, the denial of new realities in business such as the emergence of new technology, the new reality of customer wants and ignoring globalization.
Knowledge@Emory: Can you expound a little on the realities that these companies ignore?
Sheth: As far as technology, companies with legacy technology always underestimate the power of new technology. For example, telecommunications companies ignored and continue to ignore the reality that cellular phones will replace land lines. These companies never anticipated this or believed it could happen. This phenomenon destroyed the entire public phone market.
Knowledge@Emory: What about the new reality of customer wants and globalization?
Sheth: One example is that people are looking for more organic foods. Traditional food companies thought it was a fad, but look at how Whole Foods has become so dominant. Also, companies are not paying attention to globalization. Your competitors will come from countries with whom you never expected to compete. Previously, this competition was from Korea and Japan. Now it’s from India and China.
Knowledge@Emory: What are some other bad habits you found in once successful companies?
Sheth: Another bad habit is arrogance. As companies become successful, they think they are bigger than life and above everyone else. For instance, they ignore laws and ethical boundaries and become abusive to customers, employees and suppliers. Other signs that a company is self-destructive is complacency. This rests on three pillars: your success in the past, your belief that the future is predictable, and your assumption that scale will protect you against any setback. There’s no better example of this than Ma Bell. The only thing better than a monopoly is a government-regulated monopoly. But there’s a downside: It’s hard not to get fat and lazy. Thanks to its monopoly-bred complacency, AT&T had difficulty competing after it was forced to break up on 1984. How do you wake up the company? Reengineer to eliminate waste and curb inefficiency.
Knowledge@Emory: Any other bad habits that companies should be aware of?
Sheth: There are several more: Competency dependence means that the success gained from a uniqueness leads to more dependence on it. But the thing that brought you success may become obsolete. For example, Kodak was built on providing film for cameras, but the world is going digital. So how can a film company go digital? Its own unique capabilities became a trap. The company has to ask itself, ‘How do we transition from one technology to another?’ The chemical engineers populating a film company will likely not come up with a digital product, so you have to recruit talented people from the Silicon Valley.
Knowledge@Emory: Do you believe companies spend too much time worrying about being destroyed by competitors?
Sheth: What companies should worry about is another bad habit I call competitive myopia. Researchers have found that it is better to enlarge the market as opposed to defining your competition too narrowly. PBS, for instance, doesn’t define itself as a television company. It defines itself as an entertainment company. In a marathon, a runner watches everybody, but as the race narrows he is just watching two or three key players. The Coca-Cola Company only watches Pepsi, IBM watches Cisco. The danger of this type of focus is that competition may come out of nowhere. Companies tend to underestimate new entrants, especially those from other countries.
Knowledge@Emory: What are the last two bad habits you found while researching your book?
Sheth: There is volume obsession, or growing the top line at the expense of operating margin. You believe your company can recoup profits by making it up in volume but it doesn’t happen. The best remedy for this is to manage your costs and improve your margins without sacrificing your top line. The last bad habit I discuss is turf wars. As companies grow they create geographic silos, product silos, in addition to traditional functional silos, which eventually begin to fight among themselves. The politics of key decisions the company take over and the company self-destructs.
Knowledge@Emory: What can companies do to avoid these seven bad habits?
Sheth: In the book I provide diagnostic tools and remedies. I write about the role of intervention, and suggest corrections for CEOs or heads of companies. The final message of The Self-Destructive Habits of Good Companies: Like in medicine, prevention is better than a cure.