Why Smart Executives Fail: And What You Can Learn from Their Mistakes - Rilegato

Yet a few years or even a few months after they were so celebrated, their companies crashed. Key operations were shut down. Workers were laid off. The company's stock plunged. Huge ventures, to which these leaders and their companies were deeply committed, turned out to be almost worthless. When the dust settled, we found out that these leaders had destroyed hundreds of millions or even billions of dollars worth of value.

How is this possible? How can these business leaders fall so far so fast? How can so many people be so disastrously wrong? What can possibly account for the scores of business failures we see every year, in different industries, and even in different countries? And how can we prevent this sort of thing from happening again?

Six years ago I set out to answer these questions in the most extensive investigation ever conducted on this subject. My goal was not only to understand why businesses break down and fail, but to focus on the people behind these failures; not only to understand how to avoid these disasters, but to anticipate the early warning signs of failure. Ultimately, I wanted to move beyond ad hoc explanations of failure on a case- by-case basis and expose the roots of these breakdowns in a definitive way.

Some of the answers my research team uncovered were as surpris- ing as the sudden fall from grace experienced by many of the business leaders we studied. In fact, many of the qualities that sound like the attributes of a dream enterprise turn out to be the basis for a business nightmare. For managers, many of the qualities we aspire to emulate, or feel guilty for not having, turn out to be ones we're better off with- out. For investors, many of the signposts of success that we strive to identify turn out to be markers for failure. And for those of us simply fascinated by the world of business, in part because the leaders and executives that run organizations seem so much apart from the rest of us, it turns out that they have the same weaknesses and character flaws, and make the same kinds of mistakes, though perhaps on a grander scale, that we do.

The Causes of Failure

Giant business disasters can be prevented-but only if we start thinking about business leadership and organizations in strikingly new ways. For starters, this means putting aside the easy answers and looking intently at the real causes of business failures-the people who create, manage, and lead the company.

Journalists, employees, business gurus, other managers, investors, members of the general public-everyone has an opinion on how a top executive managed to turn an apparently successful enterprise into a corporate catastrophe. In fact, there are seven theories usually cited for executive failure. But how many are correct?
1. The Executives Were Stupid
The most common explanation for a business failure is to say that the CEO and other senior executives were stupid and incompetent. We point to their incredibly stupid mistakes and conclude that if man- agement could do such stupid things, the executives involved must be stupid people.

But is this true? Are major business failures ever really due to stupidity or lack of talent? The reality is that people who become CEOs of large corporations are almost always remarkably intelligent. Every failed executive who was interviewed for this book was extremely articulate, perceptive, and knowledgeable. No one who talked with these executives for even a few minutes could fail to be impressed with their intelligence. Does anyone really think that former Rubbermaid CEO Wolfgang Schmitt, who was known as an innovative genius and had a knack for knowing the right answers before most people even recognized the critical issues, is lacking in raw intelligence or talent? Does anyone really think that Wang Labs founder An Wang, who earned a Ph.D. from an Ivy League university, owned several patents in his own name, and created a billion-dollar company, was lacking in raw intelligence or talent?

Nearly all of these people reached the top because executives and shrewd investors repeatedly chose them over their fellow managers for being the most able and most competent. Many of them graduated from the world's most selective and demanding schools. In the earlier stages of their careers, they were the managers who turned crises into triumphs. Once they got to the top, they were often able to hang on to their positions long enough to shape the fate of their enterprises, because corporate boards and business partners were utterly confident of these executives' ability to make truly intelligent decisions. Nobody wants to entrust the fate of a large corporation to somebody who isn't very, very smart, so as a rule, they don't.

Despite these executives' general intelligence, could the major business failures nevertheless be due to ignorance of the industry or a lack of relevant knowledge or experience?

This possibility isn't very plausible either. The people responsible for major business disasters almost always have terrific track records in their relevant areas of business. They tend to be enormously knowledgeable about everything that seems likely to affect their company. If they come upon something they don't know, they generally make a point of catching up right away. These people are usually recognized as the top authorities on whatever type of business they are in.

In sum, managers are far from stupid. We cannot understand corporate failure by resorting to the cop-out excuse of poor managerial quality. No, we'll need to look elsewhere for an explanation.

2. The Executives Couldn't Have Known What Was Coming

The second most common way of explaining business disasters is to acknowledge that while the executives were intelligent, they were caught by events they couldn't have foreseen. Even the best executives might be expected to fail when business conditions suddenly shift in unpredictable ways.

The only problem with this explanation is that none of the business disasters we investigated turned out to be due to executives being caught by unforeseeable events. In company after company, regardless of industry, time period, or even country, the managers had every opportunity to see the important changes that were coming to their industry. In most cases, the executives possessed all the necessary facts. In many cases, people tried to tell them what these facts meant.

Executives at the Schwinn Bicycle Company knew all about mountain bikes and the other new designs that would threaten their brand. They had even received presentations on these designs and turned them down. Motorola knew all about the digital cell phones that would cut into its analog sales. Motorola was collecting royalties on them. When the Internet changed the PDA market that General Magic was going after, it was a development that some of General Magic's own people had predicted. In each of these cases and many others, the relevant change in business conditions was foreseen and discussed-and then disregarded.

3. It Was a Failure to Execute

Recently, it has become fashionable to claim that the executives of failed companies probably had the right policies, but that their companies didn't carry out the policies well enough. If the managers and employees at all levels had only done their jobs better and not messed up the details, everything would have been fine. This certainly sounds like an appealing explanation. It implies that the senior managers got the big things right and only slipped up on the little ones. It suggests that a few improvements in "execution" are all that would be necessary to put everything right again.

Yet attributing business failures to "a failure to execute" is a bit like attributing business bankruptcies to insufficient money. Every business failure can be described as a failure to execute because the business ultimately failed to do what it set out to do: create value for its employees, customers, and stockholders. Furthermore, by the time the business as a whole has broken down, many of its operations will also have broken down. Show me a business that has failed, a business guru might proclaim, and I'll show you a failure to execute.

But how often is the root cause of a business breakdown simply a failure to execute? Major business and engineering schools turn out competent management and operations experts by the thousand. Tell these experts exactly what you want to do, and they'll set up a reasonably ef- ficient and reliable system for doing it-usually in a matter of weeks. Major consulting firms can deliver impressive operations expertise to companies in a matter of days. Given the availability of this expertise, no one can realistically claim that an inability to execute operations effectively is the main reason a business fails. If execution were the core problem, all a CEO would have had to do to save his or her company would have been to pick up the phone.

A closer look at companies that underwent major breakdowns makes this explanation even less plausible. In many cases, the businesses that suffered huge losses were typically performing all sorts of operations brilliantly. Even when some kind of operational breakdown was at the heart of a company's problems, it was never where the problems began. What could be more operational than computer glitches that throw data on billing, costs, and internal metrics into turmoil? But the real reasons Oxford Health Plans struggled so mightily in 1997 with operational br...