A Sure Way to Fail
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|failures of financial organizations | Peter Drucker | collapse of the housing industry | Bank of America | derivative loans | Kenneth D. Lewis | financial crisis | General Motors | Drucker | bankruptcy | Henry H. “Hap” Arnold | U.S. Air Force | social change | General Arnold | trends and new developments | Ford Motor Company | business cautionary tales | Merrill Lynch | Freddie Mac | U.S. Army Air Forces | economics | William Cohen | Washington Mutual | actions of competitors | unexpected major events | technology | AIG | Bill Cohen | Fannie Mae | Lehman Brothers | Business Strategies|
Drucker's Lesson About Failing
Peter Drucker taught that if you continue doing what made you successful in the past, you will eventually fail. This has been true in all times and in every field including not only business, but also war and politics. Companies, industries and even countries failing to understand this single principle litter history.
The United States toppled the Taliban and won the Afghanistan War with a limited number of specially-trained troops. However, the idea that the same thing could be done in Iraq, a much larger country with a different infrastructure, culture and problems was a sure way to fail. Consequently, in addition to our inability to repeat a victory in Iraq in the same way, we now have a very serious insurgency problem in Afghanistan.
Recently we have seen failures of financial organizations so powerful that we would never have thought it possible. Lehman Brothers, AIG, Merrill Lynch, Fannie Mae and Freddie Mac, Washington Mutual and many others have collapsed, been taken over by the government, been acquired by others or are coping with serious problems brought on by their failures.
Drucker's Advice for Current Affairs
Unfortunately, as you read this, hundreds of once successful organizations, big and small, are proceeding down the same primrose path to failure in blissful ignorance that disaster is awaiting just around the corner. This is not because of the present crisis. We’ll see plenty of these disasters too; and there’s no question that our new president will have his hands full. However, I’m talking about organizations that aren’t in danger now. They plan to operate following the same, formerly successful ways of the past. Drucker would say that that is a big mistake.
Of course, the recent failures in the ongoing financial crisis are placed at the doorstep of derivative loans gone bad and the collapse of the housing industry. Yet financial organizations exist that took Drucker’s advice and changed course before it was too late. For example, Bank of America escaped the fate of many banks and now looks for acquisitions among those failing. What was Bank of America’s secret? In 2001, Kenneth D. Lewis became CEO. He considered Bank of America’s derivative loan program, a then-successful business with a "bright future” too risky given the fact that every business boom would eventually falter.
Lessons From the Past
Classic business cautionary tales of those ignoring this concept include the demise of the buggy whip industry and everything having to do with equestrian transportation. After the automobile industry was well established, a very successful Ford Motor Company lost its market leadership to General Motors for 50 years when founder Henry Ford failed to notice or acknowledge that customers were prepared to ignore the mighty Model T in a single color, black, and pay a lot more for a variety of colors.
The railroad, the great invention of the 19th century, helped win the American west and in the process created some of the wealthiest men in America. From Europe to Asia, it caused major changes in world for the next hundred years. Yet the legendary and powerful companies, which were the industry’s stalwarts, shrank to tiny shadows of their former eminence when airline transportation became wide spread.
The entire billion-dollar vinyl record industry vanished almost overnight and vinyl record manufacturers lost millions when they failed to prepare for the growing threat from compact disc technology.
Slide rules were once carried by engineers worldwide. Their market disappeared in a flash with the introduction of the handheld calculator.
The point is, like a light bulb that burns its brightest just prior to complete failure, many of these companies and industries were at their best just a few years—or in some cases, just a few months—prior to their bankruptcy.
Causes of Failure
Why do these tragedies occur? Why can’t a company or an organization continue to do what has made it successful in the past? Because the environment changes in some critical way that invalidates all the old rules. For example:
- Technology—Something new like the automobile comes along and downgrades the horse from a basic means of transportation to a sport or pastime.
- Economics—The economy falls into depression or becomes inflationary. One condition might cause potential customers to hold on to their money; the latter to spend more freely and in a much shorter period of time.
- Social Change—Prior to the 1950s, almost all men wore hats. Now they’re relegated to specialty stores.
- Politics, Laws and Regulations—Prohibition on the sale of alcoholic beverages becomes illegal or becomes legal (both happened in the 1920s in the United States) and causes major changes in the spirits industry, even criminal behavior.
- Actions of Competitors—Apple Computer started the personal computer industry. But IBM’s strategy of encouraging—rather than restricting—others in making compatible software gives IBM PCs the edge.
- Unexpected Major Events—The terrorist attack on 9/11 leads to increased air travel restrictions and much greater security.
You might think that senior leaders easily anticipate and readily prepare for change, but this is rarely the case for several reasons. These leaders are in power because they “made it” under the old paradigm. Their prior actions made them and their organizations successful. They are comfortable with the old way, not some new, unproven idea or way of doing business. Some are afraid to deviate, afraid to make a mistake. They invest heavily in the old model and avoid anything that says that they must invest again and start over. It takes an exceptional leader to do this.
One of the most remarkable cases of a leader who was able to recognize the future was not a business executive but a military leader—Henry H. “Hap” Arnold, the Commander of the U.S. Army Air Forces during World War II. After the U.S. Air Force was given the status of an independent military force after the war, he became the first and only five-star general that the Air Force has ever had.
General Arnold had fought his entire career for an Air Force independent of the U.S. Army and full career opportunities for those who flew. These had not been enjoyed when the Air Force was under the control of non-flying senior Army officers. Yet with a lifetime of fighting for a flying force, immediately after formation of an independent Air Force, General Arnold cautioned his flying officers: “There will come a day when the airplane will be outmoded as a weapon system and the Air Force must be ready to adopt others means of fulfilling its mission.”
General Arnold said that almost 60 years ago when airplanes were the only delivery system in Air Force’s inventory. As the years went by, space, unmanned and other systems took an increasingly larger share of the Air Force budget.
A Word of Caution
However, there is a challenge for those wishing to adopt Drucker’s advice. It would be foolish, even dangerous, to abandon successful products, organizations, strategies or weapons systems while they are still very profitable and useful. How then can we recognize when the significant environmental change is near and that we must immediately take action with our products, services or means of operating to be ready? Here are a few suggestions:
- Know what’s going on, not only in your industry, but in the world. Familiarize yourself with new products and also anything that could remotely affect your operations. This means a regimen of continuously reading trade journals, newspapers and other relevant media. You can never stop this as a process.
- Ask yourself not what will happen, but what can happen based on current developments.
- Play a “what if” game with yourself. What would you do if…
- Watch trends and new developments closely. If sales drop over several quarters find out why. Do not automatically assume that everything will “return to normal.” There is no normal.
- Recognize that nothing lasts forever, prepare yourself mentally for change and take immediate action when necessary, regardless of your previous investment in time, money or resources.
- While you should not change just for the sake of change, establish a program of continual review of every product, strategy, tactic and policy. Aggressively seek opportunities to change and use change to stay ahead of the competition.
- Make your own products, services, and strategies obsolete and look for better ways to meet demands.
Do these things and you’ll not only stay ahead of the competition, you’ll succeed and survive brilliantly while others plodding on in the old way will fall by the wayside.
William Cohen, Ph.D.|
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