Why Success Can Be Dangerous

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Since its creation by Thomas Watson Sr. in 1914, IBM has had cycles of precipitous decline and dramatic revitalization. Until his death in 1956, Watson made it one of the largest, most profitable and innovative enterprises in the world. At one time, during the 1980s, IBM held 83% of the market and was the biggest single component of the S&P 500. Today it ranks 35th – its lowest point in the last 40 years.

Within a decade of its heyday, industry analysts were describing the company as “a dinosaur, an implosion, a wreck.” Those responsible for its growth and eventual legacy forgot what had made the company such an enormous success. While IBM doesn’t stand alone in misunderstanding how to adapt to incessant, uncertain and disruptive change, it does serve as a classic case study for today’s leaders on how not do deal with good fortune.

Over the course of the last 15 years, 90% of Fortune 500 companies have disappeared. The Harvard Business Review recently projected another 32% will fail in the next five years. Most assuredly, having reached this pinnacle of recognition, those who achieved the gold standard of prominence believed their success would continue. What they missed in their thinking is that, without continual transformation, failure is virtually inevitable: 97% of new products fail, 90% of oil wells drilled are dry, 80% of venture-capital funded firms disappear, 80% of corporate acquisitions add no new value, 70% of new drugs never pan out, 60% of new restaurants close within 3 years, and 60% of new businesses never make a profit (ever). Why would your business be any different?

Let’s look at one particular period in IBM’s turbulent history to learn how not to lead in unpredictable times. Despite its oft-hallowed position as the industry leader, a large part of the company’s up-and-down existence stemmed from an inability or an unwillingness to break with its past and radically alter its future course in the context of the changing, occasionally disruptive, landscape. For decades, the company’s growth strategy was predicated on supplying one-stop shopping for information services to large firms – something that was greatly valued and in which IBM excelled.

The Watsons (both Sr. and Jr.) based their core business approach on what every customer seeks – people they can trust, who are good problem solvers and who focus on adding value. This, essentially, is what IBM sold its customers and why it prospered. But, by the mid-80s, the company strayed from that strategic imperative, a decision that confused and angered its customers. It also had become bloated with excess bureaucracy (hence unnecessary cost) and its employees were increasingly demoralized.

In the mid-nineties, a new top management team took charge and vowed to change this business philosophy. As Lou Gerstner, the CEO at the time, noted: “We are completely transforming the business ….” Under his early leadership, growth returned. Sales reached $72 billion, up more than 12 percent. Profitability increased by 42 percent. Shareholders were richly rewarded, albeit at the expense of not recognizing and rewarding employee effort. Then, as before, the world changed. But IBM did not. What was previously acknowledged as the world’s most admired corporation stumbled badly.

Critics widely attributed IBM’s latest decline to this: it had become a follower, not a leader. Rather than embracing the need for relentless change, and being receptive to the emergent focus of its upstart competitors, the executive team once more took success for granted – they again lost touch with its customers’ evolving interests, expectations and concerns. They, in turn, openly castigated IBM’s leadership for its arrogance.

In consequence, the company’s employees became disillusioned and ineffective. Managers had led their followers to believe their job security was unconnected to organizational performance. In surveys, top-performing IBM employees complained bitterly that the company’s management had become far too tolerant of poor performers. Leadership did not listen. In short, success overwhelmed management fundamentals: the company’s executive team became wildly optimistic, even negligently so, about a future it clearly misdiagnosed.

How does a company become the victim of its own success? As the IBM example illustrates, success can easily breed complacency. Attitudes drive behaviours. This kind of arrogance and its counterpart – hubris – fuels a culture of entitlement, instils an aversion to risk taking and creates a sense of invincibility. All of which inflate a bubble of ignorance that makes it even more difficult to change.

Intoxicated with good fortune, leaders lose perspective and start overreaching. The prevailing corporate culture pushes the wrong type of executive to the top – leaders who are too steeped in the complacency of success and too certain of their own wise judgments in a time of rapid, unpredictable change and disruption. Success can often lead to overly exuberant and exalted strategies based more on pride than on reality.

The self-inflicted arrogance of success seduces leaders to think they can dictate what their customers should buy from them, only to discover too late that they can’t. When the employment “pact” of safety and security is eroded or broken, staff loyalty and productivity are diminished. Companies can pay high salaries in an effort to induce superior performance but, if they don’t bring out a sense of vision and worth in their people, they inevitably fail. And, when employees become unengaged, customers become dissatisfied and begin to look elsewhere.

Smart leaders are those who are plugged into the future. They don’t live in the past hoping their proven formulas for success will endure. Rather, they think futuristically on all cylinders, anticipate powerful new signals emanating from the horizon of change, possess the peripheral vision to see beyond the obvious, and discern which critical choices must be made and why.

A year ago, I wrote a blog about “smart machines that learn more, synthesize data better and aren’t biased. Which is why they make fewer mistakes than any human ever can. We are not machines. So, above all else, a smart leader is the one who, aside from being plugged in, learns from mistakes and takes the necessary steps to correct them. This sometimes means going back to school to learn new ways to lead in an unpredictable, volatile world.

That is precisely what Thomas Watson Sr., considered by many “the world’s greatest salesman,“ did before he built IBM. He was a smart leader. Those who followed? Not necessarily so. As the architects of prior success, they deluded themselves into thinking their good fortune would continue.

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