How can you build a great company and keep it that way for years to come?
By avoiding two costly types of behavior born out of success -- hubris and complacency.
Either one of them can turn today’s success into tomorrow’s failure.
The dangers of hubris turning success into failure are elaborated by Jim Collins in How The Mighty Fall. Hubris born out of success, argues Collins, is followed by a four stage decline: Leadership becomes arrogant, as it considers success an entitlement; Undisciplined Pursuit of More, ie reckless behavior, sets in, and the company takes greater risks; Denial of Risk and Peril occurs, which causes failure of leadership to recognize and address risks; Grasping for Salvation emerges, resulting in a sharp decline visible to the public; and Capitulation to Irrelevance or Death.
Simply put: Hubris born out of success is behind reckless strategic choices that can haunt the company for years to come.
Bank of America’s near-death experience in recent years is a case in point. Back in the middle of the subprime crisis, Bank of America’s (NYSE:BAC) made two strategic choices that ended up costing the bank dearly: the purchase of Countrywide Financial and the purchase of Merrill Lynch.
The purchase of fast-growing mortgage company Countrywide Financial was supposed to be the quick ticket into the mortgage market, a natural area to expand into for a bank with plenty of funds to lend. Instead that purchase was the “poison bait” for Bank of America, and the finance company became the poster child for the excess of the mortgage market —not to mention that the price paid for a company with such huge liabilities was too high.
The purchase of legendary Merrill Lynch was supposed to be the quick ticket for expansion into another sector of market investment banking -- again, another natural area for a bank to expand in the era of financial deregulation. But as it turned out, this movement wasn’t terribly good either: Merrill Lynch had its own liabilities, and its own aggressive culture, which didn’t blend well with Bank of America’s conservative culture, as discussed in a previous piece.
The dangers of complacency, ie the idealization of accomplishments, are explained well by Gary Kasparov in How Life Imitates Chess, one of the highest rated chess players in the world. Success, argues Kasparov, acts as the “gravity” which pulls people back to earth.
“Winning creates the illusion that everything is fine. We think only of the positive result without considering all the things that went wrong—or that could have gone wrong—along the way. After a victory we want to celebrate, not analyze. We replay the triumphant moment in our mind until it looks as though it were inevitable.”
Xerox (XRX) is a good case in point. For many years the company dominated the copy-machine market. Its management paid close attention to day-to-day operations and pursued policies that improved the quality and lowered the cost of these machines. Yet management failed to pay attention to disruptive technologies and new products, such as fax machines and digital copiers, which undermined the entire copy-machine market.
Eastman Kodak is a second case in point. For decades, the company dominated the camera film market. Its management invested heavily in technologies that improved its film, but failed to anticipate technologies that delivered alternative cameras, such as the digital camera -- developed by Japanese challengers like Sony Corporation.
More recently, Hewlett-Packard and Cisco Systems (NASDQ: CSCO) followed the same path. After growing by leaps and bounds for two decades (HPQ for much longer), the leadership of the two companies became complacent, failing to see the competition closing in from all directions—Hewlett-Packard’s leadership failed to see the threat from IBM Apple Inc., and Lenovo; and Cisco Systems’ leadership failed to see the threat from Juniper Networks and Huawei.
Both companies relied on mergers and acquisitions to expand product portfolios—though Cisco more than Hewlett-Packard.
The bottom line: Past success doesn’t warrant future success. On the contrary it can become the source of hubris and complacency, which can lead to failure. The solution? “Question the status quo at all times, especially when things are going well, “ argues Gary Kasparov.“When something goes wrong, you naturally want to do it better next time, but you must train yourself to want to do it better even when things go right. Failure to do this leads to stagnation and eventual breakdown.”
