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It's Our Business, Too

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A book that examines large-scale corporate failures holds some important lessons for education on what can happen when inertia sets in.

Policy & Advocacy I HAVE BEEN READING Why Smart Executives Fail (Portfolio, 2003) by Sydney Finkelstein, a Dartmouth College (NH) business professor. Finkelstein and his team at Dartmouth’s Tuck School of Business investigated 51 companies that had endured significant business failures—significant to the tune of hundreds of millions of dollars in losses, some leading to bankruptcy. The companies crossed all industries, from Johnson & Johnson, to Motorola, to the Boston Red Sox, to Samsung, as well as a few of the dot-coms.

Why is an editor and lifelong educator reading a book geared for business types? Precisely because it is geared for business. We in education are affected strongly by what businesses do, especially those who sell to education. And, more important, I think we can and should learn from business, because our leaders— superintendents, technology coordinators, principals— can be prone to the same mistakes as business leaders.

Finkelstein first separates great corporate mistakes into four categories: 1) New-Business Breakdowns; 2) Innovation and Change; 3) Mergers and Acquisitions; and 4) Strategy Gone Bad: Doing the Wrong Thing. He then looks at the causes of corporate failure, including fulfilling the wrong vision, having delusions of a dream company, tracking down lost signals, and maintaining bad habits (he discusses seven tendencies of spectacularly unsuccessful people). Finkelstein finishes with two chapters on learning from mistakes. His team interviewed CEOs and managers who experienced tremendous losses, and did extensive research on their companies. The results are interesting for all their insider information, but they are even more fascinating in the aggregate as Finkelstein shows how some of the same mistakes were repeated acrossdiverse industries.

While there are lessons to be learned from every kind of mistake, I want to focus on those discussed in the “Innovation and Change” category, because we in technology and education say that we are all about those very two things: innovation and change (see“Charp-en Up Those Entries,” page 6 in our magazine).

Finkelstein looks at three companies—Johnson & Johnson, Motorola, and Rubbermaid—who suffered tremendous downturns “not because of something they did,” he writes, “but because of something they didn’t do. The world was changing for each of these companies, and they knew it. Yet in each case…they failed to respond until it was too late. Surprisingly, what we found again and again were managers who were fully aware of the competitive challenges and changing customerdemands they were facing, yet chose not to act.”

Johnson & Johnson was riding high with 95 percent market share in the stent (the little stainless steel device that keeps arteries open after an angioplasty) business. Hospitals loved the product, as it revolutionized cardiology by allowing for a procedure that did not require cardiac surgeons. However, the more they used the stent, they realized it needed some improvements, such as greater flexibility to move through curving arteries and different lengths to accommodate various- sized blockages. In addition, J&J began to be accused of price gouging, as it offered no volume discounts and didn’t seem to care about the demands on hospitals to contain healthcare costs.

With a stranglehold on the market and a secure patent, the company got complacent and didn’t listen to its customers. Guidant, a European company, did listen, and received fast-track approval from the US Food and Drug Administration for its cardiovascular products, partly due to increased pressure from cardiologists in this country. Within two months of receiving FDA approval, Guidant had 70 percent of the market, and Johnson & Johnson saw its share plummet to below 30 percent.

Motorola, which started out making car radios—merging the words motor and Victrola to make its name—became known as an innovator in television, walkie-talkies, and the space program. It made the world’s first pager and got into the processor business by supplying Apple Computer. The company manufactured cell phones early on and developed bulky, expensive analog systems for businesspeople. Motorola dominated, with 60 percent of the cell phone market in 1994.

However, about this time, an early form of digital mobile telephony was interesting wireless carriers. Digital was much less prone to interference and, unlike analog, could be made secure. More important, digital networks could handle about 10 times the number of subscribers than analog due to, among other technical capabilities, its ability to compress digital signals. As a result, digital could spread fixed costs over a much broader set of users, thus lowering the price and allowing more people to get cell phones.

Wireless carriers began to look to Motorola for digital. They asked for it, begged for it, demanded it. Motorola ignored them and continued to push analog. Even worse, the company owned a number of digital patents that it licensed to competitors such as Nokia and Ericsson. The royalties Motorola received from these licenses were evidence of digital’s growing popularity. Certainly the company had the know-how to go digital, and the market data to indicate that it was the right thing to do. Finkelstein cites a number of factors for Motorola’s unresponsiveness, including lack of oversight of a highly autonomous division and misplaced incentives, especially a disincentive to absorb the costs of shifting from analog to digital cell phones.

Lastly, Rubbermaid’s problems were the result of a similar failure to act in the face of significant shifts in the market. In Rubbermaid’s case, the shift was caused by changing distribution channels that managers saw but didn’t react to in time. When the company did finally act, its problems were made worse—a classic example of haste making waste. “As often happens,” Finkelstein writes, “when crash programs are put in place to make up for years of inaction, even more problems develop.”

As often happens, Finkelstein writes, when crash programs are put inplace to make up for years of inaction, even more problems develop.

Finkelstein’s analysis of all three companies’ inability to anticipate, or even respond to, change in their environments has lessons for any organization. The clearest lessons are: Stay close to your customers, pay attention to your competition, and don’t let technology get away from you. But the professor doesn’t stop there. He looks at why the organizations did not react to key shifts in their businesses. Each company had its own reasons based upon its corporate history, culture, and structure. The primary enemy was simple inertia; it was easier not to act. He quotes Barbara Tuchman, author of The March of Folly, and her use of the term wooden-headedness,“which refers to the practice of relying on ‘preconceived fixednotions while ignoring or rejecting any contrary signs.’”

Apply this to education at all levels of policymaking—federal, state, and local. Does your organization have policies that support teaching and learning of the 19th or 20th century and ignore how ingrained technology is in the adult workplace? Does your organization have policies suited for the children of an Ozzie and Harriet world, policies that don’t account for the diversity of today’s student population and the degree to which technology is at the core of their lives? Does your organization assume that all content must come in a bound book while ignoring how both students and adults now get much of their information digitally and use it to support key decision-making? Are you or your organization guilty of wooden-headedness?

Geoffrey H. Fletcher is editorial director of T.H.E. Journal and executive director of T.H.E. Institute.

This article originally appeared in the 01/01/2007 issue of THE Journal.

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