Don Sull's blog

In today’s paper, I have written about why good companies decline.

Many people tell a simple story of corporate failure. Success breeds hubris which leads to overreach and triggers decline. After studying the causes of corporate failure and helping companies avoid it for two decades I have discovered a more profound dynamic that drives corporate decline. The commitments required to succeed harden over time and prevent companies from adapting effectively when circumstances shift. Organisastions often succumb to active inertia – they respond to disruptive changes in the environment by accelerating activities that worked in the past. This post describes the dynamic in finer detail.

Managers make a commitments whenever they take an action in the present that locks their comapny on a trajectory in the future. Commitments confer efficiency, focus and differentiation. They attract resources and can also build a sustainable competitive advantage. Companies succeed when the market benefits of their commitments outweigh their costs.

Managers make five types of commitments:

• Frames focus attention on what matters (e.g. market definition, success metrics, focal competitors)
• Processes are standardised procedures to get things done
• Resources are specialised assets – tangible and intangible – that help a company compete
• Relationships are the enduring links to stakeholders and among units within the organisation
• Values are the set of beliefs that identify, unify and inspire people associated with the business.

Several factors harden commitments. Time and repetition enhance familiarity. Managers avoid reversing commitments to maintain their credibility. New commitments often reinforce the status quo. Interconnections among commitments hinder make it hard to unpick one without disrupting the rest.

When stable commitments meet turbulent markets, active inertia often ensues. Commitments both enable and constrain action. The external context determines whether the benefits outweigh the costs of commitment. Market shift often alter the relative costs and benefits, rendering a once-critical commitment an obstacle.

• Frames become blinders: Frames that focused attention on critical issues obscure peripheral vision into emerging threats and opportunities. At GM, executives focused on cross-town rivals, which led them to underestimate the threat posed by Toyota.
• Processes lapse into routines that people follow because they are familiar not optimal. Pharmaceutical companies continue to pursue a research and development model that had been broken for years.
• Resources become millstones. Market changes can devalue assets, leaving them hanging around the corporate neck like millstones. Newspapers own specialized printing presses and distribution networks that decline in value as readers look online for news.
• Relationships become shackles. The handshakes critical to past success become handcuffs that limit a business’s agility. Compaq understood Dell’s direct model, but Compaq’s relationships with distributors hindered their ability to replicate a direct approach
• Values ossify into dogmas. The beliefs that once inspired and defined employees can harden into unquestioned dogmas that constrain agility. A lawyer’s dogmatic adherence to the professional norm of doing all legal work themselves has impeded their move to codify routine work in software or outsource it to less costly service providers.

Companies caught in active inertia resemble cars with their back wheels in a rut. Managers press on the gas – respond with a flurry of activity to market shifts. Instead of pulling out of the hole, they just dig themselves in deeper. Hardened commitments constitute the ruts that lock them into accelerating activities that worked in the past.

Looking in from the outside with the benefit of hindsight, it is easy to deride managers who spin their wheels as stupid, lazy, arrogant or complacent. All these vices play a role, no doubt, but the root cause goes much deeper. Corporate failure is rarely a morality play where the virtues of humility and hard work degenerate into the vices of arrogance and complacency. Rather it is a tragedy where two goods – commitment and flexibility – collide.

Over the next week or so, my posts will explore active inertia in detail, provide a diagnostic exercise to assess commitments in your own organization, dispel some common myths about why good companies go bad, elaborate warning signs of trouble, and discuss how to avoid corporate decline.