Book Talk

:

How The Mighty Fall

(and why some companies never give in) Authored by Jim Collins

By Dr T.H.Chowdary

*Director, Center for Telecom Management & Studies * Chairman, Pragna Bharati (Intellect India) , AP *Fellow, Tata Consultancy Services Formerly: Chairman & Managing Director Videsh Sanchar Nigam Limited, Bombay T: +91(40) 6667-1191(O)2784 3121® F: +91(40) 6667-1111(O) [email protected]

Talk @ TCS, Hyd: 22 Jan 2010

Companies that are History

      

Arbuthnot & Co - Tulip Bubble AT&T; Siemens, RCA, Zenith, Hindustan Teleprinters, Hindustan Cables, Hindustan Antibiotics *General Motors – Pan Am Airways Jayanthi Shipping * Mundhras British India Enron Fannies Nay * Bank of America; AMES...

Citicorp *Gen Motors * Pan Am Krishi & Prudential, Palai Central Bank vs Charminar; Global Trust Bank AT&T, WorldCom (Data Com)



Maddoff -SE non-Ex Executive Chairman

THC_CTMS  S436_Jan2010

Satyam (Tech Mahindra)

2

THC_CTMS S436_Jan2010 3

THC_CTMS S436_Jan2010 4

THC_CTMS S436_Jan2010 5

Stage #1 Hubris Born of Success

• •

Success Entitlement Arrogance Neglect of a primary fly-wheel

• •

What replaces why Decline in learning orientation Discounting the role of luck ( P.43)

THC_CTMS S436_Jan2010 6

Hubris

 Hubris= Excessive Pride that brings down a hero or outrageous arrogance that inflicts suffering upon the innocent  Motorola bean Y2001 with 147,000 employees. End Y 2003- dropped to 88,000 stock prices came down by 50%  Decline in learning orientation THC_CTMS S436_Jan2010 7

• • • • • • •

Stage#2 Undisciplined Pursuit of More

Unsustainable Quest for Growth,confusing big with great Undisciplined discontinuous leaps Declining proportion of right people in key Seats Easy cash erodes cost discipline Bureaucracy subverts discipline Problematic succession of power Personal interest placed above organisation's interest (P.63) THC_CTMS S436_Jan2010 8

Why Turmoil seizes a Company

• A domineering leader fails to develop strong successors (or drives strong successors away), and thereby creates a leadership vacuum when he or she steps away.

• An able executive dies or departs unexpectedly, with no strong replacement to step smoothly into the role • Strong successor candidates turn down the opportunity to become CEO • Strong successor candidates unexpectedly leave the company • The board of directors is acrimoniously divided on the designation of a leader, creating an adversarial “we” and “they dynamic at the top.

THC_CTMS S436_Jan2010 9

• • • •

Why Turmoil seizes a Company ...contd

Leaders stay in power as long as they can and then pass the company to leaders who are late in their careers and assume a caretaker role Monarchy-style family dynamics favor family members over non-family members, regardless of who would be the best leader The board brings in a leader from the outside who doesn't fit the core values, and the leader is rejected by the culture like a virus The company chronically fails at getting CEO selection right THC_CTMS S436_Jan2010 10

Stage#3 Denial of Risk & Peril

• • • • • • Amplify the positive discount the negation Big bets and bold goals w/o empirical validation (Merck vioxx, Iridium Satphone) Incurring huge downside risk based on ambiguous data Externalisign blame Obsessive reorganisations (AT&T) Imperious detachment (D P 77/78 & P.81) THC_CTMS S436_Jan2010 11

Stage#3: Denial of Risk & Peril Imperious detachment ...contd

Teams on the Way Down Teams on the Way Up People shield those in power from grim facts, fearful of penalty and criticism for shining light on the harsh realities People assert strong opinions without providing data, evidence, or a solid argument.

The team leader has a very low questions to-statements ratio, avoiding critical input and/or allowing sloppy reasoning and unsupported opinions.

People bring forth unpleasant facts – 'Come here, look, man, this is ugly” - to be discussed; leaders never criticize those who bring forth harsh realities People bring data, evidence, logic and solid arguments to the discussion.

The team leader employs a Socratic style, using a high questions-to-statements ratio, challenging people, and pushing for penetrating insight.

Team members acquiesce to a decision yet Team members unify behind a decision do not unify to make the decision successful, or worse, undermine the once made and work to make the decision succeed, even if they vigorously decision after the fact. disagreed withteh decision.

THC_CTMS S436_Jan2010 12

Stage#3: Denial of Risk & Peril Imperious detachment ...contd

Teams on the Way Down Teams on the Way Up Team members seek as much credit as Each team member credits other people for possible for themselves yet do not enjoy the confidence and admiration of their success yet enjoys the confidence and admiration of his or her peers peers Team members argue to look smart or to improve their own interests rather than argue to find the best answers to support the overall cause.

To team conducts “autopsies with blame,” seeking culprits rather than wisdom.

Team members argue and debate, not to improve their personal position, but to find the best answers to support the overall cause.

The team conducts 'autopsies with out blame,” mining wisdom from painful experiences Team members often fail to deliver exceptional results, and blame other people or outside factors for setbacks, mistake, and failures.

Each team member delivers exceptional results, yet in the event of a setback, each accepts full responsibility and learns from mistakes.

THC_CTMS S436_Jan2010 13

Stage#4 Gasping for Salvation

• • A series of silver bullets Grasping for a leader as a saviour (HPs July 19,1999 Carly Fiorina from Lucent) P-85 • • • • • • Panic& haste Radical change & Revolution with fanfare Hype precedes results Initial upswing followed by disappointments Confusion & cynicism Chronic Restructuring &Erosion of financial strength (P.100) THC_CTMS S436_Jan2010 14

Circuit City (used car business)

•

Grew >20% p.a; grew to 10 times in a decade



1998 Wall Street Journal praised the CEO



10-11-2008 filed for Bankruptcy



Best Corporate leaders relently ask questions Why, Why, Why & have an

incurable compulsion to vaccum the brains of people they meet .



To be

a knowing person

different from is fundamentally

THC_CTMS S436_Jan2010 15

Ames & Wall Mart

 Ames began in 1958  Wall Mart in 1962 ( Sam Walton)  Ames grew in the NE Wall Mart in mid South   1973-'86 both grew alike, generating returns over NINE times the market Y2008 – Ame dead & gone Wall Mart; No#1 on Fortune 500; $ 379 billion (Rs. 19 lakh crores)  Walton: Humility & learning Orientation (story on P. 40/41)  Motto: to enable people of average means to buy S436_Jan2010 16

Motorola

  Motorola increased its patents from 613 to 1016 from 1991 to 1995 It said, “We rank no# 3 in patent productivity in the US .

 Merck patented 1933 new compounds during 1996-2002, yet declined  In 1999 HP launched its “Invent” campaign & nearly doubted its patent applications in two years; just as it spiraled into stage 4 decline (gasping for salvation) THC_CTMS S436_Jan2010 17

Motorola …contd

• • • Motorola bought Gen Inst Corpn for $17 bln Jumped into Internet & broadband frenzy Built a global cost structure for revenues of $ 45 bln but 2001 Revs. Crashed to $ 30 bln • Y 2003 got Sun Microsystems Ed Zander as CEO, hounded by share holders, stepped down 4Y later in 2007. (P. 92/93) THC_CTMS S436_Jan2010 18

Fall of Iridium (Motorola's child)

• 1985 Idea of a Motorola engineer's wife's idea while on vacation in Bahamas cellphone did not work; so satellite phone • • • Seed capital 1980s * 1991 Iridium spun out By 1996 – invested $ 537 mln ; debt $ 750 mln Handset brick – size cost $ 3000; Charge $ 3 to 7 /mnt. While cell phone size and cost and charge continued to fall • 1998 went live with customers • 1999 file for bankruptcy, defaulting on loans of $ 1.5 bln • Motorola took a hit of $ 2 bln!

THC_CTMS S436_Jan2010 19

Rubber Maid

 Rubber Maid (Story P 47 to 49)  Early 1990 British Museum visit  In 1994 decided to introduce at least one new product a day, seven days a week, 365 days per year  Fortune said: No # 1 most admired co in the US, more innovative than 3M, Apple, Intel  Introduced 1000 new products in 3 Y  During 1994-'98 lost control of costs, failed to deliver orders on time  Eliminated 6000 products variations. Closed nine plants, wiped out 1170 jobs.

THC_CTMS  S436_Jan2010 21 Oct 1988 sold out to Newell corpn.

20

Rubber Maid ...contd

• Catastrophic decline can be brought even by driven, intense, hard-working & creative people. • 2008 Wall Street melt down people went too far ( every family must own a house), too much risk, too much leverage, too much financial innovation, too much aggressive opportunism too much growth.

THC_CTMS S436_Jan2010 21

• • • • • •

Merck

1995 CE Ray Gilmartin – defined Business Objective – Top Tier Growth Company launched

Vioxx

our biggest, fastest, ad best launch ever” Probability of a new molecule creating a profitable return is about 1 in 15,000!

1999 VIOXX (Rheumatoid arthritis) X Naproxm By 2002 generated $2.5 bln & by 2004 - 100 mln prescriptions Mid Sept 2004 found that 18m after treatment, heart attack & stroke propensity increased.

Vioxx – removed from market.

Stock dropped from $ 45 to 33 chopped $ 25 bln of S436_Jan2010 22

Hewlett Packard

• • • • The Packard Law : No company can consistently grow revenues faster than its ability to get enough of the right people to implement that growth and still become a great company.

Difference between wrong and Right people is the former see themselves as having jobs while the latter see themselves as having responsibilities. Bank of America – lost a lot of good young people because “we weren't a meritocracy” THC_CTMS S436_Jan2010 23

THC_CTMS S436_Jan2010 24

IBM

• • • • • • • Watson father & son led for 57 years ( 1914-1971) $ 1000 investment in 1926 returned $ 5 mln by 1972 Lost $ 15 bln from 1991-'93 Hired LOU Gerstner a CEO ( who Says Elephants can't Dance?) Had to cut $ 7 bln in costs Realised their OS/2 failed & Windows won Customer Focus THC_CTMS S436_Jan2010 25

THC_CTMS S436_Jan2010 26

Nordstrom's Rebound

• Known for extra ordinary customer service in retailing.

• • Led by 4 th Gen Blake Nordstrom Hired nice people and taught them to sell “we can't hire sales people & teach them to be nice” • Improved inventory discovered that returns were driven by

margin dollars divided by average inventory.

THC_CTMS S436_Jan2010 27

THC_CTMS S436_Jan2010 28

The Satyam Scam

• Taking action inconsistent with your core values is undisciplined. Investing heavily in new arenas where you cannot attain distinctive capability, better than your competitors, is undisciplined.

Launching headlong into activities that do not fit with your economic or resource engine is undisciplined.

Addiction to scale is undisciplined. To neglect your core business while you leap after exciting new adventures is undisciplined. To use the organization primarily as a vehicle to increase your own personal success- more wealth, more fame, more power – at the expense of its long-term success is undisciplined. To compromise your values or lose sight of your core purpose in pursuit of growth and expansion is undisciplined.

THC_CTMS S436_Jan2010 29

•

Share Holder X Flipper Value X Price

Share value & share price share holders & share flippers Maximise share holder value NOT share flipper price • • Greatest leaders seek Growth -in performance – in distinction impact – Creativity – People Don't confuse growth with excellence • Big does not equal Great Great does not equal Big THC_CTMS S436_Jan2010 30

An Young Historic Leader

• March 15, 44BC Gaius Julius Caesar bled to death in Pompei's Theater of Rome punctured by 23 slab wounds • In his will he named his grand nephew, Octavian. At 18, as successor • • In 42, BC he demolished Caesar's enemies Then eliminated Antony & Cleopatra ( the mother of Caesar's biological son) • Octavian Augustus Caesar transformed himself as the First Emperor of Rome • Bud did not establish a mechanism for transfer of power to generations of outstanding Leadership THC_CTMS S436_Jan2010 31

• • •

Civilisations That Rose and fell into history

Mesopotamia, Egypt, Persian, Greek,Rome, INCAS, MAYAS, AZTEC Civilizations that rose, declined and are recovering - Indian, Chinese Civilisation that rose declined and is in the throws of death-Arab THC_CTMS S436_Jan2010 32

Try a Little Virtue

Instead of greed, how about generosity Instead of envy, try a little charity Instead of pride, show some humility Instead of wrath, let us see composure - Lee Iacocca The Book, Where have all the Leaders gone? THC_CTMS S436_Jan2010 33

THC_CTMS

Dhanyawad: Thank You

S436_Jan2010 34