Why good companies go bad

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A R T I C L E

Why Good Companies Go Bad by Donald N. Sull

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P R O D U C T N U M B E R 4 3 2 0

Why do some of the

best companies languish

when markets change?

Because they insist on

doing only what has

worked in the past.

T H E I D E A

Many leading companies plummet from the pinnacle of success to the depths of failurewhen market conditions change. Becausethey’re paralyzed? To the contrary, because theyengage in too much activity—activity of thewrong kind. Suffering from active inertia, theyget stuck in their tried-and-true activities, evenin the face of dramatic shifts in the environ-ment. Instead of digging themselves out of thehole, they dig themselves in deeper.

Such companies are victims of their own suc-cess: they’ve been so successful, they assumethey’ve found the winning formulas. But these

same formulas become rigid and no longerwork when the market changes significantly.

When companies understand that action canbe the enemy, they are less likely to join theranks of the fallen. Before asking, “What shouldwe do?” and rushing into action, managersshould ask, “What hinders us?” They shouldlook deeply at the assumptions they makeabout their business and industry. And theyshould pay particular attention to hallmarks ofactive inertia: strategic frames becoming blind-ers, processes hardening into routines, relation-ships becoming shackles, and values hardeninginto dogmas.

Why Good Companies Go Bad

The following examples demonstrate the disastrous effects of active inertia:

• Strategic frames become blinders. Strate-gic frames shape how managers view theirbusiness; they help managers stay focused.But these frames can also blind managersto new options and opportunities.

E X A M P L E :After seven decades of uninterrupted growth,Firestone reigned supreme in the U.S. tire industryin the 1970s. Then Michelin introduced the saferand more economical radial tire. Firestone com-peted with Michelin head-to-head in Europe, butwas blind to the threat to its core U.S. market, andso continued to produce conventional tires only.Firestone lost significant market share and wasacquired a decade later.

• Processes harden into routines. Establishedprocesses can become ends in themselves,even when they’re no longer effective. People overlook better ways of working.

E X A M P L E :McDonald’s built its success on standardizedprocesses, all dictated by headquarters. By rigidlyfollowing these procedures into the 1990s,McDonald’s lost market share to Burger King andTaco Bell, who were much quicker to meet cus-tomers’ changing desires for healthier foods.

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• Relationships become shackles. Every company needs strong relationships with its constituencies—customers, suppliers,employees. When conditions change, however, these relationships can restrictflexibility.

E X A M P L E :Apple’s vision of technically elegant computersand its freewheeling culture attracted the world’smost creative engineers. Once computers becamecommodities, however, the company’s healthdepended on cutting costs and speeding up pro-duction time. But Apple’s engineers refused tochange, and the company’s relationship with its“star” employees damaged its ability to respond tomarket changes.

• Values harden into dogmas. A company’svibrant values unify and inspire its people.Over time, however, they can harden intorigid, self-defeating rules and regulations.

E X A M P L E :Polaroid placed very high value on cutting-edgeresearch—to the point of defining itself by thatresearch. Eventually, that value turned into dog-matic disdain for marketing, finance, and even cus-tomer preferences. The company’s single-minded-ness nearly destroyed it.

T H E I D E A A T W O R K

I N B R I E F

ne of the most commonbusiness phenomena is also one of the most perplexing:

when successful companies face bigchanges in their environment, theyoften fail to respond effectively. Un-able to defend themselves againstcompetitors armed with new prod-ucts, technologies, or strategies, theywatch their sales and profits erode,their best people leave, and theirstock valuations tumble. Some ulti-mately manage to recover – usuallyafter painful rounds of downsizingand restructuring – but many don’t.

Why do good companies go bad?It’s often assumed that the problemis paralysis. Confronted with a dis-ruption in business conditions, com-panies freeze; they’re caught like the

proverbial deer in the headlights. Butthat explanation doesn’t fit the facts.In studying once-thriving companiesthat have struggled in the face ofchange, I’ve found little evidence of paralysis. Quite the contrary. Themanagers of besieged companiesusually recognize the threat early,carefully analyze its implications fortheir business, and unleash a flurryof initiatives in response. For all theactivity, though, the companies stillfalter.

The problem is not an inability totake action but an inability to takeappropriate action. There can bemany reasons for the problem –rang-ing from managerial stubbornness to sheer incompetence – but one ofthe most common is a conditionthat I call active inertia. Inertia isusually associated with inaction –picture a billiard ball at rest on atable – but physicists also use theterm to describe a moving object’s

T H I N K I N G A B O U T …

When business conditions change, the most successful companies areoften the slowest to adapt. To avoid being left behind, executives

must understand the true sources of corporate inertia.

Donald N. Sull is an assistant pro-fessor of strategic and internationalmanagement at London BusinessSchool.

O

Copyright © 1999 by the President and Fellows of Harvard College. All rights reserved. artwork by edwina white

by Donald N. Sull

Why GoodCompan i es

Go Bad

tendency to persist in its current tra-jectory. Active inertia is an organi-zation’s tendency to follow estab-lished patterns of behavior – even inresponse to dramatic environmentalshifts. Stuck in the modes of think-ing and working that brought successin the past, market leaders simplyaccelerate all their tried-and-true ac-tivities. In trying to dig themselvesout of a hole, they just deepen it.

Because active inertia is so com-mon, it’s important to understandits sources and symptoms. After all,if executives assume that the enemyis paralysis, they will automaticallyconclude that the best defense is ac-tion. But if they see that action itselfcan be the enemy, they will lookmore deeply into all their assump-tions before acting. They will, as aresult, gain a clearer view of whatreally needs to be done and, equallyimportant, what may prevent themfrom doing it. And they will signifi-

cantly reduce the odds of joining theranks of fallen leaders.

Victims of Active InertiaTo see the destructive potential ofactive inertia, consider the exam-ples of Firestone Tire & Rubber andLaura Ashley. Both companies wereleading players in their industries,and both failed to meet the chal-lenge of change – not because theydidn’t act but because they didn’tact appropriately.

was enjoying seven decades of un-interrupted growth. It sat atop thethriving U.S. tire industry, alongsideGoodyear, its crosstown rival inAkron, Ohio. Firestone’s managershad a clear vision of their company’spositioning and strategy. They sawthe Big Three Detroit automakers as their key customers, they sawGoodyear and the other leading U.S.tire makers as their competitors, and

T H I N K I N G A B O U T …

As Firestone entered the 1970s, it

they saw their challenge as simplykeeping up with the steadily increas-ing demand for tires.

The company had become a mon-ument to its own success. Its cultureand operations reflected the visionof its founder, Harvey Firestone, Sr.,who insisted on treating customersand employees as part of the “Fire-stone family.” The Firestone coun-try club was open to all employees,regardless of rank, and Harvey him-self maintained close friendshipswith the top executives of the big

carmakers. (In fact, his grand-daughter married

Henry Ford’s

Firestone was not taken by surpriseby the arrival of radials. Through itslarge operations in Europe, it hadwitnessed firsthand the Europeanmarkets’ quick embrace of radialtires during the 1960s. And it haddeveloped forecasts that clearly indi-cated that radials would be rapidlyaccepted by U.S. automakers andconsumers as well. Firestone sawradials coming, and it swiftly tookaction: it invested nearly $400 mil-lion –more than $1 billion in today’sdollars – in radial production, build-ing a new plant dedicated to radialtires and converting several existingfactories.

Although Firestone’s responsewas quick, it was far from effective.Even as it invested in the new product, it clung to its old ways ofworking. Rather than redesign its

production processes, it just tin-kered with them – even though

the manufacture of radialtires required much

higher quality

The women’s apparel maker LauraAshley also fell victim to active in-ertia. The company’s eponymousfounder spent her youth in Wales,and she started the business withher husband, Bernard, in 1953 as away to re-create the mood of theBritish countryside. The company’sgarments, designed to evoke a ro-mantic vision of English ladies tend-ing roses at their country manors,struck a chord with many women inthe 1970s. The business grew quicklyfrom a single silk-screen press inLaura and Bernard’s London flat to a major retailer with a network of500 shops and a powerful brand theworld over.

Laura Ashley expanded her tinyoperation not to maximize profitsbut to defend and promote tradi-tional British values, which she feltwere under siege from sex, drugs,and miniskirts in the 1960s. Fromthe beginning, she and Bernardexercised tight controlover all aspectsof the

4 harvard business review July–August 1999

why good companies go badT H I N K I N G A B O U T …

The fresh thinking that led toa com

pany's initial success is often replaced by a rigid devotion to the status quo.

grandson.)Firestone creat-ed fiercely loyal man-agers, steeping them inthe company’s family valuesand in its Akron-centeredworldview.

The company’s operating and capital allocation processes were designed to exploit the booming de-mand for tires by quickly bringingnew production capacity on line. Inthe capital-budgeting process, for example, frontline employees iden-tified market opportunities andtranslated them into proposals forinvesting in additional capacity.Middle managers then selected themost promising proposals and pre-sented them to top executives, whotended to speedily approve the mid-dle managers’ recommendations.

Firestone’s long-standing successgave the company a strong, unifiedsense of its strategies and values, itsrelationships with customers andemployees, and its operating and in-vestment processes. The companyhad, in short, a clear formula for suc-cess, which had served it well sincethe turn of the century.

Then, almost overnight, every-thing changed. A French company,Michelin, introduced the radial tireto the U.S. market. Based on a break-through in design, radials were safer,longer-lasting, and more economicalthan traditional bias tires. They hadalready come to dominate Europeanmarkets, and when Ford declared in1972 that all its new cars would haveradials, it was clear that they woulddominate the U.S. market, too.

standards.In addition,the company delayedclosing many of its factories thatproduced bias tires, despite clearindications of their impendingobsolescence. Active inertia hadtaken hold.

By 1979, Firestone was in deeptrouble. Its plants were running atan anemic 59% of capacity, it wasrenting warehouses to store unsoldtires, it was plagued by costly andembarrassing product recalls,and its domestic tire business hadburned more than $200 million incash. Although overall U.S. tiresales were plateauing, largely be-cause radials last twice as long asbias tires, Firestone’s CEO clungto the assumption of ever-growingdemand, telling the board that hesaw no need to start closing plants.In the end, all of Firestone’s intenseanalysis and action was for naught.The company surrendered much ofits share of the U.S. market to for-eign corporations, and it sufferedthrough two hostile takeover bidsbefore finally being acquired byBridgestone, a Japanese company,in 1988.

business,keeping design,

manufacturing, distri-bution, and retailing in-house. Thecouple opened a central manufactur-ing and distribution center in Wales,and they proudly labeled their gar-ments “Made in Wales.” They pro-vided generous wages and benefits totheir employees, thereby avoidingthe labor unrest that crippled manyBritish industries throughout the1970s. They also established closerelationships with their franchiseesand customers, who grew fiercelyloyal to the company’s products andthe values they embodied.

When Laura died in 1985, Bernardkept the company on the course hiswife had set. Fashion, however,changed. As more women enteredthe workforce, they increasinglychose practical, professional attireover Laura Ashley’s romantic garb.Competitors publicly dismissed theLaura Ashley style as better suited tomilkmaids in the 1880s than CEOsin the 1980s. At the same time, ap-parel manufacturing was undergoinga transformation. With trade barri-ers falling, fashion houses wererushing to move production offshore

Frequently, though, the systembegins to harden. The fresh thinkingthat led to a company’s initial suc-cess is replaced by a rigid devotion tothe status quo. And when changesoccur in the company’s markets, theformula that had brought success in-stead brings failure. (See the exhibit“The Dynamic of Failure.”) In par-ticular, four things happen:

Strategic frames become blinders.Strategic frames are the mentalmodels – the mind-sets – that shapehow managers see the world. Theframes provide the answers to keystrategic questions: What businessare we in? How do we create value?Who are our competitors? Whichcustomers are crucial, and which canwe safely ignore? And they concen-trate managers’ attention on what is important among the jumble ofraw data that crosses their desks andcomputer screens every day. Thestrategic frames of Firestone’s man-agers, for example, focused theireyes on their competitors aroundAkron and their customers in De-troit. The frames also help managerssee patterns in complex data by fit-ting the information into an estab-lished model. In LauraAshley’s heyday, its stra-tegic frames enabled itsexecutives to quicklyjudge potential productextensions based ontheir fit with traditionalEnglish style.

But while frames helpmanagers to see, theycan also blind them. Byfocusing managers’ at-tention repeatedly oncertain things, framescan seduce them into be-lieving that these are theonly things that matter.In effect, frames can con-strict peripheral vision,preventing people fromnoticing new optionsand opportunities. Al-though Firestone com-peted head-to-head withMichelin in Europe andhad witnessed the rapidrise of radial tires there,its leaders still couldn’tsee the French company

or to outsource it entirely, dramati-cally reducing their operating costs.Laura Ashley, in contrast, continuedto pursue the outdated designs andthe expensive manufacturing pro-cesses that had served it so well inthe past.

The company did not, however,suffer from paralysis. By the late1980s, an outside consultant hadidentified the major challenges fac-ing Laura Ashley and had outlinedremedial actions. Recognizing theneed to act, the board of directors,chaired by Bernard, brought in a se-ries of new CEOs, asking each to develop and carry out a restructur-ing plan that would increase salesand cut costs. The new plans set offflurries of activity, but none of themwent far enough in recasting thecompany’s strategy. It remained un-clear whether Laura Ashley was abrand, a manufacturer, a retailer, oran integrated fashion company. Nordid the plans refresh the company’straditional values to bring them inline with the marketplace. Afflictedwith active inertia, Laura Ashleywent through seven CEOs in a de-cade, but the company’s decline con-tinued. American televangelist PatRobertson recently joined the boardas an outside director, leading one fi-nancial journal to conclude that thecompany sought divine inspirationfor its earthly problems.

The Four Hallmarks of Active InertiaTo understand why successful com-panies like Firestone and Laura Ash-ley fail, it is necessary to examinethe origins of their success. Mostleading businesses owe their pros-perity to a fresh competitive for-mula – a distinctive combination ofstrategies, processes, relationships,and values that sets them apart fromthe crowd. As the formula succeeds,customers multiply, talented work-ers flock to apply, investors bid upthe stock, and competitors respondwith the sincerest form of flattery –imitation. All this positive feedbackreinforces managers’ confidencethat they have found the one bestway, and it emboldens them to focustheir energies on refining and ex-tending their winning system.

as a serious competitor in their coredomestic market. As a strategic framegrows more rigid, managers oftenforce surprising information into ex-isting schema or ignore it altogether.Laura Ashley’s managers repeatedlydismissed sales declines as tempo-rary fluctuations rather than as in-dicators of basic shifts in women’sfashion.

Sadly, the transformation of stra-tegic frames into blinders is the rule,not the exception, in most humanaffairs. Consider the disastrous evo-lution of France’s military strategyduring the first half of this century.At the turn of the century, Frenchmilitary doctrine glorified attack,reflecting a belief that élan vitalwould prevail over all odds. But theattack-at-all-costs strategy proveddisastrous in the trenches of WorldWar I. As a result, the country’s mili-tary changed its strategic frame andadopted a purely defensive posture,which took concrete form in theMaginot Line, a series of fixed for-tifications erected to protect France’sborders from German invasion. Thesefixed defenses, however, provedworthless in halting blitzkrieg

harvard business review July–August 1999 5

why good companies go bad T H I N K I N G A B O U T …

The Dynamic of Failure

Leading companies can become stuck in the modes ofthinking and working that brought them their initial success. When business conditions change, their once-winning formulas instead bring failure.

Strategic Frames

The set of assumptionsthat determine how managersview the business

Processes

The way things are done

Relationships

The ties to employees,customers, suppliers, distributors,and shareholders

Values

The set of shared beliefsthat determine corporate culture

Shackles

Blinders

Routines

Dogmas

attacks. The hard-won lesson fromthe First World War became a tragicblinder during the Second.

When strategic frames grow rigid,companies, like nations, tend to keepfighting the last war. When Xerox’smanagement surveyed the competi-tive battlefield in the 1970s, it sawIBM and Kodak as the enemy, its40,000 sales and service representa-tives as its troops, and its patentedtechnologies as its insurmountabledefenses. Xerox’s frames enabled thecompany to fight off traditional foesusing established tactics and to re-buff repeated attempts by IBM andKodak to attack its core market. Butthe strategic frames blinded Xerox to the new threat posed by guerrillawarriors such as Canon and Ricoh,which were targeting individualsand small companies for their high-quality compact copiers.

Once Xerox’s management recog-nized the magnitude of the threatfrom the new entrants, it belatedlybut aggressively launched a series ofquality programs designed to beatthe Japanese at their own game.These initiatives did stem Xerox’sshare loss, and the company’s victoryover the Japanese was trumpeted inbooks with titles like Xerox: Ameri-can Samurai. The focus on beatingthe Japanese, however, distractedXerox’s management from theemerging battle for the personalcomputer. At the time, Xerox’s PaloAlto Research Center was pioneer-ing several of the technologies thatsparked the personal computer revo-lution, including the graphical userinterface and the mouse. But Xeroxwas unable to capitalize on the newopportunities because they lay out-side its strategic frames.

Processes harden into routines.When a company decides to dosomething new, employees usuallytry several different ways of carry-ing out the activity. But once theyhave found a way that works par-ticularly well, they have strong incentives to lock into the chosenprocess and stop searching for alter-natives. Fixing on a single processfrees people’s time and energy forother tasks. It leads to increasedproductivity, as employees gain ex-perience performing the process.And it also provides the operationalpredictability necessary to coor-dinate the activities of a complex organization.

But just as with strategic frames,established processes often take on a life of their own. They cease to bemeans to an end and become ends in themselves. People follow theprocesses not because they’re effec-tive or efficient but because they’rewell known and comfortable. Theyare simply “the way things aredone.” Once a process becomes aroutine, it prevents employees fromconsidering new ways of working.Alternative processes never get con-sidered, much less tried. Active iner-tia sets in.

At Firestone, the routinization ofprocesses was one of the major im-pediments to an effective responseto radial technology. The companyran into manufacturing and qualityproblems because it tried to accom-modate radial production by justtweaking its existing processes. Fire-stone produced tires that no onewanted because its capital-budget-ing process promoted unnecessaryinvestments in capacity –the capitaloutlays were driven by frontlinemanagers who, quite understand-ably, were not keen to volunteertheir own plants for closure. And itfailed to bring in people with freshviewpoints because its executive re-cruitment and promotion processesconcentrated on building loyalty and instilling a uniform mind-set. Even as the company struggled withchange, it continued to hire and pro-mote “people like us.” In 1972, all ofFirestone’s top managers had spenttheir entire careers with the com-pany, two-thirds had been born and



As a strategic frame grows more rigid, managers often force surprising informationinto existing schema or ignore it altogether.

raised in Akron, and one-third hadfollowed in their fathers’ footstepsas Firestone executives.

McDonald’s is another example of a company whose routines havedulled its response to shifting mar-ket conditions. In the early 1990s,the fast-food giant’s operations man-ual comprised 750 pages detailingevery aspect of a restaurant’s busi-ness. For years, the company’s re-lentless focus on standardized pro-cesses, all dictated by headquarters,had allowed it to rapidly roll out itswinning formula in market aftermarket, ensuring the consistencyand efficiency that attracted cus-tomers and dismayed rivals.

By the 1990s, however, McDon-ald’s was in a rut. Consumers werelooking for different and healthierfoods, and competitors such as BurgerKing and Taco Bell were capitalizingon the shift in taste by launchingnew menu items. McDonald’s, how-ever, was slow to respond to thechanges. Its historical strength – asingle-minded focus on refining itsmass-production processes – turnedinto a weakness. By requiring menudecisions to pass through headquar-ters, the company stifled innovationand delayed action. Its central devel-opment kitchen, removed from theactual restaurants and their cus-tomers, churned out a series of prod-ucts, such as the McPizza, McLean,and Arch Deluxe, but they all failedto entice diners.

Relationships become shackles. Inorder to succeed, every companymust build strong relationships –with employees, customers, suppli-ers, lenders, and investors. Laura andBernard Ashley worked diligently to win the hearts of new customers,franchisees, and investors at everystep of their company’s expansion.Harvey Firestone, Sr., maintainedclose friendships with his custom-ers, provided loans out of his ownpocket to struggling tire dealers dur-ing the Great Depression, and social-ized with many of his company’s topexecutives. Firestone and the Ash-leys, like many successful execu-tives, wove the warp of economictransactions with the woof of socialrelationships to strengthen the fab-ric of their companies.

When conditions shift, however,companies often find that their rela-tionships have turned into shackles,limiting their flexibility and leadingthem into active inertia. The need tomaintain existing relationships withcustomers can hinder companies indeveloping new products or focusingon new markets.1 Kirin Brewery, forexample, gained control of a daunt-ing 60% share of the postwar Japa-nese beer market by building strongrelationships with businessmen,many of whom had received thecompany’s lager as part of their ra-tions in the army. In the 1980s, Kirinwas reluctant to alienate its corecustomers by offering the trendy drybeer favored by younger drinkers.Kirin’s slow response allowed AsahiBreweries to catch up and then sur-pass it as the industry leader.

Managers can also find them-selves constrained by their rela-tionships with employees, as

vividly illustrates. Apple’svision of technically elegantcomputers and its free-wheeling corporate cultureattracted some of the mostcreative engineers in theworld, who went on to de-velop a string of smashproducts including the Ap-ple II, the Macintosh, andthe PowerBook. As com-puters became commodi-ties, Apple knew that itscontinued health dependedon its ability to cut costs andspeed up time to market. Im-posing the necessary disci-pline, however, ran counter to the Apple culture, and topmanagement found itself frus-trated whenever it tried to exertmore control. The engineerssimply refused to change theirways. The relationships with creative employees that enabledApple’s early growth ultimatelyhindered it from responding to en-vironmental changes.

Banc One is another companythat was hamstrung by its relation-ships with employees – in particular,its managers. Growing from humblebeginnings, Banc One became themost profitable U.S. bank in the early


Active inertia is insidious by nature.Because it grows out of success, itoften spreads unnoticed in corpora-tions. Sometimes, in fact, what man-agers consider to be their company’sstrengths are actually signs of weak-ness. If many of the following state-

ments ring true for your company,you may want to take a fresh lookat your strategic frames, processes,relationships, and values.

“We know our competitorsinside out.”

“Our top priority is keepingour existing customershappy.”

“We’re not the world’s greatestinnovators, but we run a tight ship.”

“Our processes are so well tuned that thecompany could practically run itself.”

“We focus R&D on product refinements and extensions, not on product break-throughs.”

“We’re skeptics. In our view, the leadingedge is the bleeding edge.”

“We can’t allow ourselves to get distractedby all the new fads in the marketplace.”

“We have a very stable top-managementteam.”

“We have a well-entrenched corporateculture.”

“We will never relinquish our corecompetency.”

“Our processes are world class, and wefollow them religiously.”

“If it ain’t broke, we don’t fix it.”

“We have high levels of employeeloyalty, but when we bring in talentednew people, they often get frustratedand leave.”

“We’ve carved out an enduring lead-ership position in our industry.”

“We view our current distributorsas key strategic partners. We don’twant to alienate them by rushinginto new channels.”

“Our corporate values are sacred;we’ll never change them.”

Are You Sufferingfrom Active Inertia?


the saga of Apple Computer

1990s, with a market capitalizationthat topped that of American Ex-press and J.P. Morgan. Its formula forsuccess was to acquire healthy localbanks, retain their incumbent man-agers, and grant those managers con-siderable autonomy in running theirbusinesses. These “uncommon part-nerships,” as Banc One dubbed therelationships, motivated the man-agers to act as entrepreneurs and re-spond to local market conditions.

But as consolidation and deregula-tion changed the banking industry,Banc One began to struggle. Many ofits best customers were being stolenby aggressive new competitors likeFidelity Investments, and the highcost of its decentralized, locally fo-cused operations put it at a disadvan-tage to more efficient rivals like FirstUnion and NationsBank. Banc Onewas slow to standardize its productsand centralize its back-office oper-ations because it knew that suchmoves would curb the autonomy ofthe local bank managers. It regainedits upward momentum only after itsCEO, John B. McCoy, decided toabandon the cherished uncommonpartnerships altogether.

Relationships with distributorscan also turn into shackles. DellComputer has surged ahead of rivalPC makers by selling directly to cus-tomers. Incumbents like Hewlett-Packard and IBM have been slow tocopy Dell’s model, fearing a backlashfrom the resellers who currently ac-count for the vast majority of theirsales. Airlines like Lufthansa, BritishAirways, and KLM face a similardilemma. They’ve been slow to pro-mote direct sales – over the Internet,for example –because they don’t wantto antagonize the travel agents theyrely on for filling seats.

Values harden into dogmas. Acompany’s values are the set ofdeeply held beliefs that unify and in-spire its people. Values define howemployees see both themselves andtheir employers. The “Firestoneman,” for example, exemplified loy-alty to the company and a deep com-mitment to the community. Valuesalso provide the centripetal forcethat holds together a company’s far-flung operations. Laura Ashley fran-chisees rallied around the banner of

the company’s traditional values,helping to create a strong brand iden-tity around the world.

As companies mature, however,their values often harden into rigidrules and regulations that have legit-imacy simply because they’re en-shrined in precedent. Like a petrify-ing tree, the once-living values areslowly replaced by the cold stone ofdogma. As this happens, the valuesno longer inspire, and their unifyingpower degenerates into a reactionarytendency to circle the wagons in theface of threats. The result, again, isactive inertia.

trates how once-vibrant values canossify. Founded by inventor EdwinLand, Polaroid rose to prominenceby pioneering a series of excitingtechnologies like instant photog-raphy, and its employees pridedthemselves on the company’s R&Dleadership. But over time, Polaroid’sdevotion to excellent research turnedinto a disdain for other business ac-tivities. Marketing and finance, inparticular, were considered relativelyunimportant so long as the companyhad cutting-edge technology. Valu-ing technological breakthroughsabove all else, Polaroid’s managerscontinued to invest heavily in re-search without adequately consider-ing how customers would respond.Not surprisingly, sales stagnated.Today the company is worth onlyone-third of what a bidder offered inan acquisition attempt in 1989.

Royal Dutch/Shell is anothercompany whose values became ahindrance. During the 1930s, Shellwas dominated by Henri Deterding,who was a strong leader and a Nazisympathizer. Shell’s other execu-tives finally forced Deterding out,and the painful episode imprinted onthe company a distaste for centralcontrol –a value that came to perme-ate its culture and led to the estab-lishment of fiercely independentcountry managers. The decentral-ized structure enabled Shell to seizegrowth opportunities around theworld. But when oil prices fell dur-ing the 1990s, the belief in decentral-ized authority prevented the com-pany from quickly rationalizing itsoperations and cutting costs.

Renewal, Not Revolution

Success breeds active inertia, and active inertia breeds failure. But isfailure an inevitable consequence of success? In business, at least, the answer is no. While Firestone floun-dered, Goodyear made a smooth tran-sition to radial tires, emerging as oneof the three global powers in the tireindustry. While Laura Ashley con-tinued its downward drift, Guccirighted itself after a brief stumble.History reveals many such pairs of industry leaders whose fates divergedwhen they were forced to respond to environmental changes. Think ofGeneral Electric and Westinghouse,Volkswagen and Renault, Samsungand the Hanjin Group, SouthwestAirlines and People Express.

Successful companies can avoid –or at least overcome – active inertia.First, though, they have to break freefrom the assumption that their worstenemy is paralysis. They need to re-alize that action alone solves noth-ing. In fact, it often makes mattersworse. Instead of rushing to ask,“What should we do?” managersshould pause to ask, “What hindersus?” That question focuses attentionon the proper things: the strategicframes, processes, relationships, andvalues that can subvert action bychanneling it in the wrong direction.

Most struggling companies have a good sense of what they need to do.They have stacks of reports from inside analysts and outside consul-tants, all filled with the same kindsof recommendations. Firestone’sleaders were well aware of the supe-riority of the radial tire, and LauraAshley’s executives knew that moreand more women were joining theworkforce. Their problem was thatthey lacked a clear understanding ofhow their old formulas for successwould hinder them in responding tothe changes.

Even after a company has come to understand the obstacles it faces, it should resist the impulse to rushforward. Some business gurus exhortmanagers to change every aspect oftheir companies simultaneously, tofoment revolution within their orga-nizations. The assumption is thatthe old formulas need to be thrown



Polaroid’s steady decline illus-

to the wind –and the sooner, the bet-ter. But the veterans of change pro-grams whom I’ve talked to argueagainst that approach. They say thatby trying to change everything all atonce, managers often destroy crucialcompetencies, tear the fabric of so-cial relationships that took years toweave, and disorient customers andemployees alike. A revolution pro-vides a shock to the system, but theshock sometimes proves fatal.

Look at what happened when Fire-stone finally recognized the obsta-cles that were preventing it fromsucceeding. In 1980, Firestone’s boardbrought in a CEO known for hisprowess as a turnaround artist. The

new chief executive wasted no time.He closed five of the company’s 14domestic plants, severed its long-standing relationships with severalcustomers, replaced the bottom-upcapital-budgeting process with astrict top-down approach, and filledkey management posts with a crewof outsiders. (See the insert “The In-side-Outsider as Change Leader.”)

The new CEO’s revolution savedFirestone from bankruptcy, but itleft the company poorly positionedfor future growth. The team of out-side managers disposed of several ofFirestone’s most promising busi-nesses and invested heavily in tireretailing, despite warnings from sea-

soned insiders that the company’stire stores had never been profitable.Firestone’s days as an independentcompany were numbered.

Goodyear, by contrast, took a verydifferent path. Respectful of its cor-porate heritage but not beholden toit, Goodyear adapted to the newcompetitive environment through a series of carefully staged changes,avoiding the need for a revolution.The company cut its production ca-pacity for traditional tires in a waythat showed respect for its long-standing commitments to workersand communities. Wherever possi-ble, it converted existing factories toradial production or built new radial

The Inside-Outsider as Change Leader

Guiding a company through bigchanges requires a difficult bal-ancing act. The company’s her-itage has to be respected even asit’s being resisted. It’s often as-sumed that outside managers arebest suited to lead such an effort,since they’re not bound by thecompany’s historical formula.Lou Gerstner’s success in turningIBM around is frequently held upas evidence of the need for an out-sider. I would argue, though, thatGerstner should be viewed moreas an exception than an example.Typically, outsiders are so quickto throw out all the old ways ofworking that they end up doingmore harm than good.

The approach I recommend is tolook for new leaders from withinthe company but from outside thecore business. These managers,whom I call inside-outsiders, canbe drawn from the company’ssmaller divisions, from interna-tional operations, or from stafffunctions. Charles Pilliod, for ex-ample, the CEO who led Good-year into the radial age, was bornand raised in Akron and workedhis entire career with Goodyear.But he had spent 29 of his 31 yearsprior to taking the helm at Good-

Finally, inside managers canbreak free of their old formulas by imagining themselves as out-siders, as Intel’s executives did indeciding to abandon the memorybusiness. Intel had pioneered themarket for memory chips, and formost of its executives, employ-ees, and customers, Intel meantmemory. As new competitors en-tered the market, however, Intelsaw its share of the memory busi-ness dwindle from more than 90%in the early 1970s to about 5% adecade later. At the same time, in-creasing industry capacity was sti-fling prices.

Although Intel had built an at-tractive microprocessor businessduring this time, it clung to thememory business until its chair-man, Gordon Moore, and its pres-ident, Andy Grove, sat down and deliberately imagined whatwould happen if they were re-placed with outsiders. They agreedthat outsiders would get out ofthe memory business – and that’sexactly what Moore and Grovedid. While a company’s competi-tive formula exerts a tremendousgravitational pull, thinking likeoutsiders can help insiders tobreak free.

year in the company’s interna-tional division, where he hadwatched the rapid spread of radi-als in Europe. He understood thecompany’s heritage, but he couldsee it from the objective view-point of an outsider.

Inside-outsiders have led manyof the most dramatic corporatetransformations in recent times:Jack Welch spent most of his career in GE’s plastics business;Jürgen Schrempp was posted inSouth Africa before returning torun Daimler-Benz, now Daimler-Chrysler; and Domenico De Soleserved as the Gucci Group’s legalcounsel before leading that com-pany’s dramatic rejuvenation.

Another alternative is to as-semble management teams thatleverage the strengths of both in-siders and outsiders. When Gerst-ner took over at IBM, he didn’t force out all the old guard. Mostoperating positions continued tobe staffed by IBM veterans withdecades of experience, but theywere supported by outsiders inkey staff slots and marketingroles. The combination of per-spectives has allowed IBM to useold strengths to fuel its passagedown an entirely new course.




facilities adjacent to closed plants,retaining most employees and thusmitigating the disruption to thecommunities. And whereas Fire-stone radically reduced its level ofcustomer service, Goodyear contin-ued to invest in its customer rela-tionships, establishing a basis for future growth.

If ever there appeared to be a can-didate for revolution it was IBM in1993. When Lou Gerstner left RJRNabisco to take the helm at IBM, heentered a company that had lostmore than $16 billion in three years,had been singled out as a dinosaur by Fortune, and was in the process ofbeing carved into 13 divisions thatcould be sold off in chunks. Gerstnershook up the hidebound IBM cultureand slashed costs, but he also pre-served and nurtured many of IBM’straditional strengths. Rather thanape the freewheeling style of Silicon

Valley companies, Gerstner empha-sized IBM’s reputation for stabilityand responsibility. He reassured cor-porate customers that they couldrely on Big Blue to help them moveinto the world of networked com-puters. Instead of abandoning IBM’smainframe business, Gerstner ex-panded services and acquired soft-ware that complemented IBM’sheavy metal, enabling the companyto offer “total solutions” to custom-ers’ information technology needs.Gerstner’s strategy of transformingIBM through renewal rather thanrevolution has succeeded beyondanyone’s expectations, leading to amore than fourfold increase in thecompany’s share price and position-ing it to continue as an industryleader into the next century.

IBM’s turnaround offers an impor-tant lesson to any successful com-pany facing big changes. Active iner-

tia exists because the pull of the pastis so strong. Trying to break that pullthrough a radical act of organiza-tional revolution leaves people dis-oriented and disenfranchised, cut offfrom the past but unprepared to enter the future. It’s better for man-agers to respect the company’s heri-tage. They should build on the foun-dations of the past even as theyteach employees that old strategicframes, processes, relationships, andvalues need to be recast to meet newchallenges.

1. For a discussion of how relationships withcustomers can prevent a company from inno-vating, see Joseph L. Bower and Clayton M.Christensen, “Disruptive Technologies:Catching the Wave,” HBR January–February1995.

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ARTICLES

“The Reinvention Roller Coaster: Risking thePresent for a Powerful Future” by Tracy Goss,Richard Pascale, and Anthony Athos (Harvard Business Review, November–December 1993, Product no. 93603)Like Sull, these authors look at the costs ofacting on the basis of outmoded assumptionsand premises. Change programs usuallypromise incremental progress rooted in thecompany’s previous experience. Many organi-zations, however, require a complete reinven-tion, not marginal improvement. Reinventionis not changing what already is, but creatingwhat isn’t. By conceiving a new context thatleads to a break with limiting beliefs from thepast, the process of reinvention creates open-ness to a new, seemingly impossible future.

“Evolution and Revolution as OrganizationsGrow” by Larry E. Greiner (Harvard BusinessReview, May–June 1998, Product no. 98308)In their haste to leap into the future, man-agers fail to consider historical context—theway history can serve as a guide to the future.Companies pass through a series of develop-mental stages, each stage beginning with aperiod of evolution that is marked by steadygrowth, and ending with a period of revolu-tion that is marked by turmoil. By knowingwhere they are in the company’s developmen-tal sequence, managers can learn to identifyappropriate actions and solutions. The criti-cal task during the revolutionary periods is tofind a new set of organizational practices thatwill carry the organization into its next phaseof evolutionary growth.

“Leading Change: Why TransformationEfforts Fail” by John P. Kotter (HarvardBusiness Review, March–April 1995, Product no. 4231)For companies who’ve recognized the need tochange in response to new market conditions,this article by Kotter provides a rationalsequence for working through the changeprocess. Kotter bases his insights on thetransformation efforts he witnessed at morethan 100 companies over ten years. His firstmajor lesson is that a change process goesthrough a series of phases that usually requireconsiderable time. His second lesson is thatserious mistakes in any of the phases canhave a devastating impact on the process as awhole. To help companies avoid that, Kotterexamines eight big errors that block success-ful renewal, from failing to establish a senseof urgency to not anchoring changes in thecorporation’s culture.

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