Free — Read/Download the Introduction

Introduction (Download PDF)

Can Fatal Strategic Flaws Only
Be Recognized in Hindsight?

International Business Machines Corporation lore says that, in the early
1960s, CEO Tom Watson Jr. summoned to headquarters an executive
who was responsible for a venture that lost $10 million. Watson, whose
fierce temper was legendary, asked the man if he knew why he’d been
called in. The man said he assumed he was being fired. Watson responded:
“Fired? Hell, I spent $10 million educating you. I just want to be sure you
learned the right lessons.”

Corporate America has spent hundreds of billions of dollars producing
educational failures in recent decades. But executives shudder at the
very word “failure,” so people rarely try to learn any lessons from them—
unless that lesson is how to make sure someone else catches the blame. As
we’ve seen with the subprime mortgage crisis in 2007 and 2008, which
mimics earlier financial crises, businesses keep making similar mistakes,
over and over again.

We propose to help executives and investors learn the lessons to be had
from failure. Organizations involved in life- and- death situations— such
as hospitals, airlines, and the military— routinely do after- action analyses
that help them keep from repeating catastrophic errors. We think it’s
time managers did likewise. And executives need to learn not just from
their own experiences, but from the lessons fi nanced by others, as well.
Why spend $500 million, and a decade of your life, repeating someone
else’s mistake when you could learn to avoid it by spending a few hours
with a $26 book (less on Amazon)?

Business books routinely look at successes and suggest how readers
can emulate them. But no one looks at failures and lays out methods for
how not to emulate them. Imagine a sports team that decides it will only
play offense and not play defense. It’s time executives focused some of
their attention on defense.

To glean the lessons from failure, we undertook an extensive research
effort to examine the most significant business failures of the past quarter
century. We defined failure as writing off major investments, shuttering
unprofitable lines of business, or filing for bankruptcy. Working with
leading information vendors, we built a comprehensive database of more
than 2,500 such failures suffered by publicly traded companies in the
United States. We did a literature search to look for failures that didn’t
show up in the vendors’ databases—for instance, companies that sold
themselves before having to account for a major problem. Then, using
various screens, we narrowed the list to the 750 most meaningful. Aided
by a team of researchers, we spent more than a year poring over the data.
The extent of the failures was stunning. Since 1981, 423 U.S. companies
with assets of more than $500 million fi led for bankruptcy. Their
combined assets at the time of their bankruptcy fi lings totaled more than
$1.5 trillion. Yes, that’s trillion, with a t. Their combined annual revenue
was almost $830 billion. Some of these companies went into bankruptcy
multiple times; in other words, they couldn’t even learn from their own
mistakes.

Over those twenty-five years, 258 publicly traded U.S. companies
combined for more than $380 billion in write- offs. Sixty- seven companies
had combined losses from discontinued operations that totaled
almost $30 billion.

What caused all those flameouts? The current emphasis in business
literature suggests that everything boils down to execution. Generals say
a battle plan never survives the fi rst contact with the enemy, and business
executives have much the same attitude. They reason that they can only
do so much planning. After that, they have to plunge ahead, hoping to
execute better than the other guy and maybe catch a bit of luck. Yet,
despite all the books written about how to improve performance by making
individuals and companies more effective, we found that failures
often don’t stem from lack of execution. Nor are they due to timing or
luck. What we found, instead, is that many of the really big failures
stemmed from bad strategies. Once launched, the strategies were doomed
to fail, and these failures probably could not have been prevented by even
spotless execution— unless the implementers were licensed to kill the
strategy itself.

The situation is rather like the Charge of the Light Brigade. Faulty
intelligence and vague orders contributed to the disastrous decision of the
British to charge overwhelming Russian artillery in the Crimean War.
Once the charge was set in motion, disaster was inevitable— “Into the
valley of Death / Rode the six hundred,” as Alfred, Lord Tennyson
put it.

To continue reading, download the Introduction to “Billion Dollar Lessons.”