The corporate landscape is littered with companies like Tesco, HP and Sony. Once business trailblazers, they have somehow become pedestrian and their performance has suffered. But why didn’t they spot the signs before their market share and profits started to slip?
The simple answer is that, when firms perform well, they try to hardwire the ingredients of their success into everything they do. Yet consistency can lead to inflexibility and, as tastes change, so can the things that made you successful in the first place. As management guru Tom Peters has said, “excellent firms don’t believe in excellence – only in constant improvement and constant change”.
The problem is that most big companies love routine. Think of the chief executives of GM, Chrysler and Ford, who flew into Washington in 2008 by private jet to ask the US government for billions so they could avoid bankruptcy. Their message was that an injection of new capital plus corporate prudence would ensure their survival. But Republican Gary Ackerman had done some digging. He commented that flying in on their own private jets may not have been the best example to set in the circumstances: “couldn’t you have all downgraded to first class or jet pooled or something to get here?”
Embarrassing, yes, but this story is about more than the pillorying of business leaders. A closer look reveals something more important: routine breeds inertia. These executives used private jets because that was what they were used to, and not doing so didn’t remotely figure into their preparations for the event.
And this is important because inertia can cause more damage than embarrassment. Research by McKinsey found a strong relationship between inertia in the way companies allocated capital and shareholder returns. It tracked 1,600 US firms over 15 years and found that those that reallocated resources most frequently (rather than spending money in the same way year after year) produced, on average, 30 per cent higher annual returns to shareholders.
Another problem is competitive inertia. Nokia once accounted for 41 per cent of the global mobile handset market. It grew on the back of its candy bar-shaped phones, the epitome of cool Finnish design. But Nokia was so wedded to this product strategy that it looked the other way when Motorola stormed the US market with its ultra-thin Razr flip phones. Nokia found it hard to break its design norms again when it was outmanoeuvred by Apple’s iPhone. It took Nokia a year to come up with a competing product (the 5800). But by then it was behind the innovation curve, and chasing rather than leading the market.
At its extreme, inertia can also be a precursor for something far worse than underperformance – it can lead to corporate destruction. There is a rogue’s gallery of organisations that have stepped over the line in terms of what is legally permissible, mainly because sufficient internal checks and balances were not in place. Enron springs to mind as an organisation that slavishly followed its cultural antecedents and behaved as if it were operating in an impenetrable bubble.
Once a company has reached this point, it tends to ignore information or strictures from the outside world, or interprets them as being supportive of the status quo. It also starts to take the health of its reputation for granted – seeing it almost as a given, rather than something that has to be earned.
It’s only when inertia leads to business or reputation-threatening consequences that the “normal” way of doing things is challenged. Unfortunately, for some companies, this realisation can come too late.