Why Good Companies Go Bad

Freek Vermeulen Associate Professor of Strategic & International Management

“Making Strategy Happen”

1. Compound asset growth from 1961 through 1980

2. Compound equity growth

3. Average market to book value (wealth creation)

4. Average return on capital

5. Average return on equity

6. Average return on sales

“In order to qualify as a top performer, a company must have been in the top half of its industry in at least four out of six of the measures”

“In Search of Excellence”

Peters & Waterman, 1982

Allen-BradleyAmdahlDigital equipmentEmerson electricHewlett PackardIBMSchlumbergerTexas InstrumentsData GeneralHughes aircraftIntelNational semiconductorRaychemWang Labs

Eastman KodakFrito-Lay (PepsiCo)Johnson & JohnsonProcter & GambleAtariAvonBristol-MyersChesebrough-Pond’sMarsMaytagMerckRevlonTupperwareCaterpillarDana Corporation3M

Delta AirlinesMarriottMcDonald’sDisney ProductionsK MartWal-MartBechtelBoeingFluorDow ChemicalDu PontStandard Oil / Amoco

Allen-Bradley *AmdahlDigital equipment *Emerson electric *Hewlett PackardIBM *SchlumbergerTexas InstrumentsData GeneralHughes aircraftIntel *National semiconductorRaychemWang Labs

Eastman KodakFrito-Lay (PepsiCo) *Johnson & Johnson *Procter & GambleAtariAvonBristol-MyersChesebrough-Pond’sMars *Maytag *Merck *RevlonTupperwareCaterpillarDana Corporation3M

Delta AirlinesMarriottMcDonald’s *Disney Productions *K MartWal-Mart *BechtelBoeing *FluorDow ChemicalDu PontStandard Oil / Amoco

Allen-Bradley *AmdahlDigital equipment *Emerson electric *Hewlett PackardIBM *SchlumbergerTexas InstrumentsData GeneralHughes aircraftIntel *National semiconductorRaychemWang Labs

Eastman KodakFrito-Lay (PepsiCo) *Johnson & Johnson *Procter & GambleAtariAvonBristol-MyersChesebrough-Pond’sMars *Maytag *Merck *RevlonTupperwareCaterpillarDana Corporation3M

Delta AirlinesMarriottMcDonald’s *Disney Productions *K MartWal-Mart *BechtelBoeing *FluorDow ChemicalDu PontStandard Oil / Amoco

The Organisation of Swiss Watch-makers

early 70s mid 80sSwiss global market share 70% 15%

Employment in Swiss watch industry

89,500 31,500

Proportion watches sold based on quartz technology

1% 80%

Export of watches, Switzerland(in thousands)

71,437 50,986 (1980)

Export of watches, Japan(in thousands)

11,399 68,300 (1980)

But it was a Swiss engineer who invented the quartz watch (in 1967)!

“this is just a fad; it won’t catch on”

“it is a different segment; they are not competition to us”

“people will always prefer to have a high quality watch that they can pass on to their grandchildren”

“These are just for kids; we are in a very different market”

“The quality is poor; they are no threat to us”

“this is just a fad; it won’t catch on”

“it is a different segment; they are not competition to us”

“people will always prefer to have a high quality watch that they can pass on to their grandchildren”

“These are just for kids; we are in a very different market”

“The quality is poor; they are no threat to us”

R&D HR

distribution

COMPANY/BRAND

etc.

hands

cases

wheels assem-blage

etc.

The Organisation of Swiss Watch-makers

CORPORATION

The Organisation of Swiss Watch-makers

THE SWISS WATCH INDUSTRY

The Organisation of Swiss Watch-makers

Could it have been avoided…?

Proposition 1: Yes, they should have been able to avoid it.

Proposition 2: No, it was pretty much inevitable.

Cognitive Inertia

Structural Inertia

CORPORATIONCORPORATION

INSIGHT 1:

Once a business environment has changed (creating a crisis-situation), the combination of structural and cognitive inertia makes it very difficult to adapt

structural inertia

cognitive inertia

Why Good Companies Go Bad

The Revival - Swatch

What was Hayek and Thomke’s role in the revival of Swatch?

THOMKE’s

Exploration Strategy

HAYEK’s

Exploitation Strategy

existing capability

add something new

create the environment

“get lucky”

business innovation

take existing advantage

invest in efficiency

create the environment

complementary choices

focused growth

INSIGHT 2:

exploitation strategy

exploration strategy

Companies, over time, need “exploration” but they also need “exploitation”.

They have different characteristics – e.g. in terms of management style – and are difficult to combine.

Why Good Companies Go Bad

INSIGHT 1:

structural inertia

cognitive inertia

INSIGHT 2:

exploitation strategy

exploration strategy

Why Good Companies Go Bad

several company cases; well-known and relatively unknown

some in financial distress; corporate turnaround cases

some remained very successful; because they changed!

in turbulent environments, i.e. without knowing what their worldwould look like

NOT step 1 = strategy design; step 2 = strategy implementation

what & when to decide; when to enable strategy to happen

cases, explicit tools, exercises, lecture, interactive!

several company cases; well-known and relatively unknown

some in financial distress; corporate turnaround cases

some remained very successful; because they changed!

in turbulent environments, i.e. without knowing what their worldwould look like

NOT step 1 = strategy design; step 2 = strategy implementation

what & when to decide; when to enable strategy to happen

cases, explicit tools, exercises, lecture, interactive!

“Making Strategy Happen”12 & 13 March

several company cases; well-known and relatively unknown

some in financial distress; corporate turnaround cases

some remained very successful; because they changed!

in turbulent environments, i.e. without knowing what their worldwould look like

NOT step 1 = strategy design; step 2 = strategy implementation

what & when to decide; when to enable strategy to happen

cases, explicit tools, exercises, lecture, interactive!

several company cases; well-known and relatively unknown

some in financial distress; corporate turnaround cases

some remained very successful; because they changed!

in turbulent environments, i.e. without knowing what their worldwould look like

NOT step 1 = strategy design; step 2 = strategy implementation

what & when to decide; when to enable strategy to happen

cases, explicit tools, exercises, lecture, interactive!

“Making Strategy Happen”12 & 13 March

“Making Strategy Happen”12 & 13 March

several company cases; well-known and relatively unknown

some in financial distress; corporate turnaround cases

some remained very successful; because they changed!

in turbulent environments, i.e. without knowing what their worldwould look like

NOT step 1 = strategy design; step 2 = strategy implementation

what & when to decide; when to enable strategy to happen

cases, explicit tools, exercises, lecture, interactive!

several company cases; well-known and relatively unknown

some in financial distress; corporate turnaround cases

some remained very successful; because they changed!

in turbulent environments, i.e. without knowing what their worldwould look like

NOT step 1 = strategy design; step 2 = strategy implementation

what & when to decide; when to enable strategy to happen

cases, explicit tools, exercises, lecture, interactive!

In an economic downturn, you cannot just continue do what you’re doing, you have to execute some real changes to weather the storm

A lone top manager will not be able to come up with all the necessary changes by him- or herself; you will have to mobilise people within the organisation

At some point, the economic downturn will end. Companies that take actions now, will be best placed to quickly “catch the wave” (and leave competition trailing)

In an economic downturn, you cannot just continue do what you’re doing, you have to execute some real changes to weather the storm

A lone top manager will not be able to come up with all the necessary changes by him- or herself; you will have to mobilise people within the organisation

At some point, the economic downturn will end. Companies that take actions now, will be best placed to quickly “catch the wave” (and leave competition trailing)

why now?

“Making Strategy Happen”