Recession is very bad for business reputations, as well as for business itself. It only takes a downturn in trade, or even a slowdown in growth, for yesterday's hero to become today's target of criticism and blame. Only a few months ago, for instance, John Chambers of Cisco was widely hailed as the best in the West, a manager whose strategic strengths were supported by superb systems - yet who, by his own admission, has now badly missed the sharp decline in the world market for telecommunications equipment of all kinds.
The special irony is that Chambers prided himself, and was praised by others (including Thinking Managers), for the real-time, internet-based systems that allowed him to keep constant track of sales, orders and margins. So either the system failed to throw up advance signs of the adverse trends, or the signs were ignored in the gung-ho climate of a company used to 50% annual growth rates. It's a rare manager who not only sees that the party is over, but acts, well in advance, to deal with the consequences.
It's an even rarer manager who can resist the great temptation to glory in his company's glories. If you have spent four years in producing a Digital Nervous System as universal and responsive as Cisco's, you are liable to boast about its merits - and to rest on those laurels. In fact, the glorification is ominous. Dell Computer fell into the same trap, with Michael Dell lauding his "virtual" operations, oblivious of the fact that the personal computer market was heading for inevitable slowdown. His operational superiority couldn't save Dell from the sales setbacks.
HOW GOOD WILL YOU BE?
The issue is not how good you are now, still less how good you were, but how good you are going to be. To spell that out, no management achieves all-round perfection. Weaknesses exist in its strongest areas, and abound in the weaker ones. For example, Dell came out worst in a survey of web-sellers in exactly the area where you would have expected the company to excel: customer service. Not only are faults swept under the carpet, but good performance tends to deteriorate over time - partly because the aura of self-congratulation prevents objectivity.
There's a powerful external pressure that leads to self-congratulation. The company's image and reputation are important business tools. They affect its marketing strength, its stock market rating, its ability to attract the best recruits - and, of course, they feed the vanity of its top people. It's all very well to say that you shouldn't believe your own publicity. But if you don't believe it, why should anybody else?
The line between an effective public relations policy and hubris (the classical Greek word for arrogance that invites disaster or ruin) is not easily drawn. When you actually do cross the border in the wrong direction, it's difficult to perceive that this has happened, and harder still to act on the perception. That explains the ridiculous lengths of time that once-great companies can take over badly needed change - in IBM's case, the best (or worst) part of a decade.
The real-life experience of one private investor illustrates the strange power of indecision. He always knows when the stock market has reached its peak and a bear phase looms. How? Because he starts going through the portfolio, licking his chops at the huge gains which prove what a clever investor he has been. Although the experience has been repeated many times, he has never taken the logical and highly profitable action - selling the portfolio, taking the profits and waiting to reinvest at lower prices. Probably, he never will.
He thus misses the crucial moment. So do nearly all companies that are riding high. Instead of analysing the root causes of their success - a booming stock market in the case of the investor, a booming telecomms equipment market for Cisco - they credit their own specific brilliance for what is, at least in major part, a general phenomenon. The Golden Rules fly in the face of apparent logic, but are truly golden:
THE THREE GOLDEN RULES
1. The better everything is going, the harder you must strive to improve everything.
2. Concentrate on the Weaknesses and Threats as much as the Strengths and Opportunities.
3. Build challenge and change into your personal and corporate way of life.
If you don't follow this golden formula, ridiculous results may well follow. Take one company which is hosting a seminar that is to consider some important questions. What is the business value of a company's share price? What must a company be aware of, and what must it do, to ensure that the share price remains competitive; that shareholders remain content, and that top management keeps their support - and its jobs? These sensible enquiries, though, had a bizarre side. The company concerned - Gamma Unlimited, let's say - has seen its shares fall by 60%, far worse than its leading domestic competitor; its largest shareholders are openly up in arms, and the two top jobs are specifically under threat.
In other words, Gamma's bosses had no clear or satisfactory answers to the questions their own seminar is addressing. A major factor in the strength of a share is that the management is perceived in the following light:
1. It knows what it is doing, and why, in the short, medium and long terms.
2. The three time-horizons add up to a cohesive strategy that fits the technological, economic and commercial environments.
3. The strategy is fully understood within the company and is being effectively implemented.
PERCEPTION IS REALITY
It doesn't follow that achieving this perception will be followed by a leap in the shares - though the analysts (and journalists) often show a somewhat pathetic tendency to react to every "restructuring" (i.e., new round of lay-offs) as a potential strategic masterstroke. What is true, however, is that the reverse perception is invariably deadly - especially if the perception is accurate. It doesn't have to be true, because perception (how others view you) is reality in itself. But in Gamma's case, poor perception and the facts of the case were one and the same:
1. The company had no clear strategy, but was continually reorganising in ways that impeded, rather than encouraged, strategic success.
2. In a high-tech industry undergoing fundamental and dynamic change, Gamma was lagging visibly behind in the fastest-moving sectors and the newest technologies.
3. The company was plagued internally by overlapping services and operations, endemic indecision, and a top-heavy management structure.
These defects were no secret, any more than IBM's fateful obsession with mainframe computers, to the neglect of its vital business in PCs, software, services, etc., was unrecognised, either inside or outside the company. The parallel with IBM is close: Gamma also had a cash cow, a traditional, money-spinning quasi-monopoly whose care and nurture left everything else in its shadow - but whose long-term future was doomed by technological shift.
The greatest peril of the hubristic mind-set is that management will miss such shifts - what Andy Grove of Intel calls a "strategic inflection point" and Charles Handy, the management writer, illustrates by the concept of the Sigmoid Curve. The critical point occurs below the peak of this curve, which shows the growth of sales and profits. If you fail to take action well before the apex of maximum prosperity, you will not start a new growth curve until the business has passed the peak. You have failed to obey the Golden Rules, and the company will pay the price - decline and fall.
The solution for both Gamma and IBM was obvious to outsiders: break up the company into large, discrete businesses, with the particular aim of allowing the dynamic newcomers to grow independently, without interference or overshadowing from the old core business. For Gamma, this idea was especially attractive, because the stock market's erstwhile infatuation with high technology meant that portions of the separated businesses could have been spun off at nonsensical, but richly rewarding valuations.
MISSING THE MOMENT
This proposition was debated often at the higher reaches of Gamma, and just as regularly rejected. When the issue finally became urgent, because the company needed to fund mountainous debts, the moment had passed. NASDAQ had plunged and wondrous valuations were no longer available. Such failure to act is one of several giveaways which reveal that a company is in denial and slipping away down the Sigmoid Curve:
1. Obviously beneficial, even crucial actions are aired but never resolved.
2. The top management remains in place and in total command long after the first deep cracks have appeared in the business.
3. Strategy and other paramount issues are referred to committees or study groups, often with very long deadlines.
4. The CEO is insulated from other managers and outsiders, often having a high-level "personal assistant" for the purpose.
5. Specific criticisms, from inside or outside, are ignored or dismissed - but large general "initiatives" are launched in response (to little or no goodeffect).
What, then are the good signs? They are not totally reliable - in management, every idol is in danger of being fitted with feet of clay. But, looking back over Thinking Managers, I noticed many references to Jack Welch, the titanic CEO of GE. Now, Welch's reputation is not sacrosanct. He still has the rest of this tough year to complete, having delayed his retirement to mastermind the vast Honeywell merger. But the facts behind those mentions are all excellent omens, like...
1. Setting up destroyyourbusiness.com (later changed to growyourbusiness.com) to challenge established GE operations like a hungry e-entrepreneur.
2. Leading from the front to give GE a strong sense of purpose or direction, while insisting that "To be vital an organization has to repot itself, start again, get new ideas renew itself".
3. Demanding that managers face reality and pass on bad news, taking full responsibility for running their own units, while looking four years ahead and ("probably more important") nine years on.
4. Combining hard-nosed management with insistence on shared corporate values, such as "see change as opportunity, not threat".
5. Removing "Type IV" managers who deliver on their commitments, but do not share or apply the values.
6. Insisting that GE businesses be either first or second in their global markets - or get sold or closed.
7. Launching a corporation-wide "Six Sigma" drive to achieve the highest Total Quality ratings.
FITTING THE GOLDEN RULES
Note how well the Welch attributes and policies fit the three Golden Rules. The better everything is going, the harder you must strive to improve everything - by initiatives like the Six Sigma programme. You take weaknesses and threats so seriously that you act before they even appear ("destroyyourbusiness.com"). Challenge and change are built into GE's values and into the way in which Welch has run it for 20 years.
As for the issues which concerned Gamma in staging its seminar, Welch's success drove up the share price to make GE the wealthiest company in the US (as he had aimed to do), while delighting the shareholders and making the top management the most admired (and secure) in the land. Do the shining image and the high reputation fit reality? Remember that perceptions are reality, and that they can change abruptly - witness the fall from grace of IBM and Marks & Spencer, once the most admired companies in their respective countries. But if you constantly seek to improve the realities, and do so, reputation, image (and the share price) will, by and large, look after themselves.
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