Sitting in his Mumbai hotel room after a day-long workshop with senior executives of a large corporation, Jagdish Sheth is still eager to talk shop. He adroitly juggles multiple telephone calls and interview questions even as he talks about his next book - the last one, The Self-Destructive Habits of Good Companies, was released just a few weeks ago and he's already planning a sequel. It's a pace that would leave anyone breathless, but multitasking is now second nature to the 67-year-old Sheth.
He is one of the world's most respected marketing gurus, an adviser and consultant to many of the world's best-known companies, the Charles H Kellstadt professor of marketing at Emory University's Goizueta Business School, and a prolific writer. Comparing companies' actions to that of individuals, Sheth spoke extensively with Meenakshi Radhakrishnan-Swami on why good companies go bad. Excerpts:
What's the story behind this book?
Duane Ackerman, the chairman and CEO of BellSouth, once asked me, "Why do good companies fail?" He had read the works of Tom Peters and Jim Collins and had found that many of the companies praised in those books were in trouble - companies like IBM, Sears and Xerox.
I began researching this and found that the life expectancy of companies has been declining dramatically since the 1970s, when the first energy crisis occurred. Where earlier a company would be in existence for 50 to 60 years, now its lifecycle is down to just 10.5 years.
A large part of the drop in life expectancy is due to increased mergers and acquisitions, which are happening because so many companies are in trouble.
Going forward, I believe there will be more mergers and acquisitions as both Chinese and Indian enterprises go global through acquisitions, and not just exports. Imagine: between January and May this year, acquisitions worth $2 trillion were finalized - and this doesn't include the ABN Amro deal. That is an exceptional jump when you compare with the total for all of last year, which was about $1 trillion.
You've identified seven self-destructive habits in the book...
I was inspired by Stephen Covey's Seven Habits of Effective People. While he speaks of positive habits, I have looked at negative ones. (Laughs) I'm sure there is an eighth or even ninth habit somewhere, though.
Are the seven you've listed in your book easy to spot, then?
Not really. I am inclined to believe that three or four are quite apparent, while the rest are more uncommon.
Which bad habits do companies commonly acquire?
I would put arrogance at the top of the list. Success, especially extraordinary or unexpected success, tends to boost the egos of companies, just as it does of individuals. These companies tend to be highly feted and their reputations exaggerated by the media, and that's bad news. There are enough write-ups on the rise of arrogance at Enron and Worldcomm, for instance.
Next would be complacency. When companies owe their success to monopoly situations, they stand in danger of taking their success for granted - like Hindustan Lever [Get Quote], until recently, for instance.
This is also true of monopolies of distribution - as in DeBeers - monopolies of regulation - Bharat Sanchar Nigam Ltd - or when the government owns the business - Air India. When you become complacent, you allow competitors to identify niche areas where they can establish themselves, and from there, take on the whole market. In such cases, your success breeds failure.
The third common bad habit is turf wars. As companies grow bigger, there is an increasing danger of internal battles. Whether it is dissension between divisions, as in General Electric, or family feuds as seen in so many Indian companies, the result must inevitably be suboptimal.
Number four on my list is volume obsession. This is a common problem with successful companies - they compromise on margins for the sake of further growth. Typically, value addition by a company accounts for about 30 per cent of the cost - 10 per cent each as the cost of management, labour and capital. The remaining 70 per cent is procurement costs.
So, when you increase volumes at the cost of your margins, you are actually helping your input providers (your suppliers) grow: they are making money at your expense. For instance, in the PC business, the value addition is only 11 per cent; 89 per cent is all procurement, of which 79 per cent goes to Intel and Microsoft who are making fat profits while the PC assemblers, including IBM, HP and Dell, struggle.
What about the more uncommon self-destructive practices?
Those are denial, competency dependence and competitive myopia.
What do companies deny?
Most successful companies tend to deny new realities. Such as, right now, many (if not most) companies are denying the ongoing Green Movement.
But concerns for the environment are very real and will play an increasingly important role in companies' growth in the future.
Companies also tend to deny new disruptive technologies. When cellular technology emerged, most landline service providers did not take it seriously, and suffered as a result. Similarly, analog companies never believed digital technology in imaging could ever become big. They, too, paid for that lack of foresight.
Many successful companies also tend to deny competition from non-traditional sources. When Japanese car makers came to the US in the 1970s, the people in Detroit never believed these cheap, funny-looking vehicles would ever catch on. Just as nobody believed India could ever be an IT powerhouse.
Competency dependence and competitive myopia are pretty names for bad habits...
(Laughs) Companies need to get out of the habit of continuing with an activity that has outlived its utility, just because they're good at it. Look at Marks and Spencer. It was founded on store brands, but those began proving cost-inefficient once world-class manufacturer brands picked up steam.
It is necessary to adapt to changing market needs. In the US, the single largest purchase people make after their home and car is a diamond. And who sells the most diamonds?
Believe it or not, Wal-Mart! Nobody would have believed that consumers will buy unbranded diamonds at a discount merchandiser. Traditional jewellers are now waking up that retailer reputation is key in many unbranded products and services.
As for competitive myopia, I would compare that with running a marathon. When you begin, you have hundreds of rivals. After a while, as you outpace most of them, you look only at those ahead of you. That's risky, because someone may come up from behind and overtake you.
In the case of business, myopia may be more pronounced when an industry is headquartered in one city - the media in Mumbai, for instance, or IT in Bangalore. The competition may spring up from outside. Or from another product: Coca-Cola has been busy watching Pepsi, even as non-carbonated beverages increase marketshare everyday.
Which of these seven practices is the worst?
Most people would tend to believe arrogance and complacency, but I would say denial of new realities is the most dangerous. Most successes happen by accident, but companies invariably begin attributing the success to themselves, rather than considering the role the environment played. They forget that the environment also changes.
For instance, the Indian consumer is changing very rapidly. We are seeing the emergence of what I call "call centre couples" - young, college-educated, stressed people. They don't want their parents living with them, they don't want to shop at the kirana stores, they speak English all the time... This is a very different middle class from what existed earlier. Companies that fail to recognise this group and strategise accordingly will find the going tough.
Do all companies become self-destructive?
Contrary to Schumpeterian theories, which suggest the role of capitalism and competition as constructive destruction, good companies destroy themselves by acquiring bad habits. It is akin to acquiring bad karma on the path to success. The effects may not be immediately visible, but it hurts in the long term.
The bad habits of companies are a lot like the bad habits people acquire with age and prosperity - smoking, excessive drinking, eating unhealthy foods. Not inevitable, but certainly a natural progression of growth and success. They can be prevented and/ or corrected with human intervention.
Continuous monitoring. You don't feel your arteries clogging, do you? You need regular checkups. Companies, too, need a diagnostic tool to check whether they've acquired any of these habits. If yes, then the leadership needs to decisively intervene and take corrective action. So far, there is no single diagnostic tool that can detect the effects of these practices.
The habits you list are so obviously bad. And you've just said that these are acquired, not inherent in companies. So why do companies pick up these practices?
That's exactly the point. Because they are obvious but incremental, we do not pay attention as bad habits accumulate over time and reach a tipping point. I have intentionally used the human body and mind analog to demonstrate that we go through the same process of acquiring bad habits.
What is the role of company leadership in bad habits? Both in acquiring and tackling them?
To continue with the body/mind analog, bad habits begin with the mind or at the top, then begin to spread rapidly through the body. The role of leadership intervention is most critical in at least three ways. First, monitor and measure the creeping rise of any of the seven bad habits and nip it in the bud.
Second, if the bad habits have become well entrenched, a forceful intervention tantamount to a transformation of the culture through reorganisation, reorientation and reengineering. Finally, and most importantly, prevent any of these bad habits - especially arrogance, complacency and turf wars - from establishing themselves in the culture of the company.
Air India was guilty of complacency until recently. As a state monopoly with most flights in and out of India, it had become complacent over the years. But it looks like Air India is trying to become more competitive. I am a strong advocate of Indian public sector undertakings.
They have scale advantage and can become world class global enterprises relatively quickly. This includes Maruti [Get Quote], most of the oil and gas companies, as well as banks and telephone companies. By the way, even a great organisation such as The Tata Group, had become complacent until Ratan Tata took over and shook it out of its mid-life crisis.
I fear Indian companies are now in danger of becoming arrogant. With the worldwide visibility at forums such as Davos and large-scale global acquisitions of European, American and Latin American companies, I believe Indian companies must get a reality check about much bigger incumbent competitors from the US, Europe and especially Japan and South Korea, as well as likely and even more formidable competition from Chinese globalising enterprises and new entrants from ex-communist countries.
In self-destructive mode
At the end of 2000, Intel announced that its two-year partnership with Analog Devices was about to yield fruit. The company was ready to bring to market a new chip - the high-performance digital signal processor for use in "third-generation" wireless devices such as advanced cell phones and palm-size computers.
The problem, though, as we saw with Digital, was that Intel was following, not leading, the market. Indispensable components of electronic gadgets like modems, CD players, and cell phones, DSPs had for some time been the fastest-growing segment of the microchip market.
Intel's job, then, was not only to produce the DSP, but also to oust the market leader, Texas Instruments. (It's worth noting that TI showed considerable prescience in making the leap to DSP. It could have continued to make PC chips, but, realizing that Intel had already won that battle, it looked over the horizon.
There it saw the future in "best-access" gadgets like the then-emerging cell phone, and it concluded that the DSP was the direction to take.) For its part, Intel realized, correctly, that its PC chip business was tied to slowing growth in PC sales, but the realization came later rather than sooner.
TI had already tied up a 60 percent share of the digital wireless phone business, and Mike McMahan, the company's head of R&D, told the Boston Globe that he was confident of their position in the market.
Like Digital and IBM, Intel's story illustrates that when you'retotally dominant in your chosen arena, it's hard to pay much attention to what's happening outside that arena. It's too easy, also, to ignore competition. If that was the case with the DSP in 2000, it happened to Intel again in 2003, when Advanced Micro Devices beat Intel to the market with a product it called Opteron - a chip that offered advanced 64-bit computing power while retaining the ability to run thousands of 32-bit Windows compatible programs.
According to one account, Intel and others inside the industry scoffed at the new chip from AMD, but within a year its customer list included IBM, Sun Microsystems, and HP. Then Intel had to play catch-up again. In early 2004, the company announced that it would add 64-bit capacity to its 32-bit Xeon server chips.
The story's amusing twist is that, a decade earlier, Intel's then-CEO Andy Grove had derided AMD as "the Milli Vanilli of semiconductors," taunting the smaller company for mimicking Intel chip designs rather than creating its own processors from scratch.
Reproduced with author's permission.
* The Self-Destructive Habits of Good Companies. . . And How to Break Them