• Creating new ventures
• Dealing with innovation and change
• Managing mergers and acquisitions
• Addressing new competitive pressures

The research also shows that precipitous business failures are caused by four destructive patterns of behavior that set in, without anyone noticing them, well before a business goes under:

• Flawed executive mind-sets that throw of a company’s perception of reality
• Delusional attitudes that keep this inaccurate view of reality in place
• Breakdowns in communication systems that were developed to handle potentially urgent information
• Leadership qualities that keep a company’s executives from correcting their course

• Strategic Misintent
  • Are you in danger of focusing on one principle or model to the neglect of all others? (The Magic Answer)
  • Is it possible that you’re pursuing a strategy that isn’t attainable? (The Holy Grail)
  • Could you be using an inappropriate barometer for success? (The Wrong Scorecard)
• Negative Transfer
  • Are you assuming that what’s worked in the past is what you still need today? (Yesterday’s Answer)
  • Has your company moved into an area that requires a different approach than the one it used successfully elsewhere? (A Different Game)
  • Is it possible that you have an inaccurate idea of your own competencies, relative to the competition? (A False Self-Image)
  • Are you in danger of incorrectly attributing your past success or the success of your competitors? (The Film Producer Error)
• One Track Mind (-Sets)
  • Are your ideas of what your customer needs based on limited models or experience? (It’s a Small World)
  • Are you trying to operate in a culture where you might not understand all the unspoken conventions? (Home Field Rules)
  • Have you slipped into pursuing rapid expansion at the expense of real profitability? (Expansion Fever)

Does Your Company Have an Adequate Picture of What Could Change in the Future?

• Have you taken into account the possibility that several unlikely events could occur at once? (The Perfect Storm)
• Have you distinguished between projected innovations that require routine engineering and those that require new discoveries? (The Star Wars Error)
• Have you paid enough attention to the small-scale level at which large-scale changes must be implemented? (The Big-Picture Illusion)
• Are you focusing on the right competitors, especially newcomers? (The Wrong Competition)
• Have you given enough consideration to the ways in which your entire industry could suddenly be transformed or become irrelevant? (A Static Business Model)

Executives avoid facing reality by creating an insulated culture that systematically excludes any information that could contradict their reigning picture of reality

• Watch us and see how it is done
• We’re better than you are, period
• Trust us – we know what we’re doing:
  • Company will tend to do things, not because they make any business sense, but because they carry out the vision
  • The more successful a company has been in the past, the harder that company will find it to change the model that made it a success
• We don’t need customers telling us how to run out business
• We have a positive attitude here:
  • Reinforces itself – no one wants to disrupt it with negative information
  • Makes it easier to manage employees
• No negative feedback, please
• Telling everyone will just make things worse
• Never settle for less than perfect:
  • As measured internally, whether valued or not
  • It encourages executives to expect unrealistically low failure rates
• Whatever happens, it’s not my fault
• Too much team spirit – dissent becomes impossible
• I speak for the entire company

Policies and Techniques to Keep Your Company Responsive to Outside Developments

• Compensate for company pride:
  • Create internal advocates for strategies and technologies introduced by competitors and by other outside firms that are tackling analogous tasks
  • Give someone the job of monitoring competitors’ missteps and making sure that they are avoided.
  • Use partnering to bring in new ideas and new practices
• Compensate for the company’s vision of excellence – it tends to take on its own momentum and becomes difficult to change:
  • Make sure that the improvements the company most wants to provide are the ones the customers most want to have
  • Stay alert for information that could signal how the company vision might need to be changed
  • Make each top executive responsible for dealing with real customers
• From positive attitude:
  • Reward employees that find flaws or potential problems in the P&P
  • Convene “devil’s advocate” groups to spot vulnerabilities in past and current policies
  • Find ways to disseminate unpopular knowledge quickly across the organization
• From perfectionism:
  • Change goals when the old goal is being met, rather than simply “raising the bar”
  • Small failures are OK
  • Have executives set the example by acknowledging their own small failures and by participating in discussions of how those particular failures might be avoided in the future
  • Use external benchmarks, especially for routine operations and centralized support services
  • Reward experiments that are unsuccessful when it comes to producing financial returns but are highly successful when it comes to producing knowledge returns
  • List mistakes and vote on which we learned the most from – mistake of the month
• From too much team spirit – group think:
  • Foster and preserve opinions that differ from the prevailing one
  • Request a “minority report” making a strong case for second-strongest option
  • Cross-functional teams
  • Genuine outsiders
  • Keep people who see things differently or have a passion for some alternative strategy
• From public relations reflexes:
  • Keep the liability lawyers and public relations people out of basic planning and decision making
  • Don’t think in terms of “damage control” – think instead of eliminating the damage and its causes

Why Businesses Do Not Act on Vital Information

• Undirected information:
  • No one has shown employees that they need to take the implied danger seriously (Schwinn, London Underground)
  • If importance of info is recognized, where does employee direct it? (Xerox PARC)
• Missing communication channels with people who need to act on it
• Communication channels that are too rigid and hierarchical (Challenger explosion):
  • Need a way to flag potential vital info so it gets special attention
• Missing motives:
  • Is there an incentive or disincentive to do so for employee?
  • If executives have too much to gain from the success of a project, they tend to have difficulty providing balanced information on what its chances of success might be and whether it should be canceled
• Missing oversight – I hear what I want to hear – need to seek out info that might not be coming to you:
  • It is easy for executives to accept good info easily
  • In urgent and exceptional situations critical controls get bypassed
  • Small companies and startups are prone to this
• Excessive oversight – tends to keep people operating in routine ways and communicating in routine channels
• The exceptional personality
• Overly distant overseers
• Lost lessons

Seven Habits of Spectacularly Unsuccessful People

These are the personal qualities of leaders who preside over major business failures. The personal qualities are regularly found in conjunction with truly admirable qualities, such as:

• Unusual intelligence
• Remarkable talent
• Charming, exercising great personal magnetism, and inspiring others

Nearly all of the leaders who preside over major business failures exhibit 5 or 6 of these habits.

1. They see themselves and their companies as dominating their environments.
   • They vastly overestimate the extent to which they are controlling events and vastly underestimate the role of chance and circumstance in their success
   • Human need to feel responsible for what happens to us
   • Think that they and their company are successful because they made it happen
   • We do not dominate our environments – no matter how successful we have been in the past, we are always at the mercy of changing circumstances
   • Need to generate a constant stream of new initiatives because we can’t make things happen at will
   • Reality – CEOs are constantly faced with threats that are in some respects beyond their control, and they are successful in some respects beyond what they deserve
   • Illusion of personal preeminence => belief that he is personally able to control the things that will determine the company’s success or failure
     • Rather than scrambling to keep track of changing conditions, the CEOs who succumb to this illusion believe that they can create the conditions under which they and their company will operate – through the force of their personality and genius
     • They treat people around them as instruments to be used:
       • Often use excessive or intimidating behavior
       • Speak softly and make small gestures or speak loudly and carry a big stick
   • Illusion of corporate preeminence:
     • Belief that company is central to customers and suppliers
     • Often act like customers are the lucky ones
     • Often believe the superiority of company’s product makes it invulnerable
2.  They identify so completely with the company that there is no clear boundary between their personal interests and their corporation’s interests.
   • Too much stock can be bad
   • Treat company as extension of self
   • Private-empire mentality
   • Betting on a project is betting on themselves
   • It becomes part of their identity so they are incapable of stepping back and evaluating it critically
   • Decisions express the executive’s personality
   • Can confuse personal adversaries with company’s adversaries
   • Become less careful with company’s assets
   • Making big bets got them the job.
3.  They think they know all of the answers – it is a fraud.
   • Dazzle with speed of incisiveness
   • Deep knowledge of facts
   • Gift for sheer decisiveness
   • But:
     • Rapid change in context means no one can have all of the answers
     • Speed can prevent understanding ramifications
     • Need to feel they have all of the answers means they have no way to learn new answers
     • Instinct, when something is truly important is at stake, is to push for rapid closure, allowing no periods of uncertainty, even when uncertainty is appropriate
     • Tend to relish the sort of performance they are able to give, where they make snap decisions and issue orders at high speed
     • They tend to learn only what is a direct extension of what they already know
     • Opposition can go underground
     • Tend to be control freaks, having final say on everything a company does
     • Personal control is both an extension of what they see as their executive role and protection against their own vulnerabilities
     • Fail to trust others
4. They ruthlessly eliminate anyone who isn’t 100 percent behind them.
5. They are consummate company spokespersons, obsessed with the company image.
   • High-profile constantly in public eye
   • Management efforts can become shallow
   • Can focus too much on pitching a new vision
   • Can be pop icons
   • Can ignore details
6. They underestimate major obstacles.
   • Become so enamored with their vision of what they want to achieve they overlook how to get there
   • Assume all problems are solvable
   • Executives coming off a string of successes are particularly prone to underestimate obstacles
   • Technically oriented executives are especially likely to underestimate problems that don’t seem technically intimidating
   • Habit of treating all obstacles as minor is an essential part of the leader’s style - tends to glide over obstacles through a combination of charm and momentum
   • Tend to deal with the problem by escalating their commitment
   • Admitting to being fallible makes them feel precarious
   • Recognizing the point at which escalating commitment is getting out of hand can be almost impossible for the person responsible
7. They stubbornly rely on what worked for them in the past – they chose a course of action with reference to themselves and the things that made them successful in the past.
   • If they had a defining moment they tend to let it define them for the rest of their careers

Predicting The Future – Questions To Ask When Looking for Early Warning Signs

• Unnecessary complexity.
  • Is the company’s organizational structure convoluted or complex?
  • Is its strategy unnecessarily complex for an otherwise simple problem?
  • Is its accounting overly complicated, nontransparent, or nonstandard?
  • Is it employing complicated or nonstandard terminology?
• Speeding out of control.
  • Does the management team have enough experience to handle growth?
  • Are there small, yet nontrivial, details or problems that seem to be getting overlooked by management?
  • Is management ignoring warnings now that could lead to problems later?
  • Is the company so successful or so dominant that it’s no longer in touch with what it needs to do to remain on top?
  • Do the unplanned departures of senior executives signify deeper problems?
• The distracted CEO
  • Do I have unanswered questions about the CEO’s background and talent?
  • Is the CEO spending too much money to fulfill personal missions that don’t necessarily benefit the company?
  • Are the company leaders so consumed by money and greed that they’re taking questionable or inappropriate actions?
• Excessive hype
  • Is it possible that the excitement around the company’s new products is just hype?
  • Could the excitement around the company’s merger or acquisition be hype?
  • Is the excitement around the company’s prospects just unfilled hype?
  • Is the latest missed milestone part of a pattern that could signify deeper problems?
• A question of character
  • Are the CEO and other senior executives so aggressive or overconfident that I don’t really trust them?

How Smart Executives Learn

Questions to ask about your company:

• Do you believe that the CEO and other senior executives in your company are open to different ideas?
• Does the typical employee or manage believe that they can bring mistakes to the attention of the bosses without fearing about repercussions?
• Does your company have an informal or formal process for learning from mistakes?
• Is it standard practice in your company to challenge people who say,” This is the way we have always done it!”?
• Are there a set of corporate values that people really believe in and use to decide how to handle the “gray” areas of business?

How can you strengthen your organization’s immune system against major management failures?

Risk is inherent in business.

Mistakes evolve over time and no company can avoid the affects of (1) the company history and (2) change.

Strategic, cultural, organizational, and leadership breakdowns exacerbate inherent weaknesses and risks.

Lessons:

• Depend on a culture that thrives on asking questions, staying alert, and being open-minded. The ability to recalibrate in real-time is a capability executives must nurture.
• When they see conditions changing, executives need to pay special attention to all four underlying forces of failure.

Leaders define the game that is being played, and set in motion an agenda to win the game, but they cannot, and should not, try to play every position on the field. It would be better if the entire organization was built, challenged, and empowered to create the future. CEO defines purpose and should create an organization that will have the energy, resilience, culture, and talent to manage the unknowable. The heroic CEO is one who creates an organization capable of meeting the challenges that are constantly emerging, who builds creativity, open-mindedness, a disdain for bureaucracy, and honesty into the DNA of organizational life.