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The true sources of corporate inertia

July 31, 2008

In his article entitled, “Why Good Companies Go Bad”, Donald N. Sull begins by pondering the following question: “why is it that when successful companies face big changes in their environment, they often fail to respond effectively?”

To answer this question, Sull makes a compelling argument. It’s not that these companies are paralyzed; frozen with fear and incapable of responding to the impending threat. Au contraire. One might say, they’re ‘over-responding’. Sull’s research indicates that when the captains of these companies see stormy waters ahead, everyone runs around in a flurry of activity doing what they can to save the day. Yet often, these actions are entirely inappropriate.

Sull narrows the reasons for this ‘active inertia’, that is, when organizations have a tendency to follow an established pattern of behaviour to four ‘hallmarks’. He writes that ultimately, companies who fall victim to this kind of inertia are stuck in this mind frame because, “The fresh thinking that led to a company’s initial success is often replaced by a rigid devotion to the status quo.”

Sull details two cases in particular: Firestone’s inability to respond to a changing market in radial tires, and Laura Ashley’s ultimate downfall for not recognizing a changing demographic among women in the workforce.

Sull’s four hallmarks are as follows:

1. Strategic frames become blinders. What Sull means, is that frames are the ideas, assumptions, mind-sets that shape how managers see their environment. They help paint the picture, and help guide managers in what they should see and therefore what they should be looking for. Frames allow managers to understand their business, how to create value and how to compete in the market. Yet, the same frames that allow managers to follow a certain path, can also blind them to taking the better road. When managers focus too closely one the same things, they stop paying attention to others. These can lead to fatal mistakes. Countless incumbents have been taken by surprise by ignoring the ‘little details’ that end up overwhelming them.

2. Processes harden into routines. Sull writes that for many companies, the ideal scenario is to get their process so efficient and running so smoothly, that they take care of themselves. When a process is stable and capable, it frees up peoples time to focus on other things, such as innovation and creativity. The danger, of course, is to allow a process to remain the same for too long. In doing so, they often ‘take on a life of their own’. Before you know it, people follow these processes not because they’re effective, but because it’s always been done that way. This, ironically, stymies creativity and innovation.

3. Relationships become shackles. In business school 101, relationships – we are taught – are fundamental to every business’ survival. In our experience, this still holds true. Still, when companies shift products, markets or business models, relationships with employees, suppliers and customers can impede their flexibility. They feel tied to them, obligated to continue operating the way they always have so they do not aggravate them. For instance, many airlines were reluctant to switch their operations to direct selling, because they depended on travel agents to fill their flights. Yet, the third party cost is always transferred onto the customer.

4. Values harden into dogmas. Values are an important part of instilling a culture within the company. These are often ideas instilled by the founder of the company and help create a strong brand identity. Sometimes, however, Sull argues that values can prevent a company from growing. This happens when the values become so entrenched that anything new is viewed as unorthodox and therefore should be discarded.

Sull argues that the best way to ensure that successful companies don’t fall victim to active inertia is to create renewal, not a revolution. This ensures that the original values and the resident knowledge is respected, and at the same time creating a new frame of mind – one that reflects the changing environment. In doing so, it encourages the company to survive tumultuous times.

Sull writes, “they [successful companies] should build on the foundations of the past even as they teach employees that old strategic frames, processes, relationships and values need to be recast to meet new challenges.”