CUTTING EDGE

Will history happen to your company?
Why do successful businesses find themselves losing ground? Because they get stuck in their moment of glory and forget about what matters the most—the customer By Richard S Tedlow

People who start businesses are notorious for their optimism. But most entrepreneurial ideas never pass from dream to reality. And when they do, the great majority of new companies fail

There are filters through which an idea must pass to become a business, then through which a business must pass to become sustainable, then through which a sustainable business must pass to become something special, and then through which that something special must pass to become great. The tests are severe. For that rare company that passes all of these tests, history appears to freeze in its tracks. The end point has been reached, the answer is now known. Yet history teaches that the wheel keeps turning. Bad things do happen to good companies. Why is it that great firms—companies with the smartest executives and the most powerful competitive advantages—persist in the mistakes of their predecessors? History offers three reasons.

Reason 1: The market abandons the firm: When Henry Ford introduced the Model T in 1908, his goal was to put America on wheels; and he succeeded. Prior to the Model T, automobile manufacturers produced short runs of high-priced, high-margin vehicles. But Ford was committed to the mass market. He produced a reliable appliance within the financial reach of a far larger market than any of his competitors. By 1921, the Model T held a commanding share of the US market in a product category in which scale economies and the learning curve make market leadership critical. Within less than a decade Ford lost the leadership his company was never to regain. Why? Because the market left the firm. The US was growing fast and getting richer in the 1920s. Radio, movies and sports were changing the way the post World War I generation looked at the world. Life was to be enjoyed, not just endured. Suddenly consumers wanted more from their automobiles—style, fashion, colour and choice. But Henry Ford, enraptured by tales of his own greatness, fell in love with his product and forgot about his customers. In 1908, he was inspired by his vision of Americans freed from the tyranny of distance. By 1927, he was merely making more Model T's. As a result, he lost control forever of a market he owned.

Reason 2: The firm abandons the market: Counter-intuitive though this is, it happens more often than you might think. Take the case of Sears, Roebuck & Co, for years the most trusted firm in the US. It was an honest, reliable outfit that stood by its washing machines, refrigerators, and automobile batteries. Sears enjoyed several competitive advantages: hundreds of thousands of devoted employees whose current income and retirement security depended upon its prosperity, millions of loyal customers, and the best store locations in the nation. So impressed were Sears executives with their greatness that in 1970 they started creating what at the time was the tallest building in the world. Chicago’s Sears Tower, completed in 1973, was limited in height not by ambition or conspicuous display but by the Federal Aviation Administration. Beware of big buildings like the Sears Tower. Such monuments often become mausoleums. In its heyday Sears Tower had gorgeous and expensive furniture and paintings—they did not look like they were bought at Sears. Sears had begun to put on airs. The firm was leaving its market. Sears had a lock on a segment that will exist forever: people who want the best for less. How do we know this market still exists? Because Wal-Mart moved into the void that Sears left. Sears turned its back on one of the most vibrant market in history.

Reason 3: The market abandons the firm and the firm abandons the market: This insidious case where the firm and the market bid farewell to each other simultaneously was the fate of the Great Atlantic and Pacific Tea Company, the grocery chain known as the A&P. This was the third-largest corporation in the US in 1950. Today, it is a pale shadow of its former self. The market abandoned the firm as shoppers began to move to the suburbs and favour large stores. A&P, shackled by the memories of what had made it great in years gone by, failed to heed these trends. It also stuck to its heavy investment in private-label brands in the face of the growth of nationally branded grocery products fuelled by TV advertising. Sales slowly stagnated. As they did, morale in the stores declined and the quality of management deteriorated. The good managers saw what was happening and left. As the quality of management declined, overall performance deteriorated and so did customer satisfaction. That further weakened sales. Breaking the downward cycle This downward cycle is tough to break. How do you do it? By stopping it before it starts. How do you do that? Begin by asking the right questions—and avoiding the wrong ones: Don’t ask, ‘Am I competitive?’ Every failed company would answer in the affirmative. Instead ask, ‘Am I competing in the right way?’ This is more provocative and makes you think twice. Don’t ask, ‘Am I working hard?’ It doesn’t matter. It is an input question, and customers want output, not effort. Instead ask, ‘Am I working smart?’ The people at these failed firms were not. Don’t ask, ‘Is this a good product?’ That is the trap that Ford fell into. Instead ask, ‘Will the market care?’ The customer is all that really matters. Remember, you may be selling three-inch drill bits, but the customer is buying three-inch holes. Don’t ask, ‘Do I know what I need to know?’ This is a reasonable question. That’s the problem with it: it is too reasonable. Instead ask, ‘What am I afraid to find out?’ Exploring the worst plausible scenario for your firm may help you avoid it. Finally, remember: History does not stop just because you happen to be successful.

The author is the Class of 1949 Professor of Business Administration at Harvard Business School. He is the author of ‘Andy Grove: The Life and Times of an American’ BREAK

THROUGH: Edsel Ford’s 1934 Ford Model 40 Special Speedster is driven in Ypsilanti, Michigan. In 1934 Ford returned from a tour of several European auto shows and assigned E T ‘Bob’ Gregorie the job of designing a car with a ‘continental’ look. When Henry Ford introduced the Model T in 1908, his goal was to put America on wheels; and he succeeded. By 1921, the Model T held a commanding share of the US market. But within less than a decade Ford lost the leadership his company was never to regain