Sunday, June 21, 2009

The ten commandments for business failure by Don Keough

Don Keough is a director of Berkshire Hathaway and chairman of Allen & Co, a New York investment firm. He is a retired president of the Coca Cola Company. 

Applying the basic wisdom of what the rustic said (in the prior post), figure out where I will die and ensure I walk around it and avoid it at all cost. Learn from others' failures. So here are the 10 commandments for guaranteed business failures as prescribed by Don Keough.
  • 1) Quit taking risk. He who is overly cautious accomplish little. Of course, risk should only be taken on a calculated basis. It's the management's major task to prudently risk a company's present assets in order to ensure its future existence. 
  • 2) Be inflexible. People who are inflexible are so set in their ways, so sure that they have the formula for success that they simply cannot see any other way of doing things (they cannot question and destruct their own well-loved ideas). Inflexibility is a crippling disease. A case in point involving a brilliant and legendary businessman, Henry Ford. Ford did not become the nation's richest man by inventing the automobile, or mass production. What made him a genius was his instinctive sense of mass marketing. He saw better than anyone at the time that if he could drive the cost down, the automobile could be transformed from a plaything of the rich into transportation for the masses. So to do that, he took two risks: 1) he kept reducing the profit per car in order to increase sales volume; 2) when the average wage for an automobile assembly-line worker was less than $2.50 a day, he announced in 1914 that he would pay his workers the unheard of wage of $5 a day. Ford had this idea that his workers could also be his customers - people who would both produce and consume the product. In paying $5 a day, overnight Ford increased the size of his market by paying his workers enough money to actually buy the product they were making. Yet in a few years, this genius who had been so visionary became so inflexible that he nearly ruined the company. He reportedly said, regarding the Model T, "They can have it in any color they want, as long as it is black." For a long time, that was just fine. But then people began to get tired of black. America was also roaring into the 1920s with bigger, faster, fancier, brightly painted automobiles. And Ford kept insisting that the Model T remain unchanged since 1908. He insisted that was what America wanted and needed and he was not going to change his mind. Inevitably, upstarts like Chevrolet and Dodge began to erode Ford's market and seriously challenge the company's dominant leadership. At last, more rational minds prevailed and Ford admitted the need to produce better vehicle. In 1928, he launched successful the Model A. But Ford's inflexibility had brought the company to the brink of disaster and cost it a competitive edge it has never regained. The story of failure of each company and industry is different. Some are more straightforward than others. It's obvious when you look back that in the early part of the 20th century that ice companies, no matter how they resisted, would have to find something else to do because they were going to be replaced by electric refrigeration. It is not quite obvious how the majority of more than 3000 bicycle companies just disappeared while others morphed into the automobile business, and even, as the Wright Brothers demonstrated, into the airframe business. Clearly some folks were more flexible than others. 
  • 3) Isolate yourself. There're just a few things you need to do to create your own executive bubble. Start with your surroundings. Build your own bubble. Get yourself a great big office in some remote corner of the most remote executive floor and then shut the door. Never walk around the HQ office and talk to people. Don't bother to learn of your employee's name. Always lunch with only a few close members of your immediate staff in the executive dining room. Put a big sign: "Don't make the boss mad. Bring me no bad news." Create a climate of fear. With power comes responsibility, and power includes hiring and firing. Just scream and throw tantrums. Dress down people who make istakes in front of other people. Be rude. Act like a 2-year old child. To completely isolate yourself further, put yourself first in everything. When there's credit to be taken, take all of it. When there is blame to be taken, take none of it. If the spotlight of public attention turns toward your company, leap into that light and leave your employees and associates and everyone else who might have a helping hand way off in the wings. After you have hogged the limelight, in the unlikely event that you harbor some feelings of guilt, you can assuage some of those feelings by sending your hardest workers a nice X'mas card or something. Hogging the limelight does not guarantee failure but it does make great success very difficult. Among most truly successful people, they possess a self-effacing quality - an avoidance of the spotlight. If you read Warren Buffett's annual letters, you can't help but uncover that he lavished praise and credit on someone else. Strangely enough, it is when things go wrong that Warren comes on centre stage to assume responsibility. 
  • 4) Assume Infallibility. Never admit a problem or a mistake. If something seems to be heading in the wrong direction, cover up, or better yet, wait until you have a full-blown crisis, then blame it on some external force - or blame it on someone else. Customers are frequently troublesome. You can always blame whatever goes wrong on them. Annual reports, particularly those to shareholders, is often a place you see CEOs shifting the blame to something or someone else. When a company had a disastrous year, the Chairman's letter is frequently an artful exercise in fingerpointing at any number of causes ranging from unforeseen currency fluctuations, to the unusually active hurricane season. You have certainly read, many times possibly, that "mistakes were made." Timbers were caving in, dust is in the air, and the person in charge of it all blithely asserts, "mistakes were made." Implied, of course, is, "But not by me." That's what sets Warren Buffett apart in his legendary annual letters. If in a particular year, performance is not quite up to previous years or what might have been expected, he is quick to say "It wasn't good and it was my fault." Despite his virtually unequalled record for profitably allocating capital, he lays no claim to infallibility. In his 1996 letter to shareholders, for example, Warren noted the problems with Berkshire's investment in USAir and commented, "In another context, a friend once asked me: 'If you're so rich, why aren't you smart?' After reviewing my sorry performance with USAir, you may conclude he had a point."
  • 5) Play the game close to the foul line. If you play close to the foul line, you are not likely to inspire much trust on the part of your customers or employees and you will fail. Success is more permanent when you achieve it without destroying your principles as Walter Cronkite said. Trust is one quality Don wanted, not being loved or feared. Kmart and Wal-Mart were founded in the same year (1962). Yet Kmart filed for bankruptcy in 2002. Kmart had pursued a dangerous path, along the way, there were rumors and allegations of corruption and self-dealing on the part of executives. Indeed, a senior real estate executive with the firm was convicted of bribery. The truth is they played close to the line and in some cases, the court said they crossed it. One of the reasons corruption became more wide-spread, was because our whole social environment became less civil and more tolerant of bad behavior. In 1969, a famous experiment was conducted by Philip Zimbardo, a Stanford psychologist.  Two cars with no license plate and the hoods up were abandoned - one in the Bronx, New York and the other in Palo Alto, California. In the Bronx, the car was stripped and trashed in a matter of minutes. In Palo Alto, something quite different happened. For more than a week, the car sat there unmolested. But one day the psychologist himself took a sledgehammer and began smashing the car. Soon, passerby were taking turns with the hammer and within a few hours, the car was demolished. This experiment led to the "broken window" theory of crime - the idea that if a broken window is left unrepaired in a building, soon vandals will break the rest of the windows. According to the theory, it says "No one cares. Break a window and nothing happens to you. Break more. It's ok." To a degree, the business environment was suffering a similar fate. Little cracks in the body of ethics were being ignored. Another reason why corruption became more widespread is that we began to spend an inordinate amount of time catering to our valued friends who help to make "the market" - the Wall Street analysts.
  • 6) Don't take time to think. 
  • 7) Put all your faith in experts and outside consultants.
  • 8) Love your bureaucracy. If you want to get nothing done, make that administrative concerns take precedence over all others. Leaders of complex organization walk a thin line. There must be rules and routines in every business to maintain the proper rhythm in everything. Over time, however, it seems that inevitably the rules and routines become more important than the ends they were designed to serve. The rules and routines become rigid, obsolete rituals and obstacles to the positive energy of the system. The bureaucrats who control these rituals guard them with their lives because any change undermines their own power or authority. Gradually, the bureaucrats simply can and often do become a major impediment to progress of any kind and guarantee failure. And they do look busy! They churn out internal reports and memos. They cover their backsides with trails of thousands of emails and memos in the file. They go home at night complaining of how hard they work and in reality no single productive event has taken place all day. In such enterprise, failure is guaranteed. In the cattle business, it was clear if you kept the right mix of male and female animals you would end up with a lot more animals. Bureaucracies multiply in the same way and here is how it works: You put a manager in place and within 18 months, he or she has an assistant. The assistant becomes a junior manager and guess what? Another assistant. The beat goes on. There are layers upon layers of people yet when the customer calls, nobody's home. They are all in meetings. These meetings generate more paperwork, more emails, more calls, more meetings. In fact, most often there are even meetings to plan meetings. Meetings are the religious services of a great bureaucracy and the bureaucrats are fervently religious.
  • 9) Send mixed messages. Jack Welch had indicated that when he took over GE, the company was a jumble of mixed messages, with many longtime units on the brink of failure. At the Coca Cola Company in the 1970s, there were a number of situations where communication was, at best, misleading, especially to its employees and bottlers, but also to its retail customers. Like a parent who tells the child, "Clean your plate or no dessert!" The parent said it but didn't mean it. The child got dessert anyway. 
  • 10) Be afraid of the future. Most people find it sensibly to be prudently cautious regarding the future. It is not a crime to be cautious but when caution becomes the overriding modus operandi in a business, it can precipitate failure. You see it in football. Near the end of the game, the team with the lead begins playing it safe, cautiously protecting their lead. They quit taking the same kind of risks that gave them the lead in the first place. And too often they lose in the final minutes of the game. To quit taking risk is a serious risk!
  • Bonus commandment - Lose your passion for work and life. Nothing great in the world has been accomplished without passion. The old saying goes, "Tell me what you love and I'll tell you who you are." Love has been around a long time. The word comes from the ancient Vedic, or Hindu, word of the Sanskrit "lurb," meaning desire. A major component of happiness in the business world is finding something you love doing, whatever it might be, and then finding a way to do it. To have success you have to have a high level of unadulterated desire to get up and go to work. It's not that work has to be fun. That's a misconception promoted by some of the more giddy human resources people who like to talk about team spirit. Work, real work, is often very hard, exhausting at times. Rallying the troops is not telling people to have more fun. It's telling them to work harder because they are capable of doing better. They deserve for their own self-satisfaction to perform at a higher level. The hard work itself is what makes you tap-dancing into the office. It's that passion to solve the problems of the day. If you really want to fail, lose that passion for whatever it is you are doing. Get that spring out of your way. Say to yourself, "That's good enough." Or "That's not my job." Or "I don't care." Or "I'm retiring soon anyway." We all know people who have done this. They are the grey-faced automatons found in every workplace - the people who seem to stew in their own misery, cursing the darkness rather than lighting a candle. Even if they manage to make a good living, they are not successful - in fact failures - because they set such low expectations for themselves and those around them. All truly successful people express love for what they do and care about it passionately. They display such passion in their work so much so that if you asked them they'll tell you they can't imagine doing anything else. They seem almost so crazily focused on what they do. In recent times, it is common that one's career is span over many jobs at many different companies. It makes the notion of passion antiquated. How can you be passionate about anything that is going to last only a few years, and then you are going to move on to something else? What's the point besides getting more pay?


Penny Stocks said...

Luck is always a big factor in business success or failor.


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