In a broad sense, what
leaders do is stage revolutions. They are constantly challenging the status quo
and looking around to see if they are doing the right things, or if those
things can be done better or smarter. And most importantly, when they do spot something
that needs to be changed, they do something about it. In more concrete terms,
they do two specific things:
- See reality size up the current situation as it really is, not as it used to be or as they would like it to be, and
- Mobilize the appropriate responses
This is a lot harder than
it sounds. Seeing reality requires that leaders remove the filters that screen
out the things they might not want to see, acknowledge their own and their
companies’ shortcomings, and accept the need for change. When you miss a
delivery, it’s easy to blame a supplier for not getting the parts to you on
time, or to blame the customer for having demanding specifications. It’s a lot
tougher to admit that your procurement system is messed up or to accept that
the failure to give the customer what he wants is your failure and not his
failure to be satisfied. Facing reality is about personally accepting the case
for change. This is often referred to as “acknowledging the burning platform.”
At Ameritech, former CEO Bill Weiss and current
CEO Dick Notebaert faced
reality by grasping the fact that the Chicago-based Baby Bell could not survive
without entering new businesses. Merely offering phone service, even reliable,
economical phone service, would no longer be enough. In a global
telecommunications market, it needed to be playing in more arenas. It meant
making the tough calls to stop doing some of the things it had always done, and
the even gutsier calls to build new businesses. Founders of new businesses
often see realities that older competitors in the field miss. Fred Smith
started Federal Express because he saw the reality that there would be an enormous
demand for rapid delivery of packages in the new global marketplace and that
this would make the economics of setting up such a service highly favorable.
While people already in the business fretted and complained about the
difficulty of modernizing older delivery systems, Smith set out to build a
completely new one. In retailing, while others were battling for the Pocket books
of America’s increasingly urban populace, Sam Walton saw the reality that there
was a huge customer base in small towns across the country that was being
ignored. His response was to create a company that revolutionized the concept of
the general merchandiser. The founders of Southwest Airlines had a different
sense of reality about air travel when they began offering short-haul, low-fare,
no-frills flights. That Southwest Airlines has become the most consistently
profitable American airline is a testament to the reality that Herb Kelleher and
his colleagues defined. While their competitors were looking inward, trying to
maintain “business as usual” and doing a bit of fine-tuning around the edges,
Smith, Walton, and Kelleher were looking outward to see what was actually going
on with real customers, in the real marketplace, and taking the radical actions
needed to please them. In established businesses, seeing reality is often more
difficult because it means letting go of ingrained ways of thinking and
working. Andy Grove of Intel, in his book Only the Paranoid Survive, describes
the shakeouts in the computer industry in the 1980s as some companies—including
Intel and Microsoft—adapted to new realities, while others such as IBM, DEC,
Sperry, Univac, and Wang failed to do so. As Grove explains it, around 1980,
there were several successful computer companies that had proprietary designs
for the chips and hardware in their computers, as well as proprietary designs
for the operating systems and application software that ran them. These
companies sold their large and expensive machines through their own sales and
distribution networks, and they all made lots of money. Grove calls this the
vertical period of the computer industry, because each company was a
self-contained, vertically integrated player. Then the invention of the microprocessor
changed everything. The microprocessor carried the same power as its bigger brethren,
and the same microprocessor could be put into any desktop computer. Suddenly, a
dozen different companies, including Compaq, Packard Bell, Hewlett-Packard,
IBM, and others, were able to start making and selling virtually the same
high-powered computers. As advances in microprocessors accelerated, Compaq was quick
to adopt the latest technologies. In 1983, it introduced its first portable
computer eighteen months before IBM’s hit the market. The company, founded only
in 1982, reached $1 billion in sales in 1987, the shortest time ever for an
American public firm to reach this milestone. Michael Dell also spotted the
opportunity. As a college student at the University of Texas in Austin, Dell
had lots of energy and a love for computers and risk. He did not, however, have
much love or patience for attending classes. So rather than go to lectures
about business, he set about creating one. He would toil away in his dorm room lashing
together standard parts into uniquely configured PCs that delivered just what
his customers wanted. Dell saw that the new reality of interchangeable components
meant a massive opportunity for his business to reach millions of buyers. The company now does over
$5 billion a year in sales and continues to build all of its computers to order. Among those
who ignored the tide and clung to their old line industry maps was IBM. At
first it appeared that IBM was embracing the PC revolution. Its PC machines
were among the hottest-selling in the market. But deep down, IBM fundamentally misunderstood
the new shape of the industry. Grove, who personally witnessed the revolution
as a supplier to IBM, says the company was “composed of a group of people who
had won time and time again, decade after decade, in the battle among vertical
computer players. The managers who ran IBM grew up in this world. When the industry
changed, they attempted to use the same type of thinking regarding product
development and competitiveness that had worked so well in the past.” As an example, Grove cites
the development of OS/2. This operating system was technically outstanding.
However, IBM didn’t see the importance that open architecture and
interchangeability had come to play in making PCs attractive to customers, so it
was painfully slow in making OS/2 available for computers from other
manufacturers. It took IBM almost three years to sell 600,000 copies of OS/2
(of which very few were used), while Microsoft only needed ten months to sell
approximately 13 million copies of Windows 3.0. When IBM finally decided to
make some aggressive changes to OS/2, it was too late. Microsoft had captured
people’s imagination with Windows. OS/2 was a dismal failure, and a waste of
money for IBM. The same misunderstandings that plagued IBM’s development of
OS/2 virtually killed its efforts in PCs. Initially strong in PCs, IBM
squandered its lead in the 1990s by being a “laggard with products,” according
to Bob Stephenson, who took over the PC business in 1995. The company was a
“wholly unreliable supplier” as it clung to its vertical model for the industry
and behaved antagonistically toward retailers and resellers, who actually sell
a majority of the PCs in the U.S. It started to turn this around in 1993 and
was losing billions as late as 1994. It took the company until 1996 to fully
revamp its attitude and operations. Similarly, DEC failed to see the realities
of the PC revolution. The company had burst onto the scene and broken into the
mainframe dominated market in the 1960s with its minicomputers. But faced with
the next wave of technological development, the company was nearly killed in
the early 1980s because it stuck with proprietary designs. In 1984, its leaders
were still describing PCs as “cheap, short-lived, and not very accurate
machines.” DEC and IBM both almost died as the result of their leaders’ failures
to confront reality. As I think about their blunders, I imagine knights headed
for the battlefield. Decorated with medals from past wars and flush with
praises of others, they enter the battle confidently. But they enter it
blindfolded and are slaughtered mercilessly. From its peak value of $106
billion in 1987, IBM had destroyed approximately $80 billion in stock market
value by 1993. It also went from being ranked No. 1 in Fortune’s 1986 list
of America’s most admired companies to No. 206 in 1993. In 1987, DEC’s sales were
growing at more than 20% a year. It was the darling of Wall Street when its
stock hit a peak price of $199 before the 1987 crash. After demand for their
once-popular mini-computers began to lag, its “matrix” management system of
interlocking and overlapping committees was too slow to stop the company’s
downfall. At the close of the 1990 fiscal year, DEC reported it’s first-ever
loss as a public company. What followed were three years of poorly executed and ineffectual
turnaround plans that robbed even more value from shareholders. The company’s
market value, which peaked at $26 billion in 1987, had shrunk to $4.6 billion
in July 1992. That’s when founder Ken Olsen was ousted and Robert Palmer was asked
to try to save the sinking ship a job he is still struggling to do. Facing
reality is the first crucial step that leaders must take if their organizations
are going to respond appropriately. But that is just the starting point. Once
the leader has figured out the problem/challenge/opportunity, he or she has to:
- Decide on a response,
- Determine what actions need to be taken to deliver that response, and
- Make sure those actions get implemented promptly and well.
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