Inertia is why many good companies continuously fail

Many times over the years, companies that were seemingly very popular, profitable, and at the top of their game simply disappeared.

While many people will be left in a quandary as to why this occurs, the answer is simple: good companies fail when inertia trumps innovation.

In this article, we will discuss the thoughts of an article that appeared on the Harvard Business Review (HBR) website, providing key insights into this.

Firestone dominance which led to inertia

The HBR article points out that to see the destructive potential of active inertia, consider the example of Firestone Tire & Rubber. Both companies were leading players in their industries, and both failed to meet the challenge of change—not because they didn’t act but because they didn’t act appropriately.

As Firestone entered the 1970s, it enjoyed seven decades of uninterrupted growth. It sat atop the thriving US tyre industry alongside Goodyear, its crosstown rival in Akron, Ohio. Firestone’s managers had a clear vision of their company’s positioning and strategy. They saw the Big Three Detroit automakers as their key customers, they saw Goodyear and the other leading U.S. tyre makers as their competitors, and they saw their challenge as simply keeping up with the steadily increasing demand for tyres.

The HBR article adds that the company has become a monument to its own success. Its culture and operations reflected the vision of its founder, Harvey Firestone, Sr., who insisted on treating customers and employees as part of the “Firestone family.” The Firestone Country Club was open to all employees, regardless of rank, and Harvey himself maintained close friendships with the top executives of the big carmakers. (In fact, his granddaughter married Henry Ford’s grandson.) Firestone created fiercely loyal managers, steeping them in the company’s family values and in its Akron-centered worldview.

The company’s operating and capital allocation processes were designed to exploit the booming demand for tyres by quickly bringing new production capacity online. In the capital-budgeting process, for example, frontline employees identified market opportunities and translated them into proposals for investing in additional capacity. Middle managers then selected the most promising proposals and presented them to top executives, who tended to speedily approve the middle managers’ recommendations.

The article points out that Firestone’s long-standing success gave the company a strong, unified sense of its strategies and values, its relationships with customers and employees, and its operating and investment processes. The company had, in short, a clear formula for success, which had served it well since the turn of the century.

Then, almost overnight, everything changed.

Strategic frames become blinders

The article adds that strategic frames are the mental models—the mind-sets—that shape how managers see the world. The frames provide the answers to key strategic questions: What business are we in? How do we create value? Who are our competitors? Which customers are crucial, and which can we safely ignore? And they concentrate managers’ attention on what is important among the jumble of raw data that crosses their desks and computer screens daily. The strategic frames of Firestone’s managers, for example, focused their eyes on their competitors around Akron and their customers in Detroit. The frames also help managers see patterns in complex data by fitting the information into an established model.

But while frames help managers to see, they can also blind them. By focusing managers’ attention repeatedly on certain things, frames can seduce them into believing that these are the only things that matter. In effect, frames can constrict peripheral vision, preventing people from noticing new options and opportunities. Although Firestone competed head-to-head with Michelin in Europe and had witnessed the rapid rise of radial tyres there, its leaders still couldn’t see the French company as a serious competitor in their core domestic market. As a strategic frame grows more rigid, managers often force surprising information into an existing schema or ignore it altogether.

As a strategic frame grows more rigid, managers often force surprising information into an existing schema or ignore it altogether.

The article points out that, sadly, transforming strategic frames into blinders is the rule, not the exception, in most human affairs. Consider the disastrous evolution of France’s military strategy during the first half of this century. At the turn of the century, French military doctrine glorified attack, reflecting a belief that élan vital would prevail over all odds. But the attack-at-all-costs strategy proved disastrous in the trenches of World War I. As a result, the country’s military changed its strategic frame and adopted a purely defensive posture, which took concrete form in the Maginot Line, a series of fixed fortifications erected to protect France’s borders from German invasion. These fixed defences, however, proved worthless in halting blitzkrieg attacks. The hard-won lesson from the First World War became a tragic blinder during the Second.

Processes harden into routines

The HBR article points out that when a company decides to do something new, employees usually try several different ways of carrying out the activity. But once they have found a way that works particularly well, they have strong incentives to lock into the chosen process and stop searching for alternatives. Fixing a single process frees people’s time and energy for other tasks. It leads to increased productivity as employees gain experience performing the process. And it also provides the operational predictability necessary to coordinate the activities of a complex organisation.

But just as with strategic frames, established processes often take on a life of their own. They cease to be means to an end and become ends in themselves. People follow the processes not because they’re effective or efficient but because they’re well-known and comfortable. They are simply “the way things are done.” Once a process becomes a routine, it prevents employees from considering new ways of working. Alternative processes never get considered, much less tried. Active inertia sets in.

The article adds that, at Firestone, the routinisation of processes was one of the major impediments to an effective response to radial technology. The company ran into manufacturing and quality problems because it tried to accommodate radial production by just tweaking its existing processes. Fire-stone produced tyres that no one wanted because its capital-budgeting process promoted unnecessary investments in capacity—the capital outlays driven by frontline managers who, quite understandably, were not keen to volunteer their own plants for closure. And it failed to bring in people with fresh viewpoints because its executive recruitment and promotion processes concentrated on building loyalty and instilling a uniform mindset. Even as the company struggled with change, it continued to hire and promote “people like us.” In 1972, all of Firestone’s top managers had spent their entire careers with the company, two-thirds had been born and raised in Akron, and one-third had followed in their fathers’ footsteps as Firestone executives.

Relationships become shackles

The article adds that, in order to succeed, every company must build strong relationships—with employees, customers, suppliers, lenders, and investors. Laura and Bernard Ashley worked diligently to win the hearts of new customers, franchisees, and investors at every step of their company’s expansion. Harvey Firestone, Sr., maintained close friendships with his customers, provided loans out of his own pocket to struggling tyre dealers during the Great Depression, and socialised with many of his company’s top executives. Firestone, like many successful executives, wove the warp of economic transactions with the woof of social relationships to strengthen the fabric of their companies.

When conditions shift, however, companies often find that their relationships have turned into shackles, limiting their flexibility and leading them into active inertia. The need to maintain existing relationships with customers can hinder companies from developing new products or focusing on new markets. Kirin Brewery, for example, gained control of a daunting 60% share of the postwar Japanese beer market by building strong relationships with businessmen, many of whom had received the company’s lager as part of their rations in the army. In the 1980s, Kirin was reluctant to alienate its core customers by offering the trendy dry beer favoured by younger drinkers. Kirin’s slow response allowed Asahi Breweries to catch up and then surpass it as the industry leader.

Risk management is not only about external factors

Risk management does not stop when company leaders have a good idea of the external risk factors that could impact a company. It needs to be taken further, and a proper assessment of how a company responds to these risk factors needs to be taken into account.

Take Blockbuster as a classic example. When they saw that streaming platforms and downloads impacted their business, they did not respond to the risk appropriately, resulting in the disappearance of the brand. Telkom could have faced a similar fate when Vodacom and MTN rose in prominence. Instead, its leaders decided to focus on providing broadband internet at an affordable price, allowing the company to compete with its competitors at a reasonable price.

Every problem/challenge has a solution, provided your company has the energy to approach it with innovation rather than inertia.