Why Good Companies Go Bad

Topics: Radial tire, Harvard Business School, Tire Pages: 19 (6675 words) Published: September 5, 2010
Why Good Companies Go Bad
by Donald N. Sull

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W h y Good C o m pa n i e s Go Bad
by Donald N. Sull
When business conditions change, the most successful companies are often the slowest to adapt. To avoid being left behind, executives must understand the true sources of corporate inertia.


ne of the most common business phenomena is also one of the most perplexing: when successful companies face big changes in their environment, they often fail to respond effectively. Unable to defend themselves against competitors armed with new products, technologies, or strategies, they watch their sales and profits erode, their best people leave, and their stock valuations tumble. Some ultimately manage to recover – usually after painful rounds of downsizing and restructuring – but many don’t. Why do good companies go bad? It’s often assumed that the problem is paralysis. Confronted with a disruption in business conditions, companies freeze; they’re caught like the

Donald N. Sull is an assistant professor of strategic and international management at London Business School.

proverbial deer in the headlights. But that explanation doesn’t fit the facts. In studying once-thriving companies that have struggled in the face of change, I’ve found little evidence of paralysis. Quite the contrary. The managers of besieged companies usually recognize the threat early, carefully analyze its implications for their business, and unleash a flurry of initiatives in response. For all the activity, though, the companies still falter. The problem is not an inability to take action but an inability to take appropriate action. There can be many reasons for the problem – ranging from managerial stubbornness to sheer incompetence – but one of the most common is a condition that I call active inertia. Inertia is usually associated with inaction – picture a billiard ball at rest on a table – but physicists also use the term to describe a moving object’s

Copyright © 1999 by the President and Fellows of Harvard College. All rights reserved.

art work by edwina white


tendency to persist in its current trajectory. Active inertia is an organization’s tendency to follow established patterns of behavior – even in response to dramatic environmental shifts. Stuck in the modes of thinking and working that brought success in the past, market leaders simply accelerate all their tried-and-true activities. In trying to dig themselves out of a hole, they just deepen it. Because active inertia is so common, it’s important to understand its sources and symptoms. After all, if executives assume that the enemy is paralysis, they will automatically conclude that the best defense is action. But if they see that action itself can be the enemy, they will look more deeply into all their assumptions before acting. They will, as a result, gain a clearer view of what really needs to be done and, equally important, what may prevent them from doing it. And they will signifi-

cantly reduce the odds of joining the ranks of fallen leaders.

Victims of Active Inertia
To see the destructive potential of active inertia, consider the examples of Firestone Tire & Rubber and Laura Ashley. 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 was enjoying seven decades of uninterrupted growth. It sat atop the thriving U.S. tire 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. tire makers as their competitors, and


w h y g o o d c o m pa n i e s g o b a d
The women’s apparel maker Laura Ashley also fell victim to active inertia. The...
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