What are the core underlying reasons for why smart executives fail? What are the destructive syndromes that cut across all types of great corporate mistakes and are the real root cause of failure? We found corporate failures to have many parents, but the most critical of these were breakdowns in how executives perceived reality for their companies, how people within an organization faced up to their reality, how information and control systems in organizations were mismanaged, and how organizational leaders adopted spectacularly unsuccessful habits.

The usual theories of failure simply do not explain the corporate mistakes we studied. The causes of failure are not because executives are unintelligent; you don't have to personally know executives like An Wang, George Shaheen, Bary Bertiger, Marc Porat, Kun-Hee Lee, William Smithburg, Maurice and Charles Saatchi, Wolfgang Schmitt, and the rest to get a glimpse of their intelligence. Just look at what they created over their careers and you need look no further. The causes of failure are not due to unforeseeable events; as we saw in companies like Schwinn, Motorola, J&J, Rubbermaid, Wang Labs, and the Boston Red Sox executives actually knew what was happening but chose not to do very much about it. The causes of failure are not executional errors; executional errors are mere symptoms that hide a deeper explanation for why things go wrong. The causes of failure are not any of the other simple explanations that question executive motivation, leadership ability, honesty, or resource abundance. The real story is much more complex than any of these explanations, and much more fascinating.

Executive mindset failures are at the root of most large-scale business disasters. In fact, one of the inescapable conclusions from the research program is that billions of dollars are lost because of a kind of "cognitive failure." Executives will regularly send their corporation off in completely the wrong direction or fail to restructure it the way they should, because they have made a fundamental error in the way they are thinking about the opportunities and problems their business faces. We've seen this many times, whether it is Rubbermaid's inaccurate reading of what customers want and the power they have over these same customers, or the Boston Red Sox' inability to really understand how the game of baseball had changed in the early years of integration. Many of the great corporate mistakes we studied had at their heart a fundamental breakdown of managerial reasoning and strategic thinking, necessitating a careful analysis of how to combat these mindset failures.

Companies that get their picture of reality messed up don't automatically end up failing. In every instance there was something else that went wrong. Often there was no one around to challenge the status quo and ask the tough questions. We saw this problem at Quaker, where there was no one to challenge the Snapple acquisition; we saw this at Iridium, where there was no one willing to question the logic of that project; and we saw this at Motorola, Wang Labs, the Boston Red Sox, and others. But why do companies fall into this trap? What are the underlying reasons why such delusional attitudes develop in organizations, attitudes that legislate not only how executives behave within their own company, but also how they interact with critical outsiders like customers and suppliers as well? In the book, we describe "zombie businesses" that have all of these unfortunate characteristics, and that help account for many of the failures in our research.

Over the course of the research project, we were struck by how often organizations developed breakdowns in how information was managed, how people and systems were ineffectively developed and controlled, and how boards of directors proved so unsatisfying as the ultimate arbiter of vigilance in a company. What is remarkable about many of these breakdowns, however, is how often executives believe that if there is a control or system in place, it will do the job for which it was intended. In contrast, we found that every single organizational procedure is subject to break down in the real conditions under which companies operate. These breakdowns turn out to be very costly as they remove what should be one of the critical organizational mechanisms that protects against massive failure. Few companies with executive mindset failures and delusional attitudes can withstand the deterioration of the organizational safety net without failing.

When we dissected the corporate mistakes and failures we had observed, a pattern of ineffective leadership practices jumped out. These were not just minor misjudgments, but in many cases monumental miscalculations that could be directly traced to a small set of spectacularly unsuccessful leadership habits. There is a fascinating psychoanalytic dimension to this aspect of business breakdowns, but the general subject is still firmly within the domain of business management. However decentralized some businesses might claim to be in their decision making, the importance of leaders is still such that even the largest corporations can be rapidly brought to the brink of failure by CEOs whose personal qualities generate corporate vulnerabilities, rather than remove them. One of the most remarkable findings from the research must surely be that the same patterns of ineffective leadership held whether we were looking at honorable but flawed CEOs like An Wang and George Shaheen, or rogue CEOs like Dennis Kozlowski of Tyco, Ken Lay of Enron, John Rigas of Adelphia, and Steve Hilbert of Conseco.
Book Excerpt: Early Warning Signs for Failure »