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Getting the inside scoop on corporate failure

Posted 03/22/03, by Mark Laser

Sydney Finkelstein is the Steven Roth Professor of Management at the Tuck School of Business at Dartmouth. Learn more about the book here: Why Smart Executives Fail

Let's say you're at the helm of one of the world's leading corporations and your firm loses billions when its sure-fire acquisition runs out of steam or its next big thing turns out to be not big enough. Or, worse, it becomes embroiled in a cataclysmic accounting scandal that brings down the entire company. Would you want to discuss it openly and on the record? Most of us have trouble talking about the inexcusable faux pas we committed at the company Christmas party two years ago or the oral presentation we fumbled during the quarterly review, let alone rehashing our role in a multi-billion dollar corporate meltdown. Yet CEOs and top executives from over a dozen corporations—from icons such as General Motors and Motorola, to dotcoms such as Webvan, to the infamous Tyco—were willing to do just that with Tuck School Professor Sydney Finkelstein as he conducted research for his forthcoming book, Why Smart Executives Fail: And What You Can Do to Learn from Their Mistakes (Portfolio, June 2003), which examines corporate mistakes and discusses how organizations can learn from them.

"I didn't expect the process to work as well as it did," admits Finkelstein, who with his team of researchers interviewed CEOs, former CEOs, other executives, and mid-level managers—197 interviews in all. "It was almost as if, in many cases, they were sitting by their phone waiting for our call so they could explain their side of the story. The honesty and the bluntness that emerged was surprising and remarkable." He cites, for example, one CEO who said, "I am sick and tired of people in general being overpaid...and you see it happening day in and day out in Hollywood. I want to come back as a failed Hollywood executive. You end up getting more for messing up than for succeeding." Another spent 45 minutes blaming everyone else—from his CFO to his customers—for mistakes that cost his firm hundreds of millions of dollars.

"It was almost as if…they were sitting by their phone waiting for our call so they could explain their side of the story. The honesty and the bluntness that emerged was surprising…."

-Syd Finkelstein

Why were the executives so willing to be interviewed for the book? In many cases, says Finkelstein, they believed an analysis that was more rigorous than the superficial coverage presented in newspapers and magazines, one that considered the vast complexities they faced, would cast them in a more favorable light and that a reinterpretation of the facts would exonerate them. "Many realized that something bad had happened to the company and were even trying to make some sense out of it for themselves during the interview," says Finkelstein. "Most welcomed the chance to talk to someone in the academic world, someone who was not just after a quick answer, but was interviewing a lot of people and conducting in-depth research."

Finkelstein notes that during an interview, which typically lasted 45-60 minutes, it was important to give the person the freedom to express his point of view. Often, this meant giving the interviewee a chance to describe the major highlights and successes of his career. This both served as a warm-up to the tough questions that would follow, and provided a perspective from which to better understand what went wrong. For example, when interviewed about Quaker's ill-fated acquisition of Snapple—a $1.4 billion-losing venture—former CEO William Smithburg talked at length about Quaker's earlier, extremely successful acquisition of Gatorade. "The Gatorade story was necessary to put into context why Quaker went after Snapple and why they fell into the traps they did," says Finkelstein.

During the course of their research—especially after hearing the executives describe their considerable achievements—it became obvious to Finkelstein and his colleagues that everyone interviewed was exceptionally bright, articulate, and perceptive, disproving the most common explanation for a business failure: that the CEO and other senior executives were unintelligent and incompetent. They also refuted another leading theory—that the executives didn't know what was coming—finding that none of the failures examined happened as a result of executives being caught off-guard by unforeseeable events. "Early on in the research, we discovered that virtually all the conventional answers to the question of why corporations fail are wrong," says Finkelstein. "That presented a huge puzzle that no one had looked at in depth before."

While solving the puzzle, Finkelstein and his team made several surprising discoveries. They found, for example, that in almost every case, the same underlying core phenomena occurred, cutting across time, industry, and geography. "Essentially the same patterns of failure explained the disasters of the 1980s and 90s that we considered, as well as the dotcoms and the recent scandals," Finkelstein says. "We also studied several foreign companies—from Japan, the U.K., Australia, Germany—and found the same thing." They also learned that when the going gets tough, CEOs often react just like the rest of us: they get defensive, don't face reality, have difficulty dealing with change, and sometimes choose not to respond even when they know they should. "We tend to view CEOs as celebrities and heroes," he says. "But they're human, too, with a full range of foibles and irrational behaviors."

These findings and others in the book have not previously emerged, says Finkelstein, largely because there's never been a comparable, comprehensive study on corporate failure. "The literature and business schools are dominated by 'best practice'—the best way to do things, how to get things right, how to be successful. Very seldom do we look explicitly at the other side, even though intuitively we always say we learn from mistakes."

Learning from corporate mistakes—from new business breakdowns, to the inability to cope with innovation and change, to the pitfalls of mergers and acquisitions, to bad strategy—is precisely the aim of Why Smart Executives Fail. The last two chapters of the book discuss explicitly how executives can identify cautionary signals and the common pattern by which mistakes spread through companies. "If you see the warning signs early enough, there are opportunities to step in. Or, if a mistake does happen, you can prevent it from cascading and getting out of hand," says Finkelstein. "If you recognize the pattern, I'm certain you can avoid corporate disasters." You can be certain, too—just read the book.

- Mark Laser

Dartmouth has television (satellite uplink) and radio (ISDN) studios available for domestic and international live and taped interviews. For more information, call 603-646-3661 or see our Radio, Television capability webpage.

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