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When strategy fails

Poor decision-making can kill a strategy if people in the organisation are unable to see it as a source of strategy failure. Lessons learnt from the worst CEOs of 2013

Sydney Finkelstein 

Sydney Finkelstein

Other than their spectacular failures, the five leaders whose actions landed them on my list of the worst would, at first blush, appear to have very little in common. They hail from all parts of the world and represent a range of industries, from retail to technology to natural resources. But dig a little deeper, and you will find they all share - or suffer from - common set of characteristics that led to their unique downfalls.

Microsoft's Steve Ballmer; of Sears; BlackBerry's embattled Thorsten Heins; former J.C. Penney CEO Ron Johnson; of Brazilian conglomerate OGX-OSX. Each failed in his own special way. At one end of the spectrum is Ballmer, who failed to capitalise on Microsoft's monopoly position to become a true leader across the board. At the other end is Batista, whose miscalculation on offshore oil led to billions in losses.

So what went wrong, and what can we learn from it?

As I noted in Why Smart Executives Fail, executives are, first and foremost, people. And people sometimes do things they shouldn't. We sometimes stick our heads in the sand and don't want to listen. We sometimes ignore feedback, fight change, underestimate difficulties, create our own reality, and tune out our customers. It is all of these very personal weaknesses that, when translated to the top of organisations, leads to failure. The margin for error at the top of complex businesses is very small. And that's why seemingly smart executives fail.

In my research, I have found that executives, regardless of how smart they are, are capable of making incredibly stupid mistakes. Sure, they may have terrific track records. But when they make bad mistakes, they often don't know how to quickly address and rectify them. Often, they magnify the damage by ignoring the problem.

The worst CEOs of the past 12 months all tended to be overconfident in their abilities, which only served to reduce their effectiveness as leaders. Eike Batista, Ron Johnson, and Eddie Lampert, all assumed that their success in one industry would translate to another, but their results proved just the opposite.

Eike Batista is a Brazilian entrepreneur who made his fortune in gold mines. He created inter-locking companies OGX-OSX to exploit oil fields off the coast of Brazil that supposedly held 10 billion barrels of recoverable oil. But Batista was overly optimistic in his forecasts and he underestimated the difficulty and cost of extracting oil deposits from salt, sand, and rock beneath the sea.

Batista is not experienced as a manager in this industry. He is, however, an incredible salesman and he convinced investors to put up $20 billion toward the project. Ultimately, he spent more time generating interest for it than on its execution and blamed everyone else when OGX and OSX stock dropped 95 percent in 2013. He personally lost 99 percent of his wealth.

Ron Johnson's failures at J.C. Penney have been widely reported over the last year. He unsuccessfully tried to apply Apple's to the retailer by repositioning it as a higher-end brand and redesigning stores to become sleek, hip places. However, he failed to appreciate how incredibly different the two companies and their customers and brands were. There was no testing of the - "We didn't test at Apple," Johnson famously said - and he showed no concern for risk mitigation. The result was $500 million quarterly losses and double-digit same-store sales declines. Under Johnson's watch, revenue at the retailer declined by more than $4 billion and its stock lost half of its value. He was fired in April after only 17 months as CEO. It remains unclear if the company will survive.

A successful hedge fund investor Eddie Lampert of Sears failed in the big box retailer space because he had no merchandising talent, no innate understanding of the business of retail, and no ability to organise or motivate employees. His approach - cut costs, sell assets, buy back stock - was a financial rather than a retail one, and the results were as one would expect: 27 straight quarters of declining sales; a net loss of $800 million through the third quarter of 2013; and a debt of $7 billion versus $600 million in cash.

BlackBerry's Thorsten Heins and Steve Ballmer of Microsoft, meanwhile fell victim to another common pitfall I identified: the failure to adapt to changing business circumstances.

Heins' first public comments after taking the helm of BlackBerry were that no drastic changes were needed. He also doubled down on the company's old strategy, which at this point was clearly no longer working. Two of its much-ballyhooed handsets, the Z10 touchscreen device and the Q10, which featured a physical keyboard, finally saw the light of day in 2013 after long development cycles. But by then it was too late: BlackBerry's die-hard fans had moved on. By the time Heins was fired on November 4, BlackBerry had suffered billion-dollar losses per quarter, shed thousands of employees, and saw its market cap decline by 43 percent in 2013 - and 60 percent over his 22-month tenure.

Ballmer's failure as CEO is different from the others in one important respect: made $20 billion net profit in the last year under his watch. But as they say, to whom much is given, much is expected, and Ballmer was essentially handed two monopoly franchises by Bill Gates. That he failed to do anything significant with it is incredibly disappointing. Consider that all these years later, Windows OS and Office still make up most of the revenue and profits at the company. Meanwhile, Balmer missed major opportunities in music (Zune versus iPod), phones (Windows versus iPhone/Android), and search (Bing versus Google).

The most important individual characteristic of great managers is the ability to adapt in real-time to change, a trait that was sorely lacking among all of the worst When given an incredible platform to not just compete but dominate in the Internet 2.0 world, could not shake his conservative caretaker mentality. When called on to lead the resurrection of J.C. Penney, could not shift out of the Apple mindset, regardless of how inappropriate that was for his new company. Much the same thing could be said for the others on the worst CEO list. There is simply no replacement for adaptability, openmindedness, and flexibility. And that's a lesson both experienced managers and those just starting out should heed.

Sydney Finkelstein
Steven Roth Professor of & Associate Dean for Executive Education, Tuck School of Business, Dartmouth