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The Dangers of Wishful Thinking

From the January/February 2008 Issue

Too many U.S. businesses (including tires, super¬markets, and information technology) have been infected with the disease of denial. The answer? In Lincoln’s words, ‘We must disenthrall ourselves.’

Reality BitesIf you were to stop by Google’s Silicon Valley headquarters in Mountain View, California, it might be difficult to catch the attention of a company employee. When staffers are not working furiously to expand Google’s already thoroughgoing dominance of Internet searches and online advertising, they are likely to be busy taking advantage of the com­pany’s fabled perquisites, which include a buffet of free, wholesome food; a volleyball court; laun­dry machines; and even a bike repair facility. Or perhaps the employees would be lost in thought, pondering whether to sell options on a stock that at the end of November hit $676 a share. Google’s future has never seemed brighter. 

But if you did manage to buttonhole someone at Google and then offered a gentle warning that all the great things being said about the company today were being said—with just as much fer­vor—about Intel a decade ago, you would likely be met with a blank stare. In the mid-1990s, Intel’s semiconductor business was the talk of the Valley; its chief executive, Andy Grove, was selected by Time magazine as its Man of the Year in 1997. When Grove stepped down as chief executive in 1998, Intel’s market capitalization was almost $200 billion. Its compound annual growth rate during Grove’s 11-year tenure in the top spot was 42 percent. The decade since has hardly been as giddy. Intel is still a com­pany with great strengths. It is hardly a flash in the pan. But for the past few years, the chip­maker has struggled in the eyes of Wall Street and has lost market share to a once nearly for­gotten rival, Advanced Micro Devices (AMD). Not long ago, Intel announced a major restruc­turing, including the elimination of 10,500 jobs. Yet the company clearly must make other moves that are just as bold, or else it is in danger of los­ing its distinctive position in the world of high technology. 

Could Intel’s recent past be Google’s future? Or worse: could both Intel and Google find themselves one day following the path of General Motors? It is extraordinarily difficult for even the best-run company to maintain a commanding position year after year in its chosen industry. And the last thing that deci­sion makers want to do when they’re running a business at the top of its game is to remind themselves that bad things really do happen to good companies. 

They might prefer not to contemplate it. And yet the evidence is everywhere. 

  • IBM once dominated the world of data pro­cessing. The IBM 360 was given its name because it surrounded your data needs by 360 degrees. No more. 
  • In 1970, Sales Management magazine described the five big U.S. tire manufacturers as enjoying unthreatened control over their market. Within two decades, four of the five either were bankrupt or had been absorbed by other firms. 
  • The A&P supermarket chain was once the nation’s largest retailer. Today, it is a German-owned concern with stores in six states and the District of Columbia. As the once-mighty business appears headed for the proverbial dustbin of history, the only remaining ques­tion seems to be: paper or plastic? 
  • In 1896, Dow Jones established its “Industrial Average” of a dozen leading companies’ stocks. A century later, only one firm on that list—General Electric—has survived as an independent entity.
 

And then there was the president of the Carriage Builders Association, who said in 1899 that the idea that the automobile would some­day replace the horse was “a fallacy too absurd to be mentioned by intelligent men.” Every decade, every year, every day, eternal verities turn out to be fleeting. Received business wisdom often is not so wise. The unthinkable is happening all the time. Google founders Larry Page and Sergey Brin possess fortunes that together approximate that of the endowment of Harvard University. These billionaires are still in their early 30s. Harvard has been saving up since 1636. Are these young men’s paper fortunes any more real than the dot-com wealth that swelled in the 1990s and then vanished when the first Internet bubble burst? Should they—or the head of any other company with rocketing stock and rosy prospects—be thinking in terms of a retrenchment of the kind so common in business history, or should they be planning for more thrilling successes? Let’s think about it.

The last thing CEOs want to do when their business is at the top of its game is to remind themselves that bad things really do happen to good companies.

Denial of reality is so devastating to a business and yet so commonplace that it is worth asking why there is so much of it. Although denial is often, indeed usually, an invitation to catastro­phe, it is not invariably bad. Journalist Michael Kinsley has written astutely about the personal advantages of denying that he has Parkinson’s disease. Denial has enabled him to live a more normal life. 

Even in business, denial can at times serve a useful purpose. American lore is full of stories of people who succeeded against the odds. “They laughed at Edison” is a long-time riposte of the person attempting the seemingly impossible. 

People play the lottery because they hope they will win. After all, someone does. You can tell the people buying those lottery tickets that the odds of winning are worse than the odds of being killed by light­ning, but they will buy the ticket anyway. Perhaps, then, one answer to the question “Why denial?” is that a tendency toward it is built into all of us. 

But if business history proves anything, it is that this human penchant for denial must be over­come. You will pay for it if you do not look facts in the face with brutal, painful honesty.

At the heart of denial is language. People don’t listen to others, or pre­fer not to hear what’s being said. They often don’t even listen to what they themselves say. The example cited above of the passenger-car tire industry in the United States is instructive. For decades following World War I, the industry could best be charac­terized by the phrase “cozy competition.” Four of the five large incumbents—Goodyear, Firestone, General, and Goodrich—were headquartered in Akron, Ohio, a short distance from their biggest customers, the “Big Three” automobile manu­facturers. (The exception was Uniroyal, which, although located in Connecticut, played along with the other firms.) 

The four Akron companies were deeply enmeshed in the community, generously sup­porting civic organizations. “On Friday and Saturday night, everybody who was anybody in the tire industry drank together at the Portage Country Club,” an industry observer wrote. It was not unusual for an executive from each firm to make up a foursome for a round of golf. 

Life was sweet. Growth was constant. Replacement tire demand, the only profitable segment of the industry, increased almost every year for two decades following World War II. The toughest decision was where to build the next plant. Even though returns to investors were below the all-manufacturing average, no one seemed terribly bothered by this fact in the era before shareholder capitalism. 

Growth was constant. Replacement tire demand increased almost annually for two decades after World War II. The toughest decision was where to build the next plant.

Yet there was a menacing cloud on the horizon that threatened this placid picture. American tire manufacturers produced tires whose reinforcing cords crossed the tire’s body at an angle. But this technology, called bias-ply or bias-belted, was obsolete by the 1960s. Michelin, the privately held, secretive French giant, which played by its own rules, had been mass-producing radial tires since 1948. The radial, whose cords ran per­pendicular to the direction of travel and which featured an additional layered belt, was simply a better tire than the bias-ply. It lasted much lon­ger and increased fuel efficiency. This was no state secret. U.S. firms manufactured radials in their European plants for foreign markets. In the 1960s, the bias-ply tire lasted about 12,000 miles. The radial lasted 40,000. Soon Michelin would warranty its radials for 60,000 and even­tually for the life of the car. 

Remember, the superiority of radials over bias-ply tires was well known for years. This is an important point, because, as so often hap­pens with denial, the key issues are obvious in real time. They do not require hindsight. 

Everybody knew it. As early as 1968, Consumer Reports awarded five of its top six ratings to radi­als even though they accounted for only 2 percent of the American market. Once they were intro­duced in Europe, radials were quickly adopted by motorists. There was no reason to believe that the same pattern would not repeat itself in the United States. 

But radials rolled right over the U.S. manufac­turers’ business model. The tire companies made their money by selling replacements. A 60,000-mile radial lasted five times longer than a bias-ply. Where once there were multiple purchases of a manufacturer’s most profitable line, now there would be one. To make matters worse, convert­ing bias-ply plants into radial plants required heavy investment in new machinery and signif­icant changes in the production process. 

Thus, after enjoying a stable oligopoly for decades, the American tire manufacturers were confronted with technology that whacked them coming and going. They were called upon to make massive new investments in prop­erty, infrastructure, and equipment in order to manufacture a new product that would be less profitable than the old. But the tire makers didn’t face their new situation rationally. They pre­ferred denial. If the radial revolution were too terrible to be true, then it could not be true—because if it were, it would be too terrible. 

This is the point where language comes into play. The U.S. tire industry in the late 1960s began to disparage radial tires. Radials, it was asserted, required more maintenance than bias-ply. Radials, it was alleged, provided an excessively bumpy ride rather than the “pillow-soft” experience that Americans demanded. 

As one Ford executive declared in the 1950s, the United States “is a big country with big peo­ple and big dogs. The American buyer wants a Gary Cooper on wheels, not a baby carriage. He wants a car with hair on its chest. A car a Westerner would buy to take on long trips on wide-open highways.” Such a car demanded good old American tires. 

In 1968, Consumer Reports awarded five of its top six ratings to radial tires even though they accounted for only 2 percent of the U.S. tire market.

That was a faith American tire manufacturers clung to even as evidence to the contrary became overwhelming. As late as 1971, Goodyear CEO Russell DeYoung was predicting that radi­als would “remain a third choice for American motorists for many years to come.” 

As Fortune summarized the tire industry attitude, radials might be “okay for little doo­dlebugs scooting around on cobblestones, but not for the high-powered sofas on wheels that Americans piloted.” 

Some executives at U.S. tire companies were more clear-sighted, and they were able to formu­late effective strategies. But there were too few of these executives, and the strategies were not implemented. The old-line American tire man­ufacturers held on to the past until the rub­ber band snapped and they were overwhelmed by foreign competition. 

The tire companies can be indicted for myo­pia. They can be charged with self-deception. But they cannot be called unique. Their example has scores of close cousins. And don’t kid yourself: it is easy to laugh at the self-delusion of blink­ered executives, seductive to think that if only we had been there then, we would have seen the truth and acted accordingly. The simple, sad fact is that we are all more like them than we might want to admit.

In late 1862, the country was deeply mired in the Civil War. The realization across the land was that there was going to be no quick and easy solution to the hostil­ities. On December 1, Abraham Lincoln—with that unique combination of Shakespearean grandeur and legal practicality that was the hall­mark of his magnificent utterances—submitted his annual message to Congress. He said: “The dogmas of the quiet past are inadequate to the stormy present. The occasion is piled high with difficulty, and we must rise with the occasion. As our case is new, so we must think anew and act anew. We must disenthrall ourselves, and then we shall save our country.” 

By the time of this statement, Lincoln was fin­ished with denial—and he had done his share of willfully ignoring unpleasant facts. Substitute “company” for “country” in Lincoln’s call for a cognitive revolution, and you bring the discus­sion back to business. 

Falling prey to denial is easier in business than in many other endeavors. Corporate affairs are generally conducted behind closed doors, shielded from the harsh glare of publicity. Another factor is the metrics by which corporate conduct is mea­sured. Data are everywhere. Too often, figures can be used to obscure rather than reveal the truth of the perils a business is facing. Business history offers up countless examples of companies that cope with difficulty not by changing direction but by changing the measurement of the direction they have already chosen. 

Corporate affairs are generally conducted behind closed doors. Too often, data can be used to obscure rather than reveal the truth of the perils a business is facing.

How do you fight your way through the fog of wishful thinking to get to the truth? It isn’t easy, and there is no magic formula. But for one good example, let’s go back to the story of Andy Grove. He was born András Gróf on September 2, 1936, to a middle-class Jewish family in Budapest. In other words, he was born on the wrong side of history. He is likely the last chief executive of any company who survived both the Nazis and the Communists. 

For the first two decades of his life, before fleeing to the West, Grove found it an absolute necessity to know the truth. Denying reality could mean mortal peril while living under evil and oppressive polit­ical regimes. Grove learned from hard experience as a child and adolescent that if he failed to com­bine knowledge with effective action, he might not live to see adulthood. 

Thus, later in life, and in his tenure at the helm of Intel, Grove showed an unusually intense passion for overcoming the tendency toward denial. His need to translate knowledge into action resulted in a thought experiment that was exquisitely effec­tive—and easily lends itself to adoption by other business executives. 

From 1984 to 1986, Intel was having a hard time. The company had made its name by design­ing and manufacturing semiconductor memory chips. It became known internally and externally as the memory company. But by the mid-1980s, the heart of Intel’s market had been invaded by Japanese competition. In 1986, Intel lost money for the only year in its history as a public company. What to do? 

According to Grove’s own account in Only the Paranoid Survive: “We had meetings and more meetings, bickering and arguments, resulting in nothing but conflicting proposals.” The execu­tives were wandering aimlessly in the valley of corporate death. Then Grove asked his colleague and boss, Gordon Moore, the question that broke the logjam: “If we got kicked out and the board brought in a new CEO, what do you think he would do?” Moore’s response was immediate. “He would get us out of memories.” 

“I stared at him, numb,” Grove recalled, then asked Moore: “Why shouldn’t you and I walk out the door, come back, and do it ourselves?” 

This was a moment of truth for Intel. Grove had suddenly found a different frame for his decision-making. He was able to step outside the company and his role, regarding himself no longer as the subject but as the object. He looked at the com­pany’s predicament from a new point of view and reflected on it as a rational actor. By employing this device—this thought experiment—Grove was able to examine Intel’s position unencum­bered by its heritage as the memory company. “History,” Stephen Dedalus says in James Joyce’s Ulysses, “is a nightmare from which I am trying to awake.” Intel’s history had not been a night­mare. But by 1985, it certainly was a dream from which the firm had to awake. History can be a rocket engine for a company, but it can also be dead weight. Part of the manager’s duty is to sep­arate one from the other. 

Despite its recent challenges, Intel contin­ues to lead the world in the manufacture of the microprocessor, a technology as essential to the 21st century as the railroad was to the 19th. This is thanks, in no small part, to Intel’s conquest of denial two decades ago.

Denial versus facing the truth and acting on it: this is a high-stakes game. The rewards of success are the sunlit uplands of industrial leadership. The penalties of defeat—just look around. 

Historian Richard S. Tedlow is the Class of 1949 Professor of Business Administration at the Harvard Business School and author of “Andy Grove: The Life and Times of an American,” published in 2006 by Penguin. David Ruben is a research associate at the Harvard Business School.

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