Spring 2004 25

E X E C U T I V E F O R U M

Sometimes it’s easy to spot a company in the throes of failure. As soon as youwalk in the door, you feel a dispiriting lack of energy. Gallows humor abounds.People are on the telephone looking for new jobs. Sales are plummeting; profits

are nonexistent. Charting a path to the future takes a back seat to assigning blame forthe past.

A company I know exhibits none of these signs. It’s a company most managers wouldlove to work for. From the moment you walk in the door, you can feel the sense ofpride and energy. These people are the best in their industry, and they know it. Thecompany has an unwavering vision of what it is doing. It has a sales force that won’ttake no for an answer. There is zero tolerance for major screw-ups. The most re-markable thing of all is the company’s extraordinary team spirit. People from the CEOon down identify with the company to an unusual degree. If one component of thecompany is attacked or threatened in any way, all the others will spring to its defense.

This company seems to hold an enviable position—but it is actually a disaster wait-ing to happen. In fact, it may be a disaster that has already happened, a walking corpsethat just doesn’t yet know that it’s dead—because this company has created an insu-lated culture that systematically excludes any information that could contradict its reigningpicture of reality. Companies that cultivate these positive qualities to excess become“zombie businesses.”

For six years, my research team at Dartmouth’s Tuck School of Business carried out anextensive investigation of business breakdowns—not just missteps, but major businessfailures.We looked at Motorola’s failure to shift from analog to digital cell phones, Irid-ium’s even more disastrous foray into the satellite-based cell phone business, Rubber-maid’s ruinous battle of wills with Wal-Mart, the implosion of advertising industry

B Y S Y D N E Y F I N K E L S T E I N

Zombie Businesses: How to Learn from Their

Mistakes

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Leader to Leader26

heavyweight Saatchi & Saatchi, Johnson & Johnson’sfall from the top of the cardiovascular stent business,and scores of other disasters. At almost every one of the51 companies we investigated, we were able to inter-view people who could give us firsthand accounts ofwhat happened. In all we conducted 197 interviews of CEOs, former CEOs, other top executives, and mid-level managers.

We discovered that precipitous businessfailures are caused by four destructive pat-terns of behavior that set in, without any-one noticing them, well before a businessgoes under:

• Flawed executive mind-sets that throwoff a company’s perception of reality

• Delusional attitudes that keep this in-accurate picture of reality in place

• Breakdowns in communication systemsthat were developed to handle poten-tially urgent information

• Leadership qualities that keep a com-pany’s executives from correcting theircourse

Long before obvious danger signs appear,several of these syndromes can take hold ofexecutive behavior. People might continueto do business the way they always have,maybe even doing it extremely well. Butwhen a problem develops and things stop working theway they did before, managers have no way of know-ing because they are largely cut off from the outsideinformation they need.

What makes these zombie businesses so deceptive isthat they are usually happy zombies. They are so good

at shutting out unwelcome information that they haveno idea they have become zombies. Rather than reactand adjust to problems when they occur, leaders in a zombie business adopt the delusion that theirs is adream company.The mechanism that makes a businessinto a zombie consists of company policies and com-pany attitudes that are ultimately mind numbing, a cu-mulative effect of many small and seemingly benignpolicies that are ultimately destructive.

How to Spot a Zombie Company

The first signs that a company is turninginto a zombie will often seem like

symptoms of unusual health.The companywill be thriving, at least in some importantrespect, and its executives will be justifiablyproud of this success—they will announcethat they are “number one” in their industry.Nearly every company we studied was glo-rified as “number one” in some category andmade this status part of its self-image.Almostall of them trumpeted their front-runnerstatus in company slogans, displays, and ad-vertisements.Enron actually had a sign insidethe entrance to its corporate headquartersthat read, “The world’s best energy com-pany.” Later, this sign was changed to read,“The world’s best company.”

The problem is that when a company makesbeing number one part of its self-image, thebehavior that made the company number one

in the first place starts to change.The consequences of thisinward maintenance of status can be seen almost immedi-ately in the way employees of the company begin to treatothers from outside the company.They are polite but con-descending, since they believe they don’t have to listen toothers too closely because they already know better.Manyof the executives of failed companies were not only arro-

Sydney Finkelstein isthe Steven Roth Pro-fessor of Managementat the Tuck School atDartmouth College,and the author of

“Why Smart Execu-tives Fail.” He haspublished numerousarticles in the top

journals on strategyand leadership, and

has delivered speechesand consulted to manyleading organizationsaround the world.

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Spring 2004 27

gant—they were proud of it. For example, people whodealt with General Motors and IBM in their glory daysremember vividly the condescension with which thesecompanies regarded everyone outside their ranks.

A second sign of a zombie company is that a company’sunwavering vision of what it is doing takes on a mo-mentum of its own. After a while, the company willtend to do things not because they make any businesssense, but because they carry out the vision. Levi Straussis a perfect example of this unrealistic vision. It achievedicon status by its commitment to a distinctive, qualityproduct that changed little fromdecade to decade.Yet this com-mitment was also its downfall,as the company persisted in sell-ing its traditional products de-spite considerable evidence thatcustomers’ expectations werechanging.

The extreme form of this irra-tional sense of mission is thestrategy that could be called “If-we-build-it-they-will-come.” Acompany such as the satellite-based telecom Ir idium willforge ahead, fulfilling its visionof what it wants to achieve without pausing to con-sider whether the vision still makes sense. It will launchbillion-dollar satellites to provide cell phone servicelong after much more cost-effective traditional cellphones have become ubiquitous. From the outside, thiscompulsive drive to make improvements in obsoleteproducts and to complete obsolete projects can looklike madness. But from the inside, it will seem like loy-alty to the vision that made the company great.

The single worst aspect of this excessive loyalty is thatit prevents companies from hearing what their cus-

tomers are trying to tell them. They don’t just claim,“We know what our customers want.” They go fur-ther, claiming in effect,“We know what our customerswant better than they do, because we know what’s bestfor them, and eventually they’ll see it too.” This is ex-actly the attitude that drove companies such as Mo-torola to tell their customers that they didn’t needdigital cell phones when they came asking for them.

A final sign of a zombie company is a relentlessly pos-itive attitude that shuts out critical information fromoutside the company. While a positive attitude helps

to keep everyone happy—noone, least of all the executives,wants to disrupt the resultingpositive atmosphere by beingnegative—it also encouragesemployees at all levels to dowhatever the company asks. Inaddition to shutting out cru-cial information from outsidethe company, a relentlesslypositive attitude suppresses themost crucial information frominside the company. Peoplewill avoid mentioning unset-tling information or ideas be-cause bringing up such things

sounds negative.There is no reassurance to counter anemployee’s natural reluctance to be the bearer of badnews. When a company habitually assigns blame forfailures, no one who spots a problem is going to speakup. For this reason, when the cola from Coca-Cola’sBelgian plant was said to be making people severelyill, the company’s employees weren’t eager to investi-gate and were reluctant to inform senior manage-ment—creating a problem that would plague thecompany for years. Gradually, the relentlessly positiveattitude will change the whole way the businessruns—it becomes a company of yes-men.

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Zombie businesses are

so good at shutting out

unwelcome information

that they have no idea

they have become zombies.�

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Countering the Forces That TurnCompanies into Zombies

The aspects of organizational culture just de-scribed—company pride, vision, loyalty, positive

attitude—often produce willing, enthusiastic employ-ees. Yet as soon as they begin to insulate a companyfrom things it doesn’t want to hear, they become arecipe for business failure. These are symptoms of a business organization that allows its reigning picture

of reality to become detached from the wider world,preventing any inadequacies from being discovered andcorrected.The problem is that you don’t want to eliminatethe qualities that are causing the trouble. You want tobalance them with qualities that will counteract their un-wanted effects. How do you do this? Fortunately, foreach of the qualities that tend to isolate a company fromcritical information, there are policies and techniquesthat leaders can use to compensate. See the sidebar fora summary of the key points.

How to KeepYour Company ResponsivetoOutside Developments

Compensate for companypride.

• Create internal advocates forstrategies and technologies in-troduced by competitors andby other outside firms that aretackling analogous tasks.

• Give someone the job of moni-toring competitors’ missteps andmaking sure that they’re avoided.

• Use partnering to bring in newideas and new practices.

Compensate for the com-pany’s vision of excellence.

• Make sure that the improve-ments the company most wantsto provide are the ones thecustomers most want to have.

• Make each top executive per-sonally responsible for dealingwith important customers.

Compensate for the com-pany’s positive attitude.

• Reward employees who canfind flaws or potential problemsin the company’s procedures.

• Make heroes of the “PaulReveres” who ride through the company warning that “theBritish are coming.” (But makesure they’re not really “ChickenLittles” announcing that the sky is falling.)

Compensate for companyperfectionism.

• Get senior managers to set the example when it comes toacknowledging and learningfrom failures.

• Use external benchmarks, es-pecially for routine operationsand centralized support services.

• Use devices such as “Mistake ofthe Month” to reward experi-ments that are unsuccessful whenit comes to producing financialreturns but highly successfulwhen it comes to producingknowledge returns.

Compensate for team spirit.

• Request minority reports andreports that aim at presenting thestrongest contrasting position.

• Create cross-functional teamsand diverse work groups whose members will see thingsdifferently.

• Seek critical evaluations fromgenuine outsiders.

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Protecting Your Company from Company Pride

First, if you want to prevent your company from turn-ing into a zombie, you have to counteract any tendencyon the part of employees to congratulate themselvestoo often. Under founders Bernie Marcus and ArthurBlank, Home Depot made a deliberate effort to pre-vent its managers from becoming too self-satisfied.“You won’t often hear us sitting around patting our-selves on the back,” the two explained in their book,Built from Scratch. “Want to know the management se-crets of The Home Depot? Number one, we are notthat smart. Number two, weknow we are not that smart.”

In addition to a general effortto avoid excessive pride, a num-ber of specific tactics can helpan organization protect itselffrom complacency. One tactic isto create internal advocates forthe competition.These are peo-ple inside the company whosejob it is to appreciate or cham-pion other firms’ strategies andtechnologies, and present criti-cal arguments for adopting them.Such advocates are usually mosteffective if they work in supportive teams. To make the advocate team effective, it will need to be given thesame incentives and support as the company’s other re-search and development teams.

An even more effective tool for bringing in new ideasand new practices is to launch joint ventures with part-ners who have very different strengths, making it clearto employees that a major goal of the joint venture is tomaximize learning from the partner company. This iswhat Toyota did when it partnered with GM to launchNUMMI in 1984.While GM was busy shutting out un-

welcome lessons that threatened “the way we do busi-ness around here,”Toyota was learning all the practicalskills it needed to run automobile factories in America.

Protecting Your Company from Its Own Vision

The biggest problem with a company vision is that ittends to take on its own momentum and becomes ex-tremely difficult to change.Yet small changes need to bemade constantly and big ones periodically. As MichaelDell of Dell Computer said in an article in IndustryWeek, “You have to be self-critical to succeed. If you sat

in on our management meet-ings, you would find that we area remarkably self-critical bunchwith a disdain for complacencythat motivates us.”

To reinforce this kind of think-ing, it is extremely helpful tomake each top executive per-sonally responsible for dealingwith real customers. Whilesome might complain that thistakes executives away from theiradministrative duties, that is ex-actly the point. Why does JohnChambers of Cisco talk to cus-

tomers several times a week? Why did Jack Welch ofGeneral Electric get involved in the details of sellingthings such as jet engines? It’s because they know thattaking responsibility for individual customer relation-ships—and making other senior executives do the same—is one of the best ways to discover what a company isdoing right and what it should be doing differently.

Protecting Your Company from Its Positive Attitude

Even if executives are in close touch with customers,there’s no way they can spot all the developments that

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A company vision

tends to take on

its own momentum.�

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might have a drastic effect on the company’s future.Thismeans that it may be worthwhile to reward any em-ployee who finds flaws or potential problems in the com-pany’s policies and procedures.DuPont has demonstratedhow effective such systems can be in its safety program.For many years, its employees have been actively en-couraged to report near-miss incidents without fear ofdisciplinary measures against themselves or their co-workers. As a result of this program, DuPont has one ofthe lowest rates of occupational injury of any company.

David Klatt, president of the Rubbermaid Group ofNewell and one of the key peo-ple charged with bringing Rub-bermaid back to its old glory,told our team this story: “Oneof the mentors I have is the guywho runs HR here. . . . He’s notafraid to come in here and shutmy door and say, ‘You know,David, you just missed this one.You screwed it up and here’show I suggest you fix it.’”Onceyou know about potential prob-lems, you have to bring them tothe attention of the people whoneed to act on them.This meansthat it’s vital to find ways to dis-seminate unpopular knowledge quickly across the orga-nization.One way to do this is make heroes of the “PaulReveres,” who ride through the company promptingpeople to take practical, cost-effective actions.

Protecting Your Company from Perfectionism

Perfectionist companies are afraid of making any mis-takes. But you have to allow for mistakes, as long asthese mistakes are part of an effort to do something dif-ferently. Executives should set the example for otheremployees by acknowledging their own small failures

and by participating in discussions of how those par-ticular failures might be avoided in the future. At eBay,for example, top managers explain what they did right,wrong, and very wrong, all in public forums. Employ-ees at these companies soon learn that it’s OK to makemistakes. In addition to facilitating change, this toler-ance helps people take responsibility for their actions,rather than make excuses.

When companies abandon their perfectionism andbegin setting more realistic goals, they need to makesure that they are measuring themselves by external

benchmarks, rather than bysome internal standard. In re-building IBM, for example, LouGerstner said (as reported in In-dustry Week),“The first thing wehad to do is reorient ourselvesfrom a highly introspective viewof the world to an obsessionwith the marketplace, both cus-tomers and competitors.” Giv-ing IBM a more realistic idea ofwhere it was genuinely deliv-ering value was a key step inbringing it back from disaster.

Finally, to protect itself morefully from perfectionism, your company should estab-lish a policy of rewarding experiments that are unsuc-cessful when it comes to producing financial returnsbut that are highly successful when it come to pro-ducing knowledge returns. Some companies even picka “Mistake of the Month.” In a staff meeting, the groupwill have each person acknowledge a mistake. Mistakesare then listed on a whiteboard and a vote is taken onwhich mistake taught the company the most. Byawarding a prize to the winner, the company can makethe point that it’s serious about getting rid of irrationalperfectionism.

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Make top executives

personally responsible

for dealing with

real customers.�

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Protecting Your Company from Too Much Team Spirit

All these methods of preventing a company from turn-ing into a zombie will only succeed if the company cancounteract the groupthink associated with too muchteam spirit. This means findingways to foster and preserve anyopinions that differ from theprevailing one. It’s these differ-ing viewpoints, after all, thatprovide the means to challenge,revise, and ultimately replacethe company’s reigning pictureof reality.

One technique for fostering dissent is to request a “mi-nority report”whenever the company is considering animportant new course of action.The job for those draft-ing this report is to make as strong a case as possible forwhichever alternative seems to be the second-strongestcandidate. Another technique is to build these contrast-ing visions into routine operations so that, much of the

time, minority reports aren’t even needed. One of themost effective ways to do this is to create cross-functionalteams and diverse work groups whose members will seethings differently.

You also might appeal to genuine outsiders, such as crit-ical evaluators from other busi-ness units in the same companyor from noncompeting compa-nies. Sometimes they can makevaluable contributions to an or-ganization’s thinking merely byasking basic questions.

Zombie businesses thrive in cul-tures that exude self-confidence,

pride, and even arrogance. They are in danger becausethey look so good. In fact, this is what makes such com-panies so delusionary in the first place. They adoptstrategies and initiatives that are never challenged untilit’s too late. Being alert to the risk of becoming a zom-bie business is a good start; active management of thoserisks is even better. �

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Foster and preserve

differing opinions.�