Genius-to-Folly Syndrome

Do we know how close to failure we may be? Our relentless competitive quest for more power and status may be our own undoing. Leaders who are prone to recklessness are the ones that are adapt in creating scenarios that reflect their own optimistic values and forward charging inclinations. We are most in danger when we begin to take for granted benchmarks of past progress and personal success.

Genius-to-folly syndrome is incredibly difficult to avoid. Although there is no universal set of early warning signs foreshadowing recklessness, here are six symptoms:

(1) Much of our time is spent plugging holes and papering over cracks even as we work to put the best spin we can on nagging substantial problems;

(2) Our disposition changes and we begin to punish the bearers of bad news;

(3) Our loyal aides and advisers (our subordinates, our friends, and colleagues) feel unable to bounce ideas off us, or more importantly, cannot collaborate with us on much-needed reality checks – - we have become the emperor with no clothes;

(4) Our self-importance brings on illusions of grandeur and infallibility – - we are defensive and so is everyone around us;

(5) We begin to feel entitled, to what we have and what we have achieved, as we seek yet more power and status – - we dismiss any notions of our own greediness;

(6) When we feel secure and in full control of our own destiny, we stubbornly refuse to take a timeout to take a look around and inventory our actual position.

What is most difficult to cope with is success. Risk-taking leaders in particular often begin to consider themselves to be exempt from the rules that govern other people’s behavior. Leaders who have demonstrated intelligence, resourcefulness, and the drive to succeed often become susceptible to uncharacteristic lapses in professional judgment and/or personal conduct. Further, success with risk-taking and rule-breaking frequently leads to a propensity to cast off self-restraint, prudence, and a sense of proportion. Often successful leaders become confused with the difference between nerve and talent.

Hmmmh….

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Stuck in Past Glory

Destructive leaders stubbornly rely on what worked for them in the past. When they find their company in decline, they revert to what they regard as tried-and-true methods. They do not consider how much the environment has changed. Instead of considering a range of options that fit the new circumstances, these leaders point to their past successes as the only point to reference. They cling to past “defining moments” – - what they are best known for and makes them special. They become unable to learn because they have learned one particular lesson too well.

Charismatic Dominance

Destructive leaders are consummate spokespersons, obsessed with the company image. They regularly display their remarkable charisma before the media. Their public persona inspires confidence amongst all employees and stakeholders. The problem is amongst the addictive accolades, their management efforts become shallow and ineffective disguised by the appearance of accomplishing things. The line between talking good performance and demonstrating same becomes blurred. Devotion to public relations leaves little time to attend to the critical details of the business. Further, as the company’s image becomes their top priority these leaders encourage financial reporting practices that promote that image. Financial accounting becomes a control tool. The culture becomes one of the entire company supporting public relations.

All Ahead Full

Destructive leaders underestimate obstacles. Typically they become so enamored with their vision of what they want to achieve, they completely underestimate the difficulty of actually getting there. When the real obstacles surface, they recklessly plunge full steam ahead into the abyss. Awesome expansion is rammed forward amidst a sea of bright red ink. They fail to hold back or reevaluate their course of action often because of an enormous need to be right in every important decision they make. Admitting to fallibility is not an option but believing in their own magic is. Recognizing that escalating commitment is getting out of hand becomes impossible. Courage in the face of adversity can be most devastating, and in fact, foolhardy.

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Creative Destruction

Creative destruction means we can’t sit on our business laurels; in fact, we must constantly abandon successes of the past. And, we have to realize that too much of our present day success is going to morph and atrophy – - – evolve in a negative way for our company.

Foster’s (Creative Destruction, 2001) analysis with associate Sarah Kaplan, in a McKinsey & Company study of corporate performance from that 1974 trough, yielded eight insights.

(1) Mature industries basically perform as the economy does. Investing in mature industries does not yield any effective diversification.

(2) Most corporations perform as their industries do – - “your industry is your destiny, which CEOs really hate hearing”.

(3) Some dynamic industries both out-perform and under-perform the economy but such performance is extremely difficult to sustain.

(4) High-return industries attract more competition than lower-return industries.

(5) The pace of change in the American economy is driven by the spread between debt and the long-term equity yield. “The spread acts like a switch on the economy”. A significantly positive spread leads to enormous innovation and productivity growth. A negative spread kills productivity, M&A activity, and initial public offerings.

(6) R&D spending does not correlate in any simple way with shareholder returns. He states internal efforts to generate new technology don’t correlate until a wider view of licensing, acquisitions, information acquisition, and information application are brought into the picture.

(7) Age matters – - young companies are able to grow quickly.

(8) Long-term performance is elusive although there are periods of time when companies have extraordinary performance:

The overriding point is that while businesses can grow quickly during certain periods of time, these periods always end. The strong performance of these companies is not evidence that they had learned the lessons of perpetual exceptional performance, but rather that they had found a formula that lasted for a while, but not forever. No one escapes the pull of economic gravity. Innovation on an ongoing never-ending basis is crucial to sustain growth.

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Do we have to INNOVATE to stay on top?

If we look at the stock market, the answer is yes. Its incredibly difficult to stay in the Dow Jones 30 or the S & P 500 for multiple decades; in fact, most participant companies have not been able to do it.

Three quarters of the companies that made up the S&P 500 in 1980 are either no longer part of it or have been placed in new industry categories (R.N. Foster, Live long and prosper. McKinsey Quarterly 1999). Foster further described the growth difficulty of the companies in the S&P 500 this way:

Of the 500 companies making up the S&P 500 index when it was introduced in 1957, only 74 remained there through 1997. Of these 74, only 12 outperformed the index from 1957 to 1998. If the S&P 500 now consisted solely of the companies on the list in 1957, the overall performance of the index would have been 20 percent a year lower than it actually was.

Foster and Kaplan (Creative destruction. McKinsey Quarterly 2001) say it is more difficult to stay in a market index today than a century ago. The 90 major US companies that comprised the Standard & Poor’s Index in the 1920s stayed there for an average of 65 years. They say by 1998 the average anticipated tenure of the company in the S&P 500 became only 10 years.

The magazine now entitled Forbes published the first list ever of the 100 largest corporations in America in the year 1917. 70 years later in 1987 Malcolm Forbes traced 39 of those remaining companies through to the then-present day. The investment return of the portfolio of those 39 companies was 20% lower than the corresponding market indexes. Long-term corporate survivors under-perform the overall market. Writing in 2003, Foster calculated that the long-term appreciation of the capital markets as a whole in the United States had yielded a total return of about 12%, about 3% lower than the total bond return. He also noted that in the 1973-1974 period 80% of the equity wealth in United States at that time was wiped out. He did not comment on the aftermath of the 2000 tech bubble that brought the NASDAQ, peak to trough, from about 5000 to about 1000 – - another 80% decline.

From 1997 to 2002 the Dow Jones Average grew at a collective annual rate of only 4.9% in revenue, 4.0% in gross profit, and .05% in after-tax profit. If the five strongest performers of Home Depot, Merck, Microsoft, Wal-Mart, and CitiGroup are excluded, the numbers drop to 2.3% and 1.6% respectively – - about the rate of inflation – - and after-tax profit goes negative (Treacy, Double-digit growth: How great companies achieve it – - no matter what, 2003). Growth is the key to the death or life of a corporation; what does not grow atrophies, withers and eventually expires.

And these days growth is dependant on innovation more than ever before.

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Will Tomorrow Be Like Today?

No!

We wish it would… and we live our lives like it will. We project an improved status quo on to the future. The truth is we just don’t see the forces that are shaping our soon to be new reality.

We need to detect what’s going on in the periphery of our world – what’s happening at the edges. It is at the outskirts of our day to day routine that we might notice change. We need to do more than notice though. We need to analyze whether those emerging forces are going to impact us now or later. Mega-forces and trend changes look insignificant and innocent as they start to surface. But their dynamics can turn our world upside down if we act like an ostrich and keep acting like tomorrow will look just like today.

We need to dig into the new social and economic trends and the psychological yearnings of those around us. Then we have a chance of anticipating and adapting. Extrapolating from the past is an exercise in self deception. Explore what’s new and why. Otherwise a tidal wave of surprise will be upon us.

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The Strategist

The strategist and the innovation leaders must not fight the people driving the current performance engine; instead they must forge a partnership with their polar opposite. Respect means understanding and appreciating the endeavors of “good people doing good work”. It’s called honor. Some would say they want to “embed innovation into the very fabric of their company”. However the necessary activities of the builders of future engines are of a counterintuitive nature; the ingenious mindset walks and talks differently than the everyday workers who are diligently putting their heart and soul into the welfare of the current performance engine. Happy coexistence is the goal, not conformity, not uniformity.

The key point to understand is that when it comes to innovation, it is more about the strategist than the strategy. Strategy fails, generally, in its execution. Contrary and hidden agendas top the main reasons strategy is not put into action. When there is organizational-wide alignment growth is inevitable. However, where consensus is lacking and conflicting beliefs prevail, strategy is almost useless. People will continue to work at cross purposes draining energy from the company’s vitality and purpose.

The strategist leads the dream. The strategist is the peacemaker and the balancer. The strategist is the evangelist. The strategist is the one who builds hope and offers a brighter future. The strategist is the one who builds harmony and embeds respect. The strategist is the one who gives a sense of identity and purpose. The strategist is the one who makes the dream come alive for everyone.

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Consensus and Leadership

Consensus is not acquiescence or unanimity. It’s not giving up what we believe in. It’s about coming to better beliefs, about understanding the corporate purpose in deeper and more intimate ways. It’s about the courage to come out of our particular silo and to quit protecting our little piece of turf. It’s about transparency across the board. That won’t happen too often if a competitive spirit prevails. So consensus gets built when the organization becomes a safe and happy place to live. That only happens when the strategist embodies the truest kind of leadership. That leadership has the deepest respect and desire for the welfare of every member of the organization, and just as importantly, the same respect and desire for the people they market to and serve.

Strategic innovation is about us living the dream personally, identifying our common purpose, and leading everyone together into the unknown future. The future is about a better life for those we serve. That’s why we innovate. The present is about delivering our best. The future is about delivering much better than that. That’s why we have to build future S-Curves while the current S-Curve is still vibrant. That’s why we have to stay the course while reinventing ourselves.

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Balancing Present and Future

Established companies strive to achieve ever higher levels of productivity and efficiency, in fact they evolve to deliver such. The focus becomes serving their customers better than their rival competition. The perspective is short term and the long-term priorities of innovation are obscured by the tyranny of the urgent. Trimble says “innovation and ongoing operations are always and inevitably in conflict”. Rewards are for short-term achievement, where every process and activity is driven to be as repeatable and predictable as possible. This kind of performance engine is very powerful in driving efficiency and effectiveness, at least as long as the marketplace stays constant.

However, the power of repeatability and predictability also establishes great limitations for new organic growth. Innovation becomes the last thing a manager is trained to do. Their view of their marketplace becomes narrower, not wider. Metrics drive everything except the most important metrics for innovation; what innovation must measure is too often excluded. In fact, organizational design relentlessly keeps resources and investment trained on the current performance engine at the cost of any emerging S-Curve possibilities.

Still, staying the course must live side-by-side with reinventing at least part of the company. Front and center must be the understanding that while the current Performance Engine is the mainstay of the company, the inevitable reality is that its existence is only temporary. The company’s survival and prosperity is going to depend on the development of new performance engines and new S-Curves. Within the organizational culture it is critical that a mutual respect develops between those that drive the present and those that develop the future.

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Focus on the Dream

In many ways, we might be right to ignore competition. Keeping our eye on the other guy tends to keep our focus on our “in common” activities. That tends to “sameness” that promotes commoditization and margin erosion in our similar offerings. By contrast if we focus on the “jobs-to-be-done” in our market, we will go where no one has gone before. We need to know what frustrates, scares and delights our customers. We need to be able to make their life easier and simpler. For that they will cheerfully pay us a premium. If we will live in their world, they will live in ours. So first we keep our customers happy, satisfied, by optimizing our current Performance Engine. Then second we love them by building new engines that will bring them what they’ve never had.

Building new engines, new S-Curves is critical to our growth, for without organic growth, we first atrophy and then later die. It’s all about direction. However, putting together a new performance engine is anything but easy. Chris Trimble says “Organizations are not designed for innovation. Quite the contrary, they are designed for ongoing operations”.

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Stay the Course – Reinvent Yourself!

To a business owner or CEO, “Stay the Course & Reinvent Yourself” may sound like a choice between continuing on a given path or choosing another. However, the truth is that innovative firms continue being one thing while becoming something else; they bridge a paradox, a duality. Let’s think of our business in terms of “Performance Engines” or “S-Curves”.

Lifecycles and S-Curves

An S-Curve can be thought of as a lifecycle of any particular product, service or business model. We can use an S-Curve to explain innovative business performance over time. Our businesses thrive by successfully delivering some form of innovation to customers or users. Our performance starts slowly as we launch a particular business (or new product/service line) on a somewhat tentative basis as we experiment to find the right business formula. We are in the red for a while but eventually we learn enough to make the formula work. As our grasp of our market increases, our business performance (now heralded – - not as a formula – - but as a business model) moves from red ink to solidly black. We breathe a sigh of relief as all our sweat and blood start to bear fruit.
Then as the attractiveness of our offering spreads our performance accelerates; often our growth looks like an exponential upward curve. Our numbers and graphs feel like “straight up forever” … and we gasp to keep up to a newfound pace. Exciting new plans (that later look ridiculous in hindsight) are made with wild goals. Our very success attracts envy and imitation. It’s not long before competition brings “me too” products to market; saturation with the accompanying erosion of margins and profits is the inevitable result. The best and brightest in our industry react with innovation and new technology. Our business model (and just about everyone else’s in our marketplace) hits obsolescence.

As growth moves from acceleration, to de-acceleration, to flat, to down what does not change is the cost of the infrastructure that was built to support that amazing growth. That overhead is rarely jettisoned easily in a decline and it may turn into a deadly millstone around our neck that kills our life’s work. Not all of us can do turnaround management.

Our Lifeblood: Performance Engines

The S-Curve by its directional shape takes us from down-sloping during the investment startup stage, to flat as we go from red to black, to rising as we make a fortune in the acceleration stage, to flat as we lose our differentiation and position, to down again as the world goes flying past us. That’s why it’s the job of the strategist to be continuously building new S-Curves or Performance Engines. That’s why we must both stay the course and reinvent ourselves.

It’s the job of every top officer to drive the current Performance Engine. The performance engine is the lifeblood of the company – – the way by which everything operates, breathes and grows in our world. High-Performance is often defined as “consistently and enduringly surpassing industry rivals in market and revenue growth, margins and profitability, total returns and cash in the bank”. When we are at our highest performance we often don’t even notice jealous competitors.

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