Death by ego
From time to time we see a long established, successful retailer suddenly free fall, lose significant marketshare, and even collapse. Why? In earlier articles I wrote about two possible explanations: failing to properly execute strategy, and losing market relevance.
But there is a third reason why retailers fail – success. Sometimes the very success of a business is the reason for its failure. Allow me to explain.
Companies that enjoy continued success can sometimes develop an arrogance about them. While this may be perceived as confidence, at times it can become overconfidence. At the executive level, this can lead to imprudent decision making, complacency about innovation and reluctance to acknowledge and act on competitive threats.
In share-trading circles, ‘overconfidence bias’ is a well-researched psychological phenomenon. For instance, companies that experience success and are driven to create more success sometimes divert scarce resources into new, riskier projects, starving or neglecting their core business.
Studies show that one in three entrepreneurs believe a project’s success is a certainty. In reality, about 75 per cent of new businesses no longer exist after five years. Overconfidence can create blindness to the possibility or likelihood of failure.
The well hashed stories of Kodak, Nokia, and Motorola all illustrate the concept of death by ego. In their heyday these companies were innovative and responsive to their customers, spurred on by an attitude of serial entrepreneurship. Yet their extraordinary successes may have also introduced a dysfunctional element into their corporate culture, which stifled innovation – complacency born of arrogance.
If we look at some of the best retail businesses that eventually failed, ego and hubris usually play a part. Owners and directors become so consumed by their own success that the business develops a willful blindness towards its business strategy, operation, and execution. As shoppers, how often do walk into a familiar store and think, ‘this isn’t what it used to be’? Wearing our consumer hats, we recognise that the retail experience we once craved has become stale and uninviting.
So, what are the tell tale signs? Typically they include:
- The brand becomes tired and its relevance questionable
- The product range delivers a sense of ‘sameness’
- In-store execution is apathetic
- Attention to ‘retail detail’ is lacking
- Organisational culture has become more about ‘what we did when we were at the peak of our game’ rather than ‘what we are going to do to be different now’.
Although successes should be celebrated, championing management to the point of worship (like Jordan Belfort’s staff praising him in the film The Wolf of Wall Street) breeds hubris and overconfidence. Instead, we believe management should maintain a healthy paranoia, constantly questioning, challenging, learning, paying attention to risks, and being open to the possibility of failure.
Ron Johnson, former CEO of JC Penney and architect of its bullish turnaround strategy, seemed to have the right idea when it came to tempering management’s attitudes. When quizzed on who was JC Penney’s biggest competitor, he answered:
“Our number one competitor is ourselves and our way of thinking, which is informed by decades of experience. It’s not another store; it’s not another format like the Internet. Our competition is ourselves and our best friend is our imagination”.
While Mr Johnson’s statement has significant merit, he was ousted as CEO just 18 months after his appointment. His legacy? About US$4 billion in revenue losses and plummeting stock prices that significantly reduced his $50 million personal investment. It is possible that Johnson’s successful career at Target and Apple contributed to his failure at JC Penney. Ego, hubris, and overconfidence are dangerous – for even the most talented retailer.
Culture can kill a company, just as it can propel a business to enormous success. The arrogance of success can be blinding and fatal. As Bill Gates said: ‘Success is a lousy teacher. It seduces smart people into thinking they can’t lose’.
In our experience, the most successful retailers are often those with the most humility and the best grasp of retail reality.
James Stewart is partner at Ferrier Hodgson.