Studies show that over 90% of startups fail. Even for those rare few that make it big, life doesn’t get much easier. In fact, only slightly more than 10% of the firms on the original Fortune 500 list are still in business today. Making an enterprise successful and keeping it that way is a staggeringly hard thing to do.
So it’s not hard to see why there has been so much effort devoted to narrowing down a company’s performance to a single factor. Some say that focusing on the customer is key. Others believe that building a great culture is the true path to success. Still others preach the gospel of developing capable leaders.
In The Halo Effect, IMD’s Phil Rosenzweig pours cold water on all of these. Firms that are successful, he points out, are perceived as being customer focused, having a great culture and building strong leadership, but when those firms hit hard times, critics claim that they are failing in those very same areas. To truly understand performance, we have to look deeper.
Peter Drucker once said that “the purpose of a business is to create a customer.” Sam Walton, the legendary founder of Walmart put it even more emphatically when he said, “There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else.”
The value of customer service has long been taken as an article of faith, but two academics, John Narver and Stanley Slater sought to quantify the effect by studying actual companies. Perhaps unsurprisingly, they found a high correlation between customer orientation and profitability, and the relationship held for both commodity and non-commodity business.
But not so fast, says Rosenzweig. What did the study actually measure? Reality or perception? For example, when Cisco was at its peak before the dot-com bust, it was said to have an “extreme customer focus.” But a year later, when things turned south, Cisco was criticized for “a cavalier attitude toward potential customers” and “irksome” sales policies.
Take a closer look at the Narver and Slater study and you’ll find that their method of research was questionnaires sent out to senior executives. So it’s not surprising that managers at successful companies felt that they were doing a good job by their customers and poorer performing companies felt otherwise, but that doesn’t really tell you much.
In Who Says Elephants Can’t Dance?, legendary IBM CEO Lou Gerstner wrote, “Culture isn’t just one aspect of the game—It is the game. Is it a culture that rewards individual achievement or team play? Does it value risk taking or consensus building?” Culture, as I’ve written before, is how an enterprise honors its mission.
So it makes sense that when researchers study corporate cultures they consistently find a strong correlation with performance. Happy, motivated employees result in happy, satisfied customers. The result is higher margins and an improved bottom line, pretty much anywhere anyone has bothered to look.
Yet again, there’s a serious question about cause and effect. Rosenzweig points out that when Cisco was flying high, it was said to have an unparalleled culture with shiny, happy people who worked long hours but loved every minute of it.” But when the market tanked, all of the sudden its culture came to be seen as “cocksure” and “naive.”
Is it really possible that a company’s culture can change so quickly? If so, what good is culture? Or are we merely seeing culture through the lens of performance? So when an organization is doing well, we see them as “idealistic” and “values driven,” but when things go sour, those same traits are seen as “arrogant” and “impractical.”
Take a look at any great company and you’ll find a great leader. IBM and Tom Watson. General Electric and Jack Welch. Apple and Steve Jobs. People who are seen as effective leaders are given stratospheric salaries and are lauded in the media. Business school case studies are written to help us understand just how great they really are.
Yet was this always true? In the 1950’s the average CEO-to employee pay ratio was 20-1. By 1980 that ratio grew to 42-1. Today, corporate leaders make more than 200 times what the average employee earns. Have leaders really gotten ten times better? If so, why are CEOs today getting fired so much more often?
The truth is that the idea of heroic leaders is mostly a myth. Leaders can do very little by themselves and so the quality of leadership is often in the beholder. No leader is perfect. All have an assortment of qualities. If an organization is doing well, then we see the positive aspects of leadership, but once things turn south, we are reminded of the things we don’t like.
So when earnings take a dive, the “tough but fair” CEO somehow becomes “an egomaniac”and the “inspirational thought leader” becomes “a quixotic fool.” It’s often hard to determine exactly which is cause and which is effect.
Clearly, it matters how businesses are run. Good leadership, an effective culture and customer focus are important. Still we shouldn’t get carried away. A study by Michael Porter and Anita McGahan found that less than a third of a firm’s performance can be ascribed to internal factors, while the rest was dependent on the performance of the industry and/or the corporate parent.
So instead of merely praising firms that are doing well and excoriating those that do badly, perhaps we should look at the one true thing that all successful companies have in common—sooner or later all hit hard times. Technology changes, markets turn and consumer tastes turn fickle. When any of those things happen, you will take a hit.
And if you look at anybody who has achieved extraordinary success, you will find that they transcend failure. Einstein couldn’t find a position as a professor and had to take a job as a clerk in a patent office. Michael Jordan didn’t make his high school basketball team. Steve Jobs was fired from the company he founded.
So instead of trying to find that magical skill or strategy which will rocket us to the top, we’d be better off preparing ourselves for the rocky road ahead. We are sure to falter at some point—and probably often—but that never has to be the end of the story. The only way to truly fail is to stop trying; the only true disgrace is to accept defeat.