This article was downloaded by: [Selcuk Universitesi]

On: 28 January 2015, At: 15:24

Publisher: Routledge
Informa Ltd Registered in England and Wales Registered Number: 1072954 Registered
office: Mortimer House, 37-41 Mortimer Street, London W1T 3JH, UK

Business History
Publication details, including instructions for authors and
subscription information:
http://www.tandfonline.com/loi/fbsh20

Why smart executives fail: Four case

histories of how people learn the
wrong lessons from history
Sydney Finkelstein
Published online: 18 Aug 2006.

To cite this article: Sydney Finkelstein (2006) Why smart executives fail: Four case histories
of how people learn the wrong lessons from history, Business History, 48:02, 153-170, DOI:
10.1080/00076790600576727
To link to this article: http://dx.doi.org/10.1080/00076790600576727

PLEASE SCROLL DOWN FOR ARTICLE

Taylor & Francis makes every effort to ensure the accuracy of all the information (the
Content) contained in the publications on our platform. However, Taylor & Francis,
our agents, and our licensors make no representations or warranties whatsoever as to
the accuracy, completeness, or suitability for any purpose of the Content. Any opinions
and views expressed in this publication are the opinions and views of the authors,
and are not the views of or endorsed by Taylor & Francis. The accuracy of the Content
should not be relied upon and should be independently verified with primary sources
of information. Taylor and Francis shall not be liable for any losses, actions, claims,
proceedings, demands, costs, expenses, damages, and other liabilities whatsoever or
howsoever caused arising directly or indirectly in connection with, in relation to or arising
out of the use of the Content.
This article may be used for research, teaching, and private study purposes. Any
substantial or systematic reproduction, redistribution, reselling, loan, sub-licensing,
systematic supply, or distribution in any form to anyone is expressly forbidden. Terms &
Conditions of access and use can be found at http://www.tandfonline.com/page/termsand-conditions

Business History, Vol. 48, No. 2, April 2006, 153170

Why Smart Executives Fail: Four Case

Histories of How People Learn the
Wrong Lessons from History
Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

Sydney Finkelstein

In a series of inductive case histories of leadership and strategy, we document the problem
of how executives often learn the wrong lessons from history. The costs associated with
such misdirected learning are significant, and often tally in the hundreds of millions to
billions in losses. These mistakes are seldom due to managerial incompetence or random
events, but rather are driven by common patterns of managerial behaviour. The case
histories of two American and two Japanese companies highlight how and why
apparently talented managers often learn the wrong lessons from history.
Keywords: Leadership; Failure; Strategy; Learning
Introduction
Senior executives create playbooks to guide managerial action, and sometimes as
much as the world changes they stubbornly hold on to those behavioural repertoires
they have relied on in the past. Rather than respond to their challenges and mistakes,
rather than actively learning from the problems of their competitors, they continue
unimpeded in their quest for certainty, stability, and conformity.
The historian Barbara Tuchman, the author of The March of Folly, coined a perfect
term to describe the behaviour of many executives who fail to learn, and learn the
right lessons, from history: wooden-headedness, which refers to the practice of
relying on preconceived fixed notions while ignoring or rejecting any contrary signs.
Just as Tuchman describes such examples of wooden-headedness as the refusal of the
French in 1914 to alter preparations for an invasion of Germany through the Rhine in
spite of evidence that this plan left the French particularly vulnerable to an
impending German march through Belgium and the lightly guarded French coastal
Sydney Finkelstein is Professor of Strategy and Leadership at the Tuck School of Business, Dartmouth College,
USA.
ISSN 0007-6791 print/1743-7938 online
2006 Taylor & Francis
DOI: 10.1080/00076790600576727

154

BUSINESS HISTORY

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

provinces,1 we wonder why historically innovative companies refuse to introduce

second generation products in spite of pleas from customers for precisely such
products.
In this article we explore the consequences of wooden-headedness in four major
companies. These four companies are very different Motorola, Sony, Wang Labs,
and Snow Brands, with two headquartered in the United States and two of Japanese
origin. And one of the four Wang Labs no longer exists as an independent
company. But as the profiles of these companies make clear, each was constrained by
history and key leaders of each took lessons from that history that were wrong. Our
purpose in discussing the four case histories is to highlight the interplay of history,
leadership, and learning, and how remarkably talented and successful leaders so often
learn precisely the wrong lessons from history.
Motorola: Mistakes in Innovation
Motorola was founded in 1928, and has had a long tradition of technological
innovation, including battery eliminators, the first hand-held two-way radio (the
Walkie-Talkie of World War II), the first television to sell for under $200 (in 1948),
and the worlds first pager. By the 1970s Motorola had developed its own brand of
microprocessor (becoming the primary supplier to Apple), and was solidifying its
reputation as a world leader in technology. Then came cell phones.
Developed in Bell Labs in the 1970s, Motorolas first cellular system began
commercial operation in 1983. By the mid-1980s, Motorolas success in cellular
telephony prompted an aggressive price-cutting reaction by Japanese manufacturers.
In 1986, however, the US Commerce Department shielded Motorola by declaring
eight Japanese competitors guilty of dumping charges, providing Motorola with an
additional competitive edge. Motorola thus became the worlds top cell phone
supplier.
Initial mobile phone users were hardly price-sensitive; cellular phones were
expensive, brick-like analogue devices that appealed to business people and
professionals whose lives depended on the ability to make and receive calls when a
phone line was not at hand. In the mid-1980s, cellular phones were practically
unknown; by 1996, some 85 million were in use worldwide. There was little doubt
that Motorola was well positioned in this business. As the then CEO Robert Galvin
Sr. said, we were the unbridled leader in analog devices around the world.2 From
1992 to 1995, Motorola seemed to prove that even a huge company, if managed
correctly, could rack up impressive growth, as revenues grew an average of 27 per
cent to $27 billion in 1995, while net income surged 58 per cent a year to $1.8 billion.
In 1994, as Motorola claimed 60 per cent of the US mobile market, an alternative
technology to the incumbent analogue cellular began catching the eye of wireless
carriers. The new technology was digital mobile telephony, first available through the
so-called PCS (Personal Communications System). Analogue technology transmitted
calls via sound waves. Signals were subject to interference, calls were frequently

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

155

dropped, and it was easy for interlopers to eavesdrop. On the positive side, since
analogue had been around for some time, area coverage was extensive. PCS on the
other hand could translate calls into digital signals: interference could be
programmed out, while security codes could be encrypted. On the negative side,
PCS could not roam (search for calling signals) and coverage was simply non-existent
as it was a brand new technology.
Critically, the powerful underlying economics of digital technology provided a
means to support true mass-market subscriber populations for the first time. As a
rule of thumb, digital networks could accommodate around ten times more
subscribers than analogue for a given slice of radio spectrum, due to the easy-tomanipulate (and compress) characteristics of digital technology. In essence, digital
technology could spread fixed costs over a broader user base, making individual use
cheaper.
These powerful technology economics enabled a consumer profile that was very
different from that with which Motorola was experienced. Unlike Motorolas usual
analogue cell client, such as successful business people, digital consumers were pricesensitive and less functionally and more aesthetically demanding. Additionally,
distribution channels for the new, cheaper digital technology would be different from
the incumbent ones.
As the leader in the cell phone business, and as the major American player (Nokia
was a Finnish company, Ericsson Swedish), it was natural that US wireless carriers
would look to Motorola as they made their move to digital. Consider what one major
telephone carrier customer had to say:
Were telling them we need digital, we need digital, we need digital. They come out
with analog Star-TAC. They were thumbing their nose at us. The sales folks they
knew. But everyone knew. We went to Shaumburg [Motorola head office in
Illinois] in 1993, 1994, but they didnt do anything. They told us we didnt know
what we were talking about. Even in 1996, after they missed the first wave of digital,
we told them we needed a dual band, dual mode phone, that this was all we would
be selling. These were not friendly conversations. But Motorola didnt do it; instead
we launched with Ericsson, then Nokia.3

Without a digital phone to offer telephone carriers, Motorola pushed hard to move
its analogue phones, creating considerable resentment from some customers. In one
instance, Motorola even tried to promote its analogue phones by offering incentives
to AT&T Wireless salespeople working at AT&T telephone shops. As one former
executive at McCaw Cellular (AT&T Wireless) recalled, Motorola hit on this crazy
idea that theyd offer incentives to our own sales force to promote analog. They were
bold and brazen in one instance they had to be physically removed from our
property.4
Of course, it was not just customers that were telling Motorola they wanted digital,
competitors were also doing so, though in a different way while Motorola did not
introduce a digital cell phone for years, the company held several digital patents it

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

156

BUSINESS HISTORY

licensed to competitors like Nokia and Ericsson. The royalties Motorola earned
provided clear evidence of the increasing popularity of digital, and acted as an early
warning signal on the direction of the market. Yet even with such incontrovertible
data on market trends and customer needs, Motorola chose to rely on internal
forecasting models that predicted carriers would be better off with analogue phones
than digital. In fact, three former Motorola CEOs Gary Tooker (interviewed 5 July
2001), George Fisher (interviewed 12 July 2001), and Robert Galvin (interviewed 21
May 1999) told us how the company was at the forefront of the development of
digital technology, making it clear that the cell phone story is not about missing out
on the next technology, but on choosing not to innovate and change when you had
the capability to do so.
So, Motorola had the capability to make digital cell phones, and had extensive data
to indicate the market was demanding digital. It could have competed from the start,
if not won, in the digital cell phone wars, but chose not to. Hence, we come face to
face with irrational behaviour in organizations.
It turns out that people and organizations conspire to sometimes produce
irrational behaviour, as they sometimes do brilliant behaviour. At Motorola, cell
phone division managers who had tremendous autonomy because of the
companys decentralized structure and because they were responsible for the fortythree million analogue franchise believed that what consumers really wanted were
better, sleeker analogue phones. One phone carrier executive heard this reaction to
his request for Motorola to supply digital phones: remember the old phones in
WWII carried on backs that is what your digital phone will look like. It cant be
done.5 Instead, Motorola focused its attention on Star-TAC, a design as small as a
cigarette pack, but still an analogue phone. Such smaller and cuter phones were
technological marvels, but they were not digital. Robert Galvin put it this way: when
one or the other thinks were so damned smart we got the answer . . . thats
arrogance.6
The former Motorola CEO Gary Tooker looked at the problem this way: some of
the leadership in the business at that time was focused too much on the short-term
profits and they werent spending enough for the future.7 While this view is factually
correct, there is more to the story. For years, the company operated with a highly
decentralized management system, with significant delegation of responsibility to the
operating businesses. While such autonomy often breeds focus and attention to
detail, at Motorola it also created a company of warring tribes that was exacerbated
by strong division-based incentives. This played out in two dysfunctional ways. First,
the warring tribes mentality disrupted co-ordination across divisions, so Motorola
lost considerable time when it decided to develop the chips necessary for digital
cellular in-house instead of outsourcing.8
Second, like many decentralized organizations, Motorola relied on division-based
incentives to motivate divisional managers. Yet each division also had to cover its
own costs of investment. The net effect may well have been that decision makers
thinking [in the cell phone division] was colored by the up-front costs they would

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

157

have entailed by shifting from analog to digital.9 Motorolas compensation system

created a short-term disincentive to take on the costs of the transition to digital cell
phones.
In the end, the Motorola story brings us back to leadership. When an organization
is unwilling yet perfectly capable of coping with change and satisfying clear and
persistent customer needs, there has been a breakdown in leadership. And this
breakdown does not stop with those immediately responsible for the decision to
stonewall customers demanding digital cell phones, but extends to the very top of the
organization where ultimate responsibility for strategy, structure, and culture surely
rests. To some extent, Robert Galvin acknowledges this: we were all lulled into a
situation of digital coming at the pace it did. We plain just made a bum decision.10
Yet cultural insularity and nominal divisional oversight have been part of the
Motorola system for years, and were allowed to propagate.
In the fast-moving cell phone business, by the time Motorola finally launched its
own digital phone in 1997, the competition was far ahead. The hit to market share
was dramatic. Motorolas US share peaked at 60 per cent in 1994 only to dip to 34 per
cent in early 1998, while Nokias share went from 11 per cent to 34 per cent during
the same time period.11 In June 1998 Motorola announced layoffs of 20,000 people as
it looked to cut costs in response to depressed profitability. So began a long series of
layoffs, restructuring, and re-strategizing that plagued the company for years.12
If you really want to understand a company, you need to understand its history.
One of the most common flaws in how we think about organizations whether we are
analysts, consultants, investors, or managers is to disregard the past in trying to
make sense of the present. Why did Motorola miss digital? One of the biggest
dilemmas in-house was deciding what type of digital to back. There were CDMA,
TDMA, GSM, all different standards with no certainty on which one would win out in
the US market, so Motorola waited. Years earlier it had found itself backing the nonstandard Apple in the personal computer business (Motorola made the microchips),
and it is likely there was concern about making the same mistake twice. So it waited,
until Nokia and Ericsson pushed it to the side even in the US market.
Culture is also a major component of history, and Motorola is known as an
engineering-driven company. Those who know the company well liken its mindset to
an internal think-tank; focus on the market and on customers is secondary. The
other distinguishing characteristic of Motorolas culture is its insularity. One
knowledgeable observer alludes to a fortress mentality, cut off from reality, in-bred,
with tremendous self-confidence, and a lack of concern with the outside world.13 If
this cultural profile is accurate, it is not hard to imagine how senior managers might
resist strategies that customers were demanding, or how arrogant attitudes might
emerge in dealing with customers.
One would think that learning would occur over time, and of course it does in some
organizations. But at others, like Motorola, the culture is so strong that there is
tremendous persistence in how systems operate and people behave, even from decade
to decade. Whether it is Motorolas history of being an innovative leader which is

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

158

BUSINESS HISTORY

pushed aside by more market savvy followers think car radios, televisions,
and . . . digital cell phones or its tendency to put technology above customers, the
results can be powerful. As one former CEO lamented to us, every time we stumble
significantly it is because we have been so successful in one generation of the technology
that we dont focus on replacing ourselves with the next technology quick enough.14
A culture as strong and successful as Motorolas is resistant to new ways of
thinking. In its essence, that is the challenge of innovation, whether it is creating new
cell phones, new stents, or new ways to deal with powerful customers. All
organizations have an installed base of ideas that define the managerial mindset, and
this installed base is very difficult to overcome. This is what made it so difficult for
the cell phone division at Motorola to accept digital phones as the rightful, and
immediate, replacement for analogue phones, and this is also what made it so
difficult for Motorolas top management to break out of the insular technology-overcustomers mindset. In both cases, what was lost was that healthy spirit of
discontent15 that helped define Motorolas innovative capability for years. What
appears to be irrational behaviour is often only too rational when the underlying
dynamics of organizations and people are considered side-by-side.
Sony: Learning the Wrong Lessons from History
Masaru Ibuka and Akio Morita founded Tokyo Tsushin Kogyo (Tokyo Telecommunications Engineering Company) in 1946 with a mission to be a clever
company that would make new high technology products in ingenious ways.16 With
the development of the transistor, the cassette tape, and the pocket-sized radio by
1957, the company renamed itself Sony, from the Latin word sonus meaning sound.
In 1967, Sony formed a joint venture with CBS Records to manufacture and sell
records in Japan. By 1975, with the launch of the Betamax home videocassette
recorder, Sony was in the big league.
The Betamax was a watershed for Sony. Here was a breakthrough product
offering consumers the opportunity to record and play their favourite TV shows or
watch movies whenever they wanted. Yet within two years a new videocassette
recorder (VCR) made by it arch-rival Matsushita using the VHS standard became the
product of choice for consumers. Why? Sony, working from a playbook that Apple
would pick up just a few years later, was more protective of its Betamax format and
less aggressive in aligning other electronics firms in its camp than was Matsushita.
When VHS started to take hold, motion picture studios began to release a larger
number of their library titles in that format, relegating Betamax to also-ran status
despite some technological advantages.17 We didnt put enough effort into making a
family. The other side, coming later, made a family, Morita later said, referring to the
fact that Matsushita had aggressively licensed its technology and created an
electronics industry-wide effort to unseat Betamax.18 As Mickey Schulhof, the
former President of Sony USA, later noted in Fortune, in the late 1970s we began to
recognize the need to take Sony beyond hardware. Through our experience with

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

159

Betamax, we discovered that the compelling motivation for the purchase of hardware
is software.19
As we saw with Motorola, history counts. If you want to understand a companys
strategy, you need to understand its history. And at Sony the history lesson was clear.
First came CBS Records, which Sony bought in 1988 for $2 billion. Convinced that its
record library had helped guarantee the success of the Compact Disc, Sony looked to
CBS Records to provide the software necessary to ensure the success of its new Digital
Audio Tape.
Not long after the CBS Records deal was finalized, Sony acquired Columbia
Pictures and its two production units Columbia and Tri-Star as well as a library
that included such classics as Lawrence of Arabia and contemporary titles like Tootsie
and Ghostbusters. Also under the Columbia umbrella was a syndicated television
operation that included hits like Married . . . with Children and Wheel of Fortune.
What did not come with the deal, however, was a CEO: the outgoing Columbia boss,
Victor Kaufman, told Sony that he would not stay on to run Columbia after the
merger. Sony had its candidate for a studio; now it needed a management team.
Sonys North America chief, Mickey Schulhof, charged with recruiting a studio
chief for Columbia Pictures, settled on Peter Guber and Jon Peters, who ran the
GuberPeters Entertainment Company (GPEC). Guber had credits for The Way We
Were and The Deep, and was, well, very Californian. When we spoke to Guber about
his track record, he told us: I first tap into my intuitive because I believe every
business decision is a creative decision. My intuitive really is the cartel . . . of all my
intellect, my experience, my observations, and my collective unconscious and I tap
into it because thats a place I have no fear . . . I focus on my macro-goal or macroopportunity before I go to bed to feed my unconscious.20
Peters made a name for himself co-producing A Star is Born with his thengirlfriend Barbra Streisand. In May 1980, Guber and Peters joined forces and secured
credits on many successful projects including Flashdance and The Color Purple.
Hollywood insiders, however, were critical of the team, especially of Peters notorious
temper.21 Steven Spielberg reportedly would not let the two on the set of The Color
Purple. Despite having his picture taken with the duo for the Oscar Rain Man won,
the ex-Columbia boss Frank Price claimed that they were never around while it was
being made.22 Nonetheless, there was no question that Guber and Peters had handson involvement in the highest grossing picture in Warner Bros. history, Batman.
The recent success of the GuberPeters Entertainment Company, along with
Gubers polished demeanour, was enough to convince Sony that it had found a
suitable management team for its studio even though Guber and Peters had just
signed a five-year contract with Warner Bros. This meant that, to get the dynamic
duo, Sony would have to purchase their production company, which it did for
$200 million, nearly 40 per cent above its market value. Guber and Peters split a
cool $80 million from the sale of their stock and, as studio chiefs, would receive a
salary of $2.7 million, a share of any increase in the studios market value, and a $50
million bonus pool (to be parcelled out at their discretion) at the end of five years.

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

160

BUSINESS HISTORY

Columbia Pictures was sold to Sony for $3.4 billion, which along with assumed
debt, brought the total cost to nearly $5 billion (a 70 per cent premium). Then, when
the Warner Bros. chief Steve Ross refused to let Guber and Peters out of their
contract at the eleventh hour, Sony ended up conceding to Warner (1) the portion of
its Burbank lot controlled by Columbia in exchange for Warners old MGM lot in less
desirable Culver City; (2) a 50 per cent equity stake in Sonys lucrative Columbia
House mail-order music club; and (3) the rights to distribute Columbias library over
its cable networks. The settlement terms were deemed so disadvantageous to Sony
that for weeks afterward they are the talk of the lunch crowd at Le Dome, where they
are referred to as Pearl Harbor Revenged.23 The total value of the settlement was
estimated to be over $500 million.
Sonys total acquisition bill for Columbia Pictures reached nearly $6 billion when
Guber and Peters took control.24 Almost immediately, the two embarked on a lavish
spending spree. The old MGM lot received in the Warner ransom went through an
extensive renovation costing almost $1 billion. Offices were decorated with antique
desks and chairs costing up to $26,000 each. In one famous instance, Jon Peters
approved a $250,000 decorating budget for a producer, something he would not
comment on when asked in an interview.25
Over the next two years, spending on production, management, and television also
ballooned. Overheads increased by 50 per cent to $300 million by 1991, some $60
million greater than other major studios, and its $700 million production budget was
nearly twice that of its competitors. The average Sony motion picture cost $40
million versus the industry average of $28 million. The excessive overhead and
production costs pinched the company in 1991 as the industry saw year-over-year
box-office sales slump 25 per cent in the worst take in 20 years. Management was also
unstable, as a succession of studio chiefs came and went, invariably with very
generous severance packages. Even Peters ($50 million and funding for a new
production company) left. The executive turnover at Columbia caught the eye of the
media and prompted Spy magazine to write, the hottest sport in Hollywood is Sony
Lotto a get-rich-quick scheme in which the lucky player is fired by the studio in
exchange for a fortune.26
Despite the spending and turmoil, Guber argued that $2 billion of Sonys money
brought a happy result Sony was number one at the box-office in 1991.27 In truth,
Sonys ranking in the early 1990s was largely the result of distribution agreements
with two small production companies, Castle Rock and Carolco (Carolcos
Terminator 2 alone was responsible for half of Sonys box-office take in 1991). Even
in Sonys best year, 1992, its $400 million operating income was entirely eroded by
interest and goodwill charges. With the Japanese recession, a slump in hardware sales,
and a rising yen against the dollar, Sony executives in Tokyo started to put pressure
on the studio to improve its results.
Sony decided to pull out all the stops for its most anticipated film of 1993, Arnold
Schwarzeneggers The Last Action Hero. The $90 million movie was to be the
showpiece for every type of synergy that existed between hardware and software: a

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

161

Sony movie filmed using Sony HDTV (High Definition TV) equipment; Sony
products prominently featured; a soundtrack released through Sony Music; and a
premiere in Sony Theaters equipped with Sonys proprietary SDDS surround sound.
Everything was in place except for one thing: one of the most expensive motion pictures
ever made was a box-office bomb. A string of less publicized but expensive losers
followed, paralysing the studio. By autumn 1994, Guber had gone nearly six months
without approving a script for production. Altogether, 17 of the 26 movies Sony
released in 1994 lost money, bringing the filmmaking loss that year to $150 million.
That was enough for Sony. On 29 September 1994, Guber resigned, but not
without extracting one last macro-opportunity a $275 million production package
that included an annual salary estimated between $5 and $10 million. Sony Pictures
market share, after climbing significantly in 199192, had returned to where it was in
1989, but the financial damage was yet to be revealed. The GuberPeters era finally
ended in November 1994, as Sony announced a $3.2 billion write-off related to
Columbia Pictures that wiped out nearly 25 per cent of Sonys shareholders equity.
Not long after, Sony USA President Mickey Schulhof would be ousted as Sony set out
to rebuild its motion picture operations. When asked what he might have done
differently, Schulhof said, perhaps they should have changed the management.28
What can we learn from Sonys acquisition of Columbia Pictures? Yes, they sank a
tremendous amount of money into the movie studio, and yes they did abdicate
management and even oversight to two Hollywood insiders that ended up costing
them even more money. But consider the logic behind the deal. Remember that
Sony then as now is first and foremost a hardware company, yet it believed that
the establishment of a new hardware technology required the availability of related
software demanded by the marketplace. This logic was a direct outgrowth of its
experience with the Betamax video recorder and the compact disk. Recall that the
popularity among consumers for VHS hardware spurred movie studios to produce in
that format, and Betamax died. CD players, on the other hand, took off because
Philips (which owned PolyGram Records) and Sony (through CBS Records) pushed
the product aggressively to customers in Japan, Europe and the United States.
While software is clearly an important driver in hardware success, there was
another dynamic at work that, while recognized by some at Sony, never really took
hold in its strategic calculations. That other factor, acknowledged by former Sony
Chairman Akio Morita, was the importance of building a family. With the Betamax,
Morita firmly believed that a stronger family was needed after Matsushita built a
more extensive alliance that undercut Sonys lead and made the need for Betamax
obsolete. In this analysis, the availability of format-specific software was a
consequence of the successful alliances created by Matsushita VHS video recorders
dominated the hardware market, so what else would software makers produce?
What is particularly interesting here is that the acquisition of Columbia Pictures
could only make sense if we accept the software logic and not the family logic,
because Columbia Pictures could never on its own have the market power to dictate
market acceptance of Sony hardware products. Controlling a movie studio was seen

162

BUSINESS HISTORY

as the solution to the old Betamax problem, and as the lever to promote Sonys new
HDTV and 8 mm video formats. Unfortunately, the lessons from the past were
incomplete and misleading software availability was a consequence, not a cause, of
market power.29

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

Wang Labs: When Leaders Refuse to Adapt

An Wang was an exceptional man, an inventor and innovator. He came to America
with little money, earned a doctorate in applied physics in 1948 from Harvard
University, and went on to invent the magnetic pulse memory core, a technology that
would be essential in computers for the next two decades. He was the first to develop
and realize the potential of the calculator market, and Wang was personally
responsible for numerous patents and product ideas. This quest for breakthrough technologies was not only his driving force, it was also embedded in the
culture of the company he created Wang Labs which grew to become a $2 billion
powerhouse.
The early years of the company were prophetic. As the Gods would have it, Wang
Labs was intertwined with IBM right from the start. The design for Wangs magnetic
pulse memory core was sold to IBM in 1956, but not before four years of arduous
negotiations. It did not go unnoticed that this deal closed just weeks before Wang was
awarded a patent on this technology; years later, he would suggest that IBM had
challenged his patent claim as a means of closing the sale.
In the late 1950s, Wang developed and patented a semi-automated phototypesetting device that increased the productivity of newspaper printing but, in a bungled
licensing agreement, lost exclusive rights to manufacture these machines. In need of
additional capital, Wang grudgingly sold 25 per cent of the company to a machine
tools company for $150,000, something he regretted for years.
The next two decades were good years for Wang. The introduction of the LOCI
electronic scientific calculator in 1965 literally began the desk calculator market,
which Wang dominated for the next five years. Riding the wave, Wang Labs went
public under much fanfare in July 1967, with Dr Wang personally retaining control
of over 50 per cent of the company. The Wang 2200 minicomputer and the cuttingedge 1200 BASIC word processing machine debuted in 1973, but it was not until the
company introduced a cathode ray tube-based word processing minicomputer in
1976 that Wang had his next big hit. Over the next four years, Wang introduced VS
(virtual storage) computers, its Office Information series, and its Integrated Systems
line, all cutting edge products aimed at the lucrative office-automation market. By
1978 Wang Labs was ranked as the 32nd largest computer provider, and cocky
enough to launch an aggressive television advertising campaign aimed directly against
the number one, IBM. An Wang brazenly proclaimed his company would replace
IBM as the dominant computer company in the world by the mid-1990s. As one
former manager told us, he had two suits, both gray, and in the breast pocket he
always kept a little chart showing how Wang Labs would one day surpass IBM.

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

163

This at a time when sales at Wang were around $3 billion and IBM was at $47
billion.
Momentum can keep you going for some time, but strategic breakdowns will
eventually catch up with you. The story of the word processor and the IBM PC
highlights this as well as anything. Rather than see the word processor as a product,
An Wang fell head-over-heels in love with it. While an innovating company must
truly be in love with the process of creating new products, loving an actual product is
much more dangerous. So when his son Fred pointed out that IBMs PC was a real
threat to the word processor, An Wang said, the PC is the stupidest thing I ever
heard of. Then, akin to Apples resistance to licensing its technology because no one
could be allowed to share in the aesthetic of Apple and later Macintosh, Wang was
not only slow to market with a PC but when the company did enter the market it
chose to use its own non-IBM compatible proprietary system. With one part
arrogance bred on past success, and one part attempted defiance of the emerging IBM
hegemony in PCs, An Wangs blind hatred of IBM created an unwinnable strategy.
Ever since he sold his rights to the magnetic core memory, he felt cheated and
exploited by the giant computer company and he would be damned if he would let
that happen again!
The story of An Wang and the PC almost a fable provided a window into the
closed world of Wang. Right from the beginning, An Wang had served concurrently
as President, CEO, and Director of Research, creating a benevolent dictatorship
where he retained ultimate control over every facet of the company. In a touching
story told to us by his son Fred, Ans desire for control even extended to the initial
public offering process:
At night hed read an Agatha Christie mystery before falling asleep. Hed usually
read a page or two before he would just fall off and the book would just plop off to
the floor. During the summer of 1967 just before the company went public he had
gotten hold of some handbook on taking companies public one of these coffee
table size books and hed take that to bed at night, read a couple of pages and
then youd hear the book fall because when that thing fell the whole house
shuddered. He basically read through that during the course of the summer and
was able to question and direct the investment bankers who helped us with the
IPO. He knew more about some of the things than they did just by having spent the
time reading through materials.

Where did this preoccupation with control come from? While there were almost
certainly psychodynamic attributes that contributed to An Wangs actions, and in
some respects Wangs behaviour is not much different from other CEOs of familyrun companies, there is also a history at the company that is revealing. An Wang
always thought that he gave up too much control when the company first went
public. He may well have felt that he was bullied and taken advantage of by IBM. And
he lost control of exclusive manufacturing rights because of a slipshod licensing
agreement. Much of what happened subsequently to Wang can be seen as an attempt
to avoid the mistakes of the past, but each solution turned out to be more toxic than

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

164

BUSINESS HISTORY

the problem it was meant to cure. These three events all centred on the theme of
loss of control drove Wang to make decisions that destroyed his company. Once
again, a key leader has learned the wrong lessons from the past.
With the market having shifted from word processors to PCs, and Wangs entry
stalling, the company was in trouble. The sales force did not want PCs Wang was
an also-ran in PCs, and besides, they made much more money on word processors.
The only problem was the word processor market continued to dip, eventually
going the way of centralized word processing pools in companies. Losses mounted,
and their effect was concentrated because of a decision An Wang had made during
the years of growth. Dr Wang was never happy that he had to give up so much of
the company when he went public, and he subsequently refused to dilute his
holdings to raise additional capital. Well, with limited opportunities for equity,
there is always debt, and Wang had managed to accumulate over $1 billion in debt,
including $575 million in bank loans by 1989. While the company struggled
through several more years, by 1992 it was over. Wang Labs for years one of the
most innovative companies in the computer industry filed for Chapter 11
bankruptcy protection.
Wang Labs died of self-inflicted wounds. That which made the company great an
obsessive desire by a benevolent and brilliant dictator to control every aspect of the
company led to its downfall. Wang Laboratories is a remarkable example of an
entrepreneurial start-up that never matured. Driven to control as much of his
personal environment as he could, and riding a wave of success that made him a very
wealthy man, An Wang made a series of fundamental mistakes that eventually
cost his company the longevity, and him personally the legacy, he so desperately
wanted.
Snow Brands: Not Learning from Their Mistakes
On 1 March 1955 nine elementary schools in the Tokyo area reported a major
outbreak of food poisoning affecting over 1,900 people. Two days later, Tokyo
officials announced they had found staphylococcus in low-fat milk produced by a
company called Snow Brand Milk. The company founded in 1925 as a farmers cooperative in Hokkaido, the northernmost island in Japan and a region known for
agriculture and dairy production was shocked when the contamination was traced
to Snow Brands Yagumo factory in Hokkaido, where a temporary blackout and
problems with new equipment caused the problem.
Snow Brands reaction was swift. CEO Mitsugi Sato immediately ordered a
product recall and halted all sales. He took out advertising space in all the major
newspapers to publish a public apology, and rushed off to the factory himself to
investigate the matter. Several changes emerged from this incident. Responsibility for
quality control and testing was consolidated in an independent division and multiple
layers of quality testing were integrated into the production process. Sato also set out
to instil quality into the culture of Snow Brand, distributing regular messages to all

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

165

employees about the importance of quality and elevating quality to a central position
in the companys credo.
These efforts were successful, and Snow Brand went on to become one of the most
trusted names in Japan. By 2000, the company was the largest producer of milk and
dairy products in the country, and a major player in other segments of the food
industry, including meat products. So powerful was the brand that consumers in
blind taste tests preferred a competitor, but favoured Snow Brand when the labels
were left on the product packaging. Snow Brand employed 15,000 people and had
consolidated sales of nearly 1.3 trillion (about US$10 billion).
Once again, company history can be remarkably important in understanding
strategic actions. At Snow Brand, the story of the Tokyo food poisoning was kept
alive for years. However, by the 1990s market conditions began to shift. Deregulation
enabled supermarkets to become larger and more consolidated, shifting bargaining
power from producer to retailer. Even well-known brands like Snow Brand were
pushed to lower prices as retailers filled shelves with their own private label store
brands. Seeking to meet profitability targets in this tough market, plant managers
looked to cut costs wherever they could. Factory production was stepped up not only
to keep up with demand but also to squeeze maximum capacity from existing
facilities.
The pressure to cut costs came up against the traditional Japanese consumer
preference for product freshness. Japanese food producers historically labelled
perishables with the production date instead of the expiry date. Milk production
followed what was known as a D-1 schedule milk was delivered one day after it
was produced. Product testing actually took place while the milk was already en route
to stores; even though the test required 16 hours, if problems were discovered there
was still time to recall the product. As pressure grew for product freshness, milk
producers even began a D-0 delivery schedule that brought the product to stores the
same day it was produced. Critically, the D-0 schedule prohibited timely testing of
product quality, increasing the risk of food poisoning. While the Ministry of
Agriculture, Forestry and Fisheries in Japan advised manufacturers not to deliver
within the D-0 window, some companies chose to continue the practice, including
Snow Brand. There was no margin for error.
The pressure for results ran right into a world of dramatically increasing retailer
power and consumer pressures for highest quality and freshness. Something had to
give, and it was quality. The Osaka factory started producing 100,000 tons of milk, far
above its 60,000-ton capacity. Production dates were disguised, milk that was
returned from stores was reused in other products unbeknown to customers,
numerous breakdowns in cleanliness occurred (for example, machine valves were not
washed or sterilized properly), and operational records were falsified.
The public knew nothing of this . . . until 27 June 2000. That morning the customer
service centre for Western Japan received a complaint that milk produced by the
Osaka factory was causing some people to become nauseous and sick. The first
complaint was quickly followed by dozens more, but the Osaka management took no

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

166

BUSINESS HISTORY

action. It did not contact head office in Tokyo either, and D-0 deliveries continued
for two more days.
The next day, 28 June, the Osaka public health office received a report from a
doctor concerning food poisoning apparently due to Snow Brands low fat milk.
Public health officials quickly started investigating the Osaka factory. The tainted
milk continued to sit on store shelves. The Osaka factory did not report any of this to
either the Western Japan branch office or corporate headquarters.
The Snow Brand top management was finally informed on the morning of 29 June
that milk from the Osaka factory was causing food poisoning. Later that day, at 4
p.m., the City of Osaka announced that Snow Brand milk was responsible for the
outbreak that had made more than 200 people sick. Finally, at 9:45 p.m. that evening,
some 60 hours after the first reports had come in, the President of the Western Japan
branch of Snow Brand Milk held a press conference where he admitted that the
companys products were responsible for the food poisoning. During this entire time,
Snow Brand milk remained on shelves and in customers refrigerators, exposing
additional people to the tainted product.
By 1 July, more than 6,000 people had become sick, and consumers and the media
were outraged that top executives in Tokyo had not even acknowledged the incident,
let alone taken responsibility. Finally, Snow Brand Milk President Tetsuro Ishikawa
held his own press conference, fully two days after the initial press conference in
Osaka and four days after the first complaints about food poisoning had been
received. Additional information about the bacteria was revealed at this press
conference for the first time, reinforcing doubts about the companys ability to
handle the crisis.
The demand for information and accountability continued. At a late night press
conference three days later, Ishikawa abruptly stopped answering questions and
rushed off to the elevator. Pursued by reporters who demanded that he continue the
press conference, he angrily yelled out at them from the elevator, I havent slept! A
reporter responded, So what? We havent slept either! Have you ever given thought
to the poor children who are suffering in the hospital? Ishikawa had no response, and
quietly agreed to continue the press conference. Captured on camera, this scene was
broadcast on national television over and over again, not only enraging consumers in
Osaka, but consumers, distributors and even Snow Brand employees all over Japan.
Two days later, Ishikawa announced his resignation.
The unsanitary and ill-conceived practices in the Osaka plant came to light in
subsequent investigations. In all, 13,000 people became ill in this incident, the worst
in Japan since World War II. Sales of Snow Brand milk declined by 88 per cent in July
compared to the previous year. Market share dropped from almost 40 per cent in
June to less than 10 per cent. The company swung from a net profit of 3.3 billion in
the fiscal year 1999 to a loss of 51.6 billion in the fiscal year 2001.
Remarkably, history repeated itself at Snow Brand Milk. The company consisted of
several subsidiaries besides the large milk business, one of which was Snow Brand
Foods a major Japanese producer of beef, chicken, and pork. In September 2001

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

WHY SMART EXECUTIVES FAIL

167

the Japanese beef business was hit with Bovine Spongiform Encephalopathy
(popularly known as Mad Cow disease). The Ministry of Agriculture, Forestry
and Fisheries reacted quickly to protect the beef industry and started a programme
the following month to buy back domestic beef that had to be destroyed for fear of
contamination.
With rapidly declining sales, and the same pressure to meet targets we saw earlier
with Snow Brand Milk, the temptation to cut corners re-emerged. Japanese beef is
considerably more expensive than imported beef, creating an illegal arbitrage
opportunity for Snow Brand Foods. Buying cheaper imported beef from Australia and
labelling it as Japanese beef, Snow Brand Foods submitted the beef to the Ministrys
programme and pocketed the difference. Unfortunately for Snow Brand Foods, the
government inspected one of the companys processing centres the following January,
and found 13.8 tons of mislabelled beef. Under pressure from the government and
consumers, the company voluntarily stopped selling beef and processed beef three
days later. Follow-up investigations revealed that the company had not only engaged
in similar practices in other processing centres, but had also been disguising the origin
of beef and pork for some time to enable higher selling prices.
It did not take long for the hammer to come down. On 1 February 2002 the
government brought charges of fraud and police raided headquarters and other
offices to gather additional evidence. After the milk poisoning disaster, the company
had essentially depleted its goodwill and actually ended up closing down the entire
Snow Brand Food subsidiary just three months later. Snow Brand Milk looked for
ways to isolate the damage and spun out some business operations to joint ventures,
including the manufacture and sale of powdered milk for babies. In addition, the
immediate aftermath of the scandal resulted in key asset sales and emergency capital
infusions from banking partners. Nevertheless, it appears that many consumers have
sworn off the brand and refuse to go back. All this has been reflected in a stock price
that sank to as low as 150 (from 600 a year earlier) before recovering slightly.
In looking back on what happened, it was almost as if Snow Brand management
was operating in a vacuum. Delivering milk on a D-0 schedule is about as risky a
strategy as you can imagine in an industry where 100 per cent safety and reliability is
required. One mistake is one mistake too many. In contrast to other high-reliability
organizations such as the military, nuclear power plants, and aircraft manufacture
and maintenance, the lack of production controls seems extraordinary. At Snow
Brand, there was a wilful attempt to avoid and bypass controls that had historically
been in place. Why?
There are three primary reasons. First, the pressure for results had built up to such
an extent that plant managers found themselves increasingly unable to extricate
themselves from riskier, and over time unethical and illegal, actions. At what point
does a drive for efficiency go over the line? How do managers in high-pressure
environments know where to draw that line? This is probably why revelations of
wrongdoing, or at least cutting corners, kept dribbling out from Enron, WorldCom,
and Tyco long after the initial scandal story broke. For example, months after Tyco

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

168

BUSINESS HISTORY

CEO Kozlowski resigned, we were still reading stories in the Wall Street Journal about
how the companys ADT subsidiary accounted for cancelled security alarm contracts.
And for a while it seemed as though the totality of WorldComs accounting mistakes
would increase week by week. When the culture is wrong, it permeates the entire
organization and leaves a mark so far down that it can take years to hear the other
shoe drop.
Missing throughout the Snow Brand story is senior executive leadership people
who not only can raise the profitability stakes but can also set unimpeachable ethical
standards and provide a guiding light to help meet those aggressive targets. In the
absence of clear guidelines on what is appropriate and inappropriate, some people
might push the envelope too far. Coupled with a tough competitive environment
and intense pressure for results, others might join them. Throw in a traditionally
loyal work force, and there is little expectation of dissent or censure that might
provide perspective and distance. Snow Brands managers were caught in a powerful
centrifugal force from which they could not extricate themselves. Yes, it is true they
did something that was wrong, but where was senior management?
Second, Snow Brands was not a culture where it is was acceptable to make or admit
mistakes. This was a successful company, a star company really, and one that had built
a reputation for excellence. When the milk poisoning hit, the Osaka managers were
shocked. You can almost see them saying to themselves for few would openly talk
about it that this was not really happening. Rather than acknowledge that something
had gone wrong, very wrong, Osaka managers created the fiction that they could solve
the problem themselves. Their resistance to even informing head office about mass
food poisoning speaks volumes about their confidence in containing the problem and
their incredible fear of admitting that their milk was bad. It is remarkable that Osaka
believed they could keep head office in Tokyo off the case; the notion that the
corporate office was preoccupied with the shareholder meeting was simply an excuse
to avoid informing their bosses. But while Osaka tried to figure out how to deal with
the disaster, the products remained on grocery shelves and in refrigerators, infecting
additional people that need not have been hurt.
Finally, in the case of both milk and beef, illegal practices and activities were going
on for some time before they were discovered. In fact, they might still be going on if
not for the milk poisoning, or the government inspection of beef plants. These were
not one-time transgressions but a steady pattern of inappropriate behaviour. These
practices could not have had such longevity if managers doubted what they were
doing. But, in dramatic contrast, it never occurred to Snow Brand management that
they could get caught! They were simply too good. This was a company with a stellar
brand name, a terrific reputation among customers. They could do no wrong . . . so
they did. The companys response to announcements of milk poisoning says a great
deal. No admission of responsibility, no formal investigations, and a CEO who makes
the ultimate public relations blunder by demonstrating a lack of compassion.
Meanwhile, none of this sinks in with executives at Snow Brand Foods, who proceed
virtually to repeat the disaster in the beef business just a few months later.

WHY SMART EXECUTIVES FAIL

169

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

Conclusion
Each of these case histories provides evidence for two critical insights that are at the
heart of this article. First, companies, and the people who lead them, are heavily
influenced by history. Sometimes the lessons of history are subtle, as in Sonys
misunderstanding of the importance of family in favour of a view that control over
software was paramount. In other instances, history acts as a blunt force for inertia.
Motorola could not decide which digital cell phone technology was going to be the
dominant one, to a large extent because it knew it favoured the wrong (at least
judging from potential market share) player in the personal computer business.
Similarly, An Wang was handcuffed by his own history of selling valuable technology
to IBM when operating funds were lacking, and losing partial control of the company
he founded. And sometimes both long and more current lessons of history are
forgotten, as was the case at Snow Brands.
The second major insight is that failing companies consistently heed the wrong
lessons of history. This is true both whether key decision makers are generally unaware
of history (how many people at Snow Brands around 2001 knew of the 1955 poisoning
outbreak?), or allow themselves to be dominated by history. This paradox arises
because history becomes encapsulated into the culture of an organization over time,
and cultures often form the strongest of organizational backdrops to decision making.
An arrogant culture of we know best permeated Motorolas dealing with the
customers who kept knocking on its door to order digital cell phones just as much as
Wang Labs culture of benevolent dictatorship dictated that An Wangs predilections
would govern that companys decision making regardless of the consequences.
For organizations seeking to avoid the disastrous outcomes that emerged from the
four stories profiled here, some solace may be gained by remembering not only that
history exists within the fabric of organizational culture, but also that learning the
lessons of history is not possible when leaders allow wooden-headedness to
predominate over open-mindedness.
References
Boyer, Peter J. Hollywood Banzai. Vanity Fair (February 1990).
Griffin, Nancy and Kim Masters. Hit and Run: How Jon Peters and Peter Guber Took Sony for a Ride
in Hollywood. New York: Simon & Schuster, 1996.
Klein, Edward. Lost Tycoon. Vanity Fair (May 1995).
Lardner, J., 1987. Fast Forward. New York: W. W. Norton.
Tuchman, Barbara, W. The March of Folly. New York: Ballantine Books, 1984.

Notes
1 Tuchman, The March of Folly.
2 Interview with Robert Galvin, Sr., former CEO, Motorola Corporation, 21 May 1999.
3 Interview with Emilio Echave, President of Eastern Area, AT&T Wireless Services, 20 Oct. 1999.

Downloaded by [Selcuk Universitesi] at 15:24 28 January 2015

170

BUSINESS HISTORY

4 Interview with Bill Oberlink, former President, Southeast Division, McCaw Cellular
Communications, 1 Dec. 1999.
5 Ibid.
6 Interview with Robert Galvin, former Chairman and CEO, Motorola, 29 May 2001.
7 Interview with Gary Tooker, former CEO, Motorola, 5 July 2001.
8 There is an irony in the use of the term, warring tribes. While the lack of co-operation between
divisions can be characterized in this way, Robert Galvin, the former CEO, pointed out how it
was exactly the absence of such conflict and dissension among executives in the cell phone
division, and between Corporate and the division, that was at the heart of the cell phone
problems in the mid 1990s. (Interview on 18 Dec. 2002.)
9 Interview with Robert Galvin, former CEO, Motorola, 21 May 1999.
10 Ibid.
11 Herschel Shosteck Associates, Ltd., Wheaton, Maryland (http://www.shosteck.com).
12 Motorolas global market share may have hit bottom in 2000, when it clocked a 15 per cent
share.
13 Quotations without attribution were drawn from interviews of people inside and outside of
Motorola who requested anonymity.
14 Interview with Gary Tooker, former CEO, Motorola, 5 July 2001.
15 Interview with Robert Galvin, former CEO, Motorola, 18 Dec. 2002.
16 Griffin and Masters, Hit and Run, 190.
17 The Beta format was actually picked up by broadcasters, where it survives to this day because of
its superior special effects and editing features.
18 Griffin and Masters, Hit and Run, 96. In addition, one of the reasons Sony may not have been as
aggressive as Matsushita in building a family is that many people within Sony believed that
Matsushita had copied the original Sony design. See Lardner, Fast Forward, 1512.
19 Fortune, 9 Sept. 1991.
20 Interview with Peter Guber, former CEO, Sony Pictures, 7 March 2001.
21 The stories of [Peters] tempestuous explosions are available on every corner in Hollywood,
stories of tantrums and bullying and even physical violence. Boyer, Hollywood Banzai, 190.
22 The Academy Award for Rain Man was given to producer Mark Johnson, who allowed Guber
and Peters to borrow it for the photograph. Klein, Lost Tycoon, 68.
23 Boyer, Hollywood Banzai, 135.
24 $3.4 billion cash plus $1.4 billion in debt for Columbia, $200 million for GPEC, and $500
million settlement with Time Warner. The $6 billion figure is quoted by Mickey Schulhof in
Klein, Lost Tycoon, 58.
25 In fact, Peters was one of a very small number of people we interviewed who agreed to an
interview but refused to allow us to quote what he said.
26 Griffin and Masters, Hit and Run, 320. The distaste with CEO compensation extends to some
CEOs. In an interview we did about Mattel with Alan Hassenfeld, Chairman and CEO, Hasbro,
Inc. on 28 June 2001, he said, I am sick and tired of people in general being overpaid . . . and
you see it happening day in and day out in Hollywood. I want to come back as a failed
Hollywood executive. You end up getting more for messing up than for succeeding.
27 Technically, they were not. Guber grouped Columbia and Tri-Star together. If Disney or
Warner grouped together all of their production units, they each would have had a higher boxoffice share than Sony.
28 Interview with Michael (Mickey) P. Schulhof, former CEO, Sony USA, 28 March 2001.
29 Matsushita responded to Sonys deal by acquiring MCA, creating a stalemate in the software
control game.