Robert J. Herbold, former COO of Microsoft, is now the Managing Director of the Herbold Group, a consulting business focused on profitability, strategic and operational issues. He serves on the Boards of Directors of Agilent Technologies, Indachin Ltd., Hong Kong and First Mutual Bank. In 2001, he was appointed by President Bush to the President’s Council of Advisers on Science and Technology, and he currently chairs the Education Subcommittee of the council. Bob joined Microsoft in 1994 as an executive VP and Chief Operating Officer, retiring in 2001. During his tenure he was responsible for finance, corporate marketing, market research, manufacturing and distribution, information systems, HR and public relations. During his seven years as COO, Microsoft experienced a four-fold increase in revenue and a seven-fold increase in profits. Prior to joining Microsoft, Bob spent 26 years at Proctor and Gamble. In his last five years he served as a Senior VP of advertising and information services. His experiences at Microsoft and P&G were the basis of an article he authored in the January 2002 issue of the Harvard Business review, titled Inside Microsoft: Talent in Discipline and Creativity. He is also author of The Fiefdom Syndrome – The Turf Battles that Undermine Careers and Companies and How to Overcome Them. Very recently Bob launched his second book called Seduced by Success - How the Best Companies Survive the Nine Traps of Winning.
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KE: You’ve experienced a lot of success working with two of the world’s greatest companies. What caused you to put your energy into writing this work?
BH: I saw a lot during my 40 years in business. It’s amazing how companies, organizations and individuals constantly get themselves into trouble. Stepping back and asking, “What’s going on here?” caused me to get interested.
KE: Sir Martin Sorrel, CEO of WPP Group PLC, said, “This book rings painfully true.” What is painful about this topic?
BH: Success is a huge business vulnerability. Human beings are frustrating entities and they cannot cope with praise. They lose their sense of urgency and that is the core issue in this book. That’s what's painful. People seldom recognize that success comes with the gigantic risk of vulnerability.
KE: Thinking back to Jim Collins and Jerry Porras’s books Good to Great and Built to Last, some of the companies profiled as success stories are no longer doing well. In your view, were they seduced by their own success?
BH: Yes. Boeing, Ford, IBM and Motorola are examples of how incredibly successful companies end up with these kinds of problems. I go into each one in depth in my book.
KE: One of the companies you profile in your book is Kodak. Tell us their story.
BH: Kodak was at one time, the bastion of glory. If you look at the 1980’s and 1990’s, they faced two risks. One was the Japanese firm Fuji. Fuji looked at the cost structure of Kodak and thought it could do better. Kodak had too many people and its organization was too complicated. Fuji could create quality film at a reduced cost. The second was digital photography. In 1995, when I was at Microsoft, Bill Gates gave all of his employees a Sony digital camera that took floppy discs. It was an incredible device and was a sign of what was to come.
KE: What did Kodak do about the risks posed by Fuji and digital photography?
BH: Kodak’s stock prices dropped to $75 and 25% of the drop was due to Fuji. Kodak had no option but to lay off 20,000 of its 100,000 employees. It continued with its bureaucratic organization and suffered financially. Wall Street said that Kodak moved too slowly. By 1999 not much had changed and the stock price was down to $65. The film prices were off 70% from four years prior. Fuji was causing a major disruption. Kodak’s reaction was two-fold: one was to produce a camera called Advantix, and the second was to ask the CEO to step down. Advantix was the only digital camera that required film. This camera explained the problem with Kodak’s thinking. Wall Street declared that Advantix was Kodak’s most discouraging failure. It was an embarrassing situation for Kodak and an incredible example of how humans operate.
KE: For several years, Kodak did not wake up to the call for change. What happened next?
BH: Forward three years into the future. Their stock is at $40 from the $90 high. Digital is replacing film at the hefty rate of 30% in a year. Kodak and the new CEO launched a major effort against digital, which was preposterous. This is seven years after I got that Sony camera for Christmas in 1995. Kodak generated the funds to keep this effort together by cutting dividends by 72%, which was a huge mistake. The assessment by Wall Street was that they had lost confidence that Kodak knew what to do. Three years later, the stock price was down to $26 and digital was outselling film six to one. It was time for another CEO. Wall Street’s assessment was that the world was changing faster than Kodak could change. As the CEO walked out the door he said, “I saw my first digital camera at Kodak 20 years ago, I knew right then that this company was going to transform itself.” It’s a sad story. Kodak was one of the most admired companies in America.
KE: The CEO said that he knew the company was going to transform itself. Somehow there was a large gap between knowing and doing. What is the story behind that?
BH: I analyzed 44 companies in detail. Some have been consistently successful, like Toyota. Others, like General Motors and Kodak, were successful and then hit the skids. Others, like Apple, have been up and down. My conclusion is that success is a huge business vulnerability. Successful people tend to lose their sense of urgency. They are very proud and consequently extremely protective of their work. They develop an entitlement mentality and can’t imagine a world where they’re not on top.
The causes are legacy-thinking practices and people, and some common traps that organizations fall into. Legacy people have been around a long time. They are trusted employees and have developed rituals for how they carry out their jobs. They have been successful in the past and are convinced that what they have done in the past will lead to future success. This is a huge mistake. It is the same with the practices they follow.
KE: Would that legacy thinking sound like, “we don’t do that around here”?
BH: Yes, that’s right. People get very comfortable, defensive and proud.
KE: In your book, you describe nine traps of winning. Let’s look at some of those now.
BH: The first trap I call Neglect. It has to do with sticking with yesterday’s business model. It can be a huge problem. I want to focus on what an organization can do to avoid this trap. The first company I want to talk about is IBM. In the early and mid 1980s it was immensely successful. It owned the computer industry. Then along came mini and personal computers from all kinds of different vendors. By the late 1980’s, IBM was in a tailspin. It wasn’t serious about the business and worst of all, it was ignoring customers. By the early 1990’s, IBM was losing large amounts of money and it had to do something. The CEO concluded that the only solution was to break the company up into 13 components, and he discussed that with the press, employees and analysts.
For a year and a half all that happened was discussion. There was no action. The plan probably would have worked, but nothing was happening and IBM continued to lose hundreds of millions of dollars a quarter. When the board finally dealt with the situation, they replaced the CEO and faced reality. They brought in Lou Gerstner who spent the first six to eight weeks listening to their customers. He also listened to the employees. He then emerged with a very simple strategy: to solve the IT-related business problems of its customers. It was impressive in its simplicity and its incredible focus on customers. He reorganized the whole company around customers. Previously IBM had been organized around products and geographies and the customer was left to figure it out for themselves.
KE: How might companies go about avoiding this trap?
BH: Constantly look around and see what is working in your industry as well as in other industries. You must respect patent and trademark laws, of course, but there are some great ideas out there that you can replicate. In the 1980’s there was a small steel company called Nucor. It observed that the Japanese firms were using small electric arc furnaces rather than the gigantic blast furnaces that the steel industry was using here. It saw wasted scrap steel and thought to use it as the input rather than making steel the traditional way. It saw industries using non-union labor and getting low lease rates by locating their facilities at warehouses of companies that had gone bankrupt. Nucor put all of these ideas together.
It started with mini mills around the country with each one serving about three states. It used non-union labor and warehouse space that had been leased very inexpensively. Scrapped cars were used as the input and they started making rebar. Big steel laughed at them. It was convinced nobody could make any money with rebar. But Nucor made a lot of money in rebar and then they moved onto flat steel, etc. Today Nucor has the largest cap value in the steel industry. Most of the previous competitors are bankrupt and out of business. It’s a great story of reapplying what works.
KE: Nucor reapplied ideas from unrelated industries to create a new model for its industry. What is another recommendation you have for keeping one’s business model relevant?
BH: Apple is a good example. It’s a very exciting company right now. It has had its problems and successes. Steve Jobs doesn’t use committees and compromised processes to generate big ideas. One key point I make in the book is that committees and compromised processes are no way to generate big, distinctive, disruptive ideas. When Steve Jobs rejoined Apple in 1999, he took Jonathan Ive, a graphic designer, and told him that he wanted a product that merged the capabilities of the Internet, music and the Walkman product, to enable people to get music digitally in a very simple way.
Jonathan Ive formed a small team of people who had engineering, manufacturing and marketing skills. Steve Jobs kept this group secret in Apple. He didn’t want the current manufacturing and product development people foisting their ideas on this small group. He wanted real distinctiveness, which is needed to make a product successful. Steve Jobs understood that well.
KE: Many experts talk about the importance of feeling pride in one’s work. You see pride as a trap. How does pride get in the way of success?
BH: Pride is a gigantic trap. It causes people to not keep up with the times. People and products get outdated. But there is one particular approach I want to talk about, because it is so fruitful. One way to avoid this trap is to capitalize on inflexion points, which are the key trends that customers or technology are experiencing. For example, Sony was the king of consumer electronics. Its products were immensely successful. In 1998, there were key inflexion points that Sony missed. Hard drive capacity was doubling every six to nine months; digital music was the rage; and the Internet was a marvelous device to carry information from one person to another.
These three important trends or inflexion points combined together represented a gigantic opportunity. That’s what Steve Jobs saw and what Sony should have seen. What was Sony’s problem? Unfortunately in Sony’s organization the hardware, software and music skills all resided in separate fiefdoms. Products like the iPod require deep integration of these capabilities and Sony couldn’t do that. It was too proud of what it had done in the past.
KE: How did this translate into the bottom line for Sony?
BH: The Sony story looks very similar to the Kodak story. In January 2000 Sony’s stock was at $130 share. In 2002 it was down to $45. Sony was getting beaten on many fronts. Today the price is in the lower $50's so it continues to be a big problem for Sony.
KE: I find it interesting that in both the Kodak and Sony cases, the trends were clear and obvious to competitors. Is that a function of an insular perspective, that they stopped looking outside themselves to see what was happening?
BH: I think that's right. Their processes and interaction were completely focused inward and that’s what determined how they conducted their business.
KE: Leadership plays a huge role in avoiding each of the traps in your book. In particular, you look to senior leadership to avoid “timidity.” Tell us how that played out at Porsche.
BH: The timidity trap involves not confronting issues like infighting, obstructionists and the turf wars we saw with Sony. The Porsche example is a good one because it represents the fact that you have to assemble a team you believe in and then get out of their way and let them do their job. In the 1950s and 1960s, Porsche represented the thoroughbred luxury sports car. The rear engine 911 model put this franchise on the map. In the 1970’s and 1980s, Porsche committed many sins. The first mistake was developing a mid-engine 914 with Volkswagen. What is the thoroughbred luxury sports car doing with Volkswagen?
Then it launched a front engine 924, again breaking the rule about where the engine belongs. The ultimate sin was developing a front engine 928 with a V8 engine. By now its image was badly shattered. Sales were pathetically weak. The company sold less than 12,000 cars in 1992 and 1993. It was on the brink of bankruptcy and production capabilities were very weak. On average, it took Porsche seven years to launch new models, which is too long. The company was in serious trouble. Finally in 1993, the board put in charge Vendelin Videking, a very strong-willed individual who knew the automobile business very well.
Porsche then made some bold moves. Vendelin went to BMW and grabbed a few of his friends and put his team in place. He discontinued the 924 and 928 models, but kept the classic 911. Vendelin knew that the real expertise in making cars resided in Japan so he went there and recruited a bunch of production experts and put them to work in the German production facilities. He cleaned the place up and a lot of good things started to happen.
There were big improvements on the production front. The time to produce a 911 went from six weeks to three days and the time to develop new models was cut from seven to three years. It launched the Boxster and priced it about $20,000 less than the classic 911. It took a gigantic risk with the Cayenne, a SUV. Its performance was very much like the 911 and it was marketed to young males who had families. The Cayenne became a major chunk of the franchise. To make sure it wasn’t spoiling the Porsche image, it also launched a 911 Carrera GT, a 200-mile per hour car costing $440,000. The purpose was not to sell a lot of these cars, but rather create a buzz at auto shows and have them written up in the auto magazines.
This helped protect the image during the launch of the SUV. Porsche recently launched a small sports coupe with 911-like performance called the Cayman. It's incredible what this small team did for the franchise. Porsche is selling over 100,000 units a year and its production techniques are now world class. This is an incredible success story. Porsche put a small group of talented people in charge and got out of their way.
KE: What are the rest of the traps that you detail in your book?
BH: One is boredom. If a company deals with its branding in a way that is very protective, the branding will become dull and boring. Another dangerous problem is ignoring business processes and leaving legacy people in charge of the processes. When you begin to believe that you are dependent on legacy people to run your organization, you are reluctant to move them. Bringing in new talent will also bring in bright ideas. When you hire too many people the organization becomes very bureaucratic and you lose your speed and agility.
Not dealing with poor performance and letting your star employees languish both lead to mediocrity. A culture focused on confidence and pride leads to lethargy. You want a culture that is constantly looking to the future and coming up with bright ideas, spotting trends early and jumping in before the competition. Confusion can cause leaders to send the wrong signals. People are watching what the leaders say and how they act. It has to be consistent. Leaders need to be able to say where the company is going and how it is going to get there.
KE: Looking at some of the most successful companies today like Google, what are they doing to avoid the seduction of success?
BH: They are off to a great start. Google is primarily an advertising-based company and its model has made it very successful. The challenge for it, as well as any successful company, is to figure out what to do next. How will it evolve? Will it look at its competitors’ ideas and incorporate any of them?
KE: Toyota just passed GM as the number one car manufacturer. What does it need to do to maintain its high performance?
BH: Toyota is a terrific example of a phenomenal culture. It is based on a Japanese principle called “kaizen,” which is all about continuous improvement. Every employee understands that when they go to work tomorrow, their job is different from the previous day. They look for bright ideas that will drive Toyota further. It’s a culture that constantly moves them ahead. In the book I compare the last 30 years of Toyota, which is straight up, to the last 30 years of General Motors, which is straight down. The comparison between the two companies is an incredible learning experience.
KE: How can HR professionals help their organizations sustain performance for the long term, and avoid the traps of success you’ve mentioned?
BH: The most important thing that HR needs to do is to provide a constant stream of outstanding leaders to drive the organization to higher levels. HR should work very actively with top management to continuously look at how its leaders are doing and to move ahead and put new talent in certain jobs. Pushing the organization ahead is critical. Another challenge for HR is to watch how leaders are communicating to the troops. HR needs to constantly give the leaders feedback as to how to communicate so they are not creating confusion; they are in fact leading people toward the future.
KE: What are some tools that you recommend organizations use to help develop up and coming leaders?
BH: First, have confidence in them. Give them new experiences that stretch them. Spot the good performers and find ways to give them more challenging opportunities to help them grow. HR should participate in identifying the leaders that clearly have huge potential and push them appropriately. HR should spot the characteristics that cause some individuals to be better at certain sets of tasks.
KE: What about HR’s role in helping to avoid the destructive nature of the silo mentality, which happens in most organizations today?
BH: It also happens in HR! I have been working with an organization that is shocked at how many HR people it had buried in silos. HR should have provided leadership to the entire organization instead of operating very separately under the individual fiefdoms. The Sony example is an HR problem. Someone should have taken on the top management and asked why they were allowing people to continue to act like silos. New talent and reorganization was needed. Stirring the pot is a key task for HR to keep the organization moving ahead.
KE: Sounds like a difficult balancing act in terms of organizational design: you need to be agile and yet, efficient.
BH: Absolutely, and you have to keep the organization evolving because if it gets set too long, people get too comfortable.
KE: Any final thoughts?
BH: If you think about both organizations and individuals you have to recognize the fact that once someone is in a job for a while, they get into a routine. They get comfortable with it. They begin to think, “I am on top of this job at last, and I have it figured out.” As soon as you feel like that or you sense your organization feels like that, you are in trouble. This reality is what my book is all about. Hopefully it provides new tips on how you can avoid being seduced by your own success.
If you have enjoyed this interview with Robert J. Herbold, we invite you to purchase his new book entitled Seduced by Success: How The Best Companies Survive the 9 Traps of Winning.
