From Tesco’s ill-fated expansion into the US, to Nokia’s and Blackberry’s failures to move into the smartphone market, André Spicer, of Cass Business School, explains how executives can guard against five common business errors
When Dave Lewis took over as chief executive of the British supermarket chain Tesco, he was faced with a series of grade-A blunders. These included an ill-fated expansion into North America, an ailing business strategy that prevented Tesco from taking on low-cost competitors and the ongoing challenge of online retailing. As a result, the firm had seen a sharp decline in its share price and successive quarters in which profit forecasts had dropped. To top it all, Lewis then discovered a £250m (€320m) accounting irregularity.
Tesco is far from being the only corporate giant to be affected by multiple crises in the past few years – indeed, a look back at the business pages is a reminder of some corkers. Tech firms such as Nokia and Blackberry failing to move into the smartphone market; banks such as JP Morgan and BNP Paribas creating a hothouse in which rogue traders flourished; outsourcing companies such as G4S monumentally failing to deliver on government contracts. One could be excused for thinking that some economies are run by corporate dunces.
A compelling answer to why firms do such crazy things can be found in The Blunders of our Governments, Anthony King and Ivor Crewe’s impressive analysis of the most monumental policy mistakes in recent UK history. Defining a blunder as “a gross mistake; an error due to stupidity or carelessness”, they carefully pick through the corpses of some of the great UK governmental fiascos of the past 30 years, including the poll tax, ID cards, the Millennium Dome, child tax credits, the London Underground contractors Metronet, the collapse of the European Exchange Rate Mechanism, Individual Learning Accounts and, of course, the NHS National Programme for IT.
Although readers may have differing opinions about the individual merits of these policies as ideas, the reality is that each of them was an unmitigated disaster. They each cost the taxpayer hundreds of millions, if not billions, of pounds. They wasted untold hours of citizens’ time. They destroyed the careers of many talented people. But the real clincher is that these policies did not even get close to achieving the outcomes for which they aimed. They often backfired disastrously – sparking riots, for instance, providing lucrative opportunities for fraudsters or lining the pockets of private companies.
Blunders are by no means limited to the public sector. The world of business has its fair share too. For sure, public sector officials are often the victim of the irrational whims of their political masters. However, people working in the private sector are on an equally short leash and often have to respond to the demands of the market and arbiters such as analysts.
King and Crewe suggest that at the root of such blunders are five common human errors: groupthink, cultural disconnect, operational disconnect, intellectual prejudice and symbolism over substance. I believe these errors are also at the root of many corporate blunders. So, let’s look at how this is the case and ask what might be done about it.
Many of the most heinous corporate blunders were committed by tight-knit groups of true believers. If we look at the senior management team atTesco in the run-up to its recent accounting problems, we notice that they have one thing in common: they had each spent a long time working at Tesco.
Having a group of committed and loyal senior executives can be a good thing. However, it can also create a disastrous situation in terms of groupthink. This is when people within a small, tight-knit group militantly support each other’s position, avoid questioning common assumptions and tend to violently reject any ideas that in any way counter their own. The result is a striking homogeneity of thinking. Some of the most basic questions are not asked and even when individuals have misgivings, they tend to suppress them in favour of maintaining group harmony. The result can be that corporations embark on disastrous courses of action.
Executives can take some relatively simple steps to eliminate groupthink. It should be ensured there is at least some degree of diversity within each group. This diversity should promote questioning and challenging. It is important to ensure some ritualised forms of dissent and questioning. A devil’s advocate should be appointed, different groups should be asked to try to solve the same problem or each group should be forced, once it has generated a solution, to generate a counter case as well. By doing some of these things, many of the false assumptions are likely to be shaken out before they can become problems.
Another basic human error that so many executives fall prey to is cultural disconnect. This is when we assume everyone else’s life is relatively similar to our own. For instance, many bankers were surprised to find out that the majority of the public were angry about their large bonuses. Their point of reference was other bankers working in New York or Singapore, not a teacher working in a state school in the shadow of their office complex. As a consequence, they developed incredibly skewed ideas about fair remuneration.
Tackling cultural disconnects involves acknowledging that the assumptions we might have about how other people live may well be completely wrong. Simply consulting some of those who might be affected by the latest corporate strategy is always an excellent idea.
Looking at the information available to these groups is also worth considering. If these measures fail, getting privileged decision makers to swap places with people who will be affected by their plans will make an aspiring strategist think twice.
Decision makers often have little idea about the difficulties of actually implementing their ideas. For instance, when firms are merged or acquired, their chief executive usually talks of fantastic synergies, massive cost savings and amazing international expansion. The problem is that all this is talk about what could be, rather than what is.
Achieving these promised synergies, savings and expansion takes a huge amount of hard work over many years – something that most executives are not up for. The result is that firms more often than not destroy shareholder value when they merge or acquire other companies.
An effective way to overcome operational disconnect is to introduce one simple rule: if you plan it, you execute it. If executives are put in charge of carrying through their plan, they are more likely to think carefully about it. A second tactic is to ensure people involved in executing particular aspects of a plan are informed and have an opportunity to feed into the strategy. Finally, before launching with a big bang, the wise leader is advised to pilot or test out aspects of their ideas.
Intellectual prejudices are a common cause of corporate blunders. These are ideas that an executive values, often with little or no evidence. Many executives at Nokia were committed to the idea that they needed to provide a wide product range. The number of mobile phones they sold became confusing for customers and they did not concentrate their resources in areas such as the development of smartphones.
Such intellectual prejudices are hard to dispel. Even abject failure can mean that an executive clings to an idea with even more passion. This can lead to disastrous courses of action based on ideas that might sound fine over a three-course meal, but that are a dog’s dinner in reality.
The spell of intellectual prejudices can sometimes be broken by exposing executives to other sets of beliefs. If more drastic measures are needed, then executives should be asked to consider their case using an opposing set of beliefs or values. Finally, executives can be encouraged to explore scenarios in which their pet intellectual prejudices prove to be incorrect.
Symbolism over substance
The final root cause of many significant blunders is valuing symbolism over actual substance. Typically, firms like to be seen to be doing the right thing. For instance, following the collapse in 2013 of the Rana Plaza manufacturing complex in Bangladesh, many well-known western fashion labels declared that they were going to adopt some kind of ethical labelling. This sounded nice, but ensuring their clothes were made with high labour standards in complex supply chains turned out to be difficult.
During a TV interview, it can take a chief executive seconds to commit a company to a policy. It may then take years for executives to make sure that the policy works.
To ensure that symbolism does not win out over substance, leaders could own up to the complexity of the issues they face and acknowledge that they cannot create solutions overnight.
For instance, when IKEA faced allegations in the 1990s that its rugs were being made with child labour, it was careful to explain the complexities of the issue. It then took time to work with the communities in India and Pakistan where the rugs were made. This helped to generate longer-term solutions of real substance rather than short-term symbolism.
Avoiding blunders is hard work for any executive. Often, their immediate reaction is to add in more forms of compliance, routines and technology. The problem is that these solutions are costly, cumbersome and can actually make matters worse.
The most sustainable way to get to the root of blunders is to look at the human errors underlying them. Trying to ameliorate these problems involves changing the way people work together to make decisions. Though this may take time, the end result can be a firm where ‘bound to blunder’ does not apply.
André Spicer is a professor at Cass Business School in London. He is also director of Ethos: The Centre for Responsible Enterprise
Check your blunder rating
1 Do the decision makers in your organisation have similar backgrounds? For instance, are they from a similar specialism or social group or have they spent a long time in your firm?
1 (very different) – 5 (very similar)
2 Do decision makers understand the day-to-day realities facing the people who will be affected by their decisions? For instance, do they know what information these people have, what they want and what challenges they face?
1 (yes, very much) – 5 (not at all)
3 Do decision makers understand how their policies are implemented? For instance, do they appreciate the nuts and bolts involved in making a strategy happen?
1 (yes, very much) – 5 (not at all)
4 Are decision makers fixed on particular ideas? For instance do they have favourite ideas they just will not shut up about?
1 (not at all) – 5 (yes very much)
5 Is making a decision that looks good more important than making one that is practical?
1 (not at all) – 5 (yes, very much)
5-10: you are blunder-proof
10-15: you are very safe, but some room for blunders remains
15-20: start blunder-proofing your organisation
20-25: a blunder is imminent