An evening with Dr. Jagdish Sheth

On Friday, June 3, we had a fascinating webinar by Dr. Jagdish Sheth, Charles H. Kellstadt Professor of Marketing at the Goizueta Business School, Emory University, and Atlanta GA.  The theme of Dr Sheth’s talk was “Why do good companies fail?”

About Dr. Jagdish Sheth

Dr Sheth is known for his scholarly contributions in consumer behavior, relationship marketing, competitive strategy, and geopolitical analysis. He has over 55 years of combined experience in teaching and research at the University of Southern California, the University of Illinois, Columbia University, MIT, and Emory University.

Professor Sheth has served on the Board of Directors of several public companies including Norstan, Cryo Cell International, and Wipro Limited. He has been advisor and mentor to many CEOs and large corporations. He consistently figures in the list of Economic Times top 10 “Global Thought Leaders”. Dr Sheth has been conferred with "PADMA BHUSHAN" (India's highest civilian award for NRI in literature and education) by the Indian government.

Professor Sheth is the recipient of all four top awards given by the American Marketing Association: The Richard D. Irwin Distinguished Marketing Educator Award, the Charles Coolidge Parlin Award, the P.D. Converse Award for outstanding contributions to ‘Theory in Marketing’, and the William Wilkie Award for ‘Marketing for a better Society’.

Professor Sheth has authored or co-authored over 300 articles and more than 30 books including Clients for Life, The Rule of Three, The Self Destructive Habits of Good Companies, Tectonic Shift, Firms of Endearment, Chindia Rising, The 4 As of Marketing, Breakout Strategies for Emerging Markets and The Sustainability Edge. His most recent book is:  Genes, Climate and Consumption Behaviour-Connecting the Dots.

Why good companies fail

Why do good companies fail? A few years back, this was the question the CEO of a large telecom company raised during a lunch meeting with Dr Sheth.  This CEO had benchmarked his company against four well admired corporations: IBM (for enterprise sales and marketing), Xerox (for technology), Sears (for its direct connection with customers) and Kodak (for branding). But none of these companies are doing well today. And Sears and Kodak have even gone bankrupt.

That prompted Dr Sheth to do detailed research. The result was his book: “The self-destructive habits of good companies.” Here are some highlights of the research.

• Many good companies cited as role models in “Good to Great” are also not doing well, despite having Level 5 leadership.
• One third of the companies listed in the 1970 Fortune 500 list had vanished by 1983.
• The average lifespan of companies listed in the S&P 500 list was 61 years in 1958. Today, it is less than 18 years.
• McKinsey believes that 75% of companies currently in the S&P 500 will disappear (bought out, merged or gone bankrupt) by 2027.

While such failures can happen and are indeed predictable to some extent, they need not be inevitable.

Good companies fail when they are either unable or unwilling to adapt when the ecosystem changes. For example, Digital did not take PCs seriously and dismissed them as toys. Many good companies fail to adapt because they have developed several bad habits as they have evolved into successful companies.

The seven bad habits

Dr Sheth has identified seven bad habits which make good companies fail:

• Denial
 
• Arrogance
 
• Complacency
 
• Competence dependence
 
• Competitive  myopia
 
• Volume Obsession
 
• Internal  turf wars
 

Denial

This is probably the most prevalent bad habit. For most companies, success comes by accident but it is not easy for their leaders to admit this. So leaders spin stories and attribute their success to their strategy. Media reports of successful companies accentuate this tendency.

Companies often go into a denial mode in the face of changes such as new disruptive technologies, rise of emerging economies (China and India in particular but also Brazil, Mexico, etc.), changing consumer tastes (like the rise of organic foods) and demographics.

A company is a living organism. Just like a good doctor has to be good at diagnosis, great leaders try to diagnose the company’s problems and then address them.

Arrogance

Success can lead to an overblown self-image, superiority complex, self- importance, etc. Take the case of General Motors. Charles Wilson, GM President once said: “What is good for GM is good for the country.”

Complacency

Successful companies have a false sense of comfort and security and assume that the past success will continue indefinitely into the future. Family businesses in particular can be vulnerable to this habit. This problem might also arise if the company’s past success is due to its regulated monopoly position or if the company has a strong backing from the government. As an example, Dr Sheth mentioned that diamond companies might be vulnerable to lab diamonds which are becoming popular among ordinary people and even wealthy individuals.

Competence dependence

This is the case when the competence of a company becomes its liability. The more specialized the company’s competencies, the more likely the company will fail when a new technology emerges. Prof Sheth calls this the curse of incumbency. Singer, Sears Roebuck, Kodak, Nieman Marcus, A&P, Marks and Spencer have all fallen victim to this habit. Many retailers have gone bankrupt in the last couple of years because they did not have a credible online play.

Competitive myopia

Companies have a tendency to define competition somewhat narrowly. GM for example considered only Ford as its competitor and was taken by surprise when Toyota and Volkswagen became formidable competitors. Competitive myopia often results when the leader is the industry pioneer and the second player is obsessed with challenging the number one company. Think of the rivalry between Avis and Hertz and Burger King and McDonald’s. This bad habit is partly due to the natural evolution of industries (typically three players tend to dominate an industry) and also due to the colocation of major competitors in a geographical cluster (Pittsburgh for steel, Ohio for tires, Silicon Valley for tech companies, etc.)

Volume obsession

Pioneers often set up high margin businesses. Over time, these margins come down due to competition. But the company remains confident that larger volumes will compensate for lower margins. The reason is a false understanding of economies of scale. In many industries, procurement costs are more than 70% of the costs (89% in case of PCs). So there are really no economies of scale which is all about spreading fixed costs over a larger number of units. In the process, companies also accumulate future obligations which are unsustainable and the non- operating costs become excessive and the cost of capital goes up. Prof Sheth feels that contrary to popular wisdom, there is more money upstream (on the raw materials side) than downstream.

Internal turf wars

Each function or group becomes obsessed with itself to the detriment of the company’s interests. The root cause of turf wars is the affinity and identity to a functional discipline above the company and its values. Turf wars can arise due to several reasons:

• The company is divided into product divisions and business units, which have their own priorities.
• The company is dominated by a single functional culture like branding or R&D.
• The company may have grown through mergers. Poor post-merger integration might have led to multiple cultures in the same company.

Concluding remarks

Ultimately, it is about leadership. The job of the leader is to constantly monitor the company’s health and prevent it from learning bad habits. However, if a bad habit is discovered, it should be promptly addressed like a cancer before it spreads. The best cure for a bad habit is no cure at all. It is to prevent the company from acquiring the bad habit in the first place.

Q&A

On what keeps him going

Prof Sheth is going to be 84 this year. But he feels young. He considers today’s 80 to be yesterday’s 60. What keeps him going is his obsession to learn new things. He keeps moving from subject to subject and has become a deep generalist. Dr Sheth believes that we should be lifelong students. One of his favorite quotes is that when the student is ready, the teacher will show up. Dr Sheth believes we can learn from everyone including subordinates.  Another thing which keeps Dr Sheth going is his positive outlook and optimism.

On the characteristics of a great company

A great company realizes that it does not function in isolation and is part of a larger ecosystem. It constantly monitors changes in the environment: demographics, technology, capital markets, globalization, and competition. When new trends emerge, companies must try to understand the implications. In western countries, the ageing of society is the biggest issue. The two countries most affected by this trend are Spain and Italy, due to their low birth rates. Japan has reached the point of no return. Health and wealth protection will become the key issues in ageing societies.

Prof Sheth gave the example of Monsanto which has reinvented itself a number of times as it has adapted to the environment. From textiles, it moved into industrial chemicals, then agricultural chemicals and then into genetic research to come up with genetically modified products. Singapore is a great example of a nation which reinvents itself every 20 years or so in line with the changing environment.

Leaders have less clout than is commonly believed. When leaders issue instructions, people nod their heads. But that is only lip service. Sometimes, an external leader who may not understand the technology well but who can bring new customer perspectives can be successful. Lou Gerstner of IBM is a good example. In contrast, his predecessor John Akers could not deliver the goods.

It is important to rotate people across functions. Leaders should not be comfortable only in their functions in which they have grown. It makes sense to appoint a Korean as the head of Indian operations rather than an Indian who is used to certain ways of working and dealing with local politicians. A Korean will try out new things and if he succeeds in India, it means he is a top class global talent. Similarly, we should put an Indian in charge of Brazil.

One of the reasons for Indians becoming the CEOs of famous global companies in recent years, is that they have exposure to various cultures.

Companies can also try to change themselves with some formal interventions. In 3M, CEO Allen Jacobson realized that bulk of the revenues were coming from products in existence for 10 years or more. He issued a directive for a minimum percentage of revenues to come from new products.

On the failure of Tata Nano

The failure of the Nano was not due to the wrong location of the plant in Bengal or supply chain issues. It was due to a wrong positioning. The objective of Mr. Ratan Tata was to upgrade middle class families from two wheelers to a safer transportation vehicle. But by positioning it as a cheap car, the company put off customers. After all, no one wants to buy a cheap car. In any case, with a formidable competitor like Maruti around, it would have been difficult for the Nano to compete on price in the long run.

On the future of aggregator companies

Prof Sheth expressed apprehensions about the long term future of companies like Uber. Their valuation (Price/Sale) tends to fall as they mature. This can lead to higher cost of capital, cash flow problems and higher leverage. Prof Sheth mentioned in this context that leverage (debt to equity ratio) beyond 1:1 is not a good sign. Many Indian companies operating with debt to equity ratios as high as 4:1 should heed this warning.

On family groups

Many family groups decline over time due to turf wars among the siblings. By the time the third generation family members join, problems are visible. Wise founders diversify their business so that each sibling can run a business independently. (The Piramals are a good example.) But those who do not do so create problems down the line. When many siblings are involved, it is important to develop a code of conduct. That is what the Murugappa group has done in consultation with Northwestern University.

On the Indian airline industry

Prof Sheth felt that the Tatas are the best placed to do well in the long run. They have the financial clout and the required business experience in hospitality. The Tatas also have the backing of Singapore Airlines, a formidable global player. Jet may very well go bankrupt like Kingfisher. The future of Indigo and Go Air is also a question mark. One problem for many entrepreneurs in the Indian airline business is that they are heavily leveraged.

On advice to Indian entrepreneurs who want to enter the garment business

The biggest opportunity for Indian entrepreneurs is that many global brands want to diversify away from China. The second opportunity for Indian entrepreneurs is to develop their own brands and go directly to consumers using online platforms like Shopify or even Whatsapp.  Today, in the garments business, more than design, what is important is the procurement of raw materials. If we can secure the supply of good quality raw materials, we have a tremendous competitive advantage.

On other opportunities for Indian entrepreneurs

Dr Sheth feels that there are big opportunities in the CPG sector as 60% of the consumption in the country is unbranded.  Think of Haldiram which has capitalized on this trend.  In general, wherever there is a large unorganized sector, there is an opportunity through ecommerce. Consider Amazon and Flipkart which are serving the small towns in the country.

There are big opportunities in defense as well. India is a major defense equipment buyer. The government is encouraging indigenous production. If not entire systems, in components there are big opportunities for entrepreneurs.

Infrastructure is another important sector. In general, wherever there is a lot of manual effort and time involved, entrepreneurs can bring it online and make the process more efficient and smart and with better quality. Think of shadi.com.

Indian entrepreneurs have a big opportunity to make a wide range of goods in India and tap the global market.

On advice to Indian education leaders

In India, we have traditionally looked down upon skills. Both knowledge and skills are important and they must be blended carefully in the curriculum and academic delivery. Garage mechanics are as important as engineers.

Instead of focusing on real estate, we must focus on digital platforms. The recent establishment of the National Digital University is a clear indication that online has a bright future. We must accept that online is as legitimate as face to face. It must move from the periphery to the core.

There is a huge market for working professionals. Education institutions must tap this market which is a bigger market than that for fresh graduates.

We thank Dr. Vedpuriswar for bringing out the highlights in the form of this note