Business history is littered with highly successful and admired companies that then went into decline and ended up beset by crises and outrun by the competition. They failed to understand that the most successful time in a company's life is its most dangerous time, because the very reasons for its success can also be the seeds of its downfall.
Companies find themselves caught up on what Freud called "totems and taboos". Totems are ideas that become so sacred they cannot be questioned and taboos are the questions that cannot be asked. They arise from some very deep-rooted human instincts. They reflect our natural conservative bias in the form of a reluctance to change; a confirmation bias where we only seek or accept evidence that confirms our view; and the herd instinct where everyone wants to agree with the majority.
These traits can be particularly prevalent in successful companies. They have a single-minded focus on one way of doing things, or on a specific market or on a particular product. When that approach proves successful, no one feels they can question it. The problem is that markets are dynamic. In the 1980s, the computer industry was in the middle of explosive change. Not only did IBM fail to recognise the implications, it believed that past success was a predictor of future success. In 1992, the company reported the single largest annual loss in US corporate history to that point: $4.96bn after taxes. The totem was the fervent belief that doing the things that had made IBM a great corporation would continue to make it successful in the future.
In today's market, consumer behaviour is changing increasingly rapidly and innovation is transforming processes and products at an unprecedented pace. If a business isn't self-critical enough to recognise danger, or agile enough to respond, past successes will count for nothing. They will be overtaken by the competition.
From Kodak and its refusal to adapt to the rise of digital photography to Nokia's inability to respond to the rise of smartphones, it is clear that totems are a real threat to long-term business success.
It is possible to recover from these setbacks. Kodak belatedly embraced digital and Nokia brought in an outsider as chief executive. But it is a painful process. That pain could be avoided if companies recognised the dangers earlier and created a culture where assumptions could be challenged.
The companies that are most vulnerable to totems and taboos are those that are inward-looking and that lack diversity. These tend to be private companies with dominant owners, but larger organisations are not immune. They can be just as resistant to outsiders and differing views. There are still many businesses that see growing their own talent, rather than recruiting externally, as a great strength. Yet this tends to create inward-looking cultures that discourage fresh thinking and which do not tolerate challenge or questioning of their practices. Even if people with a more challenging approach are recruited, they are unlikely to stay for very long, because they are unable to make their voices heard. This is a problem that starts with leadership. Chief executives and the senior management team will tend to embed the company's blind spots.
Yet, it does not have to be this way. Companies that recognise the danger can, for example, seek out people and information that challenge their assumptions. This ought to be the role of non-executives on boards but, as we saw in the financial crisis, that is not always the case.
Businesses also ought to seek out the views of staff and make it clear that challenge is welcome and not seen as a threat. This is not about whistleblowing but something more profound – the creation of a culture, led from the top, which supports internal debate. Equally, they should take steps to secure candid opinions from outsiders and effective competitive intelligence. These might pinpoint a totem that the company needs to address.
Modern chief executives need many qualities, but one that is not much discussed is their need for a degree of paranoia. Their competitors are out to get them and, in our fast-paced world, they could come from some unlikely places.
The companies that do challenge the totems and taboos, and understand that past performance is not a reliable predictor of future success, will be the ones that can sustain success over the long term.
Jonathon Hogg is head of people and operations practice at PA Consulting Group. For more information, click here.
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