Chapter 1 – Strategic Gridlock Alert
….WATCHING THE CRUSH OF TRAFFIC AND HUMANITY AT THE CITY’S BUSIEST INTERSECTIONS IS A LITTLE LIKE WATCHING A BECKETT PLAY: PUT THE CHARACTERS IN A HOPELESS SITUATION. GIVE THEM FEW CHOICES. SADDLE THEM WITH RULES THAT ARE NEARLY IMPOSSIBLE TO FOLLOW. IT CAN’T GO ON.—NEW YORK TIMES ARTICLE ON TRAFFIC GRIDLOCK
Gridlock doesn’t occur only in traffic. It also happens in small, medium, and large companies in virtually every industry as they strive to advance their business strategies. In fact, even the savviest executives and boards seem to be finding that as they wind their way through the turbulent 21st century business landscape, it’s easy to inadvertently drive their organizations smack into a situation that I call “strategic gridlock”: the mysterious paralysis that occurs when persistent organizational problems snarl business performance.
As I’ve consulted both internally and externally with top leadership teams in a wide range of industries, and as a business leader myself, I’ve found that these uncertain times make the risk of driving any size company into strategic gridlock greater than ever before. The rapidly changing circumstances and increasing complexity of what defines and impacts our organizations can have unexpected consequences during execution.
Unfortunately, gridlock can build so gradually that it’s often hard to spot until it reaches massive levels. Let’s take a look at how a typical scenario builds. The following example is from widely published news reports of a familiar household name, Mattel. (Note: while actual events may have been different from the published accounts, it’s still possible to see a pattern of gridlock building that resulted in Jill Barad’s departure from Mattel.)
MATTEL ON THE BRINK
When Jill Barad became CEO and Chairwoman of Mattel in January 1997, the company was the largest toy maker in the world with $4.8 billion in revenues. Headquartered in El Segundo, California, Mattel became known for brands such as ‘Barbie’® dolls, Fisher Price™ infant and toddler toys, Cabbage Patch® dolls, Hot Wheels™, and Matchbox™ miniature cars and trucks.
Industry analysts widely credited Barad for breathing new life into the company, as she resurrected sales of the ‘Barbie’ doll and accessories from $200 million when she joined as a product manager in 1981 to $1.9 billion in 1997, accounting for 38% of sales. This turn of events led to a boost in Mattel’s stock from $30 a share in January 1997 to more than $46 a share just two months later. However, unbeknownst to Mattel’s executives or board, strategic gridlock was already building.
Mattel’s problems became visible in early 1998, as the company began disclosing a series of sales and earnings shortfalls attributed to a new policy that Toys “R” Us, a key customer, put into place. The retailer had instituted a just-in-time ordering system, and other retailers were adopting a similar policy to deal with changes in how their customers were buying toys.
In June 1998, Barad announced a solution to the bad news: in the latest in a decade-long string of acquisitions, Mattel would acquire The Pleasant Company, manufacturer of the ‘American Girl’® line of dolls, books, and clothes. The deal, valued at $700 million, would enable the company to directly market to consumers through The Pleasant Company’s state-of-the-art direct marketing operation, reducing its dependence on retailers. Despite a second quarter shortfall, Barad remained “confident” that Mattel could achieve projected earnings growth of approximately 18% for 1998.
However, in December the company announced a $500 million shortfall for the year, only weeks after repeatedly assuring analysts that the company would meet its revenue projections.
“This situation is very painful and disappointing for us,” Barad said to Wall Street analysts in announcing the 33% drop in year-end earnings from estimates of about $1.78 a share to $1.20 a share. “These developments were counter to all historical trends and could not have been foreseen.”
The reason for the shortfall, according to Barad, was Mattel’s inability to quickly recover from the unexpected plunge in Toys “R” Us orders. In the same announcement, Barad unveiled her latest solution to the unexpected events: to transform Mattel from a toy company to a ‘global family products company’ that no longer depended upon retailers to reach consumers. This new strategy included an ambitious initiative: the acquisition of The Learning Company, Inc., a giant computer software manufacturer, for $3.5 billion.
The goal of the deal, completed in May 1999, was to move toward building a $1 billion interactive software business. The Learning Company included well-known software titles like Carmen Sandiego®, National Geographic™, American Greetings™, The Print Shop™, Riven® and Myst®.
The acquisition of a company in the software industry moved Mattel into new and unfamiliar territory. Barad dismissed these concerns, however, believing that the deal was necessary to reach older children no longer interested in Mattel’s core brands.
In February 1999, Mattel reported that profi ts in the fourth quarter of 1998, excluding a charge related to a legal settlement, fell 67% to $59.5 million. Revenue fell 4.3% to $1.5 billion. As sales and profi ts continued to slump, Barad announced another major initiative: a management shake-up. She introduced a new organizational structure and announced the resignations of Bruce Stein, the number two executive, and Gary Baughman, president of Fisher-Price. The company was now divided into five business units, headed primarily by newly promoted managers reporting to Barad. In her announcement, Barad stated that the reorganization would provide for “faster decision making and encourage action that is entrepreneurial and responsive to change.”
Over the next few months, big changes became the norm around Mattel. In April 1999, the toy maker announced the elimination of 3,000 jobs and planned facility closures to recover from its first quarter net loss of $17.9 million. And once again, as she had done in December 1998, Barad unveiled her latest strategy the same time that she announced the bad news. This time Mattel was launching a $50 million e-commerce venture designed to “create a premier on-line destination and e-commerce site to better serve children and their families.”
Despite these bold moves, by October 1999 it was clear that a series of persistent organizational problems were seriously snarling Mattel’s performance. For the second time in ten months, Barad stunned investors and analysts with another unexpected earnings shortfall, resulting in a $105 million loss in the third quarter of 1999 and causing the stock to plummet to about $10 per share. To make matters worse, Barad was unable to explain to the board the full extent of the problems at The Learning Company, claiming that division heads Michael Perik and Kevin O’Leary had kept her in the dark.
Mattel issued a statement that unforeseen circumstances, this time at The Learning Company, were behind the unexpected shortfall: a licensing agreement that failed to materialize, the write-off of bad debts, higher-than-expected advertising costs and returned goods. Analysts and investors, however, were pointing out that problems had clearly existed prior to the acquisition. These included accounting problems, aging brands, and integration diffi culties from two of The Learning Company’s acquisitions made in 1995.
By February 2000, Barad’s credibility with Mattel’s board, shareholders, employees, and Wall Street was damaged beyond repair. Despite assurances that The Learning Company’s problems were fixed, the unit lost another $183 million in the fourth quarter of 1999.
Unable to pull the company out of its mysteriously persistent organizational problems, Barad resigned her posts as chairwoman and chief executive officer. Her glowing career with Mattel had come to an end.
Mattel became progressively snarled in a massive case of strategic gridlock the same way that a traffic jam builds:
- Overlooking or underestimating warning signs of their organization’s reality: Although two unexpected shortfalls in revenue left Mattel’s executives scrambling, they seemed to have a distinct pattern of overlooking or underestimating warning signs about their organization’s reality. For example, not only did they miss signs leading to a major change at their key customer, Toys “R” Us, and the retailing industry in general, but they also seemed to miss a number of “red flags” regarding The Learning Company acquisition.
- Impatience to move forward: Barad’s rush to solve Mattel’s unexpected shortfalls in revenue led her to move quickly from one strategy to another. While her urgency to respond quickly was understandable, it seems as if she made assumptions about how quickly her organization could effectively respond to a rapid series of major changes in direction within a short time frame. This had the unintended effect of compounding problems rather than fixing them.
- Over-relying on what “should” have worked: In response to Mattel’s problems, Barad and her executives adopted rational strategies and initiatives that should have worked from market analysis and financial predictions. However, Barad and her team apparently missed the gaps between their rational strategies and what was really happening with key stakeholders inside and outside of the company. This left them vulnerable to shortfalls and other headaches that might have otherwise been reduced.
While the misfortunes that plagued the company mystified Mattel’s top leadership, we can draw lessons from this example that apply to organizations of all sizes and all industries.
- Strategic gridlock flourishes in uncertain times. What do I mean by “uncertain times”? Now, more than ever before, massive advances in technology, communication, globalization, business climate, and social change add up to a dizzying mix of conditions that can make it difficult for us to know whether we’re moving backward, forward, or sideways. With things changing so quickly, it’s easy to make assumptions that overlook or underestimate critical pieces of our organization’s reality and that can have a huge impact on how our strategies play out.
- We can trace persistent problems back to common but mistaken assumptions about “Organizational Reality.” The nagging pain of strategic gridlock is built upon a foundation of one or more common but mistaken assumptions that leaders make about their organization’s reality. I define “Organizational Reality” as the complex web of internal and external factors that impact and are impacted by your company. These include not only the economic, financial, and business factors commonly accounted for in strategic thinking and planning, but also less quantitative circumstances, capabilities, cultural issues, and relationships that have just as profound an influence on business outcomes.
- Strategic gridlock doesn’t happen overnight. This is the good news. The bad news is that gridlock can be hard to detect until the organization’s performance grinds to a halt, because the issues often grow incrementally. For example, Mattel’s problems developed over at least a three-year period. The creep toward strategic gridlock is also hard to catch because many business leaders view problems such as unexpected changes with customers, low product sales, and acquisition integration diffi culties as isolated executional issues. In fact, by looking at patterns of events, it’s frequently possible to trace these problems back to common themes.
- Strategic gridlock is preventable. Mattel’s story is a dramatic example of the need for top leadership teams to effectively integrate execution considerations with strategic thinking and planning, keeping in mind that what should work needs to be balanced with what will work for your unique organization. Too often, leaders conduct strategic thinking and planning without fully considering all six of what I call “the guidelines and principles of organizational reality” (represented by the acronym “U.N.L.O.C.K.®”) described in Part II. I’ve seen that when any of these principles and guidelines is omitted at the pivotal point of setting a company’s direction, there is a higher risk of unexpected problems surfacing during execution. The paralyzing effects of strategic gridlock don’t have to happen to you. Perhaps if Jill Barad, her executive team, and the board had been aware of how gridlock was building in their company, they may have been able to take early steps to control it.
ORGANIZATIONAL REALITY IN UNCERTAIN TIMES
One of the more important, yet often overlooked or underestimated pieces of organizational reality is how much more complex our business environment and organizations are today than they used to be. For example, in contrast to times past, outsourcing and alliances are more commonplace; the boundaries of modern organizations frequently extend far beyond the employees on the payroll. Not only that, external and internal stakeholders of every type have unprecedented infl uence on setting direction. Because we are connected in so many ways, and there are so many factors acting on our organizations, it’s more difficult than ever to rely upon our individual impressions of reality to guide us in making critical decisions. Since our organization is ultimately what transforms our strategies and initiatives into high performance, we must account for the unique mix of perceptions and factors that define organizational reality as it exists today before we commit to new courses of action to move toward our visions.
WHY DO MISTAKEN ASSUMPTIONS ABOUT ORGANIZATIONAL REALITY OCCUR?
The Merriam Webster Dictionary defines “assume” as “…to take as granted or true though not proved.” Many people are used to uncovering some of their assumptions about the soundness of a proposed plan. However, in our drive to move from problems to solutions and from opportunities to return on investment, we make assumptions about the source of problems, about the suitability of an opportunity, and about how well our organization should be able to implement the resulting strategies and initiatives. Unfortunately, in uncertain times, assumptions about the organization’s current reality are not always reliable, and it’s often hard to know just what “truth” is anymore. Uncovering mistaken assumptions as early as possible during strategic thinking and planning goes a long way toward reducing or even eliminating strategic gridlock during execution.
How can it be that savvy, experienced, and successful business leaders – such as Jill Barad and her executive team – get sucked into these mistaken assumptions? I believe that they, like all of us, have over the years acquired habits of thought regarding their environment and how to operate in the business world. It might be that historically, habits of thought and the assumptions that come from them helped our ancestors survive in a world that was relatively stable over hundreds, and even thousands of years. It would seem that assumptions would be useful ways to not get bogged down in indecision every time a survival choice was necessary. However, as the times have become faster paced and more uncertain, the stable patterns on which our ancestors based useful habits of thought have shifted and become much more unpredictable. In this new world, habits of thought that used to be highly functional become blinders that stop us from easily picking up on the complete picture.
MISTAKEN ASSUMPTIONS LEAD TO “HIDDEN ROADBLOCKS”
Mistaken assumptions about organizational reality show up long before the visible signs of strategic gridlock and have distinct patterns. We can group many of these assumptions into categories that I call Hidden Roadblocks.
As we’ll discuss, Mattel’s leadership team from 1997-1999 appeared to run into seven of the most common hidden roadblocks I’ve identified. In the remainder of Part I we’ll explore these at greater depth:
- Chapter 2 – One-Size-Fits-All: The tendency to adopt previously successful solutions without regard to whether they can work in your organization now.
- Chapter 3 – Management by Lobotomy: The tendency to over-rely on organizational “surgery” (such as layoffs, reorganizations, and budget cuts) to solve persistent, organizational problems.
- Chapter 4 – Act Now Think Later: The tendency to assume that you have enough information to select strategies and initiatives that meet your organization’s real needs.
- Chapter 5 – Magic of the Marquee: The tendency to expect the organization to instantly accept change.
- Chapter 6 – Roller Coaster: The tendency to assume that introducing a rapid series of new strategies and initiatives will move the organization forward.
- Chapter 7 – Tin Ear: The tendency to perceive only one “tone” of reality.
- Chapter 8 – Lighthouse: The tendency to “stay the course” despite clear-cut danger signs.
Ironically, it may be that as business leaders we’re particularly susceptible to habits of thought that lead us into hidden roadblocks. After all, we hire business leaders for their strong positive characteristics. However, when overused, these same traits can have a dark side:
A STRENGTH OVERUSED CAN LEAVE US VULNERABLE
Leadership Characteristic:………………………………………..Hidden Roadblock:
Consistency ……………………………………………………….One Size Fits All
Risk-taking and decisiveness …………………………………….Act Now Think Later
Willingness to face up to tough calls ……………………………Management by Lobotomy
Drive for high performance ………………………………………Magic of the Marquee
Enthusiasm and persuasiveness …………………………………Roller Coaster
Courage of convictions …………………………………………..Tin Ear
Self-confidence and steadfastness ………………………………Lighthouse
THE STRATEGIC GRIDLOCK CYCLE
I’ve observed that gridlock builds in a cycle starting at strategic thinking and planning and extending through execution (see diagram page 36). The cycle starts with a normal-enough identifi cation of business objectives and strategies based on the company’s vision and mission. However, if hidden roadblocks exist, they divert the strategies and subsequent initiatives, and lead to unanticipated problems. This reaction to rapidly fix the problems leads to more initiatives and actions, which more often than not run into still more hidden roadblocks, generating still more problems.
The cycle keeps building until the problems are fixed some way or another, or the gridlock becomes so bad that whoever is in control of the organization loses patience and steps in to solve the problem. Often, layoffs accompany this move. At its worst, the strategic gridlock cycle can lead to the company’s demise through collapse or acquisition.
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