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Success can build a culture of arrogance that will destroy a company

Even for the volatile tech industry, the implosion of Canadian telecom giant Nortel was spectacular. In 2000, it was the 9th most valuable  corporation in the world with a market cap of $283 billion. A decade later, it was bankrupt and ceasing operations.

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One of the company’s former CEOs, Jean Monty agreed to help fund and support an academic investigation into the company’s failure, which resulted in a massive, unprecedented study out of the Telfer School of Management at the University of Ottawa.

The researchers interviewed 48% of all Nortel executives in charge from 1997 through 2009, a group that included both CEOs and senior officers who were in the room when the company decided to file for bankruptcy. They also spoke to executives at 53 different companies that were customers of Nortel to get a sense of why they lost faith and competitors to understand the environment Nortel was facing.

The study found essential lessons for any company looking to avoid Nortel’s fate.

Failure is a long and complicated process

I asked the study’s lead author, Jonathan Calof, to pinpoint Nortel’s biggest management failure. Here’s what he said:

“It’s far too complicated to say ‘here’s what could they have done differently. It was an accumulation.”

There were three major factors that caused the failure. When Nortel was a market leader in the ’70s, it developed an arrogant culture, which led to poor financial discipline. Then in the ’90s, it focused so intensely on growth that it broke its ability to innovate and read the market. And after the tech bubble popped, it turned inward and cut costs to the point where it alienated customers.

“Which decision would you make differently?” Calof asks. “Do you not build a structure that’s a technology leader? Do you limit growth in the ‘9os?”

While it’s easy to criticize specific moves (like the company’s acquisition spree), it was multiple factors, pain points, and external shocks that combined to break the company.

Success can build a deadly culture of arrogance

Many of Nortel’s problems came from a culture that got baked into the company long before it was in trouble. In the ’70s, it could essentially tell customers what technology they needed, and charge what it wanted. The company had extraordinary success doing exactly that.

It assumed this would last forever and there would always be a majority shareholder who could bail the company out. This resulted in a culture where responding to the customer and having financial discipline weren’t emphasized. Nortel’s pride was a strength at first, but ended up costing the firm.

“It escalated into hubris to the extent of making it especially difficult to absorb acquisitions, to quickly respond to market needs, and to accept and understand what customers wanted (largely as result of the delusion of ‘we know better’),” the authors write.

Beware of “the black cloud”

In the aftermath of the tech bubble in the early 2000s, customers were rightfully worried about the ability of their suppliers to survive. Customers had started to notice people they worked with at Nortel acting differently, more “evasive” and needing to check with management before agreeing to changes. As a result, they looked more closely at the company and they didn’t like what they found.

They called their feeling of unease with Nortel a “black cloud.”

Other competitors survived by being resilient and having strong leadership (Cisco), a clear strategy, a great CEO, and supportive core shareholders (Ericcson), or by merging (Alcatel-Lucent, Nokia-Siemens).

Nortel, on the other hand, made textbook errors like failing to communicate, meet commitments, and possess a firm technology roadmap. Telecommunications companies bet their entire business on their suppliers—doubt isn’t an option.

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