Buy the Book: There is no secret formula for business success. Donald Keough inverts the question “How to succeed in business?” He looks back on numerous mistakes in his sixty-year career and identifies common factors that led to business failure so you avoid the same fate.
The Notes
- “It has been an article of faith for me that I should always try to hang out with people who are better than I. There is no question that by doing so you move yourself up.” — Warren Buffett
- “After a lifetime in business, I’ve never been able to develop a set of rules or a step-by-step formula that will guarantee success in anything, much less in a field as dynamic and changing as business.”
- The best way to identify a leader is to see how many people are following them.
- The book is based on a speech given by the author. He was asked to talk about how to win in business. He said he had no secrets to business success. Instead, he inverted the idea and talked about how to guarantee business failure.
- Keough began his career in 1949 at a TV station in Omaha, Nebraska, and worked his way to running The Coca-Cola Company.
- Companies don’t fail. Companies are an extension of the people leading them. The individuals running them make mistakes and fail.
- Quit Taking Risks
- Humans are naturally risk averse.
- For those who took a risk and reached a goal, it’s natural to not want to risk losing what was gained by taking another risk. “Why risk it?”
- The side effects of success are arrogance, complacency, and being comfortable. The temptation to stop taking risks grows with success.
- 4 of 5 new businesses fail. Most new products never last beyond testing. Those that do have a 1 in 13 chance of success. Half of the new businesses are still going, most at a loss, after 5 years.
- The Coca-Cola Company
- Robert Woodruff took a personal risk in 1930, went against The Coca-Cola board, created the Coca-Cola Export Corporation, and expanded the brand internationally.
- Woodruff did it again in 1933 by raising the advertising budget in the heart of the Great Depression. The ad campaign created the “rosy-cheeked, chubby Santa Claus we all know and love…created by the artist Haddon Sundblom.” People equated the lovable Santa with Coca-Cola and sales exploded.
- Most successful companies fail to take important risks at key moments and many are gone.
- Xerox
- Began as the Haloid Company in 1906 making photographic paper.
- Took a risk to develop and market the copying machine based on a design by Chester Carlson in 1947. Over 20 companies turned Carlson down. Xerox said yes and rolled out its first copier in 1958, which grew to over $1 billion in revenue in less than 10 years.
- Set up a research facility in Palo Alto and in 1973 developed the first personal computer and did nothing with it. Management was comfortable with its copier sales — copiers were the future — and ignored the new technology.
- Lost its leadership in copiers and posted losses in the 1990s.
- The SEC charged the company with accounting irregularities and executives charged with securities fraud in 2002.
- “They ignored the simple truth that to create profits in the long term requires innovation in the short term.”
- “Peter Drucker pointed out nearly fifty years ago, it is management’s major task to prudently risk a company’s present assets in order to ensure its future existence. In fact, if a company never has a failure, I submit that their management is probably not discontented enough to justify their salaries.”
- Taking a risk and failing is the price of staying in business. Open-minded management can correct those costly mistakes in time. Management that fails to take a risk is stuck playing catchup.
- Be Inflexible
- Be so set in your ways that you refuse to see any other way of doing things. Stay close-minded! If the situation changes, keep doing what you were doing.
- The Coca-Cola Company
- Created a new glass bottle to differentiate itself from the competition in the early 1900s. Everyone would come to recognize the new 6.5-ounce green bottle with the trademark molded into the glass.
- Pepsi-Cola created a 12-ounce bottle, with the market slogan “Twice as much for a nickel, too” in 1939. Sales doubled from 1947 to 1954.
- Coca-Cola refused to change the small green bottle and lost market share to Pepsi.
- Sharp sales declines in 1955 finally forced management to make a change. They learned that the bottle was the selling point.
- IBM
- Led the world in mainframe sales in the 1980s. It had the highest after-tax profit of any company, in history at $6.6 billion in 1984.
- It projected mainframe sales of over $250 billion by 1995.
- It developed a PC in 1981 but it projected total PC sales of only 250,000 by 1987.
- Management believed in projections and the projections were off by more than a factor of 4. Over a million PCs were sold in 1985. IBM found itself on the losing end in the PC market.
- It filed the largest corporate loss ever of $8 billion in 1993.
- Management was too busy watching its soaring mainframe revenues to realize the future was in PCs.
- Ford
- Henry Ford revolutionized manufacturing and mass marketing. For sales to soar, he needed cars to be affordable for everyone. He drove the costs down by making all the Model Ts the same which increased sales volume. He increased workers’ pay enough to buy a car.
- “They can have it in any color they want, as long as it’s black.” — Henry Ford on the Model T
- Ford refused to change the Model T from 1908 into the 1920s even though competition gained market share with bigger, faster, fancier cars with more color options.
- He finally changed his mind in 1928 with the Model A but never regained the lost market share.
- Montgomery Ward
- Was run into the ground by Sewell Avery who believed another Great Depression was around the corner during the post-WWII boom. He refused to spend money to expand the company.
- Its rival Sears doubled its sales in the decade after WWII, Ward’s sales fell 10%…and the company is gone.
- Republic Steel
- Lost all its business with the canning industry because it refused to make lighter, cheaper aluminum cans. Management said it would never give up on steel cans. The canning industry switched to aluminum and Republican Steel is gone.
- “In my experience, in the absence of other strategic changes, the truism is true—you can never cost cut your way to profitability.”
- “I believe that flexibility is a continual, deeply thoughtful process of examining situations and, when warranted, quickly adapting to changing circumstances. It is, in essence, the key to Darwin’s whole notion of the survival of the fittest. Flexibility. Adaptation.”
- Change is difficult for some people. Maintaining the status quo is easy.
- Isolate Yourself
- A great way to ensure failure is to isolate yourself from what’s going on in the company:
- Separate yourself from employees, customers, stockholders, etc. of the company,
- Surround yourself with people that tell you what you want to hear (only the good news),
- Create a climate of fear,
- Take all the credit for successes and pass the blame for failures,
- Only associate with people that agree with you,
- Assume everyone lives as you do,
- Stay overconfident in how “great” the company is doing and believe you can do no wrong.
- “One of the traits of many of the legendary builders of business was that they had an uncanny ability to know and relate to their employees at every level.”
- “I’ve personally found that it pays to be paranoid, getting bad news to the top quickly so that you can quickly take steps to avert disaster.”
- “Don’t bring me anything but trouble. Good news weakens me.” — Charles Kettering, an engineer at General Motors
- Progress in any company is defined by management’s ability to solve problems. It requires knowing/accepting there’s a problem to solve.
- “Among some of the most successful people I’ve known well and worked with I’ve found there is often a self-effacing quality—an avoidance of the spotlight.”
- A great way to ensure failure is to isolate yourself from what’s going on in the company:
- Assume Infallibility
- A sure path to failure is to never admit to a problem, cover it up if you have to, or avoid it at all costs until it blows up then blame it on someone else.
- The best leaders are quick to admit to bad decisions, deal with mistakes, and accept fault — the buck stops here mentality.
- “Reputation and image are priceless. Guard them with your life.”
- Schlitz
- Was the #2 beer in the country in 1975. They cut corners, reduced ingredient costs, and sped up the brewing process with chemicals, which lowered the quality of their beer. Consumers hated it, its reputation suffered, and the brand never recovered.
- “When the perception of quality in even the most ordinary product is lost, all is lost.”
- “I can’t emphasize this simple truth enough—it really pays to see for yourself. And it pays to really listen to your own people face-to-face instead of through the filter of layers of bureaucracy.”
- Play Close to the Foul Line
- To ensure failure make sure nobody trusts you. Not your employees. Not your customers. Not your vendors. Not your shareholders. Make sure everyone believes you won’t be fair or honest in anything you do. Throw ethics out the window.
- Trust is the foundation of business.
- Broken Windows Theory — if a broken window is left unrepaired, soon the building with be vandalized and the rest of the windows broken.
- Companies that get into trouble tolerate bad behavior, worry about what’s legal not what’s right, and graduate to “can we get away with it?” Earnings manipulation, accounting irregularities, tax evasion, fraud, and scandal results.
- “When you become someone even mildly important, be careful—the writers may praise you to the heavens and endow you with more charm and more intellect than you could possibly deserve or they will find you more flawed than Scrooge.”
- “We can never pass enough laws to make men ethical.”
- There were over 71,000 pages of federal regulations plus SEC/NYSE rules before the Enron scandal. You can’t regulate away human misbehavior.
- “Unethical men and women can flourish for periods, sometimes very long periods, but ultimately their lack of morality—and their lack of humility—destroys them. You cannot build a strong and lasting business on a rotten foundation.”
- “There is no such thing as business ethics. Just ethics. It’s not separate from the rest of your life.”
- Don’t Think
- “If you want to fail, don’t take time to think. If you want to succeed, take lots of time to think. Thinking is the best investment you’ll ever make in your company, in your own career, in your life.”
- The information age is really the data age. The risk is not enough people know how to properly interpret and think about the data.
- “We frequently add to the complexity of life without gaining any discernible advantage—in fact, at times there are definite disadvantages.”
- “I believe in research, but I don’t expect the research to give me much more than a glimmer, an imperfect snapshot, of a moment in time. Bell-shaped curves won’t really tell me how to design a vision for the future. Surveys won’t reveal how the dreams of tomorrow should be shaped because nobody knows. If the builders of early automobiles had asked people what they wanted in transportation, the probable answer would have been, ‘Faster horses.'”
- A 1970s study gave horse handicappers different amounts of information to predict which horses might win a race. The handicappers did worse with 40 pieces of information than with 5 pieces. Less is more!
- Data allows our biases to see what we want to see (confirmation bias). It can create a false understanding or certainty where it doesn’t exist.
- “I’ve become very wary of all studies related to marketing and business management. They have their place, but I’m convinced that we are often measuring the wrong variables and the wrong people are evaluating the measurements.”
- The Coca-Cola Company
- Pepsi’s sales were better than Coca-Cola’s and management wanted to know why. New Coke became the answer.
- The mistake of New Coke was brought about after 200,000 taste tests showed the tasters liked the sweeter sample.
- The company introduced New Coke to widespread outrage but eventually reversed the error.
- Researchers asked if there was a specific difference between product A and product B that could be corrected. They asked the wrong question.
- There was nothing wrong with the original formula. Slowing sales was a marketing issue. It needed to generate more excitement around the brand.
- “We pay homage to reason, but we are held hostage to emotion. We are, after all, feeling creatures, and in the excitement of a particular endeavor once the ball is rolling, it’s difficult to stop.”
- Poor M&A deals often begin because it’s someone else’s idea, it generates early excitement with management, and the need to “win” drives them to overpay for a business that offers little material benefit to the company.
- “The “animal spirits” that John Maynard Keynes wrote of are more powerful than most businesspeople would like to admit.”
- The best thing management can do is run post-mortems on past mistakes. Find out what went wrong and never repeat it. To fail, simply repeat past mistakes over and over until you’re out of business.
- Put Faith in Experts/Consultants
- Experts/consultants have all the answers, flashy presentations, and flattery to persuade you into doing the wrong things. To fail, let the experts do the thinking for you.
- The Coca-Cola Company
- Bought a wine company because consults said it was a good fit. It wasn’t. They sold it nine years later.
- Consultants recommended that New Coke was the answer to sluggish sales. New Coke was approved and failed miserably.
- “A brand is not defined by what you or I think it is. A brand is defined by what is embedded in the mind of each consumer.”
- Philip Tetlock studied experts’ views on world politics. He found that experts were 80% confident on their predictions but correct only 45% of the time. Tetlock found that follow-up questions with the experts, despite being wrong, showed no signs of changing their views on the situation. They made excuses for why they were still right instead — it hasn’t happened yet, I was right based on the data, unforeseeable forces…
- Burn Rate = simply spending someone else’s money.
- “The narrow perspective of what appears to be genius is often the inverse of wisdom.”
- “Management is a craft, not a science. Beware of those who try to mathematize and quantify human behavior. We had managers and consultants at The Coca-Cola Company who saw people merely as numbers. They were not successful. You simply cannot put numbers on everything. It is, to my way of thinking, a failure of imagination.”
- “Statistical figures referring to economic events are historical data. They tell us what happened in a non-repeatable historical case.” — Ludwig von Mises
- On comparing businesses to others in the same industry: “This is a terrible mistake because each company within an industry should be striving to differentiate itself, make itself in some way unique, not average.”
- Love Bureaucracy
- To fail, make sure administrative concerns are the top priority over everything else.
- “The geometrically elegant machinery of the organization should not get in the way of the human creativity and productivity of individuals.”
- Rules and routines guide every company but the risk is that the routines become more important than the objective of the company. The people guard those routines because it gives them power in the company. The rules become rigid obstacles to the future of the company.
- The challenge of any big company is the elimination of unnecessary bureaucracy.
- Business is simply about serving current customers effectively and onboarding new ones. Anything that doesn’t fit those two objectives is unnecessary.
- “Every expense we made, every department we created, every project we took on had to answer the basic question: Will this help to create and serve customers? If the answer was not a ringing and positive “Yes!” whatever it was we were spending or undertaking had to be eliminated.”
- “It’s unbelievable how much bureaucracy can build up in businesses, particularly those in which you can pass almost all of your costs to the consumer.” — Warren Buffett
- Mixed Messages
- To fail, never send a clear message to employees, customers, and shareholders.
- Most people fail to grasp how much money a billion represents. They only understand smaller sums of no more than several thousand.
- Fear the Future
- To fail, maintain an irrational fear of the future.
- “There is a great difference between prudent caution regarding the future and unbridled fear of that future.”
- Humans have an uncanny ability to fabricate things to fear that lie just over the horizon. Doom and gloomers are experts at “forecasting” looming disasters.
- Pessimism is a growth industry. No industry has been more wrong, yet in more demand.
- “I’ve lived through the projected end of the world from global freezing in the 1970s, the near end of the world from Chernobyl in the 1980s, the even nearer end of the world from Y2K at the turn of the century, death from alar on our apples, cancer from our power lines, cancer from our cell phones, cancer from our food coloring, and cancer from the cyclamates in the diet soft drink TAB.”
- “The news business has never been about good news. It’s the bad stuff that makes people sit up and take notice.”
- Staged Arguments — news shows use it to pit two “experts” with opposing views against each other. It elicits the idea that anything can be questioned or argued against, even something that has incontrovertible scientific proof.
- “It has always been easier to assert that the world is going to hell in a hand basket.”
- “John Bogle, founder of the Vanguard Funds, pointed out that many of us have a “rowboat” mentality. We move forward into the future the way we row a boat—facing backward, looking only at the past.”
- It’s human nature to remember the good times, forget the bad times, and see the past through rose-colored glasses.
- History, going as far back as Aristotle, is filled with people who looked down on the “younger” generation and remembered the “good old days” as if the past was better than today. That pessimistic view lends itself to the belief that progress is impossible. Nothing will ever get better.
- “The past is more or less known, more or less vaguely understood, and, therefore, for some, it is a much more comfortable place to live than the present and certainly more comfortable than the future.”
- “No pessimist ever discovered the secret of the stars or sailed to an uncharted land or opened a new heaven to the human spirit.” — Helen Keller
- Pessimism is paralyzing, causing people to do nothing.
- “To aspire to any kind of leadership in business you simply have to be a rational optimist.”
- Have No Passion for Work
- To fail, have no passion for what you do. Don’t care about the finished product.
- “A major component of happiness in the business world is finding something you love doing, whatever it might be, and then finding a way to do it. To have success you have to have a high level of unadulterated desire to get up and go to work.”
- “A brand or a brand name is the most powerful force in business. Without it, you’re just dealing in commodities and anyone can come along and carve out a share of your business. But with a good brand you have a weapon to defend your business and a foundation on which to build the future.”
