with VW having advertised its diesel cars on American television as being super clean. In one ad, an older lady holds a pure and pristine white cloth behind a car exhaust pipe with the engine running, and the cloth remains whiter than white. Those who so blatantly blur the lines of corporate values will pay—or are paying—the price (see Chapter 4). Once described by one of Europe’s leading current affairs magazines, Der Spiegel, as “North Korea without the boot camps,” the corporate leadership culture at VW is a good example of why company values have to be much more than just slogans for use at town hall meetings and offsite workshops. At VW, employees trembled with fear in front of senior management, as they could lose their jobs if they didn’t meet targets and stay within budget. Consequently, they covered up and fiddled problems, and now the business is faced with much higher costs arising from fraud. Even after the manipulated software was first exposed, VW’s inconsistent relationship with company values continued unabated. In the spring of 2016, while blue- and white-collar employees were in fear of losing their jobs and taking pay cuts, the top management pushed through seven-figure bonus payments for themselves, still convinced that they had done everything “right.” Since then, it has become increasingly clear that management performance needs to be reevaluated, and calls are getting louder for these performance bonuses to be paid back. And rightly so! By April 2019, the diesel scandal had already cost the company twenty-nine billion euros; international investor groups were lining up with damage claims, and, most recently, another 5.4 billion euros in accruals had to be put aside by the CFO. It remains to be seen whether that will be enough. Meanwhile, over seventy criminal cases against individual managers have been filed in the United States and Europe. In fact, ex-VW CEO Winterkorn and nine other VW and Audi managers no longer dare to travel to the US for fear of being arrested on the spot.
Of course, many other factors have an impact on business success, and we will take a closer look at them in the course of this book. At what point does an emotionally charged business vision start to be counterproductive (Chapter 1)? How were the Incas able to succeed over many decades in entrusting leadership to the most talented, an area where many businesses fail (Chapter 2)? What defines credible leadership (Chapter 3)? How can businesses today avoid the kinds of destructive power struggles that brought the Inca Empire to its knees? And, when faced with other people’s self-interest and biases, how can managers remain level-headed and make objective decisions? A careful analysis of Inca history can provide answers to these questions. For five hundred years, the way the Incas were viewed was heavily influenced by their insatiable conquerors and Catholic missionaries. The newcomers justified their brutality by denouncing the Incas as a “primitive” culture. Bearing this in mind, it’s well worth asking yourself: “Who’s telling me what, and why?” (Chapter 7, “Sound Judgment.”)
Two and a half thousand years ago, Greek philosopher Heraclitus of Ephesus pointed out that “there is nothing more constant than change.” In the Bible, Joseph warns the Pharaoh that seven years of famine will follow seven years of plenty (Moses 1:41). The Middle Ages produced images of the goddess Fortuna spinning the wheel of fortune—relentlessly and without any emotion. There is a clear common message. The fate of whoever happens to be at the top can quickly change. Nothing will stop Fortuna from spinning them around and down, but of course there is always a chance they will end up back at the top again.
The idea that success is fickle is probably as old as mankind. For businesses, this means that not only stunning successes are always possible, but also catastrophic collapses. And while “disruptive technology” may be a fashionable buzzword today, this idea was already the basis of Joseph Schumpeter’s theory of “creative destruction” formulated more than seventy years ago. This asserted that the driving force of capitalism was innovation; new and better processes and technology continually challenge the established order, and the ground rules for production are constantly changing. From this perspective, the mechanical loom and the steam engine can be seen as agents of “disruption,” only to be rendered obsolete by innovation’s next throw of the dice.
Those who want to stay ahead of the game must keep changing and constantly adapt in order to remain relevant and survive. We all know examples of businesses that missed the boat and let progress pass them by. Some carried on producing typewriters even as the personal computer came to dominate. Others produced flashlights, even though every smartphone now includes a flashlight function. On top of external factors, homegrown mistakes can send a business into decline, as we saw at DaimlerChrysler, GE, and VW. As early as 2004, Gilbert Probst and Sebastian Raisch at the University of Geneva were asking themselves if there could be such a thing as a “logic of decline.” They analyzed the hundred biggest corporate crises of the previous five years in the United States and Europe, looking at the fifty biggest insolvencies and fifty companies whose market capitalization had collapsed by a minimum of 40 percent in the same period.
Probst and Raisch identified four characteristics of consistent and sustainable business success:
•Performance-driven business culture
•Strong growth
•Willingness to embrace constant change
•Strong (“visionary”) leadership
Interestingly, 70 percent of the businesses that failed actually displayed all of these characteristics—but to excess! These organizations suffered badly from over-rapid growth, hasty change processes, excessively powerful and stubborn CEOs, and an “exaggerated performance culture.”
Performance Culture
An extreme performance culture—one with high salaries and bonuses, for example—fosters rivalry, along with a mercenary attitude. Employees attracted by such a culture are quick to leave the sinking ship if the business suffers a downturn in fortune, thereby accelerating its decline.
Growth
Rapid growth frequently results from too many acquisitions in too short a time period. This not only creates obstacles for business integration, but frequently overburdens the acquirer with high debt, which in turn becomes a problem during periods of lower turnover. Good examples of this are the US conglomerates Tyco and ABB. When change is not properly managed, the result is disorientation at all levels. At ABB, following sixty takeovers and countless restructurings and changes of direction, there were moments when employees were no longer certain what the business was actually there for. The final nail in the coffin is having a top management that fails to recognize the scale of the problems because past success has made them self-satisfied, dazzled by their own brilliance, and oblivious to the dangers they are facing. The business burns out, sinks into insolvency (for example, Enron, which grew 2000 percent between 1997 and 2001), or is weighed down by mountainous debt (as seen at British Telecom, Deutsche Telekom, and France Telecom). Probst and Raisch talk about “burnout syndrome.” More recent examples of this would include Porsche AG—which was assimilated into the VW group after a failed takeover attempt left it badly exposed—the ever-changing history of Infineon, and the demise of Valeant, which we analyze in Chapter 6.
Change
The collapse of successful businesses is not always determined by fate, external events, or disruptive technologies, but is frequently the result of a string of poor management decisions which, taken together—according to Probst and Raisch—form the basis of the “Logic of Decline.” So far, so bad. Unfortunately, it’s not the case that all a business needs to do to stay on a solid footing is to take its foot off the accelerator. The other 30 percent of businesses failed due to their inertia and weak, indecisive management. A phenomenon referred to as “Premature Aging” is when turnover stagnates, innovations are ignored, board members block reforms, and an overly benevolent business culture prevents essential personnel reductions from taking place. Examples that come to mind include Eastern Airlines, Kodak, Xerox, and Motorola.
