PART ONE Unbalanced Orchestration

Throughout time and industry, leaders have made some pretty huge errors in spending—errors that we spectators love to mock as moments of insanity or, at the very least, idiocy. Why would a leader spend resources in a way that actively destroys his company? Assuming the leader is thoughtful, paying attention, and not trying to sabotage anything, why would he push the “spend” button so eagerly, when it seems so clear it was the wrong call? Chances are that he is neither insane nor an idiot. Rather, leaders drive companies—and their own careers—into the ground because they have a problem with the word “yes.” They suffer from an inability to step back, get off the treadmill, and say “no” to opportunities when that’s exactly what they should be saying.

Jim Owens, whom we met in the last chapter, described the consequences of the “yes” problem as “having a long tail.” It can take months, or even years, to assess whether the outcomes of many leadership decisions were right or wrong. With the benefit of 20/20 hindsight, we followed several of these “yes” mistakes all the way back to the decision’s origin in order to identify the underlying causes. When you look closely at where all the trouble began, the lessons inspire an edifying mix of “Aha, I should have seen that coming” and “Wow, I never knew that.” Intel CEO Craig Barrett diagnosed the “yes” problem in this way: “Companies have to invest to make money. It’s when my managers one, speculate; two, overcommit; and three, try to be heroes that we run into real trouble.” As it turns out, Barrett’s list aligns closely with the three major catalysts identified in our research: irrational greed, escalation of commitment, and trying to be all things to all people.

By irrational greed we mean chasing dollars for the sake of chasing dollars. It is characterized by the inability to say no to new opportunities—even if they don’t fit within the strategic context of the organization. Escalation of commitment occurs when a leader cannot admit failure. She makes a poor strategic move, and instead of saying “no more” and conceding the battle, she commits even more resources, throwing good money after bad and sinking costs into a bottomless black hole.

Finally, leaders falter when they try to be all things to all people. This behavior stems from the attitude, “Why would we intentionally exclude a customer segment?”

These three catalysts are responsible for destroying careers and destroying companies. In this chapter, we will discuss each one, provide examples of otherwise good leaders who fell into common traps, and offer tools to help you steer clear of these mistakes yourself.

IRRATIONAL GREED: CHASING PENNIES WITH DOLLARS

You are a pretty good leader. Your track record is solid, and you’ve accomplished some short-term victories as you’ve led a successful organization. Most of your decisions have been effective. Now you are faced with a new opportunity—an opportunity that has the potential to generate significant revenue, but that doesn’t fit strategically with the scope of your organization. Nevertheless, your eyes open wider when you discover that the revenue potential is bigger than you originally anticipated. You are very tempted. What do you do?

If you take the leap, you’re not alone. Many leaders don’t have the discipline to say “no” to money-making opportunities, even those that fall outside of the firm’s scope. And many times, that’s when a downward spiral begins. The company jumps in with both feet and starts chasing dollars without critically assessing whether the opportunity is strategically appropriate. The leader becomes so enamored with the idea of the new opportunity that he sacrifices his strategic direction. Once that’s gone or compromised, the company may lose focus altogether. The leader starts leading opportunistically rather than strategically, like a shark attacking anything that moves.

This sort of thing happens all the time because, very simply, it’s hard to say no to money, and sticking to a plan is challenging when alluring opportunities arise. Leaders don’t realize they are making a mistake, because making money is their job. So following money seems like a sensible strategy. It isn’t. It’s a substitute for strategy, and it can be a costly mistake.

When we interviewed Jeff Hoffman, a founder of Priceline.com, he admitted as much. “It’s hard to say no to money,” he told us, then added, “A good leader needs to know when to leave the money on the table.” Hoffman explained how he and his partners were able to do exactly that in order to succeed. While the dot-com bubble was bursting and many entrepreneurs were finding themselves the victims of dollar chasing, Hoffman refrained. “When Priceline became good at airline tickets,” he said, “others wanted us to sell their things on our website. Our business was built around airlines and hotels. We had to decide if we were going to expand through other products or new geographies. We had a chance to sell suitcases. Is there money in selling suitcases? Absolutely, but we have decided we are not going to get into luggage. Rather, we are going to expand the business that we already do better than anyone else.”

When a leader starts chasing dollars, she runs the risk of losing strategic direction and misallocating resources. Unbalanced orchestration, or unfocused leadership, is virtually guaranteed. Chasing after dollars is like taking “strategy spaghetti” and throwing it against the wall: whatever sticks becomes your next opportunity. There is no cohesive direction, no firm control. The leader has a problem that stems from irrational greed. She makes decisions without constraints—but a leader needs to work within constraints while avoiding constriction. Constraints set up parameters that represent your strategic direction—a leader’s responsibility. If the direction is too narrow, it constricts the flexibility you need to grow; if it’s too broad, it offers no guidance for decision making.

Imagine you are driving down an expressway in a large city. There are six lanes going in your direction. To the left of the six lanes, there is a large concrete median; to the right there is a shoulder. You cannot cross over the concrete median to the left nor drive over the shoulder to the right. These are your parameters, your constraints or boundaries. However, they are not so constricting that you have to stay in one lane. You are free to change lanes as much as you want to get where you’re going, as long as you don’t cross over the boundaries. Leaders who engage in chasing dollars have no boundaries—they jump the concrete median (or at least they try to). As long as they think they can make money, they pursue it, without rhyme or reason, and with predictable consequences.

Consider the story of L.A. Gear. Robert Greenberg, founder and former CEO of L.A. Gear, spent his early professional days as a hairdresser and wig salesman. From these experiences he developed a deep understanding of women’s fashion. He then started to rent and sell roller skates to patrons in the Venice Beach area of California. With his keen fashion sense, Greenberg started marketing E.T. shoelaces (based on the movie E.T.) as a way to accessorize the skates, and ultimately opened up a hip women’s fashion shop: L.A. Gear.

While selling women’s clothes, Greenberg noticed that his daughter’s friends wore boys’ high-top basketball shoes because none were designed specifically for girls. He soon discovered that only 20 percent of athletic shoes were actually used for athletic activities, and he came up with a fantastic idea: Why not design trendy high-top shoes for girls—not as athletic gear, but as a fashion accessory? He closed his retail shop and started importing Korean-made fashion sneakers under the same name. He designed shoes in bright flashy colors like pink and turquoise, and he started to “bedazzle” the sneakers with sequins, palm trees, and other California-inspired bling. Greenberg even redesigned the high-top shoe, stopping the eyelets at the ankle—a design effort to improve style, not performance, as removing the eyelets made it anything but a performance shoe. Additionally, each pair of shoes was sold with multiple pairs of shoelaces, to further help the purchaser accessorize. L.A. Gear even developed its own type of “slouch” sock to be worn with its shoes, further targeting young women.

Greenberg knew his market. L.A. Gear became an instant success. In 1984, Greenberg launched a national advertising campaign, promoting his shoes as the “Los Angeles lifestyle.” Sales skyrocketed from approximately $11 million in 1985 to more than $820 million in 1989.¹

To position his fashionable shoes as a high-end brand, Greenberg sold them only in stores such as Macy’s and Nordstrom. By 1989, L.A. Gear was the top-performing stock in the shoe industry, becoming a national brand known for cutting-edge accessorized girls’ and women’s shoes, and promoted with risqué ads featuring beautiful California women. Greenberg’s company was named Company of the Year by Footwear News magazine and ranked third on Business Week’s list of the 100 Best Small Corporations.

Everything was going great. But things slowly started to unravel in the 1990s when Greenberg and the leadership team at L.A. Gear apparently became greedy and started to chase dollars. Three devastating strategic mistakes put the “Company of the Year” into bankruptcy.

Lest this cautionary tale scare leaders into staying solely on the straight and narrow, note that if you insist on sticking to just one lane, results are similarly poor. Leaders must create some constraints, but that simply means they must establish parameters to help keep their business on track. Businesses that too strictly constrain their products often are negatively affected by new competition and environmental changes such as recession. One of the CEOs we spoke with explained, “I got on a way of doing business that was producing okay revenue. I was in my space making brass washers and springs. I limited my focus to only these narrow products. I didn’t see China coming into the market as fast as my customers did.” He lost his entire business.

Our research has shown that when leaders abandon their strategic direction to chase after opportunities outside the scope of their business, bad things happen. In contrast, when leaders hold on too tight and don’t let go—or worse, can’t let go—bad things happen, too. It’s a phenomenon known as escalation of commitment.

ESCALATION OF COMMITMENT: KNOWING WHEN TO SAY WHEN

The gambler’s paradox is a phenomenon you can sadly, and clearly, see in any casino on any given day. Someone decides to play the slots and starts burning through his life’s savings in hours. He convinces himself that “the next time I pull the handle on the slot machine, I will win everything back. I just need to keep playing to finally get a win.” The voice inside his head says, “I can’t quit now, I am already in too deep.” Obsession is driven by his escalating commitment.

The term “escalation of commitment” was first coined by Barry Staw, a business professor at the University of California, Berkeley.⁴ It’s defined as a decision-making pattern in which a person—for our purposes, a business leader—continues to support or believe in a strategy even after it has continually failed. Escalation of commitment is often described as the inability to let go, or as an obsessive need to try to succeed even when failure is inevitable. And as we discussed in Chapter One, it can stem from perfectionism, which prevents people from accepting failure as an option. Escalation of commitment is also described as an irrational decision-making approach that arises when a significant emotional, psychological, or financial investment has been made, resulting in a significant sunk cost. And this sunk cost is so great that the leader keeps on pouring more and more resources into the project to justify what has already been invested. She continues to support the venture even though there is data that argues otherwise. Ultimately the leader starts throwing good money after bad. It is yet another scenario in which a leader needs the discipline to say no, to realize that enough is enough, to be able to raise the white flag. This discipline is hard to come by, and as a result, escalation of commitment is more common than you may think.

Escalation of commitment is almost inevitable in failing entrepreneurial ventures. An entrepreneur invests his life’s saving to start a small business. Markets may turn out to be worse than anticipated, resulting in low demand. The company has not been able to develop any sources of competitive advantage, and other competitors are taking away what little market share he already has. Cash is running out. So what does he do? Instead of admitting failure, he doubles down; he throws more money into the business and ultimately loses everything. As the expression says, you have to “know when to hold ’em, know when to fold ’em.” Unfortunately, many leaders aren’t able to figure this out. It is extremely hard to admit to strategic failure, because it means resources have been invested, money has been spent, and neither is coming back—they’re gone for good. Prior investments are now nothing more than water under the bridge. Emotionally, this is difficult to admit, so many leaders make the mistake of increasing investments when the writing is on the wall, even when logic says they should walk away. As with many other leadership mistakes, the decision is one to defy logic. Leaders get caught in the trap of “We’ve already come this far, might as well see it to the end.” These leaders have become less like CEOs and more like pit bulls. Once a pit bull bites something, it will not let go, even when holding on is detrimental to its well-being. It has been bred to ignore pain and not let go.

Priceline.com’s Hoffman has a metaphor for escalation of commitment: the “Thanksgiving Test.” Imagine a scenario in which someone shows up to Thanksgiving dinner and proudly tells everyone at the table about a magnificent venture he is going to pursue over the next year. During that year, things start going wrong. As the venture starts to fail, he realizes he can’t show his face at the next Thanksgiving dinner, because he’d hyped things up the year before. People might ask how things are going. What would he say? What could he say? Rather than be forced to admit his failure at Thanksgiving dinner, he keeps trying, throwing good resources after bad resources. As Hoffman puts it, people in this situation “just keep on beating the dead horse bloody.” So a leader should be able to ask himself, “Am I continuing to chase a losing proposition in order to save face and avoid the shame of failure? Am I too worried about showing up at Thanksgiving dinner this year?”

Leaders fall into this trap over and over because they let emotion influence their decisions. Our research shows that the three most common emotional motivators for beating that dead horse are:

Eternal Hope—The belief that somehow more investment in a dead-end project will turn things around.

Pride—The inability to admit defeat when the inevitable has occurred.

Ownership—The more ownership a leader feels when it comes to a failing effort, the higher the probability for escalation of commitment.

None of these qualities, in and of themselves, are bad. Hope can be a good thing; leaders should motivate their employees and inspire them in the face of challenges. And pride is an admirable quality in any leader, or in any follower for that matter. Similarly, we encourage leaders and their workers to take ownership of their actions—that makes for strong and healthy organizations. But when these three emotional motivators take over from logic and rational decision making—when the writing is on the wall and the strategy either has already failed or is doomed to fail—they can end careers and ruin companies.

We can also look at escalation of commitment in terms of overt versus covert investment. Overt investment is the actual dollars that you spend. Overt investment is measurable and tangible. Often it can be rationalized as an effective use of resources to “save” an investment. In contrast, covert investment is the time that you have invested, the emotional energy, and the psychological commitment to the project. Although overt investment is easier to discern, covert investment can be the more costly of the two. It’s hard to put a dollar figure on emotional investment, which is another reason why escalation of commitment is such a critical mistake: we never actually know the total cost. Whenever a leader is backed into a corner, needing to justify his decision, or whenever ego trumps pride, irrational decisions are made and resources—both tangible and intangible—are allocated poorly.

A classic business example of escalation of commitment is that of Motorola’s Iridium project. In the 1980s, the business community was demanding a new way to make phone calls. In 1985, Barry Bertiger, an engineer working at Motorola, created the concept for Iridium, ultimately resulting in a network of sixty-six low-orbiting satellites to allow users to make calls directly from anywhere in the world. At the time of inception, the idea had a lot of promise, so Motorola spun off Iridium. Given the complexity of the technologies necessary to make the network functional, it took over fifteen years from inception to commercialize the idea. Unfortunately for Iridium, during that span of fifteen years, the cell phone industry developed rapidly. By the late 1980s many of the problems with cell phones had been resolved. But how did the leaders at Iridium respond? With escalation of commitment—they said, in essence, “Well, we have already gone this far, so let’s continue to move forward.” But how could they move forward with the initial idea when the cell phone industry had virtually eliminated the need for Iridium’s low satellite network? When Iridium finally got their product to market, the phone cost around $3,000 and was relatively large. Also, given that the phones relied on satellite technology, they could only be used outdoors. The company filed for bankruptcy in 1999 and was sold for an estimated $25 million, but it had invested $5 billion over the fifteen years it spent developing the network. At a certain point during the development period, the writing was on the wall and it was time to pull the plug, yet Iridium continued to plod ahead.

Although Iridium is considered a classic example of escalation of commitment, a classic-in-the-making is emerging now. News Corp., the second largest media giant in the United States (behind Disney Corporation), bought the social networking company MySpace for $580 million in 2005. However, shortly after the acquisition, MySpace fell from its position as the dominant player in social networking to one of a company in danger of becoming obsolete. Consumers had moved on. Yet given the large initial investment, News Corp. kept pouring resources into their fallen icon.

Founder Tom Anderson had built MySpace in June of 2003, and, prior to the News Corp. acquisition in 2005, MySpace was the most popular social networking site in the world. However, by early 2008, Facebook had overtaken MySpace. The site’s downward spiral started to accelerate. Facebook had a more user-friendly platform, a brand that appealed to adults rather than the thirteen-to-fifteen-year-old demographic that MySpace had targeted, and, quite frankly, Facebook had the coolness factor working in its favor. Anderson tried several redesigns of MySpace, even changing the site’s color palette to appear more like Facebook. However, these efforts were in vain. Anderson’s company was too slow to integrate technologies that allowed users to send messages—especially direct messages—more easily.

By 2009, the verdict was in, and Facebook had won. Still, leaders at News Corp. continued to pour investment dollars into MySpace, including opening extravagant new offices around the world. Facebook, in contrast, had no such plans and continued to successfully attract new users from all over the world. But escalation of commitment won again, as News Corp. had to try to recoup its $580 million price tag.

In April 2009, Rupert Murdoch, chairman and CEO of News Corp., changed the leadership team at MySpace. Anderson stepped down as president, and Owen Van Natta, former Facebook COO, was hired to turn things around. After reducing his workforce by 40 percent, Van Natta restructured the company at a cost of $180 million; the hope was that MySpace would be positioned to rebound with a new purpose. But it was too little too late, and the company continued to fail. Van Natta left after less than a year on the job, at which point he lamented that MySpace was no longer even a social networking site, but was now only a media site⁵—a far cry from being the world’s preferred social network, which it had been just years earlier.

In March 2010, under the leadership of copresidents Mike Jones and Jason Hirshchorn, MySpace developers added recommendation engines to suggest games, videos, and music based on a user’s previous search behaviors. Developers also invested considerable resources to make the site more secure, added a new photo option, and developed a new photo app. Then in September 2010, MySpace developers enabled users to integrate MySpace with Twitter and Facebook. Wait a minute—integrate with Facebook? Wasn’t this an admission of defeat? Yet development continued to increase. Specifically, in November 2010, MySpace announced that it had created a platform to fully integrate with Facebook Connect. Developers referred to this as an effort to “Mash up with Facebook.” This mash-up seemed to represent the raising of the white flag, as MySpace recognized that Facebook had won.⁶

Despite all of the investments and changes, the downward spiral of MySpace continued to spin out of control. Specifically, even as MySpace was developing several new mobile apps, market research figures released by comScore uncovered that MySpace had lost ten million users between January and February 2011, and traffic was down 44 percent from the previous year.⁷ Advertisers (MySpace’s source of revenue) were no longer interested in working with MySpace. Finally, News Corp. officially admitted defeat and put MySpace up for sale.

After investing $580 million in 2005 and throwing additional undisclosed millions into MySpace for the six years that followed, News Corp. sold MySpace to Specific Media on June 29, 2011, for a mere $35 million. The MySpace debacle is destined to be a classic in the category of escalation of commitment. There was a point when each of the leaders at MySpace could have said “enough!” But Anderson, Van Natta, Jones, and Hirshchorn all said “more.” If these leaders had seen the writing on the wall rather than continuing to invest in a losing proposition, careers could have been saved, as well as millions of dollars.

Although the inability to quit is as common as the inability to avoid money-making opportunities, there is a third mistake, one that is the most common of all: the inability to turn down a customer.

BEING ALL THINGS TO ALL PEOPLE

Our interviews with executives illuminated the third common mistake affecting a leader’s ability to say no: fear of exclusion, or trying to be all things to all people. Whereas the actions driven by irrational greed are akin to throwing a whole bowlful of strategy spaghetti against the wall and seeing what sticks, fear of exclusion has an effect akin to throwing multiple bowls against the wall and trying to do everything—pursuing the spaghetti that sticks to the wall as well as the spaghetti that falls on the floor. This fear spurs a leader to cast his net as wide as he possibly can to ensure that no one is excluded. The outcomes of trying to be all things to all people are similar to those we saw with chasing dollars earlier in this chapter; the result is a loss of strategic direction. But the underlying catalysts that drive leaders to pursue this strategic choice are diametrically opposed. Whereas chasing dollars is based on irrational greed, being all things to all people is based on fear of failure and lack of decision-making confidence.

It is very common in entrepreneurial ventures to want to be all things to all people—especially before a leader has identified a strategic direction. Often in entrepreneurial ventures, the owner is pulled in multiple directions simultaneously. He needs to encourage talented people to join his not-so-profitable company. Investors need to be reassured that their investment will return. Suppliers need to know their invoices will get paid. The leader is so busy trying to please everyone that he has no semblance of strategic direction.

But leaders who want to be all things to all people appear at larger companies too. Recently, numerous automotive blog sites—such as autoevolution.com, autoblog.com, and benzinsider.com—have posted articles that question Mercedes-Benz USA introduction of the Mercedes B-class hatchback and a new two-door C-class coupe.⁸ These critics are concerned that these new models will dilute the Mercedes-Benz brand. Up until the introduction of the C-class, only the ultra-rich could afford to buy a Mercedes. Unfortunately for Mercedes, these articles have been accurate. The new model alienated a segment of Mercedes’ core customer base. Owning a Mercedes historically correlated with prestige, exclusivity, success. The brand has long appealed, to some extent, to an elitist market segment. Bottom line, the brand represented a specific image—an image for which customers were willing to pay a premium.

With the new models, Mercedes made it possible for customers to buy a new Mercedes for around $30,000. What once was a car that exuded prestige can now be purchased by a recent college graduate. The leaders at Mercedes have diluted the brand because they want to be all things to all people. Trying to be a luxury car company and simultaneously selling cheaper cars using the same brand? Well, it didn’t work for Mercedes. The result? For the first time in history, Audi outsold Mercedes in the first three months of 2011. According to Bloomberg, Audi is on its way to being the top luxury car manufacturer in the world, as the company expects to sell 1.5 million vehicles per year by 2015.⁹

The process of sticking your flag in the sand, taking a position, and following your strategic direction by nature will exclude potential customers. Some customers will feel left out, but that’s okay. Trying to please everyone will ultimately lead to not pleasing anyone. Strategic focus actually requires exclusion.

If you are still not convinced that trying to be all things to all people is a bad idea, ask Charles Conaway, former CEO of Kmart. At one time, Kmart was one of the most respected brands in the United States. What led to its demise? Trying to be all things to all people. Kmart tried to be chic and yet known for its low prices, resulting in lost strategic direction and confused customers.

As the first real national discount retail chain, Kmart was a brand known for great prices. Then in the 1980s, under the leadership of Bernard Fauber, Kmart decided to be all things to all people. It started to develop designer brands—Jaclyn Smith, Kathy Ireland, Joe Boxer, and later, Martha Stewart—to attract a wealthier clientele. At the same time Fauber didn’t forget about price-conscious shoppers: Kmart still relied on its weekly fliers offering huge discounts and the famous “blue light specials” in its stores.

Harvard Business School professor Michael Porter, credited as the “father of strategic management,” identified two categories of strategic focus. At one end of the spectrum, firms compete on price; at the other, they compete on being unique or differentiated. He defined firms that try to do both strategies simultaneously as “stuck in the middle.” And there is significant data to show that firms that are stuck in the middle will likely fail.¹⁰ Kmart was straddling this proverbial fence.

Then, as market conditions changed in the early 2000s, the choice for large national retailers became especially stark. H. Lee Scott Jr., CEO of Wal-Mart, decided to continue on the path of competing on price. Scott knew that his stores would not appeal to urban shoppers looking for high-end designer names. Robert Ulrich, CEO of Target, decided to follow the path of competing on differentiation. He knew that he would alienate shoppers who cared only about price, but his stores were going to be more upscale and carry more designer brands. Charles Conaway, CEO of Kmart, decided that Kmart should continue to try to serve everyone. Kmart pursued both paths and succeeded at neither. In January 2002, Conaway’s Kmart had to file for bankruptcy.

How can trying to be all things to all people be so damaging? First: brand dilution. When Mercedes and Kmart tried to be all things to all people, their respective brands became diluted. And once a brand becomes diluted, customers become confused (Kmart) or disgruntled (Mercedes). Second: sunk costs. When trying to be all things to all people, you will incur additional development costs—beyond what is necessary—resulting from a more complex business model of serving multiple markets. Trying to recoup those sunk costs can lead to an escalation of commitment.

Olli-Pekka Kallasvuo, former CEO of Nokia, provides an apt example of the sunk cost consequence of trying to be all things to all people. In 2007, Nokia appeared at number 3 on Fortune’s Top 10 Companies for Leaders. By 2010, what was once the world’s largest cell phone manufacturer was quickly deteriorating. A cursory look at their website in 2010 revealed that they had forty-four phone models available on their “short list.” Apple offered two. Too many choices resulted in excess product-development costs and very confused customers. Then Stephen Elop, Kallasvuo’s successor as CEO of Nokia, announced that the company would not compete in the smartphone market. How could the world’s leader in cell phones miss a fundamental shift in their own market? They were actually already too busy being all things to all people. Not only had Nokia invested in a plethora of models, but its leaders also had fallen victim to escalating commitment with its own operating system (Symbian). As a result, Nokia has gone from the world leader in cell phones to struggling giant. The company’s escalation of commitment combined with trying to be all things to all people created a scenario for the perfect storm. On June 22, 2011, Nokia made 24/7 Wall Street’s list of the “Ten Brands That Will Disappear in 2012.”¹¹

Story after story emerges of huge, well-established companies that lose their way trying to be all things to all people. Perhaps Alan Lacy, CEO of Sears, said it most poignantly: “We’ve had some lack of clarity and focus … And I think at the end of the day we had just not—in some shape or form—been able to get the right kind of relevance to customers in this category.”¹²

JUST SAY NO: AVOIDING THE MISTAKE OF YES

So far in this chapter we have talked about three critical—and common—mistakes that leaders make when they are not able to say “no”—“no” to chasing dollars, “no” to escalation of commitment, and “no” to being all things to all people. How can a leader develop a mind-set of saying “no” instead of “yes” when necessary?

There are four tactics leaders can use to avoid making these types of mistakes, which we will go into at length. First, explicitly define your perception of your organization based on its value. When you look in the mirror, what do you see? One way to avoid saying yes to any of these temptations is to define your organization based on the value your company provides rather than the products or services it offers. Second, relentlessly pursue an inventory of potential opportunities. The larger the inventory, the less likely a leader will jump at the first opportunity that presents itself. Comparing opportunities over the long term can help you know when to say no, whereas forcing growth opportunities is a primary manifestation of chasing dollars and trying to be all things to all people. Third, establish and use a repeatable framework that enables you to assess whether or not a potential strategy falls within the strategic scope of the organization. Finally, know where your market segments are, and, more important, know where they are not.

Perceive Your Organization’s Value Proposition

If leaders really challenge themselves to seek it out, they will find that every organization has some unique value proposition. If you develop a fundamental understanding of how your markets define value, and you couple that with a fundamental understanding of how your organization delivers value, you’ll better know which opportunities to pursue and which to avoid. The primary question a leader needs to consider is, what are the underlying reasons for the company’s existence (other than maximizing shareholder wealth)? Defining why the company exists can be the difference between pursuing the right opportunity and making a huge mistake. To define why your company exists, you have basically two choices:

1. Define your organization based on your products or services.

2. Define your organization based on the value you provide to customers.

Products and services are the outcome of business activity; value is the reason for those products and services to exist in the marketplace. Focusing on value can help you avoid a lot of strategic blunders. Every company is in business to fulfill a need, plain and simple. At Mercedes, they saw their company as an automobile manufacturer—they focused on product. And in this light, it seemed to make a lot of sense to create a new, relatively affordable line of cars. What Mercedes didn’t take into account was the value that its brand portrayed and the need it fulfilled. The brand portrayed an image of success and prestige. That was a key value driver for Mercedes, but they missed it. If they had kept their eye on protecting and building their value proposition, they would not have made this blunder.

As human beings, we are constantly trying to fulfill our needs. Every successful product or service fulfills a need. As leaders, when we focus our attention on the “needs” our products or service fulfill, rather than on the actual product or service itself, we can gain the vision needed to avoid saying “yes” when we should be saying “no.”

Relentlessly Pursue Potential

Some leaders have the false belief that opportunities for strategic growth emerge periodically, when the time is right. They see growth opportunity as a reliable—if irregularly scheduled—train. But we’ve all heard the expression “window of opportunity,” and, in reality, that’s how an opportunity presents itself—as a window that’s open briefly, and not according to any sort of schedule. There is only a small window of time when a leader can seize an opportunity. Many executives told us that in order to find the “right” growth opportunities, a leader needs to relentlessly persist, making opportunity identification an ongoing process. This is how to be ready when the window opens. Our leaders told us that almost every opportunity they’ve successfully leveraged was by design. The concept of blind luck does not exist in their world. Priceline.com’s Jeff Hoffman puts it succinctly: “Great leaders create their own luck.”

SRC Holding Company CEO Jack Stack (also author of The Great Game of Business) has shown some remarkable persistence in his career. During the height of the 2008 recession, Stack and his leadership team relentlessly pursued opportunities through some bold, contrarian moves. They borrowed at long-term fixed rates when banks were collapsing. They hired top people while other companies in their competitive space were “right sizing.” They redefined their strategic mission from fast growth to a focus on “clear roles, clear goals, clear communications and complete ESOP objectives.” One of Stack’s great formulations for this approach was to “use pessimism to our advantage and lead with optimism.” While many leaders saw the recession as a threat, Stack saw it as a potential opportunity.

Also consider Sir Richard Branson, president of the Virgin Group and one of the richest people in the world. He sees opportunities that most of us would never see, and he writes them down in notebooks. He carries around a collection of these notebooks wherever he goes, making entries on a daily basis. He states, “I can’t believe when I see people not writing things down. You know they’re not going to remember everything.” At last count, he had over 125 black ledger notebooks containing years and years of ideas. His observations turn into opportunities, totaling over four hundred business ventures associated with the Virgin Group. Hundreds more, obviously, were never operationalized, but Branson has never had to wait around for opportunity to knock on his door.

A persistent leader is constantly learning, thinking of new opportunities, like Branson. The problem with many leaders is that they don’t have an inventory of opportunities to assess, so when one presents itself, they are vulnerable to putting significant resources behind it without thinking it through and determining whether it is even strategically appropriate.

Determine Strategic Appropriateness

Often, when a leader considers pursuing a new opportunity, he spends a lot of time looking at financials. Metrics such as expected rates of return, payback periods, and cost of capital are all important considerations. Financial metrics like these are commonly used because they are hard numbers—relatively easy to generate and relatively easy to justify. But what about some of the soft-side criteria, such as strategic fit and leadership skill sets? By looking at the soft-side criteria, a leader can decrease his probability of falling into the trap of saying “yes” when he should be saying “no.” Here are three basic questions to ask in this regard:

1. Does the strategy support the current overall strategic position of the organization? If a company is pursuing cost leadership, as in the case of Kmart, does it make sense to start pursuing a strategy that focuses on differentiation? If the answer is no (and it probably is), then saying “yes” to the new strategy may indicate that the company is trying to be all things to all people. When the leadership at Mercedes decided to offer its C-class automobiles, did this support the strategic position of the organization? The answer is clearly no, as leadership diluted the Mercedes brand.

2. Is the strategy appropriate, given the current competitive environment? Given what competitors are doing, or the changing value propositions for customers, does the opportunity still have merit? Consider Motorola’s Iridium project. Several years into the project, competitors in the cell phone industry came up with new solutions to the problems Iridium was trying to solve. If leaders at Iridium had continually assessed the market, they could have saved billions instead of escalating commitment to a project that the marketplace had already doomed. When the cell phone market’s next big product was the smartphone, did it make sense for Nokia to shrug it off, even though every other major competitor was developing a smartphone?

3. Is the strategy consistent with the skills and competencies of our organization? A leader should make sure that a strategy is not spreading the company too thin. When considering skills and competencies, this could include areas such as sufficient operations, valuable intellectual property, effective distribution channels, and a leadership team with the skills to pull it off. When L.A. Gear’s Greenberg decided to get into men’s high-performance basketball shoes, the company did not have the skills to succeed. The demands that a customer puts on a high-performance shoe are different from the demands a customer puts on a stylish shoe. The technologies are different; the products are different. Considering skills and competencies can help keep you from chasing dollars for the sake of chasing dollars.

Although these questions may seem like common sense, it is easy to overlook them. The companies we profile in this chapter were all leaders in their respective industries at one time. When their leaders said “yes” at a time when they should have said “no,” it cost these companies millions, even billions, and weakened or even destroyed the company. By asking—and thoughtfully, honestly answering—these fundamental soft-side questions before embarking on new ventures, these leaders could have avoided the critical mistakes of chasing dollars, escalating commitment, or trying to be all things to all people.

Use Segmentation

Segmentation is a final technique that can help leaders avoid strategic mistakes. Segmenting markets involves dividing customers into different groups based on their unique values and needs. Every market, regardless of customer needs, can be segmented. Segmentation requires breaking a market down into its definable parts, and the more tightly you segment markets, the greater the number of potential customers that you will not serve. However, the benefit of segmenting markets is that you will avoid trying to be all things to all people. An astute leader will realize that excluding customers doesn’t mean less business; often it means more business. There are many examples of leaders who have entered slow-growth markets by discovering underserved segments.

Consider the airline industry. For decades, the passenger airline industry was considered low- to no-growth. However, Herb Kelleher, founder of Southwest Airlines, understood that there was an underserved segment of customers who wanted a no-frills airline with an exceptional on-time track record, at a low price. So Herb Kelleher created a totally new business in this seemingly impenetrable industry.

Honda Motor Co. has successfully segmented markets in different parts of the world, without diluting its brand as Mercedes did. In the United States, Honda is perceived primarily as an automobile manufacturer, with a smaller ancillary business in motorcycles. In Japan, Honda is perceived primarily as a motorcycle manufacturer, with a smaller ancillary business in cars. Even though Honda is a world leader in both automobiles and motorcycles, each market has its own perception of what the Honda brand means to them. Honda figured out that trying to cover multiple product categories in the same market with the same brand would not work.

Consider taking a look at the characteristics of customers in your markets. Do different types of customers have different value drivers? Does each type of customer have different needs? If the answer is yes, then approaching your markets as an aggregation of smaller, thoughtfully defined segments may help you avoid making many of the mistakes discussed in this chapter.

The content of this chapter may have appeared somewhat eclectic. We discussed leadership mistakes resulting from irrational greed, escalation of commitment, and the fear of exclusion (and resulting attempts to be all things to all people). However, all three of these mistakes have one critical catalyst in common: the inability to say “no” when, as a leader, you should be. And developing the ability to say “no” is often tricky to navigate. What seems like a good idea at the moment may in hindsight have you asking yourself “What was I thinking?!” However, armed with the ability to see your company through a different lens—fulfilling needs rather than products—combined with tools to build an inventory and mind-set of potential opportunities, assess strategic appropriateness, and pursue effective segmentation, you can bolster your ability to say “no” and minimize if not eliminate many of the perils that result when you allow yourself to be seduced by “yes.”

KEY TAKEAWAYS

Lessons Learned from Mistakes

The inability to say “no” brings a risk of misallocating resources and destroying strategic direction.
Chasing dollars at the cost of strategic coherence—being driven by irrational greed—can devastate a company.
When things are going badly and failure is imminent, escalating commitment (continuing to allocate resources to a project out of emotion, of hope, pride, or a feeling of responsibility) is a common and destructive mistake.
Trying to be all things to all people (through fear of exclusion from a perceived market) leads to brand dilution and loss of the ability to reach any market segment.

Successful Navigation

Define your organization based on needs and value rather than products. This provides insight that will diminish the chance of saying “yes” when you should be saying “no.”
Relentlessly pursue opportunities. This will provide you with a large inventory from which to draw, decreasing the possibility that you’ll pursue a wrong strategy simply because it’s the only one in front of you.
Assess strategic appropriateness of any potential opportunity. Doing this consistently and rigorously can reduce or virtually eliminate mistakes associated with pursuing the wrong strategy.
Segment your markets effectively, understanding which segments you can or cannot offer value to. This can reduce the potential for brand dilution and create new growth opportunities.

1. Harry DeAngelo, Linda DeAngelo, and Karen Wruck, “Asset Liquidity, Debt Covenants, and Managerial Discretion in Financial Distress: The Collapse of L.A. Gear,” Journal of Financial Economics 64 (2002): 3–34.

4. Barry M. Staw, “Knee-Deep in the Big Muddy: A Study of Escalating Commitment to a Chosen Course of Action,” Organizational Behavior and Human Performance 16(1) (1976): 27–44.