Success Can Be Fatal

Any business leader worried about the future must build a culture that welcomes it

For newspapers, the Internet offered one final chance of resuscitation and renewal. But they could not, they would not take that chance. They are now in a state of economic collapse. Over the next three years, famous newspaper brands, redolent with history and gravitas, will disappear forever from cities and towns around the country.

This blog is as much about the human failings of leaders in challenging times as it is about the newspaper business itself, and this was a colossal failure of leadership and management. On my walk this morning around the rocks and beaches of Indian Point here in Maine I got to thinking again about what might be learned from it. It occurred to me that the need for honest strategic self-appraisal doesn’t decrease with success. It increases.

How many times have you seen a team play a wonderful passing game to build a lead of 20 points going into the final quarter, then opt to play defense, sit on the lead, run out the clock – and lose? Failure is often the ironic consequence of success.

Owing to the distribution limitations of media produced on a printing press and delivered by trucks, with reach essentially defined by how far those trucks could get by sunrise, newspaper companies had long ago carved out monopoly markets they thought of as their own. The high fixed cost of printing newspapers, building a home delivery channel and maintaining a large sales force provided a steep barrier to entry for any potential competitor. The advent of television in the late 1940s killed weaker local newspapers that had already been struggling to survive in markets over-served by four, five or even six properties. As the newspaper industry inevitably consolidated, local print monopolies emerged and took root. The standard market structure became one morning newspaper per day.

Labor had few places elsewhere in town to go ply its craft. Owners, public and private, counted on little more than inherent market growth to pull their product along. When you’re the only game in town, you have all the pricing power. You charge what the market will bear, and human nature being human nature, you constantly push that envelope. So the price of newspaper advertising was driven far higher than it ever would have been in a competitive market. How great is that? For the next 50 years, newspaper companies were enormously profitable – and enormously complacent. Stasis set in. Strategic process, management renovation, marketing development and product innovation were all considered irrelevant and unnecessary – and without the need to invest in them, even more money came rolling in.

The unique local print monopoly on which the business was based lulled newspaper companies into a false sense of security and fostered the self-congratulatory delusion that they were blessed with superior business capability and knew what the market wanted without ever asking. Many were like kids who inherited dad’s company, kids born on third base who end up thinking they ran all the way there when the truth is that they’ve never bothered to show for practice and can’t play the game nearly as well as they think they can.

The distribution monopoly was no stronger than a stack of cards. Physical distribution barriers mean nothing to the Internet, the medium is “frictionless,” it has no geographic boundaries so powerful classifieds databases can be produced anywhere and efficiently distributed into any market, anywhere. The print monopoly was dismembered and the competition came to town, blowing up the antique industrial logic and feudal hierarchies to which newspapers clung. It turns out that news is a commodity and local news, especially in major metropolitan markets, is a perilously weak differentiator.

Paradoxically, the forces of cultural entropy that would undermine newspapers were set in motion at the height of their profitability and power. Once a sense of entitlement sets in, any company is vulnerable. Any company. Even Microsoft. Or Apple. Or even, for that matter, Google.

If the danger is success, then Google must really be in trouble. I know, I know, “Google” has become an eponymous verb. Forgive the grandiosity and consider the point. As the definition of “media” continues to broaden, and as consumers shift from a PC-dominated world to multiple, multi-dimensional products available anywhere and everywhere, the mobile marketplace has become critically important. The volume of search queries on the desktop is falling, while search queries on mobile platforms are accelerating dramatically. But, nobody with the possible exception of Facebook, has yet cracked the code on mobile advertising, and today, at least, while advertising is tracking mobile penetration and growing quickly, it is considerably less profitable than desktop advertising. The company’s average cost per click – the measure of how much advertisers pay to reach Google users – fell nearly 10% in 2013. I’m telling you, this loss of pricing power may be the first crack in the Google armor.

I’ve advised a couple of start-ups that Google subsequently acquired. I’ve stayed close to the managers I helped. Like me, they’re restless, they thrive on a sense of mission. You may be surprised to know that many of them want out. It’s great for the ego to be a Googler, but my guys get in at 6:30am – and there’s nobody else in at the Googleplex except the cleaners. They work out until 7am – still nobody. They finish breakfast by 8am – some of their workmates are starting to arrive at last, ferried in on the Google bus fleet from San Francisco, no public transport for them. At Google, they tell me, it’s all about operating process, and it’s a 9 to 5 sinecure. There’s nothing exciting going on. No matter what kind of market franchise you find yourself owning, torpor like that will kill you in the end. You’ll end up hiring second-stringers, run out of ideas and start to resist innovation in the core business.

It’s not that any business has a finite life. Rather, a business model does. Unless kept in a state of perpetual motion it will sooner or later outlive its usefulness and be superseded by a new one, typically spearheaded by a new company that goes on to create great value, like Walmart in the 60s, FedEx in the 70s and Dell Computer in the 80s. Then the successful new company must itself rise to the challenge of refreshing its model. Meeting the challenge of constant evolution has proven very difficult. Most companies stumble at the transition to a new business model because the threat it poses to current core profitability and the comfortable status quo triggers paralyzing internal dissent between those hellbent on conserving the present and those advocating for the future. Most of the time, the conservators win. It’s not even close.

They win because the management of most established companies, seduced and self-satisfied by income and privilege, settles in for the long haul, secure on their pedestal and secure in the belief that the gravy train will go on forever – or at least as long as it needs to. Life in the mahogany jungle at the top of an established company can be quite pleasant. A lot of people have found their way there seeking shelter. As long as you’re working your piece of the formula and don’t compete too cravenly for advancement, you can roll along happily, year after year. Relationships become collegial, even close. After a while you find yourself socializing pretty much only with people you work alongside every day. Your kids go the same schools, you belong to the same clubs, you spend your weekends in the same place. This kind of environment is a breeding ground for resistance to change. The last thing anybody wants to do is rock the boat.

So the most common consequence of success is an insular management team aided and abetted by a self-interested chief executive focused almost exclusively on tuning the current model to extract every vestige of short-term value from it. Tuning means just that. It means maintaining or even increasing current earnings by investing less in the current business.

Compensation is structured to reward managers at all levels for pulling harder and harder on familiar levers to maintain predictable financial results. After all, a dollar spent on incremental improvement in the core business is always going to yield a better short-term return than a dollar invested in an experimental new business in risky pursuit of growth. For this reason many companies spend a lot of time developing expansive strategies – and then never make the call to act.

Focusing exclusively on the core business is hardly a deficiency of course, and not everybody can be or wants to be a change agent, that’s too risky and frustrating for most people. Some established companies even manage to bring a sense of entrepreneurial urgency to the daily operating routine. But it becomes deficient when it drifts towards management by rote, management disinterested in radical innovation, management that does not care about inspiring the innate creativity of employees, management that does not jump immediately to DEFCON status at even a hint of new competition and management unwilling to fundamentally change the way their company goes to market.

Any leader with an eye to the future must build a culture that welcomes it. The first step in that process is instituting a process where the management team is frequently refreshed, perhaps by cycling executives in and out from the field, or by deliberately swapping roles and responsibilities, or by assigning extra responsibilities such as management of a new, high-profile project, or by parachuting in an outsider unencumbered by institutional history, or by having the moxie to move expeditiously on unexceptional performers despite their longevity or standing.

A process like that helps fight the complacency that seems to be the inevitable consequence of success. It gives the culture of a company a jolt and you know, that’s always a very good thing. Inside newspaper companies however, management executives had tenure. The consequence of that is about to become very, very clear.