Many highly-respected business strategists have questioned how and why business leaders miss signals that, at least in retrospect, we know the market had been sending. More often the context of their writing has been around missed possibilities and opportunities for upside growth: the failure of leaders and companies to be innovative, to manage change and to move with agility in today’s rapidly evolving markets. But recent research¹ also highlights a half-century long pattern of sudden and dramatic drops in growth and profitability on the part of Fortune 100 market leaders that threaten their economic viability. Typically these successful companies lose big – almost three-fourths of their market capitalization – in the decade following an unanticipated drop in sales. The conclusion of this research is that the root causes of dramatic revenue stalls were largely in the control of senior management. And the troubling question the authors pose is: “Why is management so often blindsided by these events?”

Our experience, consistent with these findings, is that the root cause is often an inability on the part of senior leadership to recognize and challenge their own internal mental models – their fundamental assumptions about the business, the markets, and how they compete in those markets. We call these mental models the Theory of the Business and encourage leadership practices that challenge and test the economic logic and market relevance of their theories.

In this article, we share our point of view on why clarifying and adjusting the Theory of the Business is such a difficult challenge for organizations and their leadership, and offer approaches to solve for it at the root cause level.

Why So Difficult?
1. The Arrogance of Success
Certainly one disturbing answer is the extent to which some management teams have become disdainfully arrogant behind the success of their current business. Under the illusion of superiority, they ridicule those who dare to challenge sacred cows. This can happen even in the face of otherwise compelling market data to the contrary. For instance, there is a pattern of industry leaders initially ignoring low cost entrants like a Toyota or Charles Schwab. The result in both cases was that incumbents were eventually forced to change their business models and compete from behind.

2. Doing All the Right Things
Just as often, however, resistance to challenging mental models is the unintended and unseen consequence of following superior management practices on the part of highly competent leaders. Architecting organizations for continuity and sustainability is a fundamental principle of business success. But, ironically, doing all the right things – the leadership actions that drive accountability, prioritize and communicate focused strategic objectives, align the organization around clarity of responsibilities, and ultimately achieve performance through efficiency and scalability – becomes part of the problem. This is because, over time, those internal mental models or business assumptions become overly solidified in management systems and structures, a process aptly termed “ossification.”² Mental models take on a life of their own, permeating and potentially calcifying the culture and decision-making behaviors. The more pervasive the ossification, the more difficult it is to see, let alone challenge, business assumptions.

Despite the fact that the Swiss watch industry had been devastated by Japanese competitors in the early 80’s, it took an outsider, an engineering and industrial consultant, to turn the industry around. Nicolas Hayek expanded traditional management thinking away from its narrow focus to redesign and reposition watches as fashionable, economic accessories (Swatch). The ability to challenge fundamental assumptions or internal mental models requires a conscious departure from business-as-usual, from all the commonly accepted management practices that occupy the vast majority of leadership time, including the way strategy itself is often thought of and practiced. The responsibility to ignite new possibilities lies with leadership; waiting for a reversal of ossification to arise from deep within the organization is unrealistically expecting people to row against the current.

<< Back to The Insights  |  go to page 2 >>