What to Learn from Business Disasters

Many business books are about how to learn the secrets of wildly successful entrepreneurs. Those secrets don't seem as timely when wildly unsuccessful Wall Street giants are dominating the news. A more relevant question might be: Why do large businesses sometimes fail so spectacularly, and what could have been done to solve their problems before the flameouts? That's the question former Wall Street Journal reporter Paul Carroll sought to answer in his new book Billion-Dollar Lessons: What You Can Learn from the Most Inexcusable Business Failures of the Last 25 Years, co-authored with Chunka Mui, fellow at Diamond Management and Technology Consultants. We talked to Carroll about what businesses of all sizes should draw from billion-dollar failures. Excerpts:

Will the current financial crisis make people focus on what to learn from business failures?
When we started working on this book about two and a half years ago, there was nobody who focused on failure. It was all "good to great"—nobody was thinking about "good to gone."

If you look at what's happening now, people are going to realize, "There are consequences if I do something wrong, and maybe I ought to go back and learn the lessons of past failures rather than recreate them." Take a look at Merrill and how they messed up, and Bear Stearns and Lehman—those are mistakes that were made 10 years ago at Long Term Capital Management, Green Tree Financial, and Conseco. These guys went ahead and made the same mistakes, and they're paying a heavy price for it.

Why do businesspeople keep making the same mistakes?
We spend time on the psychology of people and organizations, and it turns out that people are hard-wired to be optimistic. What people tend to do is when there is a success, even if it is totally right, they are inclined to conclude they did something right, and if there is a failure, people tend to assume it was just bad luck.

Another thing is that if you look at compensation, there was so much money to be made. The guys who made the money didn't have to give up when things went south. There are lots of issues that encourage people to swing for the fences.

But don't failures need to happen? How else can entrepreneurs learn and improve on the past?
There is that sort of thing. After a bunch of clunky mp3 failures, you wind up with the iPod. What we're trying to do is help people understand that there are some things that are brain-dead. Particularly the mistake with technology people tend to make is that they look at the technological situation as a point in time rather than something that will evolve.

So I'm Kodak, and I decide in 1981 that I'm OK because traditional film photography is better than digital photography. Kodak actually did a study and decided that they would be OK through 1990. What people didn't look at was the fact that digital photography was benefiting from Moore's Law: Every few years the cost of the digital camera was going to drop by 50 percent. If you just look at things at points in time and not as curves, you're going to get hammered—as Kodak did.

We don't want to benefit from hindsight. We're not trying to bang people on the head for making reasonable decisions that didn't work. But in the case of digital photography, it could have been foreseen.

What's the solution?
What companies need to do is foster a culture of constructive contention and debate. In all these businesses I guarantee there were people who thought, "This is a bad idea," but if you look at how strategy is set, it's a pretty complicated process. So they start shutting down objections, especially in the case of the CEO. What every business needs to do is either set up a formal process or at least foster a culture where when you make a decision, you say, "Ok, let's stop for a second, and figure out everything we possibly can that could make this idea not work." You take those ideas and evaluate them. If someone says, "By the way, Kodak might be fine until 1990 but it's going to be screwed in 1995," then you investigate that.

How much can small businesses learn from the billion-dollar mistakes of large businesses?
There still are some general lessons that apply to just about any business strategy. People tend to overestimate the benefits of doing something, and to underestimate the complexity. I have a friend who is a car dealer, and he wanted to start selling used cars. But he underestimated how hard it would be to line up the cars, misunderstood the relationship between the new cars and the old cars, and a bunch of other things that were wrong. As I said, people are wired to be optimistic, and that applies to small businesses as well.