When I arrived at Quest Diagnostics, it was so decentralized that everyone thought they were making the decisions for the company — and they were! At the same time, the company and industry faced compliance issues that led to more than $1 billion in fines. In a discussion about billing practices soon after my arrival, in response to a question about the causes of the fines, a senior executive replied, “You’re not a laboratorian; you don’t understand. There are 100,000 pages of regulations. No one in their right mind would expect us to comply with them all.” This response in itself indicated trouble — a clear sign of an imbalance of perception and integrity issues, which signaled a culture in need of dramatic change.
A CEO’s job is to decide how the company’s leadership, as a team, can call attention to the capabilities that are in short supply. Some companies, at some times, will need to become more entrepreneurial. Others will need to drive operations excellence, and still other companies will need to develop more customer focus. Different companies need to develop different capabilities to create balance.
Every time I have stepped into a turnaround situation, the incumbent management team’s understanding of its business has been scattered. Typically, after describing what I call “the five stages of any business” to the senior team, I ask them, “Where is your company in its life cycle?”
I have observed five distinct stages in any company’s condition. Stage One is “bleeding.” The company is in crisis and its business is deteriorating rapidly. The numbers are getting worse, customer satisfaction is in a nosedive, and employees are leaving for greener pastures.
Stage Two is “stability.” It’s like riding a sailboat in the middle of Lake Ontario with no wind. Business, although not great, is not getting any worse. In this stage you can predict what tomorrow is going to look like: just like today. Turnaround artists grow accustomed to seeing companies enter this stage after they pull out of the crisis. Some companies never leave it.
Stage Three is “gradual improvement.” The company sees small improvements in profitability, productivity, customer satisfaction, and growth. The sun is rising over the lake, and the fish are starting to bite.
Stage Four is “rapid improvement”: The fish are biting. The company is making tremendous sustainable gains. Every company wants to be in this stage, and the CEOs featured on the cover of Business Week usually think they are here — even if they’re not.
Rapid growth can lead to Stage Five, “arrogance.” This stage destroys companies. Their leaders have lingered in the sweet spot for so long that they believe their own press. They assume that they have found a formula that will automatically allow them to stay in Stage Four indefinitely, and they don’t believe business should be conducted in any other way. This corporate hubris is usually marked by a brief plateau, followed by sharp decline back to Stage One.
IBM enjoyed 35 years of Stage Four, rapid improvement, between 1949 and the mid-1980s. Then it passed rapidly through arrogance and back to bleeding in the mid- to late ’80s. The corporate strengths that had yielded great performance for years became weaknesses as the industry changed. IBM had $2.8 billion in losses in 1991 and more red ink in 1992. After a change in CEO leadership, IBM executed one of the great turnarounds in business history.
Of course, sometimes the economy can cause companies to enter Stage One. That happened to the entire U.S. steel industry in the 1980s. But among the companies encountering such challenges, there is always at least one that comes through even stronger than it was before. These companies are led by people who don’t waste time blaming the economy, but instead reinvent the core products or capabilities of their business.