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 / First Quarter 1997 / Issue 6(originally published by Booz & Company)


How to Stop Bad Things from Happening to Good Companies

The board must assert itself, too. If the company's leader is wedded to the old business design, is unable to examine the assumptions behind it and thus cannot provide, or even positively respond to, the "out of the box" thinking needed to bring about change, the board may have to go outside the organization for a replacement. Facing the realities of firing the C.E.O., writing down fixed assets and addressing the development of a new business design are not easy. But, in today's world, such actions may be needed to meet discontinuous change.

Sometimes, the only solution is long-term liquidation. Yet top management and boards are almost always unwilling even to face the possibility of liquidation.(2) But it must be faced, if only to provide a base level from which to think through the issues.

The Job Is Hard . . . But It Can Be Done

Maintaining external responsiveness and internal suppleness to enable you to serve and shape markets demands a remarkable constellation of talents. And a little luck along the way is always welcome. Because these tasks are hard, most businesses fail. They don't all necessarily go bankrupt; rather, they fail to reach their full potential. History shows, however, that the job can be done right. Success can be sustained over long periods, and leaders can lead. Companies can move before they must. We present some examples to provide guidance and inspiration.

John Jacob Astor immigrated to the United States from Germany in 1784, with hardly a penny to his name. When he died, in 1848, he left a fortune of about $20 million, the first American estate numbered in eight figures.

Astor began in the fur trade, becoming an expert in its every aspect. His American Fur Company, capitalized at $1 million, was one of the first American businesses to be incorporated. In 1834, after a half-century in the business, Astor withdrew. Less than a decade thereafter, the bottom fell out of the fur market. What happened?

Astor had sensed that expenses would inexorably rise. What originally made the fur business so attractive was the abundance of easily trapped animals. The explorers Lewis and Clark had marveled at encountering the "richest and most delicious fur in the world . . . deep silky in the extreme and strong." And this was Astor's for the taking. By the early 1830's, however, too many of the best animals had been killed off, and Astor's agents had to work harder to get fewer of them.

Astor thought the unthinkable and acted. Refusing to be guided by sentiment, he divided his company into two businesses and sold them off. Within seven years, one was in bankruptcy. And what did Astor do with the money from this sale? There is no substitute for vision, and Astor saw a future in New York City's real estate. Shortly before his death, he observed: "Could I begin life again . . . I would buy every foot of land on the island of Manhattan."(3) He had managed to buy enough by 1848 so that his descendants are still wealthy people.

Astor was remarkable but not unique. John D. Rockefeller's dominance over the oil industry in the 1860's and early 1870's was substantially based on his ability to dictate the terms of business to the railroads, which transported the nation's oil. In the late 1870's, however, oil pipelines were proving far more cost efficient. Rather than bemoan his fate, Rockefeller bet his company on building a pipeline of his own.(4) The result? In 1911, Rockefeller's fortune was estimated at $900 million. The gross national product of the United States that year was a little over $35 billion.

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