Companies Ignore History At Their Own Peril
Companies are frequently subjected to the same danger when a new strategy is formulated
U.S. bookstores typically have a large self-help section. If you skim the titles, chances are you'll come across several examples of inspirational reinvention stories. The hero might be a city clerk retiring to open a quaint B&B in a picturesque seaside town, or a manager who quits the world of corporate back-biting to find new challenges as a mountain guide. While these stories are undoubtedly heart-warming, they are also dangerous.
They create the impression that we can simply disregard our personal histories and start something entirely new. Not only will we lack some of the skills required for the new job, but our experiences are also rendered worthless.
Companies are frequently subjected to the same danger when a new strategy is formulated. CEOs hoping to make their mark, new competitors entering the market, or customers drifting away to new offerings are likely to spur calls for a bold plan, a radical new strategy. On paper, these grand visions usually look fantastic.
The problem is that a good strategy consists not only of a bold objective and an assessment of the market, but also a solid understanding of a company’s own resources and an implementation plan. This is why history matters. Understanding the history of a company means a solid understanding of available resources and a realistic expectation of which strategy has the greatest chance of success.
A look at Daimler , the German car manufacturer, shows us what happens when you ignore company history. In 1987, Edzard Reuter became the new CEO. He pushed for a radical new strategy. As competition for premium cars was increasing, he convinced the board that diversification was the only way out.
A series of over-priced and ill-fitting acquisitions followed. Daimler had no history and hence no experience in implementing such a strategy. Some of the most controversial acquisitions were in the defense industry. Producing weapons was much more controversial in Germany at the time, in light of its activities during World War II. In the past, working for Daimler had been a source of bragging rights, but no longer!
You suddenly had to explain why you were working for a company manufacturing weapons. It is unlikely that this would increase your enthusiasm to co-operate with the new division. But without such co-operation, the synergies envisioned by Reuter never materialized. In 1995, he was forced to retire and Daimler declared a loss of 5.7 billion German marks, the largest in the country’s post-war history.
His successor, Jürgen Schrempp, was not exactly a historian, either. Once again, he decided on an ambitious strategic move, ignoring Daimler’s lack of experience in the the mass market. In 1998, he acquired Chrysler with the intention of turning the niche player into a global force.
But the Detroit-based, mass market producer was a bad fit. Synergies never materialized and performance nose-dived. To get rid of Chrysler, Daimler eventually paid $650 million to Cerberus Capital Management in 2007.
Daimler’s story shows that ignoring history can threaten the implementation of a strategy. Carefully considering the history of an organization might slow things down, but chances to successfully implement a strategy or make needed changes will increase.
In 1994, Shell’s Return on Average Capital Employed – an important indicator in the oil industry – dropped to 7.9%, while Exxon’s was 11.1%. Cor Herkstroeter, Shell’s chairman, was aware that a new and more efficient approach was needed.
Shell was a highly decentralized organization which optimized at the country level. At the same time, the leadership team was keenly aware that this approach had a long history. It was also not without merits in an industry where local contracts were crucial.