create a New York–based equivalent of the World Economic Forum, describes it this way: “It used to be that the big ate the small; now the fast eat the slow.” Sull, the London Business School professor, thinks it is hard for established companies—the big—to be fast, at least in a way that is effective. The problem, his research suggests, isn’t that companies don’t realize the world has changed. They do. But instead of changing their behavior, Sull has found that the most typical corporate reaction is “active inertia”—businesses do what they always did, only more energetically than before. Their vested corporate interest in the existing order is so great, they have a hard time giving up today’s certain profits in the hope of earning a bigger windfall—or avoiding a significant loss— tomorrow.
Sull’s favorite example of active inertia is Firestone. The company’s founder, Harvey Firestone, was adept at responding to revolution. Firestone began producing tires in Akron, Ohio, in 1900. He saw the potential in Henry Ford’s pioneering mass production of automobiles, and in 1906 Firestone was chosen by Ford to supply the tires for the Model T. But in 1988, Firestone was acquired by Bridgestone, a Japanese competitor, for a fraction of its market capitalization a decade and a half earlier. Firestone, like so many strong legacy companies, was undone by the emergence of a new, disruptive technology—the radial tire—that had been introduced to the U.S. market. When Firestone tried to play catch-up, manufacturing radial tires in plants designed to produce the old bias-ply tire, disaster struck. Eventually, Firestone was forced to recall millions of tires and, in congressional hearings, was found at blame for thirty-four deaths.
“Firestone’s historical excellence and disastrous response to global competition and technological innovation posed a paradox for industry observers,” Sull wrote. “Why had the industry’s best-managed company turned in the worst performance in a weak field? Closer analysis reveals that Firestone failed not despite, but because of, its historical success.”
Firestone had been built to prosper in the stable postwar United States. According to Sull: “An ossified success formula is just fine, as long as the context remains stable.” But in a period of revolutionary change—which is what many industries, countries, and the world economy as a whole are experiencing today—“ossified success formulas” aren’t enough, and the outsiders who are good at responding to revolution can outflank the establishment.
Firestone’s fate, as explained by Sull, is a cautionary tale of what Jennings, from his frontier market vantage points, warned the cozy Auckland elites might happen to them: “Basically, we are living in a world that is more competitive than any other era, where change is faster and less predictable, and where long-established orders— whether they are economic, political, or industrial—are being challenged and supplanted. In this world, the difference between ‘success’ and ‘failure’ is greatly magnified. This applies to specific labor market skills, businesses, industries, and entire countries.”
And Firestone, with its active inertia, sounds a lot like Wall Street in 2007 and 2008. Many—even most—of the leaders of the country’s big financial companies knew their businesses were built on a bubble. But the structure of their companies and of their industry made it impossible to pull back.
In early July 2007, on a visit to Tokyo, Chuck Prince, then CEO of Citigroup, gave an interview to journalist Michiyo Nakamoto. Credit markets had not yet frozen, but there were enough signs of trouble to prompt Nakamoto to ask Prince about the turmoil in the U.S. subprime mortgage market and difficulties financing some private equity deals. Prince believed the ocean of cheap, globalization-fed money Citi was then still sloshing around in would eventually dry up: “A disruptive event now needs to be much more disruptive than it used to be…. At some point, the disruptive event will be so significant that instead of liquidity filling in, the liquidity will go the other way.”
Today, those remarks read like a prescient description of the overnight collapse in lending triggered by Lehman’s bankruptcy just over a year later. But even though Prince thought a “disruptive event” was inevitable, he also believed we hadn’t reached “that point” yet. In the meantime, it was his job to keep on doing business as usual: “When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”
Corporate PR would today cite that line as a cautionary illustration of why bland jargon is the most prudent idiom for business leaders. Prince’s vivid phrase not only made it onto the front page the next day, it has become one of the catchphrases of the crisis: a Google search on it more than two years later turned up nearly one and a half million references. One of the days on which it was evoked most energetically was November 4, 2007, when Prince resigned and his dancing comment became shorthand for Citigroup’s larger failure to anticipate the crisis under his leadership.
Prince deserved his pink slip: during his tenure in the corner office, Citi increased its exposure to the subprime market, grew its credit default swap business (including the number of swaps it kept on its own books), and stashed billions of dollars in risky off-balance-sheet vehicles. But he wasn’t wrong about dancing to the music. When the music stops, the loser is the one left without a chair, but the rules of modern capitalism don’t allow the big players to sit down prematurely, either.
Peter Weinberg is a Wall Street patrician—his paternal grandfather was a seminal early partner of Goldman Sachs and his mother is a Houghton, the great WASP family that founded Corning, Inc. Weinberg sat out the last years of this bubble thanks to what he admits to be lucky circumstance. He’d teamed up with legendary Wall Street deal maker Joe Perella in 2006 to found a boutique advisory firm, and they spent the next twenty-four months focused on raising money and assembling a team. But Weinberg, a seasoned investment banker who rose to run Goldman’s London office before striking out on his own, believes it is almost impossible for the CEOs he has spent a career advising to stop their ears to the boom-time music.
“I’ve been through probably six crises now in my thirty years in the business, and it’s the pendulum of capitalism,” Weinberg told me in June 2009, sitting in a conference room in his firm’s modernist offices in the GM Building on Fifth Avenue. “It’s very, very hard to lean against the wind in a bubble. Very, very hard. And very few people can really do it…. What if one of the heads of the large Wall Street firms stood up and said, ‘You know what? We’re going to cut down our leverage from 30 to 1 to 15 to 1. And we’re not going to participate in a lot of the opportunities in the market.’ I’m not sure that chief executive would have kept his job…. It is very hard to separate yourself from the herd as a leader of a large financial institution.”
This is an even more familiar story in the entertainment, media, and technology businesses. Consider the music industry. Venerable Warner Music, battered by the Web, is today owned by Len Blavatnik, another Russian veteran of that country’s economic upheaval who, like Milner, hopes his skills can be applied to disruptive technological change in the West. And in the technology industry, the cycles of transformative change are so fast that even successful revolutionaries can swiftly be outflanked.
That has already happened to Microsoft. The big question today is whether it will happen to Google. Like Sull’s managers—who see the coming threat, but are able to respond to it only by doing more of the same—the Googlers understand what is happening. In 2010, Urs Holzle, one of Google’s first ten employees and the company’s first engineering vice president, wrote a memo that company insiders called the Urs Quake. In it he warned that Google was falling behind Facebook in social networking and needed to catch up immediately.
Google’s chiefs listened and they launched an effort to do so, called Emerald Sea, after an 1878 painting by Albert Bierstadt. The painting, which the Googlers working on the project had re-created and displayed in front of the elevators near their desks, depicts a wrecked ship being buffeted by an enormous wave. Google, they believed, was the ship, and the social networking revolution was the wave: Google would either learn to ride it—or drown. Even for Google, a company whose insurgent founders are still in their thirties, responding to revolution is hard.
One reason Google may have a chance is that the business leaders of Silicon Valley, like those in the emerging markets, made their first fortunes by responding to revolution. For them, constant change is the status quo. Indeed, responding to revolution is so central to Silicon Valley culture that the most successful entrepreneurs have developed a culture of continuous revolution.
Caroline O’Connor and Perry Klebahn, at Stanford’s design school, call this the ability to “pivot.” Groupon, which began as a platform for collective political action; PayPal, which started as a way of “beaming” money between mobile phones, and then pivoted to become eBay’s banking network; and Twitter, which was a later iteration of a failed podcasting start-up, are all, according to O’Connor and Klebahn, examples of successful pivots.
Another illustration they cite is WorkerExpress. Joe Mellin and Pablo Fuentes launched that company as a
