Ruthlessly Realistic: How CEOs Must Overcome Denial

Reviewing a spectacular business failure, we often wonder why the CEO didn't see trouble coming. It was so obvious.

Why didn't Digital Equipment Corp. CEO Kenneth Olsen see the PC as a threat to minicomputers?

Did Coca-Cola's Roberto Goizueta really think New Coke was a good idea? How long did Henry Ford think he could keep selling black-only Model Ts?

"Denial has always been a problem," writes Harvard Business School historian Richard S. Tedlow in a new book, Denial: Why Business Leaders Fail to Look Facts in the Face-and What to Do About It. "What is different today is that the cost of denial has become so high. We are living in a less forgiving world than we once did."

We asked Tedlow to discuss how denial can cripple a company, and what can be done about it.

Martha Lagace: What is the meaning of denial as you conceptualize it in your book?

Richard Tedlow: Denial is the unwillingness to acknowledge and deal with reality. It is the choice—sometimes willful, sometimes unconscious, often semiconscious—to enter an "as if" world, to act "as if" facts are not facts because they are difficult to face.

Sigmund Freud referred to denial as a combination of "knowing with not knowing," a phrase that has been defined as a "state of rational apprehension that does not result in appropriate action." In her brilliant study of the disastrous decision to launch the space shuttle Challenger in 1986, sociologist Diane Vaughan used a similar phrase, "seeing but not seeing."

From the consulting couch to the launch pad, denial is ubiquitous. You find it in individuals, in teams, in companies, in industries. Indeed, you find it in entire nations and economies. Look at the invasion of Iraq, or the dot-com bubble of the 1990s, or the residential housing and commercial real-estate bubble of the past few years, or the fantasy that the market for derivatives could somehow regulate itself—the consequences of all we are dealing with this very day.

Denial is not merely being wrong. Everybody makes mistakes. Denial is falling into a cognitive Bermuda Triangle. Everything is clear, yet you lose your bearings.

Q: How pernicious a problem is denial in business today?

A: Denial has always been a problem. What is different today is that the cost of denial has become so high. We are living in a less forgiving world than we once did.

Here's an example. General Motors had a dysfunctional business model for decades. Shrewd observers knew it. The company did not transform itself because it could continue to coast along, living in the reflected aura of its past glory.

GM's leadership acted in 2008 as if it were 1998 or 1988. It wasn't. And the inconceivable happened—this once-great firm went bankrupt.

Q: Given that a CEO's role is often to keep the company energy high and to stoke optimism among employees, are CEOs by virtue of their position especially prone to denial? How could they better blend optimism and realism?

A: Accentuating the positive for employees or others is not denial, as long as you yourself are fully confronting reality. In fact, there may be times when it is prudent, even necessary, to put on a brave face.

On the other hand, convincing yourself that things are better than, or different from, what they really are is never prudent, and often disastrous. So the key is to be ruthlessly realistic with oneself. As I hope the book makes clear, this is one of the greatest challenges for any CEO.

Q: The Innovator's Dilemma by HBS professor Clayton Christensen illustrated how formerly successful incumbents can be blindsided by more nimble competitors. Do you see denial as a particular risk for large, established organizations as much as for young, entrepreneurial firms? Is denial a predictable downside to success?

A: Denial is more endemic to older firms because it so often results from stubborn adherence to a once-accurate perception of reality that has gradually become obsolete. In the words of John Kenneth Galbraith, one's view of the world "remains with the comfortable and the familiar, while the world moves on."

Henry Ford saw more clearly than most the widespread hunger for inexpensive, motorized transportation. That vision made great successes of him and his company. But eventually, when sales of his breakthrough, no-frills Model T began to flag because car buyers became interested in style, not just functionality, Ford refused to face facts. He denied that the world had moved on. And his once-dominant company paid the price.

Established firms, which by definition have enjoyed some measure of success, are more likely to deny new realities because the old ones worked well for them. Young enterprises are not similarly weighed down by the dead hand of history. But that does not mean that they are immune to denial—far from it.

Q: Companies you describe as crippled by denial include the supermarket chain A&P, the retail conglomerate Sears, and the short-lived delivery experiment Webvan. How did these companies succumb to denial?

A: To paraphrase Tolstoy, every company in denial denies in its own way. To oversimplify a bit, Sears was an example of a firm leaving its market, while in A&P's case, the market left the firm. Both were like the proverbial frog being boiled in a gradually warming pot of water. By the time they realized what was happening, the opportunity for confronting the facts and doing something about them had passed.

Webvan is an example of the fact that, as noted above, being young and entrepreneurial is no safeguard against denial. Webvan's backers convinced themselves that the dot-com gold rush was a permanent new reality rather than just another bubble. They were also blind to the obvious flaws in their business model—defects that numerous outsiders noted from day one. It was a classic case of wishful thinking.

Q: How can managers without executive authority spot the warning signs of denial and help reverse the process before it's too late?

A: It is often middle managers who are best acquainted with new realities. As Andy Grove has noted, these are the people who are out on the front lines while top management is ensconced at the home office, cushioned from the daily reality of the rough-and-tumble of the marketplace. "Snow," he wrote in Only the Paranoid Survive, "melts first at the periphery." Problems, in other words, appear initially at the borders.

Unfortunately, when middle managers actually raise these problems—especially those that contradict the firm's prevailing assumptions and conventional wisdom—they are often ignored, or worse. Henry Ford, for example, fired the executive who dared "speak truth to power" about Ford's Model T myopia—and this man, Ernest Kanzler, was his relative! (He was the brother-in-law of Ford's only child, Edsel.)

A firm that deals with bad news by literally or figuratively dismissing the person who bears it is both in denial and in trouble. Not only will that news go unheard but potential truth-tellers will quickly learn to keep quiet. Or get out.

Q: What is it about IBM and Intel that saved them from the fate of other companies that fell victim to denial?

A: One key factor in IBM's 1990s turnaround (after having denied its way through the PC revolution that it helped create in the 1980s) was its decision to bring in an outsider as CEO. Lou Gerstner was able to reimagine and reshape what had become a calcified corporate culture. The fact that he was alien to that culture, and vice versa, was enormously helpful.

You don't necessarily need an outsider to provide an outside perspective, however. Occasionally a creative, clear-headed insider can break free of both his company's and his own preconceptions by adopting a novel point of view.

This was demonstrated by Andy Grove in 1985, when he and his boss, Gordon Moore, were fighting what appeared to be a losing battle against an impossible business dilemma. In the midst of their aimless wandering, Grove asked Moore, "If the board kicked us out and brought in new management, what do you think they would do?" Suddenly the answer to Intel's dilemma became clear to both men. Grove's deceptively simple question stripped the blinders of denial from their eyes. It allowed them to see the situation afresh, face it squarely, and make what had instantly become the obvious choice.

Grove's question did not make either man smarter. Both were, and are, smart enough. So were the men who had led IBM to near-disaster in the 1980s. Fighting denial is not a matter of IQ. It is a matter of point of view.

Original article by: Martha Lagace, Q&A with:Richard S. Tedlow

Harvard business school

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