The Upside of Turbulence

Donald Sull

• Publisher: HarperCollins e-books
• Year: 2009
• ISBN:
  9780061939761
• Topic: Betriebswirtschaft
• Subtopic: Unternehmensstrategie

The Upside of Turbulence is an enlightening look at the inherent paradox of how to strategize and plan in a turbulent business world where the only thing that doesn't change is change itself. In this book, based on a decade of research, historical case studies, and intensive work with established enterprises and start-ups, Donald Sull, named an "up and coming thinker" by the Financial Times, lays out the fundamental logic of opportunity and provides a series of practical steps to translate insight into action.

1.

THE STONE IN DAVID’S SLINGSHOT

I was six years old when my grandfather first took me to see the American Steel and Wire plant in Cleveland, Ohio, where he worked for forty-two years as an engineer and then as a supervisor. As a guest, I could only proceed as far as the guard house, but even from that distance the plant terrified me—it was enormous, loud, and smoky. My grandfather held my hand and reassured me that the plant was a safe place, like a fortress. When we went back to his house for lunch, I colored pictures of the mill as a giant castle with cauldrons of molten metal to pour on attackers, defended by an army of burly soldiers clad in steel armor.

In the 1960s, the United States Steel Corporation, which owned the plant where my grandfather worked, appeared an equally unassailable fortress. Founded in 1901 by business magnates, including J. P. Morgan and Andrew Carnegie, U.S. Steel was at its inception the largest industrial corporation in the world, accounting for two-thirds of American raw steel production and one-third of global output.¹ The corporation’s size, market share, balance sheet, asset base, and technology constituted insurmountable barriers. Although its overall share slipped during the twentieth century, U.S. Steel remained one of the pistons driving America’s economic progress. When employees joined U.S. Steel operations in Pittsburgh’s Monongahela Valley in the 1960s, supervisors explained that should a war break out, the Mon Valley was one of three locations the Soviet Union would bomb to cripple the U.S. economy.²

The company was so strong, U.S. Steel executives openly challenged presidential power. Harry Truman tried, but failed, to appropriate the mills to ensure sufficient steel for the Korean War. When John F. Kennedy called for restraint in price increases, U.S. Steel executives initially ignored his request, and then raised prices anyway. The steelmaker only reversed the price hikes after Kennedy attacked U.S. Steel executives in a televised presidential press conference. In 1970, the company built a monument to its success—the U.S. Steel Tower—the highest skyscraper in Pittsburgh, encased in Cor-Ten, a steel alloy designed to weather the elements in perpetuity.

Turbulence roiled the steel industry in the decades that followed. The 1973 OPEC oil shock quadrupled the price of oil and sparked a deep recession, followed by years of stagflation, a brief recession in 1980, and a more severe downturn the following year. Other forces buffeted steelmakers’ profits, including technological shifts, exchange rate volatility, government policy, raw material costs, prices, and changing customer preferences. Each variable was volatile on its own. Mini-mill technology disrupted established production methods; governments imposed and retracted tariffs, changed environmental liabilities, and privatized state-owned mills.³ Customers in the automotive, appliance, and packaging industries substituted plastic and aluminum for steel, and sometimes switched back. Mergers and bankruptcies reconfigured the competitive landscape.

U.S. Steel struggled to adjust. By 1986, the company’s share of domestic shipments had fallen below 15 percent, it had lost money in steel for five consecutive years, and its stock had fallen to its lowest price in over thirty years. Management eliminated one-third of production capacity, diversified into oil and gas, and changed the corporation’s name to USX, but failed to halt the downward slide. Carl Icahn made a hostile takeover bid that triggered further restructuring and ultimately left U.S. Steel a shadow of its former mighty self. In 1979, the company’s steel operations employed 171,654, but the number had fallen to 27,173 a decade later.⁴

As a member of the manufacturing practice with the consulting firm McKinsey & Company, I worked out of an office in the U.S. Steel Building in the mid-1980s. Successive rounds of layoffs left entire floors of the building empty, and many survivors looked exhausted and beaten. The Mon Valley lost nearly fifty thousand steel and related jobs in the 1980s, leaving little for the Soviets to bomb. The decline and fall of the U.S. Steel empire perplexed me. The gales of creative destruction gust through steel like every other industry, but if any company could withstand the storms, surely it was U.S. Steel.

A few years later, I moved to Akron to work at the Uniroyal Goodrich Tire Company. Akron fared no better than Pittsburgh. For nearly sixty years, five tire makers dominated the market, four of them based in Akron. In the span of eighteen months, four of the five tire makers disappeared as independent companies through mergers or acquisitions by foreign competitors. Our largest customers, the Detroit automakers, continued their decades-long slide, like a car crash in slow motion. America’s industrial heartland, once the engine of economic growth, had degenerated into the Rust Belt. In 1992, I entered the doctoral program at Harvard Business School to study why companies failed in turbulent markets. My interest was more personal than academic. I wanted to understand how the industrial heartland of my youth had come to resemble a rusting hulk.

My research uncovered an insidious dynamic. To succeed, managers must commit to a specific mental map of the world, and reinforce it with processes, resources, external relationships, and a culture that support their worldview. With time and success, these commitments harden. When markets shift—and in a turbulent world markets always shift—managers find themselves ensnared in a web of commitments that they themselves have woven. They respond to turbulence by accelerating activities that worked in the past, a dynamic I termed active inertia. Executives saw changes in the market and responded, but hardened commitments channeled their actions into familiar grooves. Active inertia devastated industries beyond manufacturing, contributing to the decline of minicomputer leaders, including Digital, Wang, and Data General, hindering traditional airlines’ response to low-cost carriers and hastening the demise of regional banks.

Active inertia explained a lot, particularly why leading companies such as U.S. Steel or General Motors falter in turbulent markets. But it didn’t explain everything. In particular, the theory did not account for companies such as Toyota or Carnival Cruise Lines, which not only survived but thrived in turbulence. Most of all, active inertia did not explain Mittal Steel. Lakshmi Mittal built his first steel mill in Indonesia in 1976, and within two decades he had created the fourth-largest steel company in the world by acquiring underperforming assets in Mexico, Canada, Trinidad, Germany, Ireland, Kazakhstan, and the United States.⁵ Along the way, Mittal amassed a personal fortune worth $2 billion, securing him a place on Forbes’s list of global billionaires. Having watched market turbulence gut the mighty U.S. Steel, I was perplexed how anyone could parlay a single mill into a global empire in such an unforgiving industry.

Mittal did not owe his success to favorable industry conditions. During the 1990s, steel remained a byword for an unattractive sector trapped in a perpetual downturn. A study of the global steel industry in the 1990s conducted by Boston Consulting Group found that steel companies, on average, destroyed value for their investors and underperformed other basic-materials industries.⁶ Thirteen U.S. producers, including LTV and Wheeling-Pittsburgh, went bankrupt in a single three year span. The BCG report concluded that “capitalism alone cannot solve this problem,” and recommended government intervention to save the global steel industry. Their report did not once mention Mittal.

Mittal succeeded by embracing turbulence, not avoiding it. He made his largest bets in emerging markets characterized by extreme volatility. In 1995, Mittal heard that the government of Kazakhstan planned to sell its biggest steel mill. Many Westerners learned everything they know about this country from the mockumentary Borat: Cultural Learnings of America for Make Benefit Glorious Nation of Kazakhstan, an entertaining albeit unreliable guide to a country larger than Western Europe, which is wedged between Russia and China and sits on large deposits of natural resources. The plant, known as the Karaganda Metallurgical Complex (Karmet), is one of the largest single-site steel mills in the world. When the Soviet Union crumbled, Karmet fell into disrepair, and by 1995, it was operating at less than half capacity. Without paying customers, the factory relied on barter for 80 percent of its sales and printed its own currency to pay employees. With more than thirty thousand workers, the factory was the main employer in the city of Temirtau, whose fortunes fell with the mill’s. Temirtau’s population shrank by 40 percent, and the city suffered from widespread heroin abuse and AIDS. Kazakh prime minister Akezhan Kazhegeldin informed Mittal that any buyer would have to run the city’s orphanage, hospital, trams, schools, and newspaper, as well as the mill.

Mittal did not disregard Kazakhstan’s turbulence. The company’s financial reports catalogued daunting uncertainties, including foreign exchange risk, price fluctuations, inflation, volatile interest rates, a range of possible taxes, an evolving legal system, environmental regulations, and the possibility of nationalization. To top it all off, the operation sat on a geological fault susceptible to earthquakes. Undaunted, Mittal bought the plant within a month of seeing it, also acquiring the local coal and iron mines to supply raw materials. When the power system later collapsed, Mittal bought that as well.

By 2008, Lakshmi Mittal had created the largest steel company in the world, ArcelorMittal, and emerged as the fifth wealthiest person in the world, far ahead of well-known billionaires such as Michael Dell, George Soros, and Michael Bloomberg. The rise of Mittal and the fall of U.S. Steel illustrate the question that motivates this book: how can companies endure and even prosper in turbulence?

For more than a decade, I have sought out the most turbulent markets in the world, and conducted research to isolate what separates winners from losers. My colleagues and I have analyzed matched pairs of more- and less-successful firms within volatile countries—including book-length studies of China and Brazil—and fast-moving industries, including telecommunications, enterprise software, and Europe’s fast fashion industry (see figure 1.1).⁷ These studies revealed a set of practices that characterized successful firms.

These initial findings marked the midpoint, rather than the end of the research.⁸ To test their robustness, I submitted each finding to three additional screens. First, does an insight work in theory? Screening findings against established theory forced me to articulate why something worked, and helped me to separate insights with hard theoretical edges from fluffy notions. Second, does it generalize to other domains? People grapple with turbulence in many domains, including combat, improvisation, new product develop...