WHY SUCCESSFUL ORGANIZATIONS FALTER AND HOW SOME RISE ANEW

Untold words have been written and uttered about the rise and fall of countless companies and industries, including such once seemingly rock-solid organizations as General Motors and AIG and the enterprises of banking and home building. Pari-mutuel wagering on horse racing is on the list.

Jim Collins is a former instructor at the Stanford Business School and the bestselling author of books on corporate leadership. He is no armchair theorist, as his work is firmly grounded in extensive empirical research. The books he is best known for are the influential mega-sellers Good to Great and Built to Last. His current book (2009) is titled How the Mighty Fail (subtitle: And Why Some Companies Never Give In).

Collins and his research associates found that great companies in decline typically, although not always, follow a predictable path through five stages:

Stage 1: Hubris Born of Success. Leaders of highly successful organizations are susceptible to becoming complacent and therefore lapsing into not working as hard as they once did to keep their edge. Upper management may believe that their success is well deserved and understandable given their savvy and superior abilities. In their view, luck or good fortune has nothing to do with it. Undaunted by potential or nascent competition, leaders come to think that their organization is largely  impervious to change and that its prominence will go on in perpetuity.

Certainly, racetrack executives in the heyday of pari-mutuel wagering, when it was insulated by law from competition, acted this way. Racing’s quasi-monopoly position in the United States masked a multitude of problems with how tracks were operated. This was the era when racetracks earned their deserved reputations for notoriously poor customer focus.

Stage 2: Undisciplined Pursuit of More. Emboldened by its successes, top management goes on a growth binge and, in the process, puts a strain on the cash, fixed assets, and human resources needed to execute. The organizational system becomes increasingly bureaucratic. Upper management is fixated on short-term growth and increased scale of operations, often by going on an acquisition binge, and sometimes in businesses in which they have little or no expertise. Frustrated employees depart and the deficit in human resources begins to show up in results.

Magna Entertainment Corporation exhibited most of these characteristics after its founding in the 1990s, although it was never a great company or even a good one. The company acquired one racetrack after another, so there was not enough time and resources to assimilate the racetracks it purchased, and Magna churned management talent at an alarming rate, so there was no continuity in leadership. The company looked into expansion into shopping developments and a theme park.

Rather than fixing the racing problem, racetracks have tended to pursue greener pastures in alternate gaming and forays into non-racing retailing. For instance, The Meadows near Pittsburgh has a bowling alley. These new areas of commerce may be beneficial to a racetrack, but the risk is that management will neglect its traditional core product, which is pari-mutuel wagering. 

Stage 3: Denial of Risk and Peril. Herein the executives in charge seem oblivious to the dangers facing the organization. They isolate themselves from what is happening and tend to entertain good news while discounting the threats from the bad news, which, by now, is coming fast and furious. External factors are blamed for the organization’s hard times, and sometimes rightly so. Management attempts to recapture the organization’s vibrancy by making “big bets” into ventures and product lines that will supposedly right the organizational ship.

Racing in some states are indeed imperiled by external factors largely beyond their control but lamenting it will not solve the problem. In Kentucky, Churchill Downs is competing against slots and table games at a casino just across the Ohio River in Indiana. Management is acutely aware of the threat and is working diligently, if so far unsuccessfully, to overcome it. By contrast, Magna Entertainment Corporation was making optimistic statements about its future long after it became clear to most knowledgeable individuals that the company was about to go bankrupt.

Stage 4: Grasping for Salvation. By this time, management is in a panic mode. The organization is apt to look for a charismatic leader to return things to the good old days. The savior will have a grand vision that will bring the organization back.

The new leader comes in and makes a lot of noise about installing a new culture of innovation. He or she restructures the organization and then, when that does not improve things, does it again. Finances are rationalized. Objectives and goals are changed out frequently. One master strategy is abandoned and replaced with another, so on ad infinitum. Inconsistency becomes the only consistency and the corporate culture is one of confusion and distrust.

It is often asserted that racing needs a czar to rule the sport. Presumably, he or she will mandate that diverse interests cooperate and thereby partly at least restore the halcyon days when racing was the preeminent legal means to wager? This kind of talk is a sure sign of desperation and is  impractical besides because of the diffusion of authority over racetracks  across state lines.

In practice, the truth about successful turnaround executives is that they tend to be introspective people rather than the sterotype of charismatic personalities. They pay close attention to reality and go about their job in a thoughtful and workmanlike manner. The image of the blustery Lee Iaccoca at bankrupt Chrysler in the early 1980s is the exception and not the rule.

When Louis Gerstner Jr. was named chairman of IBM, he was the first outsider ever to head the company. IBM had fallen on desperate times because personal computers were taking away much of the business of IBM’s golden goose, the mainframe computer, or “big iron.”

Early on in his tenure, the cerebral and reflective Gerstner took a lot of criticism when he answered a reporter’s question about his vision for IBM by saying that the last thing that IBM needed was a vision. I recall visiting IBM’s Armonk, New York headquarters in 1995 and hearing , from one of Gerstner’s immediate assistants, an explanation of this seemingly inexplicable comment. Gerstner recognized that his first job was to staunch the bleeding at IBM and to surround himself with top-rate talent. Together they would labor to turn IBM around, which they did, as opposed to Gerstner articulating some lofty vision and then having everyone else implement it. The turnaround would not come about because of a bold stroke of vision, but rather, through assessing a massive amount of quantitative information about IBM’s markets and competitors, and subsequently evolving IBM toward the empirically-documented most promising paths. Anne Mulcachy, a Xerox lifer, followed a similar process when she and her colleagues resurrected Xerox from stage 4.

Stage 5: Capitulation to Irrelevance or Death. The organization plummets into extinction or hangs on as a former shadow of itself.

Collins points out that none of these stages are necessarily fatal. Declines can be reversed, even in stage 5, and organizations can be resurrected.

Collins writes: “The main message of our work remains: we are not imprisoned by our circumstances, our setbacks, our history, our mistakes, or even staggering defeats along the way. We are freed by our choices.”  His research shows that great nations, great companies, and great individuals can decline and recover. In fact, this trait—the ability to comeback from defeats—is the mark of the “truly great.”

Collins advises: “Never give in. Be willing to change tactics, but never give up your core purpose. Be willing to kill failed business ideas, even to shutter operations you’ve been in for a long time… Be willing to evolve into an entirely different portfolio of activities, even to the point of zero overlap with what you do today…create your own future,” as have a host of well-known companies.

So far, the predominant strategy employed by top executives of racetracks has been to morph their organizations from being exclusively racetracks into racinos and simulcasting facilities. In my view, this has been the correct course of action because all racetracks can no longer survive with one product, on-track pari-mutuel wagering on horse racing. Additionally, the judgment here is that remote wagering still has significant  growth potential through the implementation of Betfair-like offerings.

The takeaway from Collins’ research is for racetracks to attract the very best executive teams they can, people with a “never give up” attitude, who can quietly work together to create their organization’s future. One place to begin is the inclusion on boards of directors of insightful people who will take their appointment as a challenge instead of a resume enhancer with a few perks thrown in. Beware of people who claim to have a bold new vision for racing. The fact is, in most cases of success, the restoration of a once-strong enterprise comes incrementally rather than through some momentous flash of creative insight by a leader, and without a wholesale abandonment of what made the organization successful in the first place.

Copyright © 2009 Horse Racing Business

Comments

  1. Bill,
    Thanks for a very well reasoned and thoughtful article. But I’m wondering if the strategy pursued by racetracks to morph into “racinos” is good for the industry in the long run. I agree it makes tons of sense for individual tracks as very few tracks can survive solely on their on-track and simulcast wagering handle.

    But the unintended consequence for the industry as a whole is that there are more tracks, and by extension, horse races than the existing customer base (i.e., active horseplayers) can support. Supply and demand are out of whack.

    There are two solutions: contract supply to match demand (which means less tracks / races); or grow demand. We know contracting supply is not an option as tracks are profitable thru subsidizing their racing operations with alternative gaming.

    The only solution is to grow the demand. But alternative gaming revenue has not been used effectively to do just that. Maybe a little “vision” wouldn’t so bad as the decision to subsidize racing thru slot machines seems more and more like a faustian bargain every day.

  2. D. Masters says:

    Mr. Shanklin:

    I appreciate your observations, especially the breakdown of businesses in crisis/decline.

    I do take exception with this:

    “It is often asserted that racing needs a czar to rule the sport. Presumably, he or she will mandate that diverse interests cooperate and thereby partly at least restore the halcyon days when racing was the preeminent legal means to wager? This kind of talk is a sure sign of desperation and is impractical besides because of the diffusion of authority over racetracks across state lines.”

    First, I don’t think the “talk” is one of desperation. I think it’s talk of frustration with the current and disjointed system. As to impracticallity, the whole point of a national, uniformed regulatory authority with sanction and discipline powers is to address specifically the racing across state lines. If this country allows the betting of same across many state lines, why can’t one authority be in charge? The point would be to effectively manage the “diffusion” reasonably, with consideration to specific geographic areas. Right now, it is still every man for himself. Productive capitalism with the protection of disfunctional state racing boards and corporate entities is not going to fix itself and will (is) continuing to weaken the national value of this game as a whole. Throw in the gambling, whatever format and reckless implementation and takeout and racing in the US becomes doomed.

    I don’t think demand can be successfully increased until there is some uniform authority that can guarantee some stability and consistency to it’s investors and fans, especially considering the transitory nature of racing at multiple venues inherent here and in the 21st century.

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