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3 Jul

On boiling frogs and the perils of reactive decision-making

In the mid-1960s, WonderTech, a pioneering electronics company, burst onto the scene with a revolutionary computer. The company experienced unparalleled success during its initial years, with sales doubling annually.

However, WonderTech's rapid growth was short-lived, and it eventually succumbed to bankruptcy. And there are a lot of lessons to learn from this company's demise, that I would like to share with you today in this piece.

But before that, here's the backstory:

The Meteoric Rise

The company's early years were characterized by rapid growth and overwhelming demand for its products. Sales skyrocketed, leading to backlogs of orders that even the company's increased manufacturing capacity struggled to fulfill. The management acknowledged the delivery time issue but believed that customers would tolerate the delay due to the superior quality of their computers.

“Our computers are so good that some customers are willing to wait fourteen weeks for them. We know it's a problem, and we're working to fix it, but nonetheless they're still glad to get the machines, and they love 'em when they get 'em.”

The top management, knowing that they had to add production capacity, changed from a one-shift to a two-shift operation, and decided to borrow the money to build a new factory.

And to make sure the growth kept up, they pumped much of the incoming revenue directly back into sales and marketing — which meant hiring and training more people in their direct sales force. So much so that in the company's third year, their sales force doubled!

But despite this, sales started to slump at the end of the third year. By the middle of the fourth year, sales had dropped off to crisis levels.

Reacting to the crisis

Under pressure to maintain sales growth, the sales and marketing vice president took decisive action. He held high-powered sales meetings, fired underperforming staff, introduced sales incentives, discounts, and new advertising promotions.

The motto:

“Sell! Sell! Sell!”

Sales rebounded in the short term, and the VP was hailed as a hero.

But eventually, backlogs began to grow again. And after a year, delivery times began to rise again — first to ten weeks, then to twelve, and eventually to sixteen. The debate over adding capacity started anew.

Eventually, the approval of yet another new facility was granted, but no sooner had the papers been signed than a new sales crisis started. The slump was so bad that they had to fire the sales and marketing vice president. Over the next several years, many marketing managers came and left, but the growth always occurred in spurts, followed by periods of little to no growth.

You see, the root cause of WonderTech's decline lay in its delivery time, which had gradually increased over an extended period.

As backlogs grew relative to production capacity, delivery times worsened, leading to customer dissatisfaction. While the top management remained focused on financial performance, they overlooked the growing importance of delivery service to customers. This complacency allowed the problem to persist and eventually erode the company's reputation.

Shifting the Burden

WonderTech's failure to address delivery time issues resulted in dissatisfied customers seeking alternatives, leading to declining orders. Rather than investing in increasing production capacity to control delivery times as a pre-emptive measure, the burden shifted to customer dissatisfaction as the primary mechanism for controlling demand, and consequently, the decision to open up a new production facility.

But by this time, the response was too late.

And as the fundamental response weakened, the symptomatic response of customer dissatisfaction grew stronger, perpetuating the company's decline.

WonderTech's top management failed to maintain and advance the company's delivery time standards. Manufacturing, aligned with the eroded standard, provided justification for not rushing into major investments without sustained demand. This shortsightedness prevented the management from recognizing that investing in capacity was necessary to sustain demand.

The Boiled Frog Syndrome

The gradual erosion of standards and declining growth led to a dangerous situation known as the boiled frog syndrome.

Like a frog in gradually heating water who doesn't realize it's getting hotter until it's too late to jump out, WonderTech failed to respond to the threat of its declining performance until it was too late. The emphasis on sales and growth meant that production capacity was looked at as a means to an end — growth — versus an investment in the long-term success of the company and its service standards.

This meant that the decision to work on improving manufacturing capacity always came a little too late, and only after the sales team had started ringing the warning bells.

The Perils of Reactive Management

One of the key reasons for WonderTech's downfall was the management's inability to perceive the deeper structural patterns at play within their organization. Instead of recognizing the interconnectedness of events and forces, they viewed happenings as isolated incidents to react to, thereby missing the underlying systemic causes of their decline.

The reactive management approach was evident in how the top management focused primarily on financial indicators such as sales, profits, return on investment, and market share. As long as these metrics appeared healthy, the management paid little attention to other critical factors, such as delivery times.

This narrow focus prevented them from recognizing the early warning signs of trouble brewing within their organization.

When faced with a sales slump, the immediate response was to push harder on reinforcing sales. The sales and marketing vice president ramped up sales incentives and promotions as a reactionary measure, without trying to solve the root cause. Hence, while these tactics provided temporary relief and boosted sales in the short term, they did not address the underlying structural issues causing the decline.

Moreover, the management's limited perspective led them to overlook the balancing process that indicated the need for attention and investment in product manufacturing. But those escalating delivery times, initially seen as a minor inconvenience, gradually eroded customer satisfaction and loyalty. Customers, faced with prolonged waits, became disenchanted and sought alternatives.

The insidious nature of the shifting-the-burden structure further hindered the management's ability to detect cause and effect. This gradually eroded standards and led to a decline in growth.

But the decline was gradual and subtle. It obscured the true dynamics of the situation.

As a result, the management remained reactive, responding to crises rather than proactively addressing the root causes of their decline.

This reactive management approach is not unique to WonderTech.

It is a common learning disability among many organizations, where managers tend to focus on immediate events and forces, neglecting the larger structural patterns at play. The allure of quick fixes and short-term gains often blinds managers to the long-term consequences of their actions.

In contrast, a systems thinking approach encourages managers to step back and look beyond the surface-level events and recognize the interconnectedness of the system instead.

The focus is then on uncovering structural patterns, feedback loops, and delays that shape the organization's behavior. Once and only when this is done, can leverage points in the system be identified and addressed.

Like I always say,

“Solve for root causes, not symptoms. Think in structures and systems, not events.”




P.S. – The original story and analysis that inspired this piece is borrowed from the book The Fifth Discipline by Peter Senge. I wouldn't like to take any personal credit for this idea. I just felt like it was too good and too fundamental to not share with you all.

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