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Leaders in Denial

From the July 2008 Issue
Leaders in Denial

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Sigmund Freud described denial as a state of “knowing-but-not-knowing.” The distance between the world as it is and the world as you want it to be is simply too great, and you freeze in your tracks. Freud saw denial, in the words of his leading biographer, Peter Gay, as “a state of rational apprehension that does not result in appropriate action.”

Is denial a problem for you? Yes, it is. If you are running a company at the top of your industry, now is the time to ask whether you are on the right path. You may be riding the express train to oblivion. It is no accident that only one firm from the original (1896) Dow Jones Industrial Average is still on that list. According to the economist Paul Ormerod, on average, more than 10% of all companies in America disappear each year. Denial is a major reason—perhaps the major reason—for this constant failure.

History has lessons to teach about the role of denial in the decline of companies. The stubborn refusal of the U.S. automobile industry to admit the changeability of consumer demand is one of the best examples.

The Model T was introduced in 1908, and over the next two decades the Ford Motor Company sold more than 15 million of these cars. But by 1927 sales had flagged so severely that Henry Ford discontinued the line in order to retool his factories for its successor, the Model A. To make the change, he shut down production for months, at a cost of close to $250 million. This chain of events was disastrous for the company, because it allowed Chrysler’s Plymouth to gain market share and permitted General Motors to seize market leadership.

Why did Henry Ford, who was such a visionary in the industry’s infancy, fail to see that the Model T was about to run its course and that a smooth transition to a new vehicle was essential? Evidence of his signature model’s declining fortunes was everywhere apparent at the time. But Ford dismissed sales figures documenting the Model T’s declining market share, because he suspected rivals of manipulating them. One of his top executives warned him of the dire situation in a detailed memorandum. Ford fired him.

Ford’s blindness resulted from a conviction that he knew what customers wanted: basic transportation. He was equally convinced that this desire would never change. His favorite slogan about the Model T—“It takes you there and it brings you back”—captured this myopic view. What Ford didn’t grasp is that every product or service has two components: the core (the product’s primary purpose) and the augmented (additional functions and features). In every industry the border between the two inevitably shifts over time. (For another take on core and augmented products, see Theodore Levitt’s The Marketing Imagination.)

In 1908 the automobile was mostly core: It got you there and back again.

By the 1920s, however, the world was changing, whereas the Model T wasn’t. U.S. consumers had more money and more leisure time. The automobile had become more than a machine; it was a status symbol as well. GM’s president, Alfred P. Sloan, Jr., recognized this and responded with the augmented-product strategy. GM’s cars came in a variety of colors, and its models changed every year. Sloan introduced an array of products that announced their owners’ standing in the world: As Fortune put it, “Chevrolet for the hoi polloi…, Pontiac…for the poor but proud, Oldsmobile for the comfortable but discreet, Buick for the striving, Cadillac for the rich.”

By 1927 the line between core and augmented product for cars had shifted markedly. After World War II it shifted further still. In the words of a Ford executive, “[The United States] is a big country, with big people and big dogs. The American buyer wants a Gary Cooper on wheels, not a baby carriage. He wants a car with hair on its chest.” By the mid-1950s U.S. manufacturers were producing ocean liners of chrome with tail fins borrowed from fighter jets. They may have been dangerous, unreliable gas-guzzlers, but the bells and whistles seemed worth it.

Then, hit with oil shocks and stagflation in the 1970s, U.S. consumers returned to their original desire for basic transportation. The Big Three automakers couldn’t believe that the line between core and augmented was moving again—but the Japanese could. They swept in with precisely what Americans now wanted—cars that would get you there and back again reliably and cheaply.

This time, an entire industry had been wallowing in the tar pit of denial, unable to imagine that eight-cylinder behemoths weren’t the last word. But history teaches us that there is no “last word.” Is the automobile industry—in its failure to heed the shifting tides of consumer demand—exceptional when it comes to denial? Hardly. Just consider the growth stalls at Kmart, Digital Equipment, Firestone, and Bear Stearns, to name only a few. Denial has involved many other issues as well, from ignoring external forces such as technological innovation and demographic change to overestimating a company’s own capabilities and resources.

Freud himself was a victim of the very knowing-but-not-knowing that he described in others. He kept smoking cigars even after his oral cancer was diagnosed. Both Ford and Freud were smart, successful men who paid a terrible price for denial. Don’t let it devastate your company, too.
