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In 1587, the Vatican created the office of the promotor fidel. Tasked with playing the skeptic as the church considered a case for sainthood, the officer worked with a team of investigators, giving voice to all reasonable arguments why the prospective saint should be denied elevation to the canon. Though promotor fidel translates literally as “promoter of the faith,” this inquisitor became commonly known as the “devil’s advocate.”
It’s a title unlikely to appear on a business card, but the role of devil’s advocate is at the heart of Billion Dollar Lessons, branded a course in Business Failure 101 by journalist Paul B. Carroll and strategy consultant Chunka Mui. Instead of the usual monument-building to the conquering heroes of the corporate battlefield, Carroll and Mui autopsy the corpses of the fallen — in this case, 750 publicly traded U.S. companies that faltered between 1981 and 2006 — hoping to learn something from businesses “that tried to do the same thing as the winners did, but failed.”
The common theme Carroll and Mui identify among the misfires isn’t untalented leadership or poor execution. Rather, it’s the astonishing lack of real strategic consideration as corporations settle on risky gambits like roll-ups, adjacencies and consolidations. It’s this often-demonstrated absence of sober second thought in the boardroom that has Carroll and Mui proposing a formula to build disagreement into the corporate strategic process — what they call the devil’s advocate review.
Serving as a case study for myriad companies that “wrote off major investments, shuttered unprofitable lines of business, [filed] for bankruptcy,” or “sold themselves before having to account for a major problem,” is poor, deflated Kodak. The venerable film manufacturer saw clearly the threat posed by digital photography as early as 1981, but a thorough review of its business prospects determined that digital photography would not threaten its core business in the ’80s. In the ’90s, the company’s managers seized on the report to justify expanding into an adjacent market through the disastrous 1988 purchase of Sterling Drug for $5.1 billion — Kodak was really a chemicals business, they reasoned, not a photography company.
Even more significantly, Kodak managers opted to ignore the work in their own labs, which created the first digital camera in the ’70s and which, in 1986, developed the sensor technology at the core of today’s digital cameras: “Management’s reaction was ‘That’s cute — but don’t tell anyone about it.’” After all, profit margins on the company’s chemical-based film and paper business were far greater than they would be in the world of digital photography. A devil’s advocate review, Carroll and Mui argue, could have helped Kodak’s executives identify their blind spots and challenge received wisdom when defining their corporate strategy.
The idea at the heart of Billion Dollar Lessons is a simple one: always have somebody argue the ‘no’ side. They offer a prescription for introducing “acceptable levels of useful disagreement” into a business, and a template for how the devil’s advocate review process might be designed. And they’re certain that having somebody charged with presenting counter-arguments to executives intoxicated by deal fever can offer companies large and small a simple form of failure insurance.
A flip through the authors’ research notes shows that they have found dozens of familiar names lacking in their internal checks and balances, Xerox, Intel, CBS and Barnes & Noble among them. Most of these companies have succumbed to one or more of the same seven failure patterns. They’ve fixated on the economies and underestimated the complexities of scale, or they’ve overestimated the purchasing or pricing powers that size will bring. They’ve deluded themselves about the strength of their hold on their customers, or they’ve duped themselves through semantic games or by misunderstanding an adjacent industry. In many cases, they’ve simply not considered all the options available to them.
For instance, as Kodak’s Sterling Drug acquisition imploded (photography and pharmaceuticals being two radically different industries, as it turned out), Kodak rolled out failure after failure, trying unsuccessfully to graft digital technology onto their established business rather than adapt to an emerging marketplace. As late as 1995, when a Fortune reporter challenged Kodak CEO George M. C. Fisher with the impending collapse of the traditional photography industry, the executive sounded befuddled. “But Kodak has to grow,” he protested.
The former photo giant failed to recognize the shift to digital, failed to streamline its operations effectively, and failed to sell itself when the threat to its core business was apparent and its market valuation was still high. More damningly, its executives couldn’t even conceive of doing any of these things.
Carroll and Mui don’t propose such a review as an alternative method for setting strategy, nor do they suggest that it should override a business’s top executives. But they want executives, senior managers, and board members to “expect, accept, and even demand frank discussion and robust analysis whenever ‘bet the company’ moves are on the table.” And they want serious investors to analyze corporate announcements, and consider avoiding stock or taking advantage of short-sale opportunities when a company is pursuing one of the seven failure patterns in Billion Dollar Lessons.
Ignoring the ‘no’ side can have dramatic consequences. The very institution that invented devil’s advocacy abolished the office in 1983, after nearly four centuries of effective work. Since then, the canonization process has borne extremely different results: 500 new saints have been recognized, at a rate roughly 20 times faster than in the earlier part of the 20th century. Even the Pope, it seems, shouldn’t be too cavalier about failure insurance.
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