Cover

Contents

Cover

Endorsements

Title Page

Dedication

Foreword

Prologue

Introduction

Part I: The Ephemeral Nature of Firms

Chapter 1: Meet Carl Berger

Chapter 2: Corporate Life Cycle

Schumpeter's Ghost

The Corporate Life Cycle and Aging Firms

Part II: Individual Rigidities

Chapter 3: To Err Is Human

Not That Smart, Not That Informed, Not That Selfish

Rules of Thumb

Mental Biases

Addressing the Rigidities of Bounded Rationality

Chapter 4: The Greatest of All Time

The Theory of Self-Efficacy Beliefs

A Positive for Organizations

Pathways of Self-Confidence

Developing Self-Efficacy

A Health Warning

Implications for Management

Chapter 5: Rewiring Brains

The Human Brain

Neurons and Neuroplasticity

Plasticity, Learning, and Behavioral Change

Large-Scale Rewiring of Brains

Part III: Organizational Rigidities

Chapter 6: Long Live Bureaucracy!

Why Organizations Exist

Chaos or Bureaucracy

A Matter of Interdependencies

Large and Complex Modern Organizations

Building Tomorrow's Global Organization

Chapter 7: In Brain We Trust

Story-Telling and Spirituality as Neurological Phenomena

Why Our Brain Develops Religion

Unleashing Spirituality in Business

Insights on Company Ideologies

Chapter 8: What We Value

Understanding Corporate Culture

Subcultures

Using Culture to Reduce Need for Deep and Dense Hierarchies

Execution and Learning Culture

Transforming Culture

Chapter 9: What Not to Pay For

The Limits of Monetary Incentives

Effective (and Inexpensive) Nonmonetary Incentives

Building Effective Incentive Systems

Chapter 10: Fast Learners

Defining Capabilities

Capabilities as a Constraint to Adaptation

Building Capabilities Fast

Part IV: Serial Innovators

Chapter 11: The Secrets of Serial Innovators

Cultivating the Desire to Make a Difference

Building a Team of Learners at the Top

Positively Framing the Vision and Strategy

Building on Self-Managed Performance Cells

Promoting the Firm's Drive to Perform and Grow

Building Capabilities to Quickly Develop New Assets and Skills

Cultivating a Culture That Fosters Execution and Promotes Challenge

Chapter 12: Beyond Business: The Medici, Oxford, and the Catholic Church

Chapter 13: Legacy through Leadership

Afterword

Appendix A: Analysis of the Top 50 U.S. Firms of 1960

Appendix B: Corporate Aging and Survival

Appendix C: Key Questions for Transforming Your Firm

Understanding of Context

Company Purpose

Top Team Composition

Positive Context

Organization

Performance Management Systems

Leadership Development

Capability Building

Corporate Culture

References

Acknowledgments

About the Author

Index

Additional Praise For

Serial Innovators

“Serial Innovators deals with the fascinating problem of corporate aging and survival. Older firms have lower profitability and higher costs, they command smaller market shares, and have poorer governance, on average. The puzzle is why they are unable to reinvent themselves. Unlike many earlier books addressing this issue, Serial Innovators reviews the insights generated in various academic fields and uses that information to offer solutions. The result is a truly inspiring read.”

—Claudio Loderer
Professor, Institut für Finanzmanagement
University of Berne, Switzerland

“Serial Innovators is a book about the leadership legacies that help firms create lasting value. It is two books in one: a book about the firms that survive for long periods, how they innovate, and how they adapt to changing markets; and also the fascinating story of a new CEO and his efforts to lead his firm through new challenges and to keep his life in balance. It is about how leaders can become better leaders. Nothing more important to read these days.”

—Mario Greco
Chief Executive Officer, General Insurance
Zurich Financial Services Ltd

“One of the great mysteries of business and economics is why high performance is so fleeting. Why, like empires, do companies rise to great success, and then fall when they fail to adapt to changes in their environment? In this engaging book, Claudio Feser sheds new light on this age-old question. He finds that there are a few companies—serial innovators—that beat the odds, bounce back from adversity, innovate, and adapt to ever-changing markets. A must read for business leaders in any industry.”

—Eric Beinhocker
Author, The Origin of Wealth

“How often do you read a book that is academically thorough, utterly practical, entertaining, and inspiring? Drawing on a wide range of research, Serial Innovators tells the story of a young CEO going through both a personal and a company transformation. It is a story of leadership. It is a story of legacy. It is a story of life.”

—Thomas Gutzwiller
Professor, Executive School of Management,
Technology and Law
University of St. Gallen

“Companies are like biological organisms. They are born, they grow, they mature, they age, and they die. For most companies, this cycle is extremely short—a few years. For some it’s about a generation. But only a few achieve a cycle that mirrors the human life span. This book is about what makes companies go stale and what to do about it. In my capacity as chairman of getAbstract, I’ve read thousands of business books. This one is unique. Feser is not only a brilliant business thinker, he is also a great storyteller. Read this book and you will be enlightened.”

—Rolf Dobelli
Chairman, getAbstract
and Author, Die Kunst des klaren Denkens

“Creating shareholder value is not the only ‘raison d’être’ of corporations, firms, and businesses. Companies should positively impact society and make the world a better place. It’s about making life better, safer, and healthier. And it’s about people and leaders going through personal and professional transformation. This book provides invaluable insights on how to build companies that succeed in today’s global, complex, and fast-changing markets.”

—Bruno Pfister
Chief Executive Officer
Swiss Life Holding Ltd

“This work draws on an unusually wide set of disciplines—new and old—to shed light on the behavior of organizations and their leaders. Embracing complexity and unpredictability—rather than assuming them away—Serial Innovators is a renaissance person’s guide to leadership and institution building.”

—Bill Huyett
Director, McKinsey & Company
and Co-Author, Value

Published by John Wiley & Sons, Inc., Hoboken, New Jersey.
Published simultaneously in Canada.

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Library of Congress Cataloging-in-Publication Data:

Feser, Claudio.
Serial innovators : firms that change the world / Claudio Feser.
p. cm.
Includes bibliographical references and index.
ISBN 978-1-118-14992-8 (cloth); ISBN 978-1-118-17404-3 (ebk);
ISBN 978-1-118-17405-0 (ebk); ISBN 978-1-118-17406-7 (ebk)
1. Technological innovations. 2. Creative ability in business. I. Title.
HD45.F435 2012
338′.064–dc23
2011029125

To Evelyne, Dario, and Alessio

Foreword

From time to time—not very often—a book about business offers a genuinely new perspective on issues that confront us all. Serial Innovators is such a book.

Companies are facing a number of challenges: a dynamic market environment with ever increasing competitive pressure; increased shareholder, employee, and community expectations; activist demands; and more severe regulatory requirements. Keeping a large and global organization innovative and adaptive in such a context requires a great deal of professional competence and drive, an understanding of market opportunities and threats, and an understanding of the capabilities and limitations of the organization and of oneself.

Business always implies risk taking, which in turn implies the danger of failing. This means that companies and their leaders are inherently exposed to patterns such as overconfidence, denial, or projections.

One may expect that these defense mechanisms occur only in companies in crisis and not in times of great success. But when there is praise from all sides and no shortage of recognition, companies and their leaders may fall victim to losing their sense of reality. Successful, admired, and praised organizations can easily become self-centered and isolated from external information. Rather than remaining realistic and aware of the fragility of success, their leaders may take praise and admiration at face value, egos get inflated, and expectations exaggerated, which sooner or later inevitably lead to failure.

Serial Innovators draws on a wide range of academic research and practical experiences to provide a fact-based analysis of the processes when organizations lose their ability to innovate in an ever-changing context, and develops insights on how company leaders can build organizations that can blossom and sustain growth in today’s dynamic and challenging markets.

Serial Innovators is also the story of Carl, a young CEO, faced with the challenges of managing a large and increasingly complex organization. It is a story that opens a window on a world that most people never see: the world of those who lead, under constant pressure, and in a world full of opportunities and risks. They have to be able to make decisions based on incomplete information and sometimes contradictory pressures; they have to act while possibly still having doubts, and they must be able to make difficult people choices. Leaders, however, also have the unique privilege to shape an organization, formulate its mission, create alignment, and instill the passion; they can project self-confidence and energy to improve the lives of thousands, sometimes hundreds of thousands, of people based on the firm’s scale and capabilities.

Serial Innovators is a thoughtful and compelling book distinguished by the breadth and depth of its scope. The choice of academic references is extensive and links well with the real-life choices that a company leader has to make in shaping the organization that he leads, based on analytical thinking. The author, Claudio Feser, draws from extensive personal experience and offers food for thought for all those with leadership positions—in business and elsewhere.

DANIEL VASELLA, MD
Chairman, Novartis AG

Prologue

This is an extraordinary book. It addresses head on the most critical question facing us. That question is: “How can the organizations we create and populate deliver benefits for customers, shareholders, employees, and society?” This is not a question limited to the interests of business people. The answer to this question will determine the rate of human progress and the health of our societies for us and our children.

The greatest human invention is the ability to organize; the ability of a group of people working together toward a common goal to surpass the dreams of individuals. Innovations such as mass production, large-scale agriculture, the Internet, the sequencing of the human genome would simply not be possible without our ability to cooperate through organization. For that matter, neither would be policing, charity, or government itself. Our ability to create society rests on our ability to organize.

Claudio Feser gets to the heart of this question. What does it take to build organizations that succeed for long periods of time? And what stops us? He confronts the dark reality below the potential. Most organizations fail. They fail to engage their customers. They fail to develop their people and they fail to deliver for their shareholders. Most organizations are short-lived. Set up to achieve a goal, to deliver on a task, they grow and develop. But then eventually they age and die. In a process that resembles a super-fast version of the Darwinian evolution of species, their position in the world is taken over by younger, more nimble, more vibrant organizations. History is full of organizations that were once admired global leaders but now no longer exist, and have been replaced by younger, more dynamic competitors: British Leyland, Lehman Brothers, Digital Equipment Corporation, Enron, to name but a few. And this process of the fall of large, established, often admired organizations and the rise of new ones seems to be accelerating. According to a study by Foster and Kaplan of McKinsey & Company, in 1955 a company in the S&P 500 Index stayed in the index for an average of 45 years, and in 1975, for just 26 years. In 2009, the average was estimated to be just 17 years. Could it be that large and admired firms already carry in them the virus that will eventually lead to their decay?

This seems odd. Why would admired, world-class organizations that genuinely understand their industries, have access to the best technologies, employ the best talent, possess the best assets, have the best capabilities, systematically lose out to organizations that have none of that? How can it be that small, inexperienced newcomers systematically beat large, established, experienced, potent, world-class organizations? Why—in the world of organizations—does David beat Goliath over and over again? And why ever more quickly?

Serial Innovators offers answers to these questions. Building on recent advances in science, it dives into the psychology of the human being and of organizations to explain why organizations develop rigidities that prevent them from adapting and innovating in times of change. And building among others on Beyond Performance by Scott Keller and myself, it develops insights and perspectives on how to build organizations that not only perform, but are also healthy: organizations that have the ability to continuously adapt and renew themselves. It also shows how the leaders of organizations play a pivotal role in ensuring that organizations stay healthy, young, nimble, and innovative, and how—in doing so—leaders can build enduring legacies.

Written as a fable about a young CEO going through both a company and a personal transformation, Serial Innovators is not only a story about innovation and adaptation, it is a story about leadership and legacy. More importantly, it is a story about life.

COLIN PRICE
Leader of McKinsey & Company’s Organization Practice

Introduction

The performance pressure on company leaders today is enormous. It is tough to stay at the top. Leaders work hard focusing on profitability and value creation.

Yet, despite all their efforts, value creation by most firms is short-lived. In fact, the whole life cycle of most firms is not very long. The average life expectancy of a firm is roughly 15 years, and only 5 out of 100 live longer than 50 years. Set up on the back of an innovative idea, firms grow and develop, and sometimes they blossom into admired, world-class organizations. But eventually—as if they were biological organisms—they age and die. There is a large graveyard of defunct firms, including household names such as Texaco, Union Carbide, RCA, General Foods, British Leyland, Pan Am, Uniroyal, Bethlehem Steel, Westinghouse, Commodore, Lehman Brothers, Trans World Airlines, Digital Equipment Corporation, Polaroid Corporation, WorldCom, and Enron.

The signs of aging vary from firm to firm. Some firms become blinded by success and begin to resist external views and challenges. Some are locked into mental models and become driven by habits. Some lose the sense of purpose that pervaded them in the early days. Some become bureaucratic. Some have processes and incentive systems that have put them on an autopilot, leading in a dangerous direction. Some develop dysfunctional organizational cultures. The process of aging is subtle, silent, stealthy, and pervasive. As firms age, they struggle to keep up with changing markets, and in today’s dynamic markets slow adapters often become big losers. As a consequence, firms get taken over or go bankrupt. They die. Life is ephemeral even for firms.

Sometimes, however, but only sometimes, firms resist the process of aging and rise above this. They adapt and thrive in dynamic markets, they continuously reinvent themselves, and they change their industries. They become serial innovators. Sometimes—by continuously inventing new products and services that make life healthier, better, safer—they change the world. These firms create value for decades, for their customers, their shareholders, and their employees.

This book studies the aging of firms and the factors affecting it. It also uncovers the secrets of building a firm that is a serial innovator, a firm that adapts and thrives in dynamic markets.

It is structured in four parts.

In Part I, it introduces the concept of the corporate life cycle to show that firms, like human beings, are born, grow, mature, and eventually get sick and die.

In Parts II and III, it then studies the factors affecting the aging of firms, the factors that slow down the process of adapting to changes in the marketplace. It reviews the recent findings in relevant academic fields to understand how firms, as they grow and mature, develop rigidities that prevent change. It examines rigidities at two levels: the individual and the organizational.

In Part IV, it uses those findings to uncover the secrets to building a firm that is adaptive, innovative, and can create significant shareholder value for the long term, sometimes for centuries. It is a firm that is driven by the passion to make a difference to customers and society; a firm that is led by learners with an ambitious and positive vision; a firm that is organized and builds on its members’ desire to achieve results, and their eagerness to grow and develop; a firm that is quick in developing new capabilities; a firm that, while it focuses thoroughly on execution and results, remains externally oriented and continuously challenges itself. Building such a firm is a challenging task. It is first and foremost an act of leadership.

The book also reflects on the role of company leaders in developing such a firm. It reflects on how leaders can become great leaders who build enduring legacies.

Before we start, let me make three comments.

First, a word on the methodology used in this study. This book is about organizational longevity, continuous innovation, and adaptation. My bookshelf is full of books on great, innovative, and enduring companies, and there is no shortage of advice on how to build such firms. All too often, though, these books sample great companies at a given point in time, and search for commonalities in their strategies and approaches. Few researchers include firms in their samples that might have pursued identical strategies and approaches, but that no longer exist. The findings are therefore subject to survivor bias, a flaw in research methodology. Therefore, if you sort these books by the decade in which they were written, the names of great and enduring companies—and the strategies and approaches used to become one—change from decade to decade.

This book takes a different route. It reviews recent advances in many academic fields that are relevant to organizational adaptation—behavioral economics, psychology, neuroscience, organizational science, network theory, anthropology, sociology, and strategy—and it then attempts to apply these advances to develop insights on organizational longevity. Besides being more robust methodologically, this route makes for more varied, broad reading. The drawback of this route is, however, that the book may be perceived at times to be academic. And in fact, it is easy to get lost in the theory. Some academic material in its original form is such dry reading that it almost makes you feel as if your soul is leaving your body and wandering elsewhere! I have tried to keep the reviews of the various academic areas short, and to focus on the interesting, the practical, and the (hopefully) less obvious business implications.

Second, this book does not pretend to develop a comprehensive framework of organizational longevity, or to teach general truths about the functioning of human beings or organizations. On the contrary, it aims to provide insights, ideas, suggestions, and perspectives—in the full awareness that there are many other perspectives on the matter. It aims to provide stimuli, not definitive answers.

Third, this book is written as the story of Carl Berger. As we will see later, our thinking is guided by stories, by narratives, not by concepts or facts. The story of Carl Berger is fiction. While it builds on some personal experiences, the person and the company described in this book are fictitious, and any resemblance to any existing person(s) or firm is purely coincidental.

Let’s now start our journey of discovering the secrets of the serial innovators. But let me first introduce you to our main character, who will accompany us throughout the book: Carl Berger.

CLAUDIO FESER

PART I

The Ephemeral Nature of Firms

Chapter 1

Meet Carl Berger

Luke was the driver and general errand runner for the top executives at American Health Devices, Inc. (AHD), a global medical products company based in Trenton, New Jersey. It was an unusually sunny and warm day in November 2004 when he stood nervously at the JFK airport, waiting to meet his new boss.

The last guy, Rittenhouse, was pretty harsh, all business and all boss, never even a smile, so Luke was pretty surprised when Carl Berger emerged, having cleared customs after his flight from Tokyo. This young-looking man, with an open face and dark hair, had to be the new CEO. He'd already nodded and smiled when he saw Luke's AHD sign and he was heading directly toward him.

Luke gulped, “Good morning, Mr. Berger. I'm Luke, your driver.”

“Nice meeting you, but call me Carl,” Berger said as he reached out for a handshake. Luke then reached for Carl's fine, but worn, leather suitcase, but the new CEO hefted it himself. “I've got it,” he said. “Show me where you parked.”

Luke appraised his new CEO, getting used to his unassuming manner. To his shock, his CEO seemed to be appraising him, too.

“Thanks for coming to get me, Luke,” Carl said. “Have you been with the company for a long time?”

“Five years or so, Mr. Berger,” Luke said, as he drove the car swiftly down the road heading toward AHD's offices. “I drove your predecessor, Mr. Rittenhouse.”

“Please call me Carl,” the new CEO said again. There was no edge to his voice, but still, it was clear how naturally he could exercise authority.

“Yes, Mr. Berger, ahh. I am sorry, I meant Mr. Carl, uh, Carl.”

“That's fine, Luke,” Carl said. “How are things at AHD? Do you like your work?”

“Working at AHD is a big honor for someone like me, who hasn't been to college. After all, it's one of America's top firms,” Luke said.

Carl sat back and enjoyed the view of New York's skyline as they drove toward AHD's headquarters. He was so proud to be back home.

Carl's thoughts wandered to the events of the past few months.

AHD was a leading firm in the global medical device industry. Medical devices are products used for medical purposes in patients, in diagnosis, therapy, or surgery. Products include implantable devices (such as orthopedics, dental implants, optical devices, and hearing aids), capital equipment (like MRI and PET scanners, or X-ray machines), and related supplies.

In 2004, the medical devices industry was fast-growing and highly profitable. AHD was a strong and respected player in three market segments: orthopedic implants, dental implants, and diagnostics.

AHD was a long-standing leader in the reconstructive orthopedic implants market. In the late 1970s, due to a breakthrough innovation in coating technology, it had built an enviable market position and reputation with implant products such as joint replacements for hips and knees.

In the 1990s, AHD had seen dental implants as a natural extension of reconstructive implants, with a chance to exploit its core product development capabilities and unique manufacturing technologies. Dental implants was a small, niche market. However, given a large unaddressed patient population in industrialized and developing countries, it was growing very fast.

The diagnostics market on the other hand was large, mature, slow-growing, and commoditized. Diagnostics companies provide laboratory equipment and supplies to clinical labs, hospital labs, and large specialized labs for tests such as tumor screening and blood testing. AHD, however, focused on point-of-care (POC) diagnostics, which included testing equipment used in practices and clinics, a fast-growing and profitable niche in the broader diagnostic market.

AHD was based in New Jersey, but—with more than 25,000 employees in 40 countries—it was a truly global firm. The board of directors and the management team alone were composed of individuals of 10 different nationalities.

AHD's former president and CEO, Everson Rittenhouse III, always “Mr. Rittenhouse,” and usually “Mr. Rittenhouse, sir,” had retired in the summer of 2004 without having cultivated any obvious successor. The board of directors had been discussing the succession for almost a year, a period in which it screened several internal and external candidates and deemed them unsuitable for the top job.

In the spring of 2004, Hubert Meyer, the senior member of AHD's board and the head of the nomination committee, had contacted Carl, who was already known in the medical products industry as a young, competitive, and ambitious leader. At the time, Carl was the vice president of marketing and sales and a member of the executive team of KenkoInc in Japan. KenkoInc was a small but very fast-growing orthopedic implants company owned by two Asian private equity firms. It was located in Osaka and had sizable market positions in several Asian markets. Carl had been the vice president of marketing and sales of KenkoInc since its founding in the second half of the 1990s. It was clear to everyone in the medical device industry that he was the man behind KenkoInc's growth and success.

In the spring of 2004, Hubert was traveling in Japan. He visited Carl in Osaka “to talk business,” as Hubert put it. Hubert was a tall man in his early sixties and, like Carl, an American citizen. He was soft-spoken, thoughtful, and well-educated. He had made an impressive career in the electronics industry and commanded respect in the broader American business community and the international high tech community for his business acumen, his judgment, and his integrity.

Hubert and Carl talked little business, though. They spent much of their time talking about family and personal matters. This was somewhat surprising, since they had never met before. Carl immediately felt at ease with Hubert, however.

At the end of the day, while they were driving to the airport for Hubert's flight back to the United States, Hubert—almost casually, it seemed—asked Carl, “Would you consider moving back to America to work for AHD?”

Hubert talked about an emerging opportunity to run one of AHD's three divisions, but did not specify which one. The ambitious Carl was obviously very interested, as AHD was 10 times the size of KenkoInc.

“Well,” Carl said, “I'm honored by the possibilities your question implies. Joining AHD's management team would be quite an opportunity.”

But in the months that followed, Carl heard no more from Hubert and Carl thought that he had probably changed his mind.

Then, six months later, when he had almost forgotten the encounter, Hubert called: “Carl, we are considering you for the position of president and CEO of AHD. Can you meet some of our board members?”

“Wow,” said Carl. This was beyond his wildest expectations. All manner of thoughts rushed through his mind, and he had to control his emotions. “When do you need an answer, Hubert?” he asked.

“You have 24 hours; is that sufficient?” responded Hubert.

Carl took a few hours off. He went for a walk in Sankaku Park, close to KenkoInc's head office. He had to sort out his thoughts, to think the matter through. In the evening, he and his wife, Gwen, talked about the opportunity for several hours. In the mid-1990s, Carl had received an offer from two private equity firms to help set up and develop KenkoInc in Japan. The move looked very risky, but Carl saw it as a unique opportunity to accelerate his career. At the time, Gwen had accepted the move reluctantly. It hadn't been ideal for her career as a radiologist, but now after eight years, she loved living in Japan. They had many friends, and their two children, Dave and Alex, were happy, doing well at school, and developing marvelously. Gwen knew what the CEO role at AHD meant to Carl, and she was ready, though certainly not immediately happy, to move the family back to New Jersey.

For as long as he could remember, Carl had worked hard, really hard, for this opportunity.

Carl was a product of institutional foster care. His parents died in an accident when he was four. He grew up in an orphanage in New York, where affection and care were in short supply. Fighting for care makes one competitive. Under an apparently soft-spoken and unassuming exterior, there was a competitive and ambitious Carl. He was always under pressure, under pressure to demonstrate to the world, and to himself, that he was worthy.

Carl's appointment as head of AHD would be the culmination of an impressive career, and an ultimate demonstration of Carl's abilities. To a man in constant search of recognition and admiration, it felt like a triumph.

“After all these years, and these sacrifices, I've got a shot at becoming the head of AHD. This is incredible,” he thought.

Carl spoke the following morning with the chairman and the main shareholders of KenkoInc, and they agreed on a way forward. Then he called Hubert: “I would be delighted to interview for the position of head of AHD. Just to be offered a shot at it is a great honor for me. Thank you for your trust in my abilities. When do you want me to come over?”

“Can you be here next week?” asked Hubert.

Two months later, the board appointed Carl as president and CEO of AHD. Despite his success with KenkoInc in Asia, Carl's appointment to the top job at AHD was a surprise to everyone, in the company, in the industry, and in the country. The U.S. media covered Carl's appointment extensively. Some newspapers saw it as a huge mistake. They described the matter as if one of the leading companies in the country had been entrusted to an inexperienced child.

In his early forties, Carl was indeed young and inexperienced. Rittenhouse had retired at the age of 65, after 10 years at the head of the company. Most members of the top management team were in their fifties. Carl had no relationships with any of AHD's important customers. He had no experience in two of AHD's three business lines. And he had not received any exposure to the U.S. medical device market, which represented nearly 50 percent of AHD's sales.

From Day One, Carl's start at AHD was rocky.

After a series of short introductory meetings—with his executive assistant, with the head of the CEO's office (a kind of chief of staff), with the group executive committee (called the Group Executive Team, or GET, for short), and with the staff in the large auditorium of the Trenton headquarters—Carl met with the CFO, Monica, to discuss AHD's upcoming fourth-quarter results.

Monica was Australian. She was highly respected in the investor community. She had been one of the two internal candidates for the top job, but she did not seem to resent the Board's decision. Her short hair, clipped Aussie accent, and severe suits bespoke serious competence, an impression soon undermined by the unfolding of events.

“The estimates of the earnings for the last quarter of 2004 show a 38 percent decline from last year,” Monica had told Carl shortly after he took office. She continued: “This is due to adverse exchange-rate movements, and to some hypercompetitive moves at the edge of legality by some of our competitors. Our underlying position and momentum remain strong. Don't worry, the investors will understand it.”

They didn’t. On the release of the fourth-quarter results in mid-January 2005, AHD's share price fell by 11 percent.

But the fourth-quarter results weren't the only issue. Just one week later, Carl was informed by Monica of a pending U.S. class-action lawsuit against AHD related to diagnostic instruments sold in the United States in 2002. “We weren't expecting this, Carl. But don't worry, our lawyers believe that we can easily manage it,” proclaimed Monica.

When he discussed the matter with a lawyer he trusted, Carl did worry. In 2002, AHD had experienced a serious problem with the quality of the products in one of its manufacturing plants. Nevertheless, knowing that the problem existed, AHD still had delivered faulty diagnostic instruments to customers. Subsequently, AHD had been obliged to recall a large number of products, which had seriously damaged its reputation in the U.S. market. When Carl had interviewed for the top job, AHD executives had told him that the quality and recall matters had been resolved. Now, to his surprise, he found himself confronted with a class-action lawsuit hanging over AHD like the Sword of Damocles.

Nor were the poor fourth-quarter results and the class-action lawsuit the only unpleasant surprises Carl encountered. As he learned more about the company, Carl soon realized that AHD was no longer exactly the lighthouse firm that he and others had thought. It seemed that AHD had lost its edge in the past few years.

AHD had missed several technological developments. The medical device industry was dynamic. Many technological innovations and scientific advances—such as molecular markers for diseases, genomics, electronics, and material science—had vastly expanded the scope of new customer solutions. Unfortunately, this also had greatly enlarged the number of competitors, who were taking advantage of new technologies to make inroads into the industry. Also, AHD had failed to expand into new geographies.

In a dynamic and fast-growing industry, AHD had struggled to keep up, and had grown more slowly than its competitors. It had lost market share in all three product lines and in most of its markets. Since its infrastructure was designed for growth, and for increasing sales and production volumes, profitability was depressed. AHD was hardly making any money.

In early 2005, a Wall Street investment banker visited Carl. The fourth-quarter results had triggered a wide range of market rumors about AHD. There was much speculation about a possible imminent takeover. Deutsche Medizinal-Technik (DMT) AG, a young and innovative German medical device player that had outgrown AHD in recent years, was believed to be preparing a takeover bid for the weakened AHD. The investment banker came to test the waters, trying to understand how the management of AHD would react to a takeover bid.

Carl was frustrated with the situation. He had been successful in developing KenkoInc in Osaka. He knew what it took to compete and win in the medical device industry, but he was not so sure that he knew how to carry out a turnaround for AHD, a company that might soon be confronted with a takeover bid from a competitor.

Carl felt isolated. It seemed that he couldn't count on much help from his colleagues on the senior management team. The welcome for the whiz kid—as he was cynically, but not openly, referred to—from his colleagues in the senior management team had been frosty, to say the least. He had learned in his life that it was an advantage to appear unassuming with people—but now he wasn't so sure. A slightly more intimidating manner might come in handy right about now.

One evening over dinner, Carl shared his frustrations with Gwen. He spoke of his fear that he might become known as the last CEO of AHD, his fear of failing. He asked her: “Will this be the end of my career? I cannot let this happen. But how can I turn AHD around? Why did AHD get here in the first place? How can it be that one of the greatest firms in the medical device industry has become a takeover target? How is it that DMT AG, a much younger and smaller firm, can now threaten the existence of AHD? It is as if AHD, a once young, vibrant, healthy organization, has become old and fragile.”

Gwen listened carefully, and Carl's last comment provoked a thought. She told him about a meeting with Carla, an old friend of hers, who was now teaching strategy at Yale. She was doing research on the process of how companies emerge, grow, and eventually die. “She studies the aging process, Carl, and how it affects organizations. Maybe you might find some insights there. Shall I see if I can get a hold of her most recent study?”

The next day, she did. That day, Gwen had also news of her own that she wanted to share with Carl. A prestigious laboratory had offered her an excellent part-time position working on a significant radiology research study. But seeing Carl plagued with doubts and uncertain about what he would do next, she decided she would wait and tell him over breakfast the next day. Carl needed time to think about AHD.