Wobbling to Mediocrity and Failure

Buzz, bang and bomb is the trajectory of too many companies. We experience their loss as “I used to go there,” “I used to drive one,” or, perhaps, “I didn’t know they were still around!” Consumers pay little attention to these losses because their next buzz is just around the corner. I have long wondered how is it that well-intentioned leaders could lead a company away from what made it worthy of growth. This article answers that question and offers a few solutions.

Since I have never met a leader hell-bent on building a mediocre or failed company, the explanation has to lie in the way leaders understand the process and challenges of growth. Many leaders mistake fast growth for enterprise building. Growth is size, revenue and, often, hubris. Enterprise building is excellence, value and, always, humility. The objective of growth is scale, while the objective of enterprise building is to remain worthy of growth. Thus, the challenge for a company that generates buzz is not growth, but enterprise building.

As growth sets in, it is easy for leaders to confuse hubris with being savvy. A friend of mine recently shared a classic example of this confusion. In his role as a member of a company’s Board of Directors, he challenged the wisdom of acquiring a smaller company. The company’s CEO and CFO told the board that they were excited about the acquisition, saying that the company was very well led. In the course of their presentation, they mentioned that the object of their affections had never made money. After listening to the CEO and CFO’s rosy scenario, my friend asked them how they were going to make a well-led but unprofitable company profitable. He was questioning whether hubris could trump savvy.

Hubris works in mysterious ways. It can cause leaders to create business models based on outlandish assumptions, skip over the basics of success and see a customer base that does not exist. Inevitably, it causes them to dismiss naysayers. While hope is a wonderful thing, it is not a strategy. Nor is it a substitute for the knowledge, skill and experience necessary to build an enduringly success enterprise.

An Enduringly Successful Enterprise

Leaders crave success and in our economic system, that means making money. That isn’t the only thing that business is about, but it is the most critical as it enables all other objectives. Thus, it is safe to say that the objective of commerce is to make money.

But making money is not the objective of enterprise building; rather, it is the result of achieving the objective of enterprise building: Building a company that earns a reputation for goodness, flawless execution and being best-in-class. This objective is at the core of a company being worthy of growth. Its three elements — goodness, execution and achievement — are the source of a company’s worthiness of growth and the heart of its excellence.

Excellence

If achieving excellence were not difficult, the authors of Built to Last[1] and Good to Great[2] would have found far more than 29 companies (out of the 5,000 they studied) that met their standards for being visionary (eleven) or having made the move from good to great (eighteen). There is something that happens between the dreams of an entrepreneur and the reality of mediocrity that needs to be understood. Many entrepreneurs start a company and rapidly grow it, only to be mystified when it slips into mediocrity or fails. What happened to the potential that made growth possible?

Rarely do they recognize that the strength of entrepreneurship contains the seeds of its failure. A “fire, ready, aim” approach to enterprise building is part of the DNA of many entrepreneurial ventures. In the best of circumstances, this tendency eventually leads them to discover that there is much more to the process of enterprise building than growth. At the core of enterprise building is the answer to a rarely asked question: What can we do that is compelling and differentiating to our most valued customers?

This question gets at the essence of competitive differentiation. Compelling taps into what is “addictive” about the customer’s experience, while differentiating taps into whether the company will hold an exclusive on the experience. Very often, founders are pleased with their answer to this question, but the second question just as often gives them pause: How will you turn your good idea into a company that achieves excellence while remaining worthy of the loyalty of your most valued customers?

How leaders answer this question is the difference between those who start companies from those who build them into a competitive powerhouse. The difference boils down to variance in how excellence, reputation and leadership are thought about.

Shoulda, Coulda

On February 26, 1966, legendary restaurateur Norman Brinker opened his first Steak and Ale restaurant — naming it after the raucous banquet scene in the movie Tom Jones. The scene perfectly captured the wide open excitement and fun Norman wanted his new restaurant to be known for. He had a good idea and great timing as the emerging casual dining segment of the restaurant industry rode the wave of growth in two-income families and the popularity of restaurants as places to meet and mix. Norman and his team focused on four ideals: (1) distinctive quality, (2) a small well-executed menu, (3) a lively bar scene and (4) irreverent but attentive service.[3] On the back of these basics, the rapidly growing chain was soon known as a great place to eat and the place to be with friends and family. The restaurants were fun, cool, and definitely “in.” Success seemed all but inevitable.

And Then the Wheels Came Off

By the early 1970s, Steak and Ale was losing some of its steam. No doubt, a growing competitor base was part of the problem as was the sale of the company to Pillsbury in 1976. It moved rapidly from being a restaurant company to being an asset in an investment portfolio that included Burger King and Bennigan’s. In 1982, the “asset” was spun off as part of the Steak and Ale Restaurant Corp. By the mid-1980’s, the chain had grown to include 280 restaurants nationwide. In 1988, Metromedia purchased the asset and operated it along with its Bonanza and Ponderosa brands. It is hard to say when the company peaked, but from a proof of concept perspective, it was likely in the early 1970’s. The chronology of the company ended on July 29, 2008 when the chain filed for Chapter 7 bankruptcy protection.

In the bright light of hindsight, some company insiders attributed the wobble to the loss of key leaders such as George Beal and Carl Hays. George left in 1975 to create Houston’s Restaurant. Carl had been a mentor to many of the company’s leaders, its first VP of Operations, and an anchor of the company’s culture. His departure in 1980 was felt throughout the company. Others blamed the loss in momentum on the acquisition of the company by Pillsbury. The sense of things was that the company was robbed of its entrepreneurial spirit. The new owners pushed for efficiencies and many felt that Pillsbury treated Steak and Ale as just another commodities company. Still others argued that the company was simply feeling the normal effects of more and better competition.

While all of these explanations have merit, none addressed the fundamental problem: the company was not moving forward — it was on a downward trajectory and losing its worthiness of growth.

Energy and Hubris Are Not Experience

While many factors contributed to the company’s demise, inexperience has to be counted as one of the biggies. None of the leaders, including Norman, had grown a company, let alone one in a fast-growth mode and with as many moving parts as a full-service restaurant. Many of the leaders had never even worked in the restaurant industry prior to Steak and Ale. It is not surprising, then, that mistakes were made. Looking back, one of the big ones was not getting the leadership team on the same page with respect to the company’s basics and core idea.

In addition, the team suffered from an insidious disease endemic to many fast-growth companies; namely, hubris. The press clippings and hype about the company created a sense of invulnerability. Like rock stars, some of the company’s leaders mistook being the hot company du jour for staying power. Thus, when a competitor emerged and began to beat Steak and Ale at its own game, it was easy to dismiss it as a copycat — and a lame one at that. More and more copycats were entering the market and beating Steak and Ale at the game – casual dining – it had invented.

Eroding a Competitive Key

Every business has at least one competitive key. The power of a key is that it makes excellence possible. One of the keys in the restaurant industry and retailing, in general, is stable quality management at the unit level. These are managers who stay and build the business within its local market. Few of the leaders seemed to recognize that brand loyalty starts locally and is earned one customer at a time. Unfortunately, Steak and Ale instituted some practices that precluded the development of its competitive key.

One of the more harmful ones was playing musical chairs with General Managers (GMs). GMs were moved from restaurant to restaurant, sometimes to open a new restaurant and at other times to placate a GM unhappy with a low volume restaurant. This practice inevitably resulted in a spike in hourly employee turnover and a dip in sales in the GM’s former restaurant. While the “promoted” GMs may have been happy, the practice of musical chair management shifted the company’s focus away from local execution to opening new restaurants. In the invisible way that these kinds of things happen, growth had supplanted enterprise building as the priority. The practice musical chairs management coupled with the necessity of hiring managers from the outside to staff the company’s fast growth made it impossible for a customer-centric culture of excellence and accountability to take seed.

Growth is the Enemy of Excellence

As Jim Collins has noted, “good is the enemy of great” – and Steak & Ale was certainly good – very good. Consumers loved the concept even when it was unevenly executed. Despite growing competition, Steak and Ale was growing sales and opening new restaurants at, what was at the time, a blistering pace. Through the sharp lens of hindsight and the filter of the recession of 2008 - 2012, it is easy to see how growth lulled the leadership team into believing the company was bullet-proof.

Sales growth covers a multitude of sins, including bad management practices, lack of accountability and over staffing. During the current recession, many company leaders went through the painful process of downsizing their work force and cutting costs more than they thought possible. These steps were taken even though they feared they would alienate and overwork their employees and not be able to take care of customers in the way we wanted to. These fears notwithstanding, what many have learned is that downsizing should not be confused with rightsizing. When there is fast growth, companies tend to overstaff, overlook mediocrity and remain overstaffed even after growth has slowed or declined.

In the case of Steak and Ale, growth also brought the need for Area Supervisors responsible for multiple restaurants. However, this new layer of management did not necessarily result in improved restaurant performance. The absence of a coherent business model, management musical chairs, and the presence of newly promoted Area Supervisors who were focused on opening new restaurants to the detriment of existing restaurants made it virtually impossible to accurately assess the business potential of the existing restaurant or the leadership potential of their managers. Very soon, being an Area Supervisor rather than a restaurant leader became the pot of gold that the GMs sought.

Weakening a Culture

The ramifications of these changes and the shift in focus were profound: The real business of the company — great food, drink and hospitality — was lost in the shuffle as its culture took on the aura of “me” over “we.” In effect, the company’s leaders had taken their eyes off what made the company worthy of growth in the first place — and its business basics quickly slipped away.

Small Decision, Big Consequence

In terms of the basics, a seemingly small decision turned out to be catastrophic. Steak and Ale had started with the defining characteristic of a first-rate restaurant: a “scratch kitchen.” That is, all food items such as salad dressings, sauces and soups were prepared in-house from raw ingredients. A scratch kitchen was integral to two of the company’s basics: distinctive quality and a small, well-executed menu. However, in a push to cut costs, the company’s leaders decided to outsource some of the scratch-work that had previously been done daily in each restaurant’s kitchen. It will come as no surprise to anyone who has worked in a craft-based job, that the kitchen employees felt demeaned by the move — assuming that management no longer trusted them to get it right. They concluded that the company was lowering its standards, which was exactly the opposite of what the leaders thought they were doing by outsourcing. This sense of diminished quality soon spread to the service employees in the dining room. Very soon, employees lost confidence that “our Steak and Ale” was the best restaurant in town, and the sense that they were special for being part of it.

As employees lost their enthusiasm, employee turnover increased dramatically and the restaurants lost the vitality bred by the strong connections between customers and long-term employees. These problems were exacerbated when formidable competitors entered the market and wooed away some of Steak and Ale’s best managers and hourly employees. The company had reached the tipping point from what could have been, and toward mediocrity. By the early 1980s, the final push away from excellence was in place as the original leadership team had largely been replaced by outsiders who were ignorant of what had made the company worthy of growth or thought it irrelevant.

Leaving a Mark

I have two male dogs who, despite my lectures, seem to think that they need to leave their mark on everything. In a similar vein, Steak and Ale’s new leaders introduced changes without much thought about whether they were needed, appropriate, or understood by employees or customers. What they did was to introduce change when what was needed was to re-energize the company.

One new leader, in particular, put a high flame under the company’s stewing mediocrity when he demanded that costs be reduced even further than they already had been. He did it by reducing product quality and increasing the pressure on restaurant managers to “make their numbers.” This change in particular was a major jolt to the culture as it diverted the restaurant managers’ attention from pleasing their customers to pleasing their bosses. Not surprisingly, the company’s remaining talented middle managers began leaving in droves, taking much of the company’s intelligence, soul, cultural understanding and spirit with them. The company quickly became just another mediocre choice among the many choices available to consumers and employees.

Wobble

What happened to Steak and Ale is what happens in many companies that start with a bang and grow like crazy only to tip themselves into mediocrity. I call this phenomenon “wobble” and see it happening all too frequently. The founder of one fast growth company described it this way: “When I go into one of our stores, things are not quite right. They’re not bad, but on the other hand customers don’t seem to be having as good a time as I want them to have . . . It’s as though the more opportunity we have, the worse we get.” This process of wobble is shown in Figure 1.

As it was with Steak and Ale’s first restaurant, the first unit opens (A) and is a homerun. It embodies the founder’s considerable personality and charisma. After all, the unit (a store, a restaurant) is the founder down to the smallest detail. Emboldened by success, the founder does the logical thing: He opens a second unit (B). Overnight, “taking care of business” becomes a sprint between the two units — cutting by half the time he has to devote to either of them. Despite his best efforts, customers are not getting the personal attention that he provided when there was only one unit — and the first two restaurants (A and B) begin to wobble ever so slightly.

It isn’t that good people aren’t being hired so much as the founder’s inexperience and busy schedule prevent him from giving them the kind of attention and acculturation a fragile startup demands. Often, the new hires have the energy and initiative a founder loves to see, but there is no way they can read the founder’s mind or internalize his passion without experiencing it first-hand. So they do what comes naturally to them: They do the best that they can. It’s not that their decisions are bad, just that they vary enough from the ones the founder would have made to enable the wobble to intensify.

But as was the case with Steak and Ale, the company is carried forward on the back of a good business idea; indeed, the idea is so good that it overpowers the wobble to fuel additional growth. As growth accelerates, it isn’t a trickle of new units that are being opened, but the flood shown in Box 1 as C, D, E and F in quick succession. The founder can’t possibly stay on top of all of the openings. Like so many other founders, he does his best by working harder than ever to provide leadership. And while each of the units is close enough to the original to be successful, they are not close enough to prevent additional wobble.

By the opening of the sixth unit, the founder can’t spend much time in any one of them, and is scampering to keep the wheels on and to staff explosive growth. At the same time that the excitement of growth is intensifying, the wobble is worsening. While the founder is too busy or inexperienced to see that the company is losing some of what made it worthy of growth, he can see that he needs help — now. So he does what countless entrepreneurs have always done: He plunges ahead. More units are built and the first layer of “multiunit” managers — called Area Supervisors — is added to oversee them. This is Box 2.

Caught up in the day-to-day and incredible pace of fast growth, the founder can’t understand that the real challenge he faces is not growing the company, but developing the critical elements of the company — namely, its business basics and culture. He hopes that the added supervision will stabilize operations and, to an extent, it does, but at the cost of clouding his view of the business. The founder is quickly losing touch with the day-to-day operation of his baby.

What he does not realize is that the mix of added leaders and the blistering pace of growth are causing the company to go in too many directions at once. Serious mistakes are made that sales volume obscures. Since the founder can no longer control virtually every decision, some of the mistakes inevitably move the company away from its basics and contaminate its still formative culture. Once this happens, there is only one way to get a company back on track: Hit the pause button by stopping the opening of new units. (In my thirty-plus years of experience, I have seen this happen only once in a fast-growth company.)

The founder doesn’t push the pause button; instead, he adds more Area Supervisors. By this time, the pace of growth is at its peak as new units are opened and new people join the company, excited by the opportunity to get in on the action. But something else is happening: The “newbies” have substantially more variability in their quality and experience than anyone realizes. Equally important, company size alone dictates that the newbies will not be exposed to the founder’s values in a meaningful way.

This reality is bad news as it further dilutes the company’s culture and contaminates the company’s collective intelligence with thinking that may be the antithesis of the founder’s ideals. In effect, what is happening is that many new cultures are being introduced to a culture that has yet to take root. However, good stuff sells so the company continues to open new units.

By this time, wobble is a slowly spinning top careening wildly about its axis. The disorder is now apparent to virtually anyone who is intimate with the company’s early days, including its regular customers. Rather than spinning tightly and moving forward, the business is swinging in increasingly larger circles and wandering steadily away from what made it worthy of growth.

Typically, the company’s leaders don’t attribute the wobble to the loss of focus and lack of clear direction; instead, they ascribed to the failings of the management structure. “We have a communication problem,” leaders will say. Meanwhile, emplyees will say, “We have a leadership problem."

While both perspectives have merit, the solution does not: Add yet another level of managers. This is the birth of the “Regional Manager” shown in Box 3. Their job is to supervise the supervisors who supervise the managers who supervise the employees who take care of the customers. The founder is further from customers than ever, and there is more wobble. At the level of the customer, it is not that there is less attention, but that the attention received is inconsistent.

At this point, even the most committed employees have shifted their attention from customer caring to boss caring. As the employees shift their focus, they lose spirit as their pride in being part of something good is being drained away. It's about this time that the founder decides that he needs a president; particularly, one who “knows the industry” and is savvy in the ways of growth. He hopes that a highly experienced executive will whip things into shape and hold people accountable so that he can devote more time to infusing the business with his passion and values.

So, an experienced leader is hired, but not necessarily the right one for ensuring that the company remains worthy of growth. In addition, by going outside of his inner circle he has dashed the expectations of some of the people — and a few good ones leave. The company is now well into Box 4 and in danger of losing its mojo.

The founder is several levels removed from the day-to-day details of the business. Now that he has time to breathe, he too can smell the burning rubber of mediocrity beginning to permeate “his” company. The company lacks direction and a culture that supports its success. In response, the company’s leaders conclude that the direction of the company needs to be codified - Box 5 - except that its direction is not clearly understood, or understood in the same way by the members of the leadership team. “We need to get this puppy under control — set policy, develop manuals and make sure that everyone is trained and accountable.” 

This is actually a good idea, but difficult to pull off as the “new” policies, procedures, and manuals are suspiciously like the ones the company’s leaders left behind at their previous companies. So instead of helping, they are more likely to institutionalize the company’s movement away from what made it worthy of growth and toward what other companies are doing – good or bad. The momentum of the company is still upward, but no longer forward. Very often, this is the time when the founder cashes in by taking the company public or selling it. Often, they are simply tired of trying to stay up by running in place.

Under this scenario, shown in Box 6, money pours in, but with “ropes” attached. At the end of each rope is the company’s newest layer of supervisors. These supervisors are better known as stock analysts, “activist” investors, or venture capitalists. For an entrepreneurial company, these “supervisors” are the worst of the worst, if for no other reason than they cannot be ignored, even when their demands or direction weaken the company.

They pride themselves on their ability to ask tough questions even though they may have never worked in the industry or for the company. By trying to predict the unpredictable, the company’s remaining leaders set themselves up for criticism and the likelihood of short-terming the company. And the wheels have come off of what could have been a great company.

Lessons Learned

The story of enterprise wobble and decline is tragic, but avoidable. No matter how painful, it is rich with lessons for the leaders interested in the science and art of enterprise building. As a first cut, the lessons are the importance of leader vision, culture building, understanding business basics, and passion for maintaining the relevance and resonance of a company.

Vision

The insight that Norman Brinker had with respect to the emerging market for casual dining was brilliant. However, business insight is no substitute for understanding how to leverage an idea into sustainable growth. Insight is insight and vision is vision, and both are needed in order to build a company worthy of growth. The best leaders create an inspiring vision of their company’s future that answers the five fundamental questions that all stakeholders (e.g., customers, employees, suppliers, investors) ask: 

• Where are we going?
• What will it be like when we get there?
• How will we get there?
• Can you (the leaders) get us there?
• What’s in it for me?

A company’s vision answers these questions in terms of its values, beliefs about success, promises to each stakeholder, basics, competitive keys and metrics.

Culture Building

Arguably, the single most important responsibility of a company’s leaders is to create a culture that supports the company’s success. Culture building is the process of creating leverage for the driving force behind a company; namely, its founder(s) and leader(s). The process is as much about having enterprise members understanding the “whys” of the way we do things around here as it is understand what we do around here.

Getting on the Same Page

“Back to basics” is something you hear a lot from the leaders of troubled companies. Unfortunately, when these leaders search for the basics, they often discover that they have been lost. Business basics are the cornerstone of a company’s success and tend to center on quality, people, fiscal responsibility, and standards. While these labels make the importance of business basics obvious, they are not competitive keys in the sense that stable quality management is a key. Rather, they are the fundamentals – the blocking and tackling of effective execution – of success that leaders teach to employees at all levels. They are a critical adjunct to making sure that the company’s employees, managers, and leaders are on the same right page.

Leadership teams appreciate the need to be on the same page, but many of them underestimate what it takes and how critical it is to maintaining the relevance and resonance of the company to its customers and other stakeholders. Getting on the same right page is as mundane as having shared “company textbook” definitions of the company’s vocabulary, including words such as success, values, vision, strategy, brand, and business model. While these terms can be defined differently in different companies, they must not be defined differently within the same company. To allow otherwise, is to allow sloppy direction and enable wobble.

Final Thoughts

The lessons taught by the experience of Steak and Ale are the lessons taught thousands of times each year by the countless companies that coulda shoulda been wildly successful. The lessons are few, but vital to maintaining a company’s worthiness of growth. In his famous book – The Seven Habits of Highly Effective People – Steven Covey (an early mentor to Steak and Ale’s leaders) suggest that leaders “start with the end in mind.”[4] Defining success is certainly a major aspect of this habit, but one that leaders often leave unattended and/or unsupported.

When it comes right down to the essence of leadership, the only thing that a company’s leaders can ensure that the company’s stakeholders experience is the values of its leaders. Unfortunately, leaders are often not in touch with their values and, therefore, cannot communicate them to the company’s stakeholders or ensure that they permeate everything that the company does and stands for.

Virtually all scholars of the enterprise building process agree that leader values are the lowest, as well as the highest, common denominator of a company’s success — and most leaders have gotten that message. However, few leaders appear to understand the process of putting their values front-and-center vis-à-vis a company’s vision, strategy and results. What the example of Steak and Ale Restaurants teaches us is that being passionate about the success of a company is not the same as knowing how to keep it worthy of growth.

[1] Collins, J.C. and Porras, J.I. Built to Last: Successful Habits of Visionary Companies.
New York, New York, Harper Business, 1994.