Richard S. Tedlow

MBA Class of 1949 Professor of Business Administration, Emeritus

Richard S. Tedlow is the Class of 1949 Professor of Business Administration at the Harvard Business School, where he is a specialist in the history of business.

Professor Tedlow received his B.A. from Yale in 1969 and his M.A. and Ph.D. in history from Columbia in 1971 and 1976 respectively. He came to the Harvard Business School on a fellowship in 1978 and joined the faculty in 1979. From 1979 through 1982, he taught First Year Marketing. His involvement in marketing has continued, and he has been a member of the faculty of the "Strategic Retail Management Seminar," the "Top Management Seminar for Retailers and Suppliers," "Managing Brand Meaning," and the "Strategic Marketing Management" executive education programs. From 1978 to the present, he has been involved in the School's Business History program. In 1992 and 1993, he taught a course entitled "Business, Government, and the International Economy." He has also taught in numerous executive programs at the Harvard Business School as well as at corporations, including programs in marketing strategy and general management. His book -- Giants of Enterprise: Seven Business Innovators and the Empires They Built (HarperBusiness, 2001) -- was selected by Business Week as one of the top ten business books of 2001.

Prof. Tedlow’s book, Andy Grove: The Life and Times of an American, was published by Portfolio, an imprint of Penguin Group USA, in November 2006. It was selected by Business Week as one of the top ten business books of 2006.

Prof. Tedlow's most recent book, Denial: Why Business Leaders Fail to Look Facts in the Face, was published by Portfolio in March, 2010. It was selected by strategy+business as one of the best business books of 2010.

Read excerpts from DENIAL

The Edifice Complex: Denial at Sears

Book Excerpt: Denial at Sears (BusinessWeek.com, February 26, 2010)

 

From Denial: Why Business Leaders Fail to Look Facts in the Face—and What to Do About It, Richard S. Tedlow tells how the retailer let ego get the best of it

By Richard S. Tedlow

 

Beware the monument.

Please bear with me for a moment and read the following short poem that Shelley published in 1818, entitled Ozymandias:

I met a traveler from an antique land

Who said: Two vast and trunkless legs of stone

Stand in the desert. Near them, on the sand,

Half sunk, a shattered visage lies, whose frown,

And wrinkled lip, and sneer of cold command,

Tell that its sculptor well those passions read,

Which yet survive, stamped on these lifeless things,

The hand that mocked them, and the heart that fed.

And on the pedestal these words appear

quot;My name is Ozymandias, King of Kings:

Look on my works, ye Mighty, and despair!"

Nothing beside remains. Round the decay

Of that colossal wreck, boundless and bare

The lone and level sands stretch far away.

Ozymandias was a heavy hitter in days gone by. He built a huge statue of and to himself. If the meaning of the statue was not clear enough, he had inscribed on the pedestal that he was such a big shot that "ye [other] Mighty" were reduced to despairing at his magnificence.

But, look! The ruins of the statue were all that survived, and it has become nothing more than a "colossal wreck." Whatever the "works" were that should have caused despair to the mighty have now disappeared into the sands of time.

Gordon Metcalf became CEO of Sears in 1967. Odds are, he had never read Shelley's poem. "Being the largest retailer in the world," he said, "we thought we should have the largest headquarters in the world." So, just as cracks began to appear in the armor of Sears—despite a seemingly robust bottom line, some metrics, like return on equity and employee productivity, had begun to flag—Metcalf decreed that Sears would construct the world's tallest building. The 110-story Sears Tower, renamed Willis Tower in 2009, came to be known as "Gordon Metcalf's last erection."

On the surface, Metcalf's explanation for building the Tower seems to make sense. But when you really think about it, it doesn't. The two clauses have nothing to do with one another, and the declaration cannot survive one single word: Why? Why is it that the world's largest retailer should have the world's largest headquarters?

In 1993, when Intel was experiencing its spectacular growth, CEO Andy Grove, like the rest of the company's employees, had not an office but a cubicle. It was tiny. Fortune, in a clever variant of a classic retail metric, conducted a return to the shareholders survey that year. It measured return to the shareholders per square foot of the CEO's office. Grove led the pack by far, as Intel returned $1.64 per square foot of his cubicle.

It was not apparent that Intel needed a giant building to celebrate how wonderful it was. Why was it so obvious at Sears?

Building monuments deserves a file drawer along with trash talking when you are looking for companies in denial. I recall interviewing top executives in the Sears Tower in the summer of 1980. The pictures on their walls were quite beautiful. I wondered whether the average Sears customer could have afforded the frames. The furniture was plush. It didn't look like it came off the floor of a Sears store.

I remember looking out the windows. The view up Chicago's lakeshore was spectacular. And there was not a competitor in sight. The people down below looked like ants. Those ants were supposed to be Sears's customers. Of all industries, it is most important for a retailer to keep his or her ear to the ground. The Tower was a symbolic denial of that reality.

The year the Tower was dedicated, 1973, was the first year of the chairmanship of Arthur Wood. Writer Donald Katz described him as "patrician," "elegant," "the consummate old-world gentleman-businessman." His opulent office included works from his private art collection by Degas and Monet.

Wood was unlike Kmart's great merchant Harry Cunningham. An even bigger problem is that he was the antithesis of the incomparable Sam Walton.

Just prior to the first oil shock in 1973, retail sales in the United States began to decline in real terms. Sears's economist (this is prior to the oil shock) felt the country was looking at a severe recession the following year. A "senior officer" of the company, according to Katz, told the economist that if he publicized an official forecast to this effect, he would be fired. There appears to be a persistent belief in once-great companies that have lost their way that if you simply avoid speaking the blunt truth, all the problems will just go away. It is almost as if by telling the truth, you are endowing problems with a reality that they would not otherwise have. It is this brand of magical thinking that leads to shooting the messenger.

Sales in 1974 actually increased seven percent, which would not have been bad if the company had not forecast a rise of fifteen. Profits were off almost a quarter, a dramatically steep slide. Here indeed is the essence of the problem of denial. Reality is always just around the corner.

Sears wandered in the wilderness amid intermittent signs of life from 1973 until it was bought by Kmart owner Eddie Lampert in 2005. The company abandoned its Tower in 1992, a year in which it lost almost $4 billion, and relocated outside of Chicago to a town called Hoffman Estates. Kmart adopted Sears's name and the combined company is today called Sears Holdings.

Sears began to hire consultants in the 1970s, but they were no more helpful than the homegrown executives. Sears convinced itself that its market was "saturated." The way to grow, therefore, was to enter whole new lines of business. The company bought the real estate franchise Coldwell Banker and the financial broker Dean Witter. Why the company's CEOs thought they would do better managing businesses in industries they did not understand than they would in general merchandise retailing remains one of life's mysteries.

In fact, there was a fortune to be made in the very classes of trade in which Sears made its name. We know this—and everyone at Sears should have known it at the time—because Wal-Mart's spectacular success was no secret. Sam Walton had become the richest man in the world. He dressed in a grass skirt and did the hula on Wall Street itself in 1984 because Wal-Mart's stock had so outperformed what he had bet it would be. You had to be wallowing pretty deeply in denial to miss this.

Sears executives should have been focused on nothing else. Instead, they were playing around with the "store of the future" and telling themselves they would succeed selling "socks and stocks."

For the sake of symmetry, we should note that Walton did not pay much attention to Sears. In his autobiography, he only mentioned it once, and not very flatteringly. "One reason Sears fell so far off the pace is that they wouldn't admit for the longest time that Wal-Mart and Kmart were their real competition," he wrote. "They ignored both of us, and we both blew right by them."

It has often been observed there are no mature markets, only tired marketers. Unfortunately, nobody at Sears was making that observation, and there is no company which it described—or which demonstrates the pitfalls of denial—more perfectly.

Adapted from Denial by Richard S. Tedlow by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © 2010 by Richard S. Tedlow.

Introduction to DENIAL

THIS BOOK is being written in the midst of the worst global economic crisis since the Great Depression. How, when, and indeed if the crisis will end no one knows. But whatever the future holds and the postmortems reveal about the crisis, one culprit is abundantly clear: denial.

Denial by financiers who pursued short-term gain while ignoring long- term consequences that were highly likely, if not inevitable. Denial by the banking and real-estate industries that what goes up can come down.

Denial by homeowners and consumers that the bills for goods bought on credit will someday come due.

Denial by investors who convinced themselves, once again, that “this time, it’s different.”

Denial by politicians and bureaucrats of inconvenient truths that didn’t fit their free-market ideology.

Denial even by swindlers whose Ponzi schemes could only end in disaster, not just for their victims but for themselves.

Denial today is all around us. Eliot Spitzer, the governor of New York (who made his name while the state’s attorney general as the “watchdog of Wall Street”), was in March 2008 caught patronizing a high-priced prostitute in a fancy Washington hotel. It quickly came out that this was not his first such dalliance. Later, after he had resigned as governor because of the scandal, Spitzer was asked by a television interviewer how a well-known politician such as himself could possibly have expected to get away with such behavior. “[Being caught] crossed my mind,” he replied, “but like many things in life, you ignore the obvious at a certain moment because you simply don’t want to confront it.”

If you’re looking for a succinct expression of the essence of denial, it would be hard to do better than this. You ignore the obvious. Why? Because you simply don’t want to confront it. You know the consequences, but you don’t know. You see, but you don’t see.

Denial is the unconscious calculus that if an unpleasant reality were true, it would be too terrible, so therefore it cannot be true. It is what Sigmund Freud described as the combination of “knowing with not knowing.” It is, in George Orwell’s blunt formulation, “protective stupidity.”

From the young child who insists that his parents haven’t separated even though his father has moved out, to the alcoholic who swears he is just a social drinker, to the president who declares “mission accomplished” when it isn’t, denial permeates every facet of life. Business is no exception. In fact, denial may be the biggest and potentially most ruinous problem that businesses face, from start-ups to mature, powerful corporations.

But surely businesspeople ought to be among the most hardheaded and clear-eyed among us. Why would a sane, smart person deny a fact of critical importance to his or her business? Because, to state the obvious, he or she is human. And the impulse to avoid painful truths, just like the impulse to avoid pain itself, is a part of human nature.

I have been teaching and writing about business history for four decades, and what is striking about the dozens of companies and CEOs I have studied is the large number of them who have made mistakes that could and should have been avoided, not just with the benefit of hindsight, but on the basis of information available to decision-makers right then and there, in real time. These mistakes resulted from individuals denying reality.

Denial is a pervasive problem not only historically but today. It seduces not only dreamers but the most rational people among us. Why is it seductive? Because it is soothing. It is convenient. It allows us to live in a world of our own creation—while it lasts. It permits us an “as if ” existence. We live “as if ” things were the way we want them to be, rather than the way they are.

But this is only part of the seduction. Denial sometimes actually works. Plenty of entrepreneurs have succeeded even though others denied they had a chance. The overwhelming majority of new businesses fail. Everyone who starts a business denies that the statistics apply in his or her case.

Even denial in the face of certain catastrophe is not necessarily irrational. The inevitability of catastrophe does not mean that we personally will suffer its consequences. Our successors or descendants may pay the price instead. “Après moi, le déluge” was the famous phrase attributed to Louis XV. “After me, the deluge.” He did not use the preposition pendant, which means “during.”

Anyone could increase the profits of Procter & Gamble this year by eliminating the advertising for Tide. It would be a terrible blow to the brand in the long term, but sales might not slump too badly right away. A decision like that would be so obvious that it would make news. However, the same result could be achieved in a thousand less public ways throughout the corporate world.

Even in the case of certain catastrophe, denial can be an intelligent strategy. Permit me to provide a personal illustration. As my late wife was dying of cancer, she once said to me that we should declare a forthcoming holiday a “disease-free weekend.” I immediately agreed. Denial was automatic and complete. We lived “as if” she were healthy. She bought us four wonderful days in the face of the abyss.

Denial is seductive because it can work in the short term. Occasionally it works in the long term, but that is rarely true in business. In business, pretending that things are better than they are virtually ensures failure.

As we have noted, however, denial is a part of human nature. You can never avoid it completely, and its avoidance is not a matter of raw intelligence. The protagonists in the first part of this book were not stupid. If they could succumb to denial, anyone can.

Yet as the second part of the book shows, some people rise above denial and stare reality unblinkingly in the face. These exemplars of courage and clarity are remarkable and merit scrutiny. Indeed, the British sociologist Stanley Cohen suggests that denial is so common that rather than trying to fathom why we deny, we should instead focus on when and why we do not. “When do people pay attention?” he asks. “When do they recognize the significance of what they know? When will they be aroused to act, even at personal risk?”

Shedding light on these questions is the aim of this book. Discovering who got it right, who got it wrong, and why may help us to answer them and move us closer to our goal. A goal that should be no more or less than this: to confront more than we deny.

Adapted from Denial by Richard S. Tedlow by arrangement with Portfolio, a member of Penguin Group (USA), Inc., Copyright © 2010 by Richard S. Tedlow.