Books@Daily Finance: Facing Up to the Awful Truth

In 1985, executives at the Coca-Cola Co. took a bold and revolutionary step, the kind of fearless bet on innovation hailed in one business manifesto after another. They scrapped their iconic, time-and-market-honored product for a flashy, up-to-the-minute creation: New Coke.

It was an infamous fiasco from which the company struggled to recover. But when you think about it, history might have turned out differently. Had Coke's executives merely stood pat with old Coke while Pepsi stole more and more market share from them, their company could conceivably have headed down the path to oblivion.

So the executives' fatal flaw wasn't aggressiveness or a determination to shuck off the dead hand of the past. Their deeds aren't worth recalling simply because they reflected a bad decision. To Harvard Business School historian Richard S. Tedlow, the story is worth recalling because of something else: denial -- or, in the words of Sigmund Freud, a "knowing without knowing," a tendency to ignore the obvious because you can't stand to confront it.

What the Coke executives both understood and failed to see was the fact that theirs was no ordinary product. Coke -- or Coca-Cola Classic, as they were forced to rebrand the product -- was an icon. "To a lot of Americans, changing the hallowed formula was an insult from someone you thought was your friend," writes Tedlow. The consumer, who regarded Coke as an American birthright, owned a piece of their brand.

Being Wrong vs. Being in Denial

Tedlow's book Denial: Why Business Leaders Fail to Look Facts in the Face – And What to Do About It (Portfolio, $26.95) considers numerous business blunders caused by this failure to focus. It's a highly readable, often invigorating collection of case histories that many readers have heard a bit about, accompanied by insightful analysis.

Hindsight, of course, is 20-20. As I read Denial, I wondered why so many business books employ hypothetical examples featuring XYZ Co. and executives named John. One reason for that is that the real world is messy and confusing. Should Goodyear, Firestone, and other tiremakers of the 1970s have preserved the same products and sales strategy that had provided a half-century of steady, solid profits -- at a time when the top four U.S. tire companies held a 74% market share? Or should these successful Fortune 500 companies have ditched what they were doing and accepted the idea that long-lasting, expensive radial tires would inevitably dominate the market?

Real-world predicaments are thorny, and the answers just aren't that easy. Tedlow never pretends they are. But, he says, it's one thing to be simply wrong, as merchandiser Montgomery Ward failed after World War I to anticipate the expansion of the consumer economy. It's another thing to be in denial: to see and yet not see the need to change, to avert your eyes from the awful truth.

Tedlow sees denial again and again in corporate America: grocery retailer A&P's long failure to adapt to the supermarket-and-TV age, IBM's very slow conversion to the personal-computer revolution, Henry Ford's adamant refusal to accept consumers' growing desire for a car grander than a no-frills Model T. These are powerful stories, and Tedlow understands that they're best described in economical, unfussy prose.

Watch Out, A&P. Here Comes TV

The author provides a few success stories, tales about executives who overcame the human tendency to look away from unpleasantness and made the hard choices -- like DuPont Co.'s very grudging adoption of a new organizational structure in the 1920s, and Intel Corp.'s decision in the 1980s to surrender the memory-chip field to Japanese producers, and concentrate instead on producing microprocessors.

In Intel's case, the much-employed hypothetical executive of business-book legend finally had a useful role to play. In mid-1985, Intel president Andy Grove posed a telling question to CEO Gordon Moore: "If we got kicked out and the board brought in a new CEO, what do you think he would do?" Moore answered immediately: "He would get us out of memories." It was the necessary, intelligent-outsider point-of-view that allowed the men to take a careful look at what they knew they must do: shut down factories and dismiss scores of employees. They did, and the company survived.

But my favorite tale in Denial is Tedlow's account of A&P, the third-largest corporation in the U.S. in 1950, with sales of $3.2 billion, far bigger than its two closest competitors, Safeway and Kroger. By the 1970s, the company was wandering in the wilderness, and today it's "not much of a factor in an industry in which it was once the leader," in Tedlow's words.

What happened? TV. Starting in the 1950s, television was building the popularity of national brands, even as A&P clung to its private-label veggies and Ann Page frosted flakes. The company refused to sign the long leases that suburban mall developers demanded, and shut itself out of growing markets. An east-of-the-Mississippi entity, A&P avoided the exotic population-exploding areas of Texas and California. And above all, in the words of a 1970s A&P executive: "They just didn't believe these things were happening." The company had been a leader for so long, its executives couldn't imagine a world where history passed them by. Tyrannosaurus rex couldn't have agreed more.