In looking at sick companies, or even healthy ones that have experienced difficulties with certain parts of their operations, it is tempting to be overly critical. It is easy to criticize with the benefit of hindsight. Mistakes are inevitable, given the present state of decision making, and the dynamic environment facing organizations.

Mistakes can be categorized as errors of omission and of commission. Mistakes of omission are those in which no action was taken and the status quo was contentedly embraced amid a changing environment. Such errors, which often typify conservative or stodgy management, are not as obvious as the other category of mistakes. They seldom involve tumultuous upheaval; rather, the company's fortunes and competitive position slowly fade, until management at last realizes that mistakes having monumental impact were allowed to happen. The firm's fortunes often never regain their former luster. But sometimes they do, and we have described the cases of Continental Airlines, Harley-Davidson, and even IBM who fought back successfully from adversity.

Mistakes of commission are more spectacular. They involve bad decisions, wrong actions taken, misspent or misdirected expansion, and the like. Although the costs of the erosion of competitive position coming from errors of omission are difficult to calculate precisely, the costs of errors of commission are often fully evident. A particularly costly type of errors of commission are those involving unwise mergers and acquisitions. But errors of commission are seen in many other cases throughout the book. Looking at a few such examples, the costs associated with the misdirected efforts of MetLife in fines and restitution totaled nearly $2 billion. With Euro Disney, in 1993 alone the loss was $960 million from a poorly planned venture; it improved in 1994 with only a $366 million loss. With Maytag's overseas Hoover Division, the costs of an incredibly bungled sales promotion brought it a loss of $315 million (10.4 percent of revenues) in 1992, with losses continuing to mount after that.

Although they may make mistakes, organizations with alert and aggressive management evince certain actions or reactions when reviewing their own problem situations:

When a company is slow to recognize emerging problems, we think that management is incompetent or that controls have not been established to provide prompt feedback at strategic control points. For example, a declining competitive position in one or a few geographical areas should be a red flag to management that something is amiss. To wait months before investigating or taking action may mean a permanent loss of business. Admittedly, signals sometimes get mixed, and complete information may be lacking, but procrastination is not easily defended.

Just as problems should be quickly recognized, the causes of these problems— the "why" of the unexpected results—must be determined as quickly as possible. It is premature, and rash, to take action before knowing where the problems really lie. To go back to the previous example, the loss of competitive position in one or a few areas may reflect circumstances beyond the firm's immediate control, such as an aggressive new competitor who is drastically cutting prices to "buy sales." In this situation, all competing firms will likely lose market share, and little can be done except to stay as competitive as possible with prices and servicing. However, closer investigation may reveal that the erosion of business was due to unreliable deliveries, poor quality control, noncompetitive prices, or incompetent sales staff.

With the cause(s) of the problem defined, various alternatives for dealing with it should be identified and evaluated. This may require further research, such as obtaining feedback from customers and from field personnel. Next, the decision to correct the situation should be made as objectively and prudently as possible. If drastic action is needed, there usually is little rationale for delaying. Serious problems do not go away by themselves: They tend to fester and become worse.

Finally, some learning experience should result from the misadventure. The president of one successful firm told me:

Successes deserve as much analysis as mistakes, although admittedly the urgency is less than with an emerging problem that requires quick remedial action. Any analysis of success should seek answers to at least the following questions:

Why were such actions successful?

Part I presents two major firms that were particularly shaped by an economy gone bad. One of these, Walmart, adapted to the changed consumer concerns, and became the star of the retail industry. Procter & Gamble was confident its branded items could withstand price pressures, only to confront a consumer who now demanded the best value.

The comeback of Continental Airlines from extreme adversity and devastated employee morale to become one of the best airlines in the country is an achievement of no small moment. New CEO Gordon Bethune brought human relations skills to one of the most rapid turnarounds ever, overcoming a decade of raucous adversarial labor relations and a reputation in the pits.

In the early 1960s, Harley-Davidson dominated a static motorcycle industry. Suddenly, Honda burst on the scene and Harley's market share dropped from 70 percent to 5 percent in only a few years. It took Harley nearly three decades to revive, but now it has created a mystique for its heavy motorcycles and gained new customers. And its Rallies are something else again.

In an earlier edition, we classified IBM as a prime example of a giant firm that had failed to cope with changing technology. Along with other analysts, we thought that the behemoth could never rouse itself enough to regain its status as a major player. But we were wrong, and IBM once again has become a premier growth company.

Google is arguably the most successful new enterprise ever. It was founded by Sergey Brin and Larry Page both of whom dropped out of Stanford's Ph.D. program to do so. With its unique search engine, it raised advertising to a new level: targeted advertising. In so doing, it spawned a host of millionaires from its rising stock prices and stock options and made its two founders among the richest Americans, in the company of Bill Gates and Warren Buffett. How did they do it?

Starbucks is also a rapidly growing firm—not as much as Google, but still impressive—and a credit to founder Howard Schultz's vision of transforming a mundane product, coffee, into a gourmet coffee house experience at luxury prices, while epitomizing the best in employee benefits.

In April 1992, just outside Paris, Disney opened its first European theme park. It had high expectations and supreme self-confidence (critics called it arrogance). The earlier Disney parks in California, Florida, and more recently Japan, were spectacular successes. But the rosy expectations soon became a delusion as a variety of planning miscues showed Disney that Europeans, and particularly the French, were not carbon copies of visitors elsewhere.

Boeing had an interesting dilemma: too much business. It was unable to cope with a deluge of orders in the mid- and late-1990s. Months, and then years, went by as it tried to make its production more efficient. In the meantime, a foreign competitor, Airbus, emerged to oust Boeing in 2003 as number one in the commercial plane industry. But by 2006, Boeing had turned the tide and had Airbus on the ropes, as both struggled to bring innovative new planes to full production.

Vanguard fought Fidelity to become the largest mutual fund firm. Vanguard's business plan has been to walk a road less traveled, to shun the heavy advertising and overhead of its competitors. It provided investors with better returns through far lower expense ratios, relying on word-of-mouth and unpaid publicity to gain new customers, while old customers continued to pour money into the best values in the mutual fund industry.

In July 1999, Hewlett-Packard, the world's second biggest computer maker, chose Carly Fiorina to be its CEO. Thus she became the first outsider to take the reins in HP's sixty-year history. Three years later she engineered the biggest merger in the high-tech industry, with Compac Computer. Only a year later, HP was able to boast that this merger had become a model for effectively assimilating two giant organizations. But growth in profitability did not follow, and early in 2005, the board fired Fiorina.

Southwest Airlines found a strategic window of opportunity as the lowest price carrier between certain cities. And how it milked this opportunity. Its CEO Herb

Kelleher was a charismatic leader, and built it to become the nation's sixth largest airline, a feared competitor to major airlines in many of their domestic routes, and the only one to be profitable for over 30 consecutive years.

Herman Miller, maker of top-of-the-line office furniture, had long been extolled in management books and classrooms for successfully melding good business operations and altruistic employee and environmental relations. In recent years these policies were seriously tested as demand for its high-price products declined and harsh realities pitted altruism against viability.

United Way of America is a nonprofit organization. The man who led it to become the nation's largest charity perceived himself as virtually beyond authority. Exorbitant spending, favoritism, conflicts of interest—these went uncontrolled and uncriticized until investigative reporters from the Washington Post publicized the scandalous conduct. Amid the hue and cry, contributions nationwide drastically declined.

The problems of Maytag's Hoover subsidiary in the United Kingdom almost defy reason. The subsidiary planned a promotional campaign so generous that the company was overwhelmed with takers; it could neither supply the products nor grant the prizes. In a miscue of multimillion-dollar consequences, Maytag had to foot the bill while trying to appease irate customers.

The insurance firm MetLife, whether through loose controls or tacit approval, permitted an agent to use deceptive selling tactics on a grand scale, and enrich himself in the process. Investigations of several state attorneys general forced the company to cough up almost $2 billion in fines and restitutions.

The merger of Chrysler with Daimler, the huge German firm that makes Mercedes, was supposed to be a merger of equals. But the Germans lied to the Americans, and the top Chrysler executives were soon replaced by executives from Germany. Assimilation and coordination problems plagued the merger for years. Nine years later, Daimler sold Chrysler to a private equity firm for tens of billions of dollars less than it paid.

Merck, the pharmaceutical giant, learned that its blockbuster arthritis drug, Vioxx, doubled the risk of a heart attack or stroke. After five years and $500 million in advertising, it had 20 million users at the time it recalled the drug on September 30, 2004. Critics and tort lawyers assailed the company for its procrastination.

Product safety with automobiles is among the worst abuses any company can confront. Worse, however, is when such risks are allowed to continue for years. Ford Explorers equipped with Firestone tires were involved in more than 200 deaths from tire failures and vehicle rollovers, and Ford and Firestone each blamed the other for the deaths.