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Smoke ‘Em If You Got ‘Em

Know when to go all in… And when to surrender

Smoke ‘Em If You Got ‘Em

When, if you believe the movie Barbarians at the Gate (or the book by the same name), executives at RJR Nabisco were ready to unveil the first-ever smokeless cigarette in the late 1980s, they knew—after wasting several years and several hundred million dollars—it…

(A) Tasted like s—-
(B) Smelled like a f—-
(
C) Could trigger a mild hernia

And the correct answer is… (D) All of the above.

“We’ve spent $350 million and we’ve come up with a turd with a tip?” CEO F. Ross Johnson is said to have said at the time. “God almighty. We’ve poured enough technology into this project to send a cigarette to the moon, and we came up with one that tastes like it took a dump?”

So, knowing fully well this new product—“Premiers,” they were called—was certain to crash and not burn, leaving in their wake a face full of egg and a bottom line full of blood, what was RJR’s next move?

  1. A) Buried them in the landfill near corporate HQ in Winston-Salem, North Carolina
  2. B) Went back to the drawing board and perfected their imperfections
  3. C) Fessed up to stockholders and took their lumps

And the correct answer is… D) None of the above.

That’s right. Despite anticipating universal disdain from nicotine-ingesting consumers and potential hard-lining from an FDA that threatened to classify Premiers as a drug, one of the biggest and most successful CEOs in the world at one of the biggest and most successful companies in the world in one of the biggest and most successful industries in the world actually launched them into the market.

He should have launched them into outer space.

Because as this is a case study and not a fairy tale, there was no happy ending. Premiers went on sale. Nobody bought them. RJR lost upwards of $900 million. To divert attention, Johnson and management tried to orchestrate a leveraged buyout of shareholders. Chaos, not to mention a bidding war, ensued, a bidding war ultimately won by LBO kingpin Henry Kravis. When all was said and done and 8K’d, Johnson, his top lieutenants, along with executives from American Express—runner-up to Kravis in the LBO faceoff—got themselves whacked.

It was like the end of a mafia movie. With golden parachutes in lieu of Colombian neckties.

There’s a term in poker that describes this, when a player has already bet so much money on previous streets that he or she has to stay in the hand until the end, even if the chances of winning are more none than slim.

It’s called being “pot committed,” and that’s what happened to Johnson and his team. Well, pot committed and “thought committed,” too, because they just couldn’t get off the idea of a smokeless cigarette. And how could they? They’d been hyping Premiers for more than a year in the hopes of boosting confidence in an investment community growing twitchy from the spate of class-action lawsuits against tobacco companies. RJR had talked itself into a corner… and there was no trap door to escape through. If they

hadn’t marketed Premiers, investors would never believe anything Johnson and his team said. Damned if you do… screwed if you don’t.

Pick your poison.

Looking back on your own career, you’ve no doubt stared down a similar crossroad. And you likely are to do so again. Could be an employee you’re recruiting. Could be an acquisition you’re targeting. Could be a product you’re developing or a promotion you’re designing. Could be just about anything that gets you pot committed and/or thought committed.

What to do?

Well, two things. First off, fight the urge to hype. When working on something new—especially something groundbreaking and therefore unproven—be more like a ninja warrior and less like a carnival barker. Stay stealthy. Don’t make a big to-do at a trade show. Don’t over-market what’s not in the market yet. Don’t beta test it in a high-profile location; rather, go someplace remote. You know, like they did with the atomic bomb.

Secondly, you have to know when to fold ‘em. The flip side of pot committed and thought committed is something called the “sunk-cost fallacy.” Human nature abhors the admission of failure. It’s why you—when you were 16 years old—spent $50 at the carnival midway trying to win a stuffed kangaroo you could have bought online for 10 bucks.

OK, 53 years old, not 16, but the point remains.

It’s also the reason gamblers—or day-traders or house flippers—mounting a comeback from a losing position stay in action until they get even, even if by doing so, they end up losing everything. The smart players, and the smart business people, know how and when to cut their losses.

Next time you’re in this situation, game out all the remaining costs to complete the initiative. Not just the development costs, but the marketing costs and the opportunity costs and yes, the reputation costs. Add up the true carnage in case of failure, because it’s probably even more than you think. Then, and only then, will you know if it’s worth finalizing.

Or euthanizing.

Roger Snow is a senior vice president with Scientific Games. The views and opinions expressed in this article are those of the author and do not necessarily reflect the views and opinions of Scientific Games Corporation or its affiliates.

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