How Companies Fail
As Warren Buffet has so famously said, “When the tide goes out, you see who’s not wearing a bathing suit.” Well, the tide has certainly gone out and there are a lot of naked companies around. Many of the failed companies will insist that they had been the victims of a “perfect storm.”
However, in the years to come, it will become apparent that some companies have actually used the crises to gain market share, increase employee loyalty and enhance profitability while their competitors were crumbling.
Why do some firms prosper when others fail?
The crisis has already produced a lot of post-mortems and no small amount of schadenfreude. Jim Collins has rushed out a book on companies that fail (probably his best), and there are already numerous articles and discussions on cable TV of varying quality.
Some of the commentary is thoughtful, some sanctimonious, and some theatrical. Yet, muddling through the pundits and insiders, as well as my own personal experiences, one theme becomes clear:
Failures share common attributes and are therefore shouldn’t be that hard to spot long before the situation becomes irreversible. The companies that fail are the ones who don’t believe the rules apply to them.
What a Failing Company Looks Like
Overconfidence: Collins covers this aspect at length, and he makes the very good point that organizations get overconfident due to past success. Moreover, they often forget or confuse the reasons they were successful in the first place.
For instance, they discount luck that they had (which always plays a role), and build narratives starring themselves as the heroes. They believe that they succeeded due to some inner magic that they alone possess.
Where others see ambiguity, they see certainty. After all, they have triumphed because they always knew better. Why should they listen to the doubters now?
Overvaluing Strategy and Undervaluing Process: Companies that endure build superior processes over the long term. Thousands of small incremental improvements build up over time into an enormous competitive advantage.
One never hears of brilliant strategies from the likes of GE, Microsoft or Goldman Sachs. These boring companies merely plod along, dominating their industries year after year, for decades.
Companies headed for trouble focus too much on grand strategy and too little on how things get done; too much on numbers and not enough on math. A “strategically driven” company is usually too focused on senior management and not enough on the people implement process.
There is also usually a heightened sense of urgency and a fairy tale quality – Cinderella is in such a rush to get to the ball that she can’t bother to notice that her carriage is rusting and the wheels are about to come off.
Looking for Dragons to Slay: A company at the height of its success often feels all-powerful and looks for exciting new challenges. Frequently, they seek out new, more inspiring lines of business out of boredom and hubris rather than specific business objectives.
Company leaders usually talk about “taking the company to the next level” during this stage, having outgrown their present lines of business; they feel it’s time to take new risks. Another characteristic is that they often want to “re-engineer” the company. A company that needs to be re-engineered is in big trouble.
At- risk CEO’s often become media darlings and start using words like “vision” and “transcend” They are all too eager to explain to the uninitiated the heights they plan to conquer. To the doubtful, they simply point out that “you can’t argue with success.” Yet, that isn’t much of an answer. Great failures are born out of great successes.
Disruptive Competition: An enterprise that is full of itself and looking to conquer new worlds can fail to notice that trouble is lurking beneath the surface of their core business. A disruptive threat is never obvious so it’s easy to miss.
Sometimes a new product focuses on the most unprofitable consumers and makes the incumbent’s business actually perform better financially. Other times, the disruptive product targets non-consumption and actually increases the overall category penetration before it starts taking customers from incumbents.
Whatever the case, disruptive competition is a dire threat because it isn’t obvious. Frequently, it is only amount of time before the technology improves, the basis of competition shifts and a powerful incumbent finds itself in deep trouble. (See What Is Disruptive Innovation?).
The Lambda Response: Once trouble starts, how a company responds will have a lot to do with whether it ultimately survives. A cautionary example can be taken from biology and the well known Lambda virus.
This type of virus can lie dormant on host DNA for years. It is nearly undetectable and reproduces along with the cell. To all appearances, it is harmless. However, when the cell comes under stress, chemicals are released to protect the organism. Unfortunately, these same compounds alert the Lambda virus that the cell is at risk, which then enters its “lytic” phase. It multiplies itself millions of times, eventually bursting and killing the cell.
In other words, sometimes the cure is worse than the disease.
Many companies in distress fall victim to the same response. Their reaction to the crises alarms employees, partners and clients alike. Latent frustrations and suspicions come quickly to the surface, exacerbating an already dire situation.
Panic replaces hubris as the company zeitgeist; decision making becomes choppy and irrational. Pointing fingers alternates with speeches to rally the troops and a series of new strategies, but trust has been lost. To paraphrase Gary Hamel, there is no longer a community of purpose.
The Sisyphus Solution
Management theorists offer many solutions, both to maintain corporate greatness and for companies in distress. Here, I’ll propose just one.
In the Greek myth, Sisyphus was condemned to roll a boulder up a hill, only to have it fall back again so that he could repeat his task. The French writer Albert Camus imagined Sisyphus at the bottom of the hill, about to renew his labor, as at his happiest; reveling at the task at hand.
When company leaders are like Camus’ Sisyphus, they are most likely to be successful. Companies who are focused at the task at hand, rather than building empires and seeking out the “Next Big Thing” are doing their shareholders the greatest service. For a company to be profitable over the long term it has to perform and that can only happen if the organization is united in its purpose.
Once management loses the passion for developing superior products, serving their customers and creating a great workplace, trouble lies ahead. Whatever appearances might lead observers to believe, the company is on the road to failure.
In the final analysis, some people are serious about creating value and some people have other ambitions. That’s the difference between a businessperson and a “big-shot.”