Companies must learn to celebrate and support people within the organization who are willing to challenge the status quo, to bring totally different perspectives on delivering value to customers, and to take experimental risks to explore new business models.
Companies are born, companies fail, capitalism moves forward; ‘creative destruction’, they call it, and what Paul O’Neill, former U.S. Treasury Secretary, called ‘the genius of capitalism’. “There is a myth, a misconception, floating around the universe that companies fail for millions of reasons”, says Mark Stevens. “That every death of the entrepreneurial dream is the result of a separate and distinct story unrelated to any other.
But the fact is, every company I have ever worked with that is dysfunctional, bleeding, damaged and en route to a head-on collision with disaster lacked basic fundamentals…” In the writings of Gary Hamel he says; most businesses were never built to change; they were built to do one thing exceedingly well and highly efficiently, ‘forever’.
That’s why entire industries can get caught by change. In a world where change is shaken rather than stirred, the only way a company can renew its lease on success is by reinventing itself root and branch, before it has to: A feat that even the smartest companies have trouble pulling off. Without doubt, the greatest threat to success is success itself:
Success corrupts. Hamel continues, saying; given enough time and enough incrementally myopic decisions, companies will eventually run out of momentum. Strategies start to die the moment they’re born. While death can be delayed, it can’t be avoided. Autopsies reveal three primary causes of death.
- Clever strategies get replicated.
- Venerable strategies get supplanted.
- Profitable strategies get eviscerated.
The seeds of failure are usually sown at the heights of greatness; that’s why success is so often a self-correcting phenomenon. Years of continuous improvement produce an ultra-efficient business system; one that’s highly optimized, and also highly inflexible. Successful businesses are usually good at doing one thing and one thing only. Over-specialization kill adaptability; but this is a tough trap to avoid, since the defenders of the status quo will always argue that eking out another increment of efficiency is a safer bet than striking out in a new direction…
In the article “Why Companies Fail” by Ram Charan and Jerry Useem write: CEOs offer every excuse but the right one; their own errors. Corporate collapses involve many breakdowns, including; ethics, trust, common sense, and that’s just to name a few. But perhaps the most troubling breakdown is in corporate oversight: Directors, senior executives, and Wall Street analysts all failed miserably by missing–or concealing–danger signals until it was too late.
Regulators will no doubt have plenty to say on the issue, but the most zealous reformers should be the companies themselves. They can begin with three changes that, taken together, will provide a better early warning system against failure:
- Reengineer the Board of Directors. Remember re-engineering? It was applied to every corner of the corporation at one point or another–except the Board. That needs to change. Incompetence is not the problem. Boards can be full of very capable people, and yet be totally ineffective as a group. Boards are the heart and soul of a company and they must act responsibly to identify and prevent trouble before it becomes a crisis.
- Turn employees into corporate governors. Regular employees; not executives, not directors, not shareholders, have the most to lose when a company fails. With their jobs, pensions, and stock-option wealth on the line, it follows that they have a greater incentive than anyone to act as company watchdogs. Yet few companies tap this built-in alarm system.
- Banish EBITDA. Companies hit the skids for all sorts of reasons, but there is one thing that ultimately kills them: They run out of cash. Yet most managers are too preoccupied with measures like EBITDA (earnings before interest, taxes, debt, and amortization) and ‘return on assets’ to give cash much notice. Boards don’t ask for it. Analysts don’t analyze it. Corporate financial statements do typically include a statement of cash flow, but it’s a crude snapshot that excludes off-balance-sheet items and doesn’t show where the cash comes from. The solution is a detailed, easily readable cash-flow report. Give it to the Board. Give it to employees. Break out cash flow by division, letting people track the company’s blood-flow themselves.
In the article “Why Companies Stagnate and Fail” by John W. Davin writes: Success breeds arrogance. Caretaker executives who’ve never been entrepreneurs and have never built something out of nothing are prone to view success as an entitlement, rather than the result of innovation, gut-wrenching decisions and perseverance. Isolated from the bleeding edge of change by subservient minions, they start believing their own speeches.
Unlike Andy Grove, Intel’s former CEO, they aren’t perpetually paranoid. Instead, they’re naively confident and therefore prone to under-estimate threats and discount new competitors. These aren’t the only things that can turn leaders into also-ran, but they’re the ones I’ve encountered most often.
To the question; “can an organization die an untimely death?” an economist would answer ‘no’: “Institutions die when they deserve to die, that is, when they have shown themselves perpetually incapable of fulfilling stakeholder demands”. There are many causes why companies fail or stagnate, but four reasons continue to come up in almost all cases.
- No Vision, strategy or strategic business plan.
- Weak or ineffective management.
- Lack of information and control systems.
- Under capitalization.
In the article “Why Has Anyone Ever Failed?” by Bill Gluth writes: The only reason anyone has ever failed is they didn’t take action when it was most needed. They sat on the sidelines trying to figure out what to do, or they took the wrong action and it cost them dearly. There are really only a few reasons for failure:
- They didn’t know what action to take.
- They didn’t trust their own knowledge and personal intuition in moving forward.
- They looked at their options for so long they became paralyzed. This is often called ‘analysis paralysis’.
According to statistics from the Association of Insolvency and Restructuring Advisors (AIRA), the majority of business failures (67%) are caused by internally generated problems within the control of management; not by bad luck or external events like an economic recession.
Being accountable is a crucial step to overcoming the obstacles that face management. Without someone taking ownership of a problem, nothing changes. Waiting for an external factor, outside of your control, in order to have a reason to change is a sure-fire recipe for business failure.
According to Gary Hamel: “To thrive, in turbulent times, organizations must become a bit more disorganized; less buttoned down, less uptight, less compulsive, less anal.” Strategies get old and, in recent years, strategy life cycles have been shrinking and, sooner or later, every strategy dies.
The signs of advancing age are always visible; if you’re looking for them. As William Gibson once said, “The future has already happened, it’s just unequally distributed.” To see it coming, managers have to pay attention to nascent technologies, unconventional competitors and un-served customer groups.
The future will sneak up on you unless you go out looking for it. It’s not enough to spot trends, you have to think through their implications and how they’ll interact; and then develop contingency plans appropriate to each scenario. The more time a company devotes to rehearsing alternate futures, the quicker it will be able to react when one particular future begins to unfold.
In the April 16, 1999, an issue of the ‘Informant’ writes: “An organization is like a tree full of monkeys, all on different levels, some climbing up, some falling down, most just swinging round and round. The monkeys on top look down and see a tree full of smiling faces. The monkeys on the bottom look up and see nothing but ass-holes.”
Too often CEOs succumb to an undisciplined lust for growth, accumulating assets for the sake of accumulating assets. Why? It’s fun. There are lots of press conferences. It’s what powerful CEOs do. No one likes a good growth story better than Wall Street…. When companies run into trouble, the desire for a quick fix can become overwhelming.
The frequent result is a dynamic that Jim Collins describes in his book ‘Good to Great’; “vacillated, shifting from one strategy to another, always looking for a single stroke to quickly solve its problems. [It] held pep rallies, launched programs, grabbed fads, fired CEOs, hired CEOs and fired them yet again.”
Lurching from one silver bullet solution to another, the company never gains any traction. Collins calls it the ‘doom loop’, and it’s a killer. Company failure has many parents, but the most critical of these is a breakdown in how executives perceived reality for their companies, how people within an organization faced up to their reality, how information and control systems in organizations were mismanaged, and how organizational leaders adopt spectacularly unsuccessful habits. Most companies don’t change until they are in pain… on the verge of dying… then, it’s too late… Companies must be truly proactive and adaptive to succeed…
When executives look at new opportunities they see them through the lens of the current business model and view them as competing with the current way the organization creates, delivers, and captures value. Organizations fail at business model innovation because they blindly take cannibalization off the table even if a new business model may have significant upside potential.