Why do successful
companies fail?
 

Tea with Mussolini, a Franco Zefirelli´s film
describes a group of sophisticated English women that did not want to accept the
deterioration of democracy in Italy in the years before the II World War. The
behavior of the ladies that meet for tea every afternoon resembles the ones of
GM, Kodak, Polaroid, Blockbuster, Chrysler, Delta, American Airlines, Texaco,
RadioShack, Yahoo,
AOL, Motorola, Xerox, HP, and Blackberry, to name a few. All these companies have
been substantially reduced in size, fallen from an industry leadership position, or even declared bankruptcy, but not because their senior executives
were dishonest or fool. On the contrary, many CEOs were smart,
hardworking, well-intentioned professionals trying to make the right call. However,
the hell is paved with good intentions and no company, regardless its size and
past profitability, survives to a cocktail of bad managerial decisions such as the
pursuit of undisciplined growth, severe risk-taking policies, and lack of
aggressiveness regarding innovation, to name a few. Their failure was not always the result
of taking the wrong daily actions. RadioShack, for instance, developed
expertise in many key activities for a retailer of electronic gadgets, however,
one single decision – ignoring the emergence of smartphones – killed its
business model.

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We tend to think
big companies like ubiquitous juggernauts that never fail, unstoppable giants
nominated to lead the world or
organizations that will last for generations and yet some fail in a matter of a few years. How can such large
companies fall so quickly? Game-changing events rarely have only one
root cause and company failures are no exception to this rule.  So, why do big companies
fail? There are several reasons that explain why once-mighty firms fail and many happen simultaneously.
Business literature shows that there are firm, industry (or systemic), and country-specific
causes for the decline and even extinction of organizations. Here comes a
humble effort to describe all of them.

 

Firm-specific reasons

Senior executives make mistakes as anyone does, but corporate failures
reflect gigantic miscalculations that are caused by wrong calls from leaders.  The list of “what can go wrong” for firms is quite
extensive: bad managerial decisions, poor timing, slow decision-making
process, yes-sir mentality, irrational decision-making, slow action-taking, for
instance.  Companies
that have failed often knew what was happening but chose not to do much about
it. Sometimes they even do something, but often their actions are too little
too late. Other times no one has the guts to challenges the status quo to ask
the tough questions. Fear of the unknown and pushbacks from the organization can
develop, affecting how companies handle key their future.

Sheer
size is another firm-specific reason for failures. Large companies have a relatively
poor record of accomplishments in innovation because of their slow decision-making
processes since decisions need
to be filtered by several managerial layers. Therefore, they do not quickly
react to changing environments, resulting in
their falling behind. Kodak
provides the best examples of firm-specific reasons for failure because the
company let digital cameras drive a once powerful industrial giant into the penny-stock territory.

 

Industry-specific
reasons

Blockbuster´s top managers, for instance,
denied the market reality of the rise of streaming while the
idly watched Netflix destroy its business,
therefore did not explore some partnerships with streaming providers.  This company is a good example
of a company that ignored a disruptive threat. According to the influential book Innovator´s Dilemma, written by
Clay Christensen, disruption occurs when entering companies focus on the lower end of the market. Disruptors are largely
ignored by traditional leaders due to entrant´s
low margins and low profits because entrants do not focus on the customer base
focused on by large companies. Disruptions are then industry-specific technological changes that
transformed once ignored entrants into industry leaders. The
automotive industry in the US in the 80´s is an example of the denial of
threats by newcomers. Yahoo also provides a textbook
example of failure due to non-recognition
of the death of web portals and the birth of social media. 

 

Overall, large/traditional/established companies
tend to fail because they do not pay attention to disruptive technology and
only focus on their customer base, leading to a decline in sales. It is surprising
to realize that many firms keep driving toward inevitable disaster at top speed.

 

Country-specific
reasons

Walmart´s failure in Germany provides an example of a highly successful
behemoth in many countries which failed in a country due to local idiosyncrasies.
First, German consumers tend to prefer small neighborhood stores rather than an impersonal chain (although Germany´s Aldi is quite successful in
that country). Second, Germans have taste and deep pockets for well-designed,
something deeply contrary to the simple look-and-feel of all Walmart´s store.
Finally, Walmart could not replicate the low-cost structure in Germany, mostly
due to country´s strict and higher minimum wages policies.

 

Disneyland Paris, formerly known as
Euro Disney, presents additional country-specific differences that explain
unexpected failures. Competition with tourism in Paris and attention to wrong
details proved that Disneyland Paris was acting on an
American view of Europe rather than a native view. Location matters when it comes to understanding business success.

 

Is there a
solution for big companies to avoid failure?

Research in management suggests that failure or
irrelevance may be avoided. A multitude of consultants and business schools
help big firms to dribble potential disastrous
fates; their suggestions generally include the creation of an independent branch outside the company to allow it to make
quick decisions without the influence from headquarters and stockholders. The
explanation for the segregation large companies-innovative startups comes from the concept that disruptive business
model cannot be under the scrutiny of
short-term results.

 

Another solution is the acquisition of small companies that might be considered
disruptive. However, Mergers & Acquisitions cause problems for large
companies on their own because of the poor history of successful integration
between well-established and small, innovative startups. 

 

How did successful
companies deteriorate from greatness to mediocrity?

James
“Jim” Collins, in his book How the Mighty
Fall: And Why Some Companies Never Give In” describes the five steps
followed by some companies on their way
to mediocrity. Step one consists of
companies that attribute their success
to their own superior qualities. This is a problem because firms fail to question their relevance when conditions
change. Step two happens when firms
overreach or move into industries or growing to a scale where the factors
behind their original success no longer apply. Step three has to do with denial of risk. Warning signs mount, but
the firm’s headline performance remains strong enough for bosses to convince
themselves that life is still good. Excuses
arise, and problems are invariably blamed on external causes. In step four the problems are clear enough
that firms start grasping for salvation. Rather than returning to the
fundamentals that made them great, they gamble on a new, charismatic savior-boss, dramatically change strategy, make
a supposedly transformational acquisition, or fire some other supposedly silver
bullet. Finally, step five deals with irrelevance or death of the
company.

 

Conclusion

It may be a cliché, but managers and business
analysts forget that no company will avoid downturns. Sometimes problems start
from within, sometimes technology causes disruption and a few times customers´
habits and regulation change a lot from one company to another. Big firms´
crumbles are so poorly understood albeit
well-documented. In fact, even the road to mediocrity is well-mapped. The
challenges that CEO face are huge, and we see no reason to be easier in the
future.    Why do successful
companies fail?  

Tea with Mussolini, a Franco Zefirelli´s film
describes a group of sophisticated English women that did not want to accept the
deterioration of democracy in Italy in the years before the II World War. The
behavior of the ladies that meet for tea every afternoon resembles the ones of
GM, Kodak, Polaroid, Blockbuster, Chrysler, Delta, American Airlines, Texaco,
RadioShack, Yahoo,
AOL, Motorola, Xerox, HP, and Blackberry, to name a few. All these companies have
been substantially reduced in size, fallen from an industry leadership position, or even declared bankruptcy, but not because their senior executives
were dishonest or fool. On the contrary, many CEOs were smart,
hardworking, well-intentioned professionals trying to make the right call. However,
the hell is paved with good intentions and no company, regardless its size and
past profitability, survives to a cocktail of bad managerial decisions such as the
pursuit of undisciplined growth, severe risk-taking policies, and lack of
aggressiveness regarding innovation, to name a few. Their failure was not always the result
of taking the wrong daily actions. RadioShack, for instance, developed
expertise in many key activities for a retailer of electronic gadgets, however,
one single decision – ignoring the emergence of smartphones – killed its
business model.

 

We tend to think
big companies like ubiquitous juggernauts that never fail, unstoppable giants
nominated to lead the world or
organizations that will last for generations and yet some fail in a matter of a few years. How can such large
companies fall so quickly? Game-changing events rarely have only one
root cause and company failures are no exception to this rule.  So, why do big companies
fail? There are several reasons that explain why once-mighty firms fail and many happen simultaneously.
Business literature shows that there are firm, industry (or systemic), and country-specific
causes for the decline and even extinction of organizations. Here comes a
humble effort to describe all of them.

 

Firm-specific reasons

Senior executives make mistakes as anyone does, but corporate failures
reflect gigantic miscalculations that are caused by wrong calls from leaders.  The list of “what can go wrong” for firms is quite
extensive: bad managerial decisions, poor timing, slow decision-making
process, yes-sir mentality, irrational decision-making, slow action-taking, for
instance.  Companies
that have failed often knew what was happening but chose not to do much about
it. Sometimes they even do something, but often their actions are too little
too late. Other times no one has the guts to challenges the status quo to ask
the tough questions. Fear of the unknown and pushbacks from the organization can
develop, affecting how companies handle key their future.

Sheer
size is another firm-specific reason for failures. Large companies have a relatively
poor record of accomplishments in innovation because of their slow decision-making
processes since decisions need
to be filtered by several managerial layers. Therefore, they do not quickly
react to changing environments, resulting in
their falling behind. Kodak
provides the best examples of firm-specific reasons for failure because the
company let digital cameras drive a once powerful industrial giant into the penny-stock territory.

 

Industry-specific
reasons

Blockbuster´s top managers, for instance,
denied the market reality of the rise of streaming while the
idly watched Netflix destroy its business,
therefore did not explore some partnerships with streaming providers.  This company is a good example
of a company that ignored a disruptive threat. According to the influential book Innovator´s Dilemma, written by
Clay Christensen, disruption occurs when entering companies focus on the lower end of the market. Disruptors are largely
ignored by traditional leaders due to entrant´s
low margins and low profits because entrants do not focus on the customer base
focused on by large companies. Disruptions are then industry-specific technological changes that
transformed once ignored entrants into industry leaders. The
automotive industry in the US in the 80´s is an example of the denial of
threats by newcomers. Yahoo also provides a textbook
example of failure due to non-recognition
of the death of web portals and the birth of social media. 

 

Overall, large/traditional/established companies
tend to fail because they do not pay attention to disruptive technology and
only focus on their customer base, leading to a decline in sales. It is surprising
to realize that many firms keep driving toward inevitable disaster at top speed.

 

Country-specific
reasons

Walmart´s failure in Germany provides an example of a highly successful
behemoth in many countries which failed in a country due to local idiosyncrasies.
First, German consumers tend to prefer small neighborhood stores rather than an impersonal chain (although Germany´s Aldi is quite successful in
that country). Second, Germans have taste and deep pockets for well-designed,
something deeply contrary to the simple look-and-feel of all Walmart´s store.
Finally, Walmart could not replicate the low-cost structure in Germany, mostly
due to country´s strict and higher minimum wages policies.

 

Disneyland Paris, formerly known as
Euro Disney, presents additional country-specific differences that explain
unexpected failures. Competition with tourism in Paris and attention to wrong
details proved that Disneyland Paris was acting on an
American view of Europe rather than a native view. Location matters when it comes to understanding business success.

 

Is there a
solution for big companies to avoid failure?

Research in management suggests that failure or
irrelevance may be avoided. A multitude of consultants and business schools
help big firms to dribble potential disastrous
fates; their suggestions generally include the creation of an independent branch outside the company to allow it to make
quick decisions without the influence from headquarters and stockholders. The
explanation for the segregation large companies-innovative startups comes from the concept that disruptive business
model cannot be under the scrutiny of
short-term results.

 

Another solution is the acquisition of small companies that might be considered
disruptive. However, Mergers & Acquisitions cause problems for large
companies on their own because of the poor history of successful integration
between well-established and small, innovative startups. 

 

How did successful
companies deteriorate from greatness to mediocrity?

James
“Jim” Collins, in his book How the Mighty
Fall: And Why Some Companies Never Give In” describes the five steps
followed by some companies on their way
to mediocrity. Step one consists of
companies that attribute their success
to their own superior qualities. This is a problem because firms fail to question their relevance when conditions
change. Step two happens when firms
overreach or move into industries or growing to a scale where the factors
behind their original success no longer apply. Step three has to do with denial of risk. Warning signs mount, but
the firm’s headline performance remains strong enough for bosses to convince
themselves that life is still good. Excuses
arise, and problems are invariably blamed on external causes. In step four the problems are clear enough
that firms start grasping for salvation. Rather than returning to the
fundamentals that made them great, they gamble on a new, charismatic savior-boss, dramatically change strategy, make
a supposedly transformational acquisition, or fire some other supposedly silver
bullet. Finally, step five deals with irrelevance or death of the
company.

 

Conclusion

It may be a cliché, but managers and business
analysts forget that no company will avoid downturns. Sometimes problems start
from within, sometimes technology causes disruption and a few times customers´
habits and regulation change a lot from one company to another. Big firms´
crumbles are so poorly understood albeit
well-documented. In fact, even the road to mediocrity is well-mapped. The
challenges that CEO face are huge, and we see no reason to be easier in the
future.