Why Companies Fail

Posted by Greg Bustin (August 1, 2005)

Excerpted from the book, Take Charge! How Leaders Profit From Change, by Greg Bustin.

The line that separates successful companies from those that under-perform or fail altogether is often a fine one. Yet that line – while fine – is nevertheless distinct.

Last year, we compared a successful company to a failing company. We showed how two companies responded to similar challenges. These companies are not start-ups. They are well-established companies with millions of dollars in cash reserves, plenty of human resources, great customers and proven intellectual capital.

Our role in both companies – at least initially – was significant: we worked directly with senior management to help identify, confirm and articulate each company’s competitive advantage and assist with implementing a program designed to strengthen customer relationships and build new ones.

Both companies first confronted the challenges of change. But one company faced new challenges created by internal and external issues that threatened their sustainability. The other company ignored them. Today, the successful company continues to move forward. The other company has been folded into another company where a new management team now calls the shots.

Making Tough Choices

Why do companies fail?

If the line that separates success from failure is distinct, why can some companies see it and others cannot?

It’s tempting to say the choices may not be as clear at the time a decision must be made as they are in hindsight. But that’s not always true. Because hundreds of cases have shown that making the right choices – difficult and painful though they may be – will help a company push through tough times to survive and, perhaps, thrive. Likewise, shirking responsibility to make a tough choice or simply allowing poor practices to continue will eventually catch up to a company and cause it to fail – or cost those at the top their jobs.

So what’s the difference?

The Seven Deadly Sins

From the vantage point of working with changing companies during uncertain times and watching many more companies struggle with change, we offer The Seven Deadly Sins – any one of which can cause most companies to fail.

Failure to tell the truth. When employees are afraid to tell their boss the truth (or the CEO is afraid to tell the board or Wall Street the truth), you’ve got trouble in River City . John Quincy Adams called facts “stubborn things” – they will stick around and eventually surface. The temporary cover-up of the truth will topple any business – or business leader – sooner or later. Under CEO Dick Brown, EDS execs said “delivering bad news was not a good thing…so you postponed it as long as you could.” EDS survived, but Dick Brown did not.
Failure to understand who you are. Knowing who you are provides focus, which drives execution, which propels success. Most companies can only do one thing really well. Diversification is a compelling strategy if you’re GE or IBM, but trying to be too many things to too many people can kill small- to mid-sized companies. A great strategy requires sacrifice. So be true to your roots, make a choice and get going. If leaders are not aligned behind the strategy, don’t expect employees to be. And if employees aren‘t aligned, say goodbye to customers.
Failure to solve the right problem. Don’t confuse symptoms with bigger, systemic problems. Treating symptoms instead of the bigger issue is like putting a band-aid on a broken arm. The problem persists – and so does the pain associated with it. Poor problem-solving frustrates customers and vendors, demoralizes employees, and is unprofitable for the enterprise.
Failure to adapt. We’re not talking about strategy du jour. We’re talking about organizations that innovate to better serve customers and reach new ones because they know what customers want and they know the value customers place on their products and services. Think of banks broadening their services and expanding into new channels to serve customers via ATMs, online and even in grocery stores. Companies that sacrifice R&D or delay product launches for short-term cost savings eventually lose. Take calculated risks based on solid research that leverages your competitive advantage.
Failure to act. Waiting too late can be as bad as doing nothing at all. Lack of urgency is another killer. “Do something,” said retailing genius Stanley Marcus. Excessive delays in the name of information-gathering avoids decision-making and turns into analysis paralysis. Collin Powell has said that when “th e probability of success… is in the 40 to 70 [percent] range, go with your gut.” Don’t wait until you have enough facts to be 100 percent sure, because by then it’s almost always too late. Procrastination in the name of reducing risk actually increases risk.
Failure to achieve operational excellence. Your organization must be able to execute its strategy at consistently high levels. What gets measured is what gets done. Do you reward performance and penalize sub-standard work? Failure to do so will drive away your best employees, partners and suppliers – and, eventually, your best customers.
Failure to develop a productive culture. Culture has been called the invisible hand that makes things happen within organizations. The best cultures do not condone fear, politics or meritocracy and are places where ideas and careers flourish. “I would rather try to persuade a man to go along, because once I have persuaded him he will stick,” said Dwight Eisenhower. “If I scare him, he will stay just as long as he is scared, and then he is gone.” Organizations that are overly dependent on a single individual – whether it’s the CEO, the star sales person or a brilliant engineer – are also at risk.

Like people, organizations have souls. Any one of these seven deadly sins can undermine your enterprise’s soul. Where is your organization most vulnerable?

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