Why companies fail
By: Ram Charan & Jerry Unseem
Fortune Magazine (Europe Edition) #11
Charan & Unseem explore the critical question of corporate failure and come up with, ‚Ten Big Mistakes‛ that they maintain are the ‚standard stuff of corporate folly‛. The article is based on researching a number of the 257 public companies with $258 billion in assets that declared bankruptcy last year. One point that is sure to grab your attention is the authors’ assertion that it is a done deal that your company has made at least one of these fatal mistakes!
The big 10 (in no particular sighting order) are:
#1 Softened by success:
The point is made that people are less likely to make optimal decisions after prolonged periods of success. Most mountaineering accidents occur after reaching the summit. Quoting Boston College sociologist, Diane Vaughan, the point is made that people don’t surrender their mental models easily and thereby resist change.
#2 See no evil:
In other words, refusing to see the writing on the wall. Contrasting Polaroid (didn’t respond to change) and Intel (did respond) the point is made that it is explaining away the ‚brutal facts‛ that renders a company prone to failure. This point is one highlighted by Jim Collins in his influential management books, Build to Last and Good to Great.
#3 Fearing the boss more than the competition:
This will result more often than not in CEO’s not getting the information they need to make informed decisions. During World War II, Churchill worried that his own larger than life personality would deter subordinates from bringing him bad news, set up an office outside the chain of command whose main job was to tell him the unvarnished truth.
#4 Overdosing on risk:
This is simply living too close to the edge. You want to play with fire‌
#5 Acquisition lust:
Too often CEO’s 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 CEO’s do. It is much the same as what very one of us at some time in our life has done and that is have eyes bigger than our stomachs! Indigestion pills anyone?
#6 Strategy du jour:
When companies encounter problems, the desire for a quick fix can become overwhelming. Lurching from one silver bullet solution to another, the company never gains any traction on their problem. Two of these quick fixes include reengineering the board and turning the employees into corporate governors. The point is made that it is the regular employees who have the most to lose in a company going bad. It follows that they have the most incentive to act as company watchdogs, yet few companies tap into this built-in alarm system. The authors make the point that what is really needed is a survey, carefully designed and administered by an outside agency that regularly solicits employee feedback on sensitive questions.
Note: TomorrowToday.biz has performed this task in a number of cases and should you be interested in discussing this possibility in your context please doesn’t hesitate to contact us. From our experience, we think it is one of the smartest things you can do!
#7 Listening to Wall Street more than to employees:
Lucent CEO Rich McGinn makes the telling point that, ‚Stock price is a byproduct; stock price isn’t a driver…and every time I’ve seen any of us lose sight of that, it has always been a painful experience‛.
#8 A dangerous corporate culture:
Rotten cultures produce rotten deeds. Case in point? Look no further than Arthur Anderson and Enron. Be it risk without accountability, profit taking without disclosure or conflict of interests without safeguards, they all have their makings in a defective corporate culture.
Note: This is another area in which energizes us (TomorrowToday.biz) and we have developed various barometers to assist gauging corporate culture health. Interested?
#9 The new-economy death Spiral:
Alan Greenspan has his own theory on failure. Testifying about Enron in February, he noted, ‚A firm is inherently fragile if it’s value-added emanates more from conceptual as distinct from physical assets‌Trust and reputation can vanish overnight. A factory cannot.‛ The speed of some recent failures would seem to confirm this thesis. The first domino falls when questions are raised. Wrongdoing is suspected. Customers delay on new orders. Debit ratings are lowered. Employees head for the exits. More customers defect and the rest is history‌! Can the spiral be halted? The authors believe it can‌if it is prevented from building momentum. However, once started, the spiral can bring a company whose main assets are people and ideas to its knees with breathtaking finality.
#10 A dysfunctional board:
‚The CEO is always likely to want to turn the board meeting into a pep rally‛ says NellMinow, founder of the board watchdog group Corporate Library. The board needs to be concerned not with hearing the good news but rather with the bad news. As Robert Duvall says in The Godfather: ‘I have to go to the airport. The Godfather is a man who likes to hear bad news immediately.’ AddsMinow, ‚That should be emblazoned on every corporate governance policy sheet‛
For the full article point your browser to http://www.fortune.com/indexw.jhtml?channel=artcol.jhtml&doc_id=207916
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