Why do successful companies fail?
Why do businesses fail? The Small Business Administration in 2004 (latest year for available
date) identified the launch of 580,900 new employer businesses and the closing of 576,200.
This report suggests that for every business failure another business took the chance to open
and to fail.
According to Dr. Jagish Sheth (the Kellstadt Professor of Marketing Strategy at Emory University
School of Business and the author of "The Rule of Three: Surviving and Thriving in Competitive
Markets)," good companies successfully emerge in the first place by being at the right place at
the right time. He found that most successful companies start opportunistically....by accident,
not by some great design where people chart out their futures. Frequently, one customer
discovered them and the entrepreneur/leader took advantage of the situation, e.g., Microsoft's
luck with DOS and IBM, Humble beginnings; usually by accident, rather than by design.
However, when the context changes and the organization is either unable or unwilling to
change its culture, processes, systems and structure, it is likely to fail or get transformed. “
There are at least six major external contexts that become catalysts for failure or
transformation:
1. Customers - customer needs change,
2. Technology - technology advances force a change in direction or add complexities,
3. Competition - competitors forge ahead, e.g., Dell overtaking Gateway or Starbucks
vs. Maxwell House, et al,
4. Globalization - expansion into new markets increases complexity,
5. Capital markets - e.g., the dollar or interest rates go up or down, and
6. Regulation - the government deregulates, e.g., aviation, or adds regulations, e.g.,
securities industries.
10 reasons that good companies fail:
1. Status quo management - senior management doesn't want to rock the boat. Let's just
do things the way we've always done it.
2. Success breeds failure - e.g., management becomes arrogant and complacent and
alienates its' customers or doesn't understand the changing market demands
3. Neglect of emerging markets
4. Non-traditional competition - e.g., niche players create new markets - Starbucks and
the specialty coffee movement
5. Internal conflicts - executive level conflicts adversely affect the ability of the
executive team to work effectively together,
6. Cost inefficiencies
7. Regulation barriers
8. Rapid technology advances - e.g., Big Blue (IBM) got left behind in the personal pc
revolution
9. Rapid deregulation
10. Unexpected events - e.g., 9/11
To survive for the long run, organizations must develop a culture that is adaptive. Cultural
change is the easiest to work with because people are quite capable of adapting quickly.
Changing government regulations, for example, can take years.
However, culture change requires the following three transformations occurring at the same
time, what Jagdish Seth calls the "Tripod of Transformation:"
Mindset X Organization (structure) X Rewards
Most companies only focus on one of the legs of the tripod of transformatiion. In fact, most
companies believe that communication and education will be sufficient (Mindset). E.g.,
"Here is our new vision, mission and values."
Some attempt reorganization as a starting place hoping that new leadership will create needed
change. Very few focus on the reward system. Generally, however, it is the reward
transformation that is most effective in bringing culture change. People will do that for which
they are rewarded. If you reward people more for selling X product/service and you want
them to sell Y...good luck! If you fire people for speaking up...people will keep quiet and not
rock the boat and the boat will surely sink. If you tolerate people who abuse others because
they achieve results, no matter how much you extol "people are our greatest asset" values,
you will be sending a stronger message that it's ok to run over others on the road to success.
Or, if your incentive systems uses performance rankings were the top individuals receive the
bulk of the rewards you will promote a me first vs. teamwork culture. You can see that
building an effective reward/incentive system is complicated.
Now for the most interesting piece of his research in my opinion...Most organizations don't
change until they are in pain...on the verge of dying. Very few are truly proactive and
adaptive.
How can failure be prevented?
Many business writers, business consultants and business coaches attribute business failure to
a lack of strategic planning, a lack of leadership, a lack of vision, a lack of processes, the list
is endless. Dan Kennedy, a renowned marketing and sales expert said "That there is no
business success or failure, but rather people success and people failure." However, the
problem with identifying one reason for business failure is the problem.
Businesses are complex by their very nature. To believe that only one factor will either make
or break a business is foolhardy and contributes to the silo solution mentality. This approach
is simply stated like this: If I fix this one problem, then everything else is OK.
Successful businesses harness what I call the dynamic forces of performance - strategic
planning, execution and measurement. These forces, much like the forces in nature, act
upon each performance field such as profitability, customer service, growth and innovation to
name a few. When all 3 forces are in alignment, the field experiences tremendous energy and
improved performance happens.
Processes help to unite the forces and close any performance gaps between the forces. People
development process links strategic planning and execution. Many companies have great
strategic planning capacity, but fail to execute or implement the performance change.
Even if strategic planning and execution are OK, sometimes measurement of the desired
results is still lacking. A goal achievement process helps to bridge this gap.Between
measurement and planning is the process of quality. Reviewing the quality of the
performance field helps to not only improve measurement, but establishes a high
performance culture of continuous improvement.
All of these forces and processes operate within the eye of leadership. Effective leadership is
necessary to manage each of the forces as well as the processes. If effective leadership is not
present, then the forces fail to maximize their impact upon the field.
What is the business survival rate? Statistically, roughly 66 percent of new businesses survive
two years or more, 50 percent survive four years or more, and 40 percent survive six years or
more, according to the study “Redefining Small Business Success” by the U.S. Small
Business Administration. Further, companies that have employees (instead of one-man
shops), college-educated owners, and those that have good financing tend to survive longer.
Also supported by the numbers in the study, manufacturers overall have a better chance of
staying alive compared to service and retail firms.
With this information as a backdrop, a list of 7 ways to prevent failure of successful
businesses has been compiled.
1. Understand your market, your customers, and your customers' buying habits.
Two easy questions: Who are your customers? And why do they spend their money
with you? You should be able to clearly answer in one or two sentences. Customers
are the only people that put money in your account. Without them, you will not
survive.
2. Understand and communicate what you are selling. You must clearly define your
value proposition. What do you do that can help or benefit me? Once you understand
it, ask yourself if you are communicating it effectively. Does your market connect
with what you are saying?
3. Adequate financing. Cash is king. If you don't have enough cash to carry you
through the sales cycles and downward trends, your prospects for success are not
good. When businesses go looking for lenders to provide that cash, they quickly find
that funding sources are finicky and difficult to please.
4. Anticipate or react to competition, technology, or other changes in the
marketplace. It is dangerous to assume that what you have done in the past will
always work. Challenge the factors that led to your success. Do you still do things the
same way despite new market demands and changing times? What is your
competition doing differently? What new technology is available? Those who fail to
do this end up obsolete.
5. Dependence on a variety customer. Pay attention to your revenue sources. If you
have a customer that is providing a majority of your income, ask yourself what would
happen if they left or went out of business. Where would you be? Whenever you have
one customer so big that losing them would mean closing up shop, watch out. Having
a large base of small customers is a safer beat.
6. Define your product/service offering. Trying to do everything for everyone is a sure
road to failure. Spreading yourself too thin diminishes quality. The market pays
excellent rewards for excellent results. Excellent results come from doing what you
do and doing it well over and over again.
7. Good management. Management of a business encompasses a number of activities:
planning, organizing, controlling, directing and communicating. The cardinal rule of
small business management is to know exactly where you stand at all times. If
managed properly it could be the key to success.
