Why Do Once Successful Companies Fail?

March 17, 2010
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How can one explain why seemingly successful companies, like Wang Labs and Digital Equipment, go bankrupt or fall from a successful leadership position?

How can one explain why seemingly successful companies, like Wang Labs and Digital Equipment, go bankrupt or fall from a successful leadership position? I continue to be intrigued by the fact that almost half of the roughly 25 companies that passed the rigorous tests to be listed in the once famous book by Tom Peters and Robert Waterman, In Search of Excellence, today either no longer exist, are in bankruptcy, or have performed poorly. What happened in the 25 years since the book was published? Ponder this question, “How many of the original Standard and Poors (S&P) 500 list originally created in 1957 are on that list today?” Answer: 74, just 15% according to CFO.com. And of those 74, only 12 have outperformed the S&P index average. Pretty grim. My belief is when it comes to considering whether to implement and integrate the various component methodologies that constitute Performance Management, there are actually two choices. To do it or not to do it. Many organizations neglect the fact that the choice to not act, which means to continue with the status quo and to perpetuate making decisions the way they currently are, is also a decision.

Invulnerable today, aimless tomorrow

Perhaps it is because when an organization is enjoying success, it breeds adversity to taking wise and calculated risks. Each new day going forward requires making strategic adjustments to anticipate continuously changing customer needs and counter tactics by competitors. Risk management is about balancing risk appetite with risk exposure. If there is not enough risk taking appetite, then performance will eventually suffer. (And if risk appetite is excessive, well the current global fiscal crisis is evidence of its outcome.) How can an organization create sustainability for its long term performance?

In Sydney Finkelstein’s book Why Smart Executives Fail based on his research, he observed that the causes of failure are not because executives are unintelligent – they are typically quite smart. The causes of failure are not necessarily due to unforeseeable events. Companies that have failed often knew what was happening but chose not to do much about it. The causes of failure are not always errors due to taking the wrong daily actions.  The explanation involves the attitude of executives. This includes a breakdown in their reasoning, strategic thinking, and creating a culture for metrics and deep analysis.

Prominent examples are Wang Labs and Digital Equipment. Wang Labs failed in part because it specialized in computers designed exclusively for word processing and did not foresee general-purpose personal computers with word processing software in the 1980s, mainly developed by IBM. Digital Equipment was satisfied with its dominance in the core minicomputer market which it was first to introduce the minicomputer. However Digital was slow to adapt its product line to the new markets for personal computers (PCs). The company’s entry into the personal computer arena in 1982 was a failure, and later PC collaborations with Olivetti and Intel achieved mixed results.

Often no one challenges the status quo and asks the tough questions. Delusion and fear of the unknown can develop in organizations that affect how they interact with key relationships like customers and suppliers. My belief is when it comes to considering whether to implement and integrate the various component methodologies that constitute Performance Management, there are actually two choices. To do it or not to do it. Many organizations neglect the fact that the choice to not act, which means to continue with the status quo and to perpetuate making decisions the way they currently are, is also a decision.

In many cases executives believe that if there is a control system in place, it will do the job for which it was intended. However in many organizations their systems and policies are constructed for day to day transactions but not for analyzing the abundance of raw data to make sense of what it all means. Sustainability is based on transforming data into analyzable information for insights and decision making. This is where business intelligence and enterprise performance management systems with embedded analytics fit in, such as from software vendors like SAS.

The emerging need for analytics

With today’s global recession, the stakes have never been higher for managers to make better decisions with analyzable information. Companies that successfully leverage their information to out-think, out-smart, and out-execute their competitors. High-performing enterprises are building their strategies around information-driven insights that generate results from the power of analytics of all flavors, such as segmentation and regression analysis, and especially predictive analytics. They are pro-active, not reactive.

Executives are human and can make mistakes, but in company failures these are not simply minor misjudgments. In many cases their errors are enormous miscalculations that can be explained by problem in leadership. Regardless of how decentralized some businesses might claim to be in their decision making, corporations can be rapidly brought to the brink of failure by executives whose personal qualities create risks  rather than mitigate them. In Finkelstein’s book he observes these flaws can be honorable such as with CEOs like An Wang of Wang Labs or with rogue CEOs like Dennis Kozlowski of Tyco, Ken Lay of Enron, John Rigas of Adelphia, and Steve Hilbert of Conseco.

To sustain long term success companies need leaders with vision and inspiration to answer “Where do we want to go?” Then by communicating their strategy to managers and employees they can empowering their workforce with analytical tools for workforce to correctly answer, “How will we get there?”

GARY COKINS