Why Good Companies Fail (It’s Not the Economy)
Since 2008, many businesses have struggled to recover from the “Great Recession.” But as many companies have emerged from that slump, they’ve noticed a change in the economic tide; what they once thought was an endless supply of opportunity and revenue seems to be slowing to a trickle — and they have to work harder than before to maintain their size and clout.
But I’d like to argue that this is not because of the volatile economy or changing global market. What is it? We’ll discuss that in this article.
How long is your business going to last?
Did you know that the average life of a corporation is just under 20 years (even for S&P 500 companies!) and growing shorter? I recall attending a seminar a few years back where I had the good fortune to hear Dr. Jagish Sheth speak. Jag, as he likes to be called, is 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. He has conducted extensive research into the factors that contribute to building great companies and contends that, in general, three major players will dominate every market.
Small specialty players end up filling niche markets, but any company caught in the middle will be swallowed up or destroyed. McDonalds, Burger King and Wendy’s — or Nike, Adidas and Reebok — are good examples of the Rule of Three. According to Jag, good companies successfully emerge 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 or long-term plan. Frequently, one customer discovered them and the entrepreneur/leader took advantage of the situation, e.g., Microsoft’s luck with DOS and IBM.
Predictably (and unfortunately for many), as companies mature and cultural or economic situations change, it is likely they will fail or be transformed (generally into something quite different than the founders imagined). This happens if an organization is either unable or unwilling to change its culture, processes, systems and structure accordingly.
Where does your organization need to change?
The research seems to suggest at least six major external contexts that become catalysts for failure or transformation, especially as an organization expands:
- Customers — customer needs change
- Technology — technology advances will force a change in direction or add complexities
- Competition — competitors forge ahead, e.g., Dell overtaking Gateway or Starbucks vs. Maxwell House, etc.
- Globalization — expansion into new markets increases complexity
- Capital markets — e.g., the dollar or interest rates go up or down
- Regulation — the government deregulates or adds regulations
For most companies, all of these 6 elements will shift at some point. Effective leadership, which can help an organization survive beyond that 20-year mark, is all about anticipating and adjusting to external contexts and events.
10 reasons that good companies fail
According to Jag, the top 10 reasons that companies fail are:
- Status quo management — senior management doesn’t want to rock the boat; “Let’s just do things the way we’ve always done it”
- Success breeds failure — e.g., management becomes arrogant and complacent and alienates the customers, or doesn’t understand changing market demands
- Neglect of emerging markets
- Non-traditional competition — e.g., niche players create new markets — Starbucks and the specialty coffee movement
- Internal conflicts — executive level conflicts adversely affect the ability of the executive team to work effectively together
- Cost inefficiencies
- Regulation barriers
- Rapid technology advances — e.g., Big Blue (IBM) got left behind in the personal PC revolution
- Rapid deregulation
- Unexpected events — e.g., 9/11, the Great Recession
To survive over the long run, your organization must develop a culture that is adaptive and constantly monitors and responds to these 10 factors. Of the 10, dealing with “cultural” (general mindset) or people factors are the easiest to work with because people are quite capable of adapting quickly. Changing government regulations, however, can take years.
However, culture change requires three transformations, according to Jag. They must also occur at the same time to form what Jag calls the “Tripod of Transformation.”
The Tripod of Transformation
The Tripod of Transformation is fairly simple:
Mindset x Organization x Rewards = Transformation
When attempting cultural change, most executives only focus on one of the legs of the tripod. In fact, most executives believe that communication and education (mindset change) will be sufficient to change an organization’s behavior, e.g. creating a new vision, mission and values statement.
The other common tactic is to reorganize the leadership team, hoping that new leadership will create needed change. Unfortunately, very few companies focus on the reward system. Generally, however, it is the reward transformation that is most effective in bringing about culture change. It’s a basic principle of human nature: People will do that for which they are rewarded.
But I’ve found in my own experience — and Jag’s research backs this up — that organizations don’t change until they are in pain, or on the vergy of dying. Very few are truly proactive and adaptive. If you want to truly weather any economy and exceed past your organization’s 20-year expiration date, harnessing the power of change — and the Tripod of Transformation — will make a huge difference.
