Why Do Once Successful Companies Fail

How can one explain why seemingly successful companies, such as Borders, Blockbuster, Circuit City, Wang Labs and Digital Equipment, go bankrupt or fall from a successful leadership position? I find it fascinating 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 that book was published? Ponder this question: How many of the original Standard and Poor’s (S&P) 500 list originally created in 1957 are on that list today? Answer: 74 – just 15 percent. And of those 74, only 12 have outperformed the S&P index average. Pretty grim.

My belief is that when it comes to considering whether to implement and integrate enterprise and corporate performance management (EPM/CPM) methods, you make a choice either way – to do it or not to do it. This might seem obvious, but many organizations neglect the fact that the choice to not act – to perpetuate the status quo and continue making decisions the way they currently do – is also a decision.

Invulnerable today, aimless tomorrow

Perhaps it is because when an organization is enjoying success, it breeds aversion to taking calculated risks. Organizations often suffer from the manra, “We don’t do that here.”

But with today’s increasing volatility, uncertainty, and globalization removing trade barriers each new day requires strategic adjustments to anticipate continually changing customer needs and counter-tactics by competitors. Enterprise risk management (ERM) is about balancing risk appetite with risk exposure. If there is not enough risk-taking appetite, then performance will eventually suffer. (If risk appetite is excessive, well, the current global fiscal crisis was evidence of its outcome.) How can an organization create long-term sustained survival?

In Sydney Finkelstein’s book Why Smart Executives Fail, he observed that the causes of failure are not because executives are unintelligent – they are typically quite smart. Finkelstein writes that 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. Nor are the causes of failure always errors due to taking the wrong daily actions.

The explanation involves the attitude of executives. This includes breakdowns in their reasoning, strategic thinking, and efforts to create a culture for metrics and deep analysis.

As earlier mentioned, 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.[i] Digital Equipment Corporation (DEC) was satisfied with its dominance in the core minicomputer market, which it was the first computer hardware vendor to introduce. However, DEC 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 such as with its customers, suppliers, and partners.

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, systems and policies are constructed for day-to-day transactions but not for analyzing the abundance of raw data – think Big Data – to make sense of what it all means. Long term sustained performance is based on transforming data into analyzable information for insight and foresight to support decision making. This is where business intelligence, business analytics, and enterprise and corporate performance management systems with embedded analytics fit in. Software technology is no longer the impediment for performing investigation and discovery. Those tools are proven. The impediment involves people requiring skills with behavioral change management.

The emerging need for analytics

With the remnants of the global recession continuing to adversely affect organizations, the stakes have never been higher for managers to make better decisions with analyzable information. Companies that successfully use their information to outthink, outsmart and out-execute their competitors are high-performing enterprises. They build 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 proactive, not reactive.

Executives are human and can make mistakes, but when companies fail it is not simply due to minor misjudgments. In many cases, their errors are enormous miscalculations that can be explained by problems with 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 that these flaws can be honorable – such as with Wang Labs – or not, as in the headline ethical lapse cases such as Enron, Tyco International, WorldCom, Parmalat, Satyam, and Adelphia.

To sustain long-term success, companies need leaders with vision and inspiration to answer, “Where do we want to go?” By communicating their strategy to managers and employees, they can empower their work force with analytical tools to correctly answer, “How will we get there?”

In the past the best leaders and executives had the best answers. That is not true today. Now the best leaders and executives have the best questions! They can no longer rely on their past experiences or intuition that got them promoted to their C-suite roles. They need to create a culture for analytics including skills and competencies in their work force to be analytical.

[i]  Quoted from http://en.wikipedia.org/wiki/Wang_Labs