Why Good Companies Fail and It’s Not Due to the Recession

By Carl Robinson, Ph.D., copyright 2009

The economy is tough, but getting better.  I hear it from most of my C-Level clients.  The tone is now, “We need to gear up so that we are not left behind as we emerge from the recession.”  If you’ve been fortunate, you’ve built a good, perhaps “great” company that has weathered this crisis and you are poised to be ready for the upswing. 

Did you know that the average life of a corporation is only 14 years and growing shorter – not factoring in the impact of the recession?   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," and several other books.  He has conducted extensive research into the factors that contribute to building great companies. He contends that generally three major players will dominate every market.  Small specialty players end up filling niche markets.  However, any company caught in the middle will be swallowed up or destroyed.  McDonalds, Burger King and Wendy's or Nike, Adidas and Reebock are good examples of the rule of three.  I bet it’s hard to think of others except those in your neighborhood.  In Seattle, we have Dick’s, with only five stores, but always seems to be busy.

According to Jag, 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.

Predictably and unfortunately for many, as companies mature and cultural or economic situations change, if an organization is either unable or unwilling to change its culture, processes, systems and structure accordingly, it is likely to fail or be transformed (generally into something quite different than the founders imagined).

The research seems to suggest 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.

Effective leadership is all about anticipating and adjusting to external contexts and events.

Jag outlines 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 or this deep recession

To survive for 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 with which to work 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 Jag calls the "Tripod of Transformation:"

Mindset X Organization X Rewards

Most executives, however, only focus on one of the legs of the tripod of transformation. In fact, most executives believe that communication and education (Mindset change) will be sufficient to change an organizations behavior, e.g., "Here is our new vision, mission and values."

The other common tactic is to reorganize the leadership team, hoping that new leadership will create needed change, e.g., "We've just hired Bob from MegaStar as our new CEO," and he's going to save us...with the crew of executives he will bring with him.

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.

The key to building an adaptive organization is that you need to attend to all three factors.

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.

Please contact me if you are interested in learning more about how you can parlay all three factors within your organization.