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The Currency of Success - Interpersonal Intelligence™

Why Good Companies Fail: Catalysts, Reasons & Interventions

The economy is tough, but is getting better. I hear it from most of my C-Level clients. Now, the tone is, “We need to gear up so that we are not left behind as we emerge from the pandemic.” 

If you’ve been fortunate, you’ve built a good, perhaps “great” company that has weathered this crisis and you are poised for an upswing. Did you know, though, that the average life of a corporation is only 14 years and growing shorter? And that’s without factoring in the impact of COVID-19.

This briefing looks at

  • the catalysts that cause companies to fail,
  • reasons why companies fail,
  • and why interventions are sometimes misplaced.

I recall attending a seminar a few years ago where I had the good fortune to hear Dr. Jagish Sheth speak. Jag, as he likes to be called, is the Charles H. Kellstadt Professor of Marketing at the Goizueta Business School of Emory University, and the author of several books including “The Rule of Three: Surviving and Thriving in Competitive Markets,” and most recently ‘The Global Rule of Three: Competing with Conscious Strategy.’

The Rule of Three

Jag Sheth has conducted extensive research into the factors that contribute to building great companies. He contends that usually three major players will dominate every market – the generalists. The Coca-Cola Company, PepsiCo and the Dr Pepper Snapple Group are good examples of rule of three generalists. 

I bet it’s hard to think of other soda producers except those in your neighborhood. These smaller, niche companies are specialists. However, any company caught in the middle will be swallowed up or destroyed. 

According to Jag, good companies successfully emerge in the first place by being in the right place at the right time. He found that most successful companies start opportunistically….by accident, not by some brilliant design where people chart out their futures. Frequently, one key customer discovered the company, and the entrepreneur/leader took advantage of the situation. Microsoft’s ‘luck’ with DOS and their IBM negotiations is an obvious example. Humble beginnings…usually by accident, rather than by design.

Predictably and unfortunately for many, as cultural or economic situations change, a maturing company must evolve. If an organization is either unable or unwilling to change its culture, processes, systems, and structure accordingly, it is likely to fail.

Catalysts for failure

Research suggests 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,
  4. Globalization– expansion into new markets increases complexity,
  5. Capital markets– interest rates go up or down, for example, and
  6. Regulation – the government deregulates or adds regulations.

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

10 reasons why good companies fail

Jag identifies ten causes for failure. To survive for the long run, your organization must develop a culture that is adaptive and constantly monitors and responds to these ten factors. 

  1. Status quo management – senior management doesn’t want to rock the boat and change how things have always been done.
  2. Success breeds failure – management becomes arrogant and complacent, potentially alienates its’ customers or doesn’t understand the changing market demands.
  3. Neglect of emerging markets
  4. Non-traditional competition – niche players create new markets for example.
  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 technological advances
  9. Rapid deregulation
  10. Unexpected events – of which we are becoming quite accustomed.

Of the ten, dealing with ‘the cultural 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, cultural change requires three key transformations occurring simultaneously; what Jag calls the “Tripod of Transformation.

Mindset – Organization – Rewards

Jag’s tripod balances Mindset Change, Reorganization and Reward Transformation. Most executives, however, only focus on one of the legs of the tripod.

Mindset Change – Most executives believe that communication and education is sufficient to change an organizations behavior. How often have you heard, “Here is our new vision, mission and values”?

Reorganization – The other common tactic is to reorganize the leadership team, hoping that new leadership will create needed change. “We’ve just hired Barbara from MegaStar as our new CEO,” and she’s going to save us…along with the crew of executives she will bring in.

Reward Transformation – Very few executives focus on the reward system although, generally, it is the most effective strategy in bringing cultural 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, but 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 strong message that it’s ok to run over others on the road to success. Or, if your incentive systems use performance rankings where 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 legs of the tripod.

Changing too late

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.