Why Good Companies Fail

By Carl Robinson, Ph.D., copyright 2004

So you've built a good company...perhaps even a "great" one and the future looks bright. Did you know, however, that the average life of a corporation is only 14 years and growing shorter. I recently had the good fortune to hear Dr. Jagish Sheth speak at the Mid-Winter Conference for the Society of Consulting Psychology. 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 also consults with Fortune 50 companies and others worldwide at the CEO and Board level. He has conducted extensive research into the factors that contribute to building great companies. He contends that every market will be dominated by three major players, with small specialty players filling niche markets, and any company caught in the middle will be swallowed up or destroyed. Think...McDonalds, Burger King and Wendy's or Nike, Adidas and Reebock.

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.

However, when the context changes and the organization is either unable or unwilling to change its culture, processes, systems and structure, it is likely to fail or get transformed.

Jag believes that there are 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.

Leadership is all about anticipating and adjusting to external contexts and events according to Jag.

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

To survive for the long run, your organization must develop a culture that is adaptive. He believes that cultural change is the easiest to work with 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 (structure) X Rewards

Most companies only focus on one of the legs of the tripod of transformatiion. In fact, most companies believe that communication and education will be sufficient (Mindset). E.g., "Here is our new vision, mission and values."

Some attempt reorganization as a starting place 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.

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.

If you want to learn more about why "good companies fail" and what you can do to keep your company on the winning path, I encourage you to read Jag's book. I provide a link to purchase it on my book recommendation page.