By Anders Drejer & Christer Windelov-Lidzélius

Why do companies fail? Is it inevitable, caused by disruptive changes in the organisations’ environment or managerial sloppiness? Or can it be avoided? Interestingly, in a world where interest has always mainly been in the winners, we know a great deal about how companies fail. There are different views on what failure actually means and there is not necessarily agreement on how come that a company failed. For instance, not reaching explicit goals or even growing or earning less than the industry average may be perceived, by some, as corporate failure. We will, however, be focussing on the ultimate corporate failure – in which the company ceases to exist as juridical entity.

 

Fact and fiction about corporate failure

Beginning with the idea that corporate failure is the ultimate form of failure, bankruptcy, we reviewed 62 publications and models for corporate failure. We will spare you the boring details and sum up the key learnings instead.

First, it is a myth that corporate failure is the result of laziness on the part of top managers. The sayings “they didn’t want it enough” or “they didn’t try hard enough”, however tempting to utter about failed rivals, are simply not true. Research and experience show that during crises top managers work even harder and longer than their counterparts in other organisations.

So, then, why do they fail? Well, our second finding is that the hard-working top managers are busy doing the wrong things during a crisis. Consider the well-known example of Blockbuster, which eventually failed as it did not respond in time to the emerging industry of streaming and Netflix. The CEO at the helm, John Antioco, has been very explicit in his (self-)defence of his actions during the company’s demise. Antioco is enraged by claims of inaction and incompetence, and emphasises the immense workload which he and his teams took on, also blaming short-sighted shareholders for demanding that Blockbuster cut investments in digitalisation in favour of short-term results. He may well be correct.

 

Active inertia

John Antioco may well be right. The example of Blockbuster and many others follow a pattern known as “Active Inertia” or, in more popular terms, being busy shooting yourself in both feet.

In order to fail, first you need to be successful. Here, “successful” means that you, as a top manager/management team, create a so-called market picture (your perception of that market) that is in line with the realities of your chosen market. Based on this, you design processes to create value for your customers that they appreciate or even consider unique, and you acquire technologies and assets to support the value creation. Finally, out of the success emerges a set of positive values among your employees that carries the business model. The latter may be labelled corporate culture or the social reinforcement of practices that create success.

 

After all, the employees meet your customers every day and will be the first to sense that all is not well with the market picture

 

How do you fail?

Markets, indeed the world, have a tendency to change. The main reason for failure according to our research has revealed that instead of altering your market picture according to the changed market, you make your market picture a dogma. Something that is repeated more and more loudly but never questioned. For instance, in the newspaper industry there was a dogma for a long time that millennials would “grow up and become like us, the ageing, affluent executives living secure lives in the suburbs”. Alas, that did not happen. In 2020, the average age of buyers of Denmark’s largest newspaper is 63. It will be 64 in 2021. It easy to predict the outcome. But the dogma remains and remains unquestioned. Also, your processes cease to be directed at customers and become routines that are repeated for the sake of the routine, not for the customer. This internal focus has a tendency to create additional routines that do not create value for the customers at all and, additionally, are costly. Still, in this situation, you soldier on with your precious routines. Furthermore, your assets cease to be valuable and become ballast that weighs the company down. So, you own a great many buildings and trucks for distributing packages? How valuable are those assets, if drones emerge to disrupt the industry? Last, and worst, your employees lose faith in the business model and start finding new jobs and/or getting lazy or even destructive. After all, the employees meet your customers every day and will be the first to sense that all is not well with the market picture.

And what do you do? You make cost-cutting exercises and strategy processes, hire consultants by the numbers and work hard! But if you fail to ask the right questions, you are like a horse stuck in quicksand – the harder you try to get out of your predicament, the deeper into trouble you will get.

 

Kaospilot Publishing launches a journal aimed at disseminating research, ideas and opinions about innovation and related fields. This piece is out is by Anders Drejer and Christer Windeløv-Lidzélius. It speaks to the fundamental need of renewal and development.

Also available through Spiro School of Business -The Innovation Series

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