Business Failure isn,t often the result of mismanagement. And you will be shocked to learn that most high profile businesses failed during four major business passages: creating new ventures, dealing with innovation and change, managing mergers and acquisitions, and addressing new competitive pressures.
We analyzed some of the key business failures in the past decade and realized that precipitous business failures are caused by four destructive patterns of behavior that set in, without anyone noticing them, well before a business goes under.
Here are the four common syndromes that led to business failures for many.
- Flawed executive mind-sets that throw off a company’s perception of reality.
- Delusional attitudes that keep this inaccurate reality in place.
- Breakdowns in communications systems developed to handle potentially urgent information.
- Leadership qualities that keep a company’s executives from correcting their course.
These four destructive syndromes of business failures we discovered were breakdowns in how executives perceived reality for their companies, how people within an organization faced up to their reality, how information and control systems in organizations were mismanaged, and how organizational leaders adopted spectacularly unsuccessful habits.
Let,s head straight to the break downs. There are thirteen of them.Diving right in!
1. Brilliantly Fulfilling the Wrong Vision
And The special Forces moved in with remarkable efficiency. Every phase of the operation had been planned in advance. The soldiers couldn’t predict exactly how the opposition would respond, but the alternative scenarios had been thoroughly rehearsed. Each time an unexpected obstacle arose, the team know how to handle it. Their high tech communications system kept them in constant contact with each other. Their weaponry was devastating. By the time the operation was over, they had killed or captured everyone in the base they were attacking, suffering few casualties.
There was only one problem: The base they had captured belonged to friendly forces. The Special Forces neutralized the personnel they were there to support.
How did this happen? One suggestion was that the Special Forces had been dropped off at the wrong town. Another suggestion was that the target had been chosen by aerial reconnaissance with no one on the ground verifying the choice. Still another suggestion was that the base had been occupied earlier by enemy forces, but that the battle lines had recently changed.
Whatever the source of the error, the soldiers carried out the operation brilliantly. They were simply operating with a picture of reality that was obviously inaccurate.
Most business failures are like that. The real problem is that the company was carrying out the wrong operations. The real causes of nearly every major business failures are the things that put a company on the wrong course and keep it there. But there is one blind spot that appears somewhere near the center of almost every major business failure: a seriously inaccurate perception of reality among executives.
2. The Magic Potion for success
The most seductive of all strategic misintentions is the “magic formula.” This is what managers have fallen for when they let all their decisions be guided by one principle they believe is the secret to success.
Pursuing the magic formula leads managers to focus on one principle or one model to the exclusion of all others. It encourages one big bet that is often the wrong one. Most magic formulas attribute excessive importance to one single causal factor.
3. The Odds of doing the Impossible
Call it the Holy Grail. A Holy Grail in business failure terms, is a strategy that remains forever unattainable. Unlike a magic formula, which attributes excessive importance to one single causal factor, a Holy Grail attributes overwhelming importance to a causal factor that doesn’t even exist!
They are usually remarkable, but the truth is that they don’t exist.
4. The Wrong Scoreboard
A wrong scoreboard is simply an inappropriate measurement of success. A company using the wrong scoreboard might have a fairly realistic idea of what it is trying to do in other respects, but it has chosen the wrong indicator to judge how well it is doing. Any time company executives put too much emphasis on a barometer that doesn’t accurately reflect its true level of success, the company risks doing itself damage.
The most common example of wrong scoreboard is market share. In many contexts, of course, market share is an important indicator of how well a company is doing. But it doesn’t measure the value a company is actually creating, nor the value it can capture.
Lyft,s IPO in 2019 is the perfect example. Lyft did an admirable job of going public in a way that almost perfectly balances the interests of investors and the company itself.But in about a week since Lyft‘s (NASDAQ:LYFT) stock went public, many investors have rushed to judgment about the ridesharing company’s prospects for future success. The share price spent so much of this week below its $72 per-share offering price that Lyft quickly gained a label as a busted IPO. A rush of negativity about the launch sought to highlight the risks and less attractive attributes of the company.
5. A Different Game
A company’s perceptions of reality often become obsolete not because times have changed, but because it has moved into a new area where its version of reality is no longer valid. In an attempt to leverage its core competencies, it will attempt to apply those competencies to another market that seems on the surface to be very similar.
Toro went from building lawnmowers to manufacturing snow throwers, a natural extension of product directed toward potentially similar customers. Yet, the surface similarities – seasonal market, midrange price, homeowner customers – masked a simple, yet critical, difference. Grass grows, but snow does not always fall. Then, despite one snow-less winter, Toro continued to make snow throwers, only to be hit with another season without snow. As former Toro CEO David McLaughlin said, “We were blind to the risk.”
6. The Vague reality
What seems obviously false with the benefit of hindsight seemed obviously true at the time. IN fact, most cases, the false reality seemed so obviously true that no one thought to question it.
This is perhaps the biggest lesson of all.
If you want to catch your company before a mistaken picture of reality has done too much damage, you have to stop and question the things that seem obvious. You have to take the prevailing assumption, the things that go without saying and scrutinize them to see if they are really true.
But there is still something else to consider when it comes to evaluating pictures of reality – how long the reality will remain valid. To prosper for an extended period of time, a company needs to have an adequate understanding of what parts of its reality could change. What are the most common ways in which our perception of reality could be wrong?
7. The Wrong Competitors
One of the simple ways in which businesses inaccurately predict change is by focusing on the wrong competitors. Usually, this happens because executives assume that the companies that have been their main competitors in the past will continue to be their main competitors in the future.
8. A Static Business Model
What has this to do with business failure?
This means that they behave as though business in the future will follow the same models it has followed in the past. When a big change does occur, requiring the company to adopt a new business model, these executives are left totally unprepared.
9. Unrealistic Predictions of Change
Making sure that you’ve got an accurate picture of reality means verifying that the facts you assume to be true really are true. Making sure that you’ve got an accurate picture of what could change means making allowances for things you can’t know. It means distinguishing between business conditions that, for better or worse, are likely to remain the same and those that, for better or worse, are likely to change.
10. Price , Arrogance and the Evil.
Many of the executives we researched upon and whose businesses failed were not only arrogant – they were proud of it. People who dealt with GM and IBM in their glory days remember vividly the condescension with which these companies regarded everyone outside their ranks. Daimler-Benz had the same reputation more recently. Saatchi and Saatchi was the probably the most arrogant ad agency the world has ever seen.
The explosive growth of Mossimo, Oxford Health Plans and LA Gear was partly fueled by a belief that they were “rewriting the book” for their industries and hence, had little to learn from anyone. Webvan, Etoys, and most of the other dot coms made little secret of the disdain they had for traditional businesses.
Iridium’s arrogance was positively stratospheric, reaching, in fact, all the way into space.
The air of superiority such companies adopt gradually affects the way people inside the company behave, even among themselves.
“We’re Better Than You Are. Period!”
An Wang and his engineers at Wang shook their heads dismissively at each new product IBM introduced because they found these products so technically inferior to their own.
In addition to being unable to learn from other firms’ successes, companies with this attitude have no way to learn from other firms’ failures. They attribute such failures to the other firm’s overall inferiority. They didn’t recognize that these failures are often due to errors any firm could commit, and that these errors need to be consciously avoided.
“You can’t argue with success.”
And, as long as the company appears to be successful, there is little motivation to change. But, by the time it becomes undeniably obvious that the old model isn’t working and won’t start working again soon, the company’s fortunes are often past reviving.
Somewhat surprisingly, the same sense of mission that can lead a company to resist change can also lead it to make changes no one has asked for.
11. “Hell With Customer” Attitude. The Ultimate Business Fail
The single worst aspect of an excessive loyalty to the company mission is that it prevents companies from hearing what their customers are trying to tell them, perfectly apprehending the formula for business failure.
Having a “we are the experts” culture is a problem that can afflict any kind of company, high tech or low tech, if it has a vision of excellence that takes on a life of its own.
Even Starbucks, which has so far avoided the qualities of a zombie business, had a brush with this kind of thinking some years back when customers asked for skim milk in their coffee lattes. Senior executives argued that Starbucks high quality, dark roasted coffee did not taste as good with skim milk.
One executive even said that offering skim milk, “is not in keeping with the quality of our coffee. That is bastardizing it. It’s getting tot he point that we’ll do anything the customer wants us to.”
Businesses that let their sense of mission take precedence over everything else don’t just pay insufficient attention to their customers; they also pay insufficient attention to their suppliers, and this can be just as big of a problem.
Numerous dot coms failed to listen to what their suppliers were telling them about the costs of actually delivering what the dot coms were selling. Like hundreds of other companies blinded by their own vision, each of these organizations moved inexorably toward disasters hat could have been reduced or avoided if their executives had listened to what their suppliers were saying.
The swiftness with which a company will be called to account for not listening to customers and suppliers will depend on its competitors. Johnson & Johnson demonstrated this dramatically in its stent business. Cardiologist customers had asked for circulatory stents that were comparatively easy to handle, they were flexible, and that came in varying lengths. But J&J’s 90% market share and its “we are experts” culture prevented it from paying sufficient attention to its customers’ requests.
12. Aversion to Negative Feedback
A relentlessly positive attitude shuts critical information from outside the company.
In addition to shutting out crucial information from outside the company, relentlessly positive attitude suppresses the most crucial information from inside the company.
People will avoid mentioning unsettling information or ideas because bringing up such things sounds negative.
Any innovations that could result in big improvements will have to come from senior management because everyone else will be uncritically doing what they’ve been told. And when people are scared to draw attention to unwelcome information, it’s a slippery slope to becoming involved in cover-ups.
13. Inhuman Mania for perfection
When companies adopt internal metrics, they tend to settle into an almost irrational perfectionism. They aim for high standards in every operation without stopping to ask if these standards are appropriate. This determination to excel, regardless of whether it serves any business purpose, can easily get out of control.
As former IBM CEO Lou Gerstner said in evaluating the problems that beset IBM as it moved into its period of decline. “My view is that the company had been so successful for so long it stopped comparing itself with competitors and started gauging itself by internal measures. That’s a recipe for trouble.
The only way to find out if a new product or a new business model will work is to try it out. Companies in the grip of perfectionism are unable to recognize this. They can’t distinguish between failures due to negligence and failures due to something innovative that didn’t pay off yet. So, they tend to punish the “failures” associated with exploring new possibilities, taking reasonable risks, and offering innovative solutions.
In the worst cases, these companies make a habit of finding someone to “take the fall” for each failure. These policies discourage the kinds of innovation that companies most need to stay competitive and profitable.
Perfectionist companies are especially prone to excuse their failures by blaming them on “unforeseeable events beyond our control.” They’ll argue that failure was due to an unlikely combination of factors that won’t happen again for a long time. This would mean that, however large the failure may have been, it wasn’t anyone’s fault and there’s no need for major reforms.