Why Successful Companies
Usually Fail
The dynamics of
corporate collapse are caused by three phenomena.
The
annals of business history are replete with the names of once great companies
that dominated an industry, only to lose pre-eminence and become shadows of
their former selves or even disappear. Understanding why powerful companies
fail and how to avoid such failure is one of the holy grails of business and
management research, not to mention having spawned an enormous and lucrative
consulting industry.
Yet,
the very fact that successful companies continue to fail is testament to an
incomplete understanding of the drivers of corporate demise. Some argue that
strategic outcomes and ultimately a firm’s future are determined by the
choices, commitments and actions of top management. In this logic, stellar
performance is linked to incumbent CEOs (think Jack Welch at GE, Lou Gerstner
at IBM, Alan Mulally at Ford or Andy Grove at Intel) as is poor performance,
even if the leader has only been in office for a short time (like Ellen Kullman
at DuPont, Fritz Henderson at GM, Christopher Galvin at Motorola or Jorgen
Centerman at ABB).
Another
school of thought puts the emphasis of corporate demise on an organisation’s
structures, processes and business models which foster rigidity and so make
adaptation and change extremely difficult, if not impossible. And finally,
proponents of Schumpeterian creative destruction attribute corporate decline to
a firm’s inability to adapt to a radically changing external environment –
which has become all too apparent across a range of industries from
bricks-and-mortar retail to publishing and communications in the face of
technological disruption.
While
all three of these arguments are compelling, none alone is sufficient in
explaining why and how companies fail – this calls for a more holistic view of
a company over its lifecycle. We have been very fortunate and privileged to
have such a perspective with over 20 years of research at Nokia Mobile Phones;
a business that shaped an industry it came to dominate with one of the
strongest brands in the world, only to all but disappear in a fire sale to
Microsoft.
“Ringtone: Exploring the Rise and Fall
of Nokia in Mobile Phones”,
our recent book which won the 2018 Academy of Management’s prestigious Terry
Book Award, charts and analyses Nokia’s journey. But our findings are relevant
far beyond the realms of Nokia’s experience in attempting to explain why
successful companies fail. We found that what leads a company down a
competitive dead-end is a combination of management volition, organisation
adaptation and industry evolution, with each playing a more or less prominent
role over time, and the interdependencies between them becoming lethal.
Management
choices
Management
choices obviously contribute to a company’s decline, but it isn’t just the
decisions of the incumbent management team that play a role. The seeds of
strategic stasis are usually sown by management choices made a decade or so
earlier. It is these decisions that lead to the heuristics, creeping
commitments and hubris that create a context in which future action is taken.
Strong
heuristics, particularly from the unconscious or unintended learning a company
experiences as it grows and overcomes crisis situations, become implicit
‘principles’ in decision-making. So, for example, in its early days, having
invested huge sums in technology development, Polaroid found there was a very
limited market for its expensive instant cameras and certainly not one large
enough to sustain the company. In the face of this crisis, Polaroid adopted a
film-first, ‘razor blade’ model whereby it sold cameras at cost but made a huge
margin (around 70 percent) on the film for its cameras. This simple heuristic,
that only film makes money, became entrenched and shaped future management
decisions for the next 30 years. Even though Polaroid recognised the need to
invest in digital technologies as early as 1985, successive management teams
framed the challenge too narrowly in terms of ‘printing’ digital images rather
than producing affordable cameras to capture images (as Japanese competitors
Sony and Canon were doing). After numerous CEOs, restructurings and ‘new
strategic directions’, Polaroid filed for bankruptcy.
Poor
and inadequate cognitive framing can also result from ‘creeping commitments’ –
past decisions to which a company becomes hostage and which sets them on a
direction from which it is difficult to deviate. Here, Nokia’s Symbian
operating system provides a good example. Initially adopted by a consortium of
mobile phone producers in 1998 in a bid to stave off the threat of Microsoft
entering the industry, over time Nokia’s commitment to and continued investment
in this device-centric operating system had a profoundly negative impact on its
ability to adapt to a platform and ecosystem approach.
Success
tends to breed hubris and this, in combination with the voracious appetites of
certain classes of shareholder, can lead to managers focusing on the
operational issues which will drive greater efficiency for the benefit of
short-term results and not long-term sustainability and growth. This is what
happened at IBM under the leadership of Sam Palmisano, who was so focused on
doubling shareholder returns every five years he failed to see, or acknowledge,
that the competitive environment was changing. With no response to this shift,
IBM was in serious trouble – although this wouldn’t become apparent to the
outside world until a few years later.
Organisation
adaptation
Management
choices lead to the implementation of structures, processes and business models
which if left unchallenged can result in dysfunctional rigidity and become a
formidable constraint to much needed adaptation further down the line.
At
IBM, it wasn’t long after Ginni Rometty succeeded Palmisano as CEO that the
depth of problems began to show. Fewer corporate customers were buying hardware
in favour of cloud solutions and ‘software as a service’ (SaaS) and this had a
significant impact on the firm’s performance. Yet IBM was trapped in a highly
integrated, symbiotic business model in which hardware sales were tied to both
high margin software sales and the proliferation of IBM consultants to install
and maintain this. For years, this business model had stifled growth
initiatives and made change extremely difficult. After brave choices and a
long, difficult and painful reorganisation, IBM is finally beginning to
re-emerge to fight in a new competitive environment.
Organisation
structures can prove just as big an impediment to much needed change as
out-of-date business models. Both ABB and Nokia found themselves mired in
infighting and intense internal competition due to matrix structures which
proved difficult (and ultimately impossible) to manage as different groups with
vested interests sought to protect their corners. In this scenario, under
performance pressure, misinformation from business groups tends to filter
upwards giving senior management a false impression of how a company is faring.
Combined with a lack of internal collaboration that prevents people from
‘connecting the dots’ which point to changes in the external environment, it
becomes clear how structure can play a large part in pushing a company towards
failure.
Changing
environment
When
the very nature of an industry changes, this is bound to result in casualties
and successful incumbent companies are perhaps the most vulnerable as they are
more likely to be locked into a co-evolution with existing partners, suppliers
and major customers when it comes to a vision for the future. In addition, both
management choices and the level of organisational adaptation will make it more
or less difficult for a firm to step out of its current business model and
recognise the environment around them is radically changing.
Neither
the board nor the management of Kodak understood how fast the environment was
changing from film to digital photography, and so management choices fatally reinforced
the importance of the core film business. With the support of IBM’s board,
Palmisano was so focused on increasing shareholder returns that he failed to
see the locus of competition was shifting to the cloud and on-demand. And Nokia
was so locked into its product-centric view of the industry, its management
couldn’t conceive of the platform-based future Apple and Google were
creating.
Weathering
the storm
While external
shifts in the nature of an industry clearly play an end-stage role corporate failure,
it’s the interdependencies between these changes, management choices past and
present, and the structures and business models a firm has adopted which
ultimately determine whether a company has the ability to ride that change or
be brought down by it. It is only companies that have made bad management
decisions and have poor organisation structures and business models that
succumb to the external forces of change.
Yves Doz
Read more at
https://knowledge.insead.edu/strategy/why-successful-companies-usually-fail-10001#DmROadJDkTqFOd31.99
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