Source: Makridakis, S. G. (1990). Forecasting, planning, and strategy for the 21st century. NY: The Free Press. (Chapter 11)
Failure is a natural process, observed in both biological and organisational systems. In this chapter, different types of failure are illustrated and the most common factors that contribute to failure described. Delaying or avoiding failure is discussed as a conscious organisational process requiring a clear understanding of the factors that cause failure and the ability and willingness to do something to avoid their negative consequences. The need to recognise permanent environmental changes and the critical tasks of learning and adaptation to such changes are stressed. Finally, the statement that success breeds its own failure is explored and the implications discussed.
Charles Babbage was a genial British engineer. He created the speedometer, the actuarial tables for the insurance industry, the cowcatcher for the railroads, and several other important inventions. In 1822 Babbage started building the first computer. The principles of his computer were the same as those of modern computers, yet Babbage had neither electricity nor electronics at his disposal to put his theoretical design into operation. That did not prevent him from building a full-scale computer, which consisted of an intricate collection of steam-powered cranks, gears, pulleys, and levers. It is exhibited in a museum in London. Babbage's mechanical computer was ingenious. It included the idea of programming, a central processing unit, memory, and means of information input and of printing the output. Babbage worked on his computer until he died in 1871. He spend all his money, a $34,000 grant (the equivalent of about $10 million in today's dollars) from the government and large sums made available through his friends, to build his computer. His house was full of a series of half-completed models of his visionary creation.
Babbage's work on mechanical computers was a total failure, as the tolerance required for accurate processing of information were far beyond the capabilities of the best of machinists and metallurgists of his time. Babbage was a prophet of the modern computer. More than a century and a half ago he foresaw the value of such a machine and tried his best to build it. Unfortunately, his timing was off by a little more than 120 years. Had he lived a century later, Babbage might have been successful and ahead of everyone else in producing a workable computer.
AM (Addressograph-Multigraph) Intentional was created in 1930. It developed, manufactured, marketed, and serviced a wide variety of business machines and related equipment, including embossed-metal address plates and duplicators capable of printing a whole page in a single stroke. Until the early 1960s, AM was considered one of the best managed companies in the business annals of the times and darling of Wall Street, included in most blue-chip portfolios. In 1946, for instance, AM's sales were close to one-fourth of those of IBM and seven times those of Xerox.
The management of AM International first ignored photocopying and the changes being brought about by electronics during the late 1950s and 1960s. The executives considered photocopying too expensive to replace their cheap duplicating machines and concluded that the new technology in electronics was but a passing fad with little practical value for their own business. They were convinced that no competitor could uproot them; after all, they had a formidable network of suppliers and maintenance centres both in the United States and abroad, providing them with impressive competitive advantages. In the middle 1960s photocopying started making serious inroads into AM's business; and its management suddenly realised that something had to be done. Its response was to overreact to the emerging technological threat. New products (automatic duplicators, copiers, electronic communicators, automatic printers and others) were rushed to the market. They were misconceived, barely tested, misplaced and targeted to the wrong segment. The results of the R&D and marketing efforts were disastrous, further aggravating AM's financial problems, as sale had stagnated and profits flattened. In an effort to show growth, AM's management went on an acquisition spree, but that did not help either. The companies bought were not carefully chosen and were scattered in too many unrelated fields. They had to be resold to raise needed cash and to retrench to AM's main business: duplicating. By then it was too late. The new photocopying technology had rendered mechanical duplicators obsolete, and with them AM International, which filed for bankruptcy under Chapter 11 in April 1982.
Western Union was founded in 1856. Its telegram business was a monopoly that grew and flourished for most of the first half of our century. It also provided a high rate of return and substantial dividends for its shareholders. Western Union was the high-tech company in the early part and this century and did reasonably well until the 1960. The decline started in the early 1960s. It was slow and persistent, as long distance telephone rates dropped and new forms of communication were discovered (telex, electronic mail, overnight delivery, and fax). More aggressive companies appeared, and Western Union lost its monopoly position and its accrued competitive advantages. Management did little to correct the situation. Somehow it was felt that nothing could be done or that there was no need to do anything, because nobody could threaten Western Union's basic business. The company managed to show reasonable profits during the 1960s and 1970s. In the early 1980s Western Union's problems started accumulating and its cash flow deteriorated. In 1984 the prospect of bankruptcy first appeared on the horizon, but reorganisation was averted when a group of banks agreed to lend the corporation $100 million. At that time stock dropped to $9 from a high of $47 less than a year earlier. The attempted turnaround was not successful. The downhill trend continued until December 10, 1987, when Western Union's slow, steady decline led to bankruptcy proceedings under Chapter 11.
A somewhat different story of failure is that of WOW (Worlds of Wonder). In 1986 WOW's revenues from toy manufacturing were close to $100 million after only six months of existence. In 1987 revenues jumped to $327 million. Stock was valued at $29 a share when the company went public in 1986. WOW was growing fast in a high-margin market. It became a Wall Street favourite because of its imaginative toys that kids loved to play with and its marketing skills in distributing and pushing such toys. By early 1987 WOW employed 900 people and was planning to market more than a hundred new toys. Success ended abruptly, even faster than it had started. In March 1988 WOW went into Chapter 11 proceedings. Its staff was cut to 130 and its stock plummeted to one dollar. Early success had made WOW management overly optimistic and resulted in overstretching the company's resources and capabilities. Had WOW managed its growth and set more realistic goals, it would probably have remained a highly successful toy manufacturer.
Extent of and reasons for failure
Failures abound. Even though they might outnumber successes, they are somehow less well known. People obviously do not like to talk about their failures; often they hide or rationalise them, or they pretend that nothing has happened. Writing about failures is not as easy as publicising successes; the person blamed for failure can sue the writer. The public doesn't want to read about failures, having far more interest in heroes and success stories. Apart from failures that bring laughter (the Woody Allen type) and some spectacular ones that get a lot of publicity, little is made of the phenomenon. From a rational point of view, failures should be publicised even more than success. It might even be worthwhile to create a "museum" of failures where they can be studied with a view to helping future generations learn how to avoid similar ones.
The extent and persuasiveness of failure can be inferred from the following statistics collected from various sources:
· Between 35 and 80 percent (depending on the specific study) of new products fail ever to make a profit.
· More than half of spending on new products is used for products that never made it to the market.
· On average it takes eight years until corporate ventures become successful, while the majority of new ventures never make a profit.
· There were close to half a million business bankruptcies in 1988, a number that increases substantially during periods of recession.
· Personal bankruptcies grew more than two-thirds between 1980 and 1988, with about one person in every 250 declaring bankruptcy.
· For every successful corporate turnaround there are two that fail.
· In the automobile industry alone more than 1,500 firms have failed, including that of Charles Duryea, founder of the first automobile company; that of William Durant, the creator of GM, who founded his own company after he was ousted from GM; and that of John De Lorean, the charismatic auto executive.
· In the computer industry more than 300 firms have failed in the last twenty years.
· Texaco was fined $10.3 billion by a court, and in the end it had to pay $ 3 billion as an out-of-court settlement to Pennzoil.
· GM lost 12 percent of its market share between 1978 and 1987 (worth about $24 billion)
· In 1987 there were twenty-six U.S. companies with losses of more than $100 million
· In 1987 U.S. banks lost a staggering $5 billion -- close to 8 percent of their equities.
· In 1987, among the largest thousand global corporations, there were forty companies that accumulated more than $10 billion in losses.
· At least three people committed suicide following the stock market collapse of October 19, 1987.
Factors that contribute to failure
[Exhibit 11-1, omitted here, presents sixteen prominent failures including the Bhopal disaster. It also summarises the factors most likely to have contributed to failure and the consequences involved. Please see the book for the exhibit.]
In this section, the factors that contribute to failure are classified and elucidated, although the causes of failure are sometimes so diffuse that they can hardly be attributed to a single factor. In the remainder of this chapter various ways of delaying or avoiding failure are discussed.
Failure as a Natural Process
In the biological world failure is synonymous with death and is considered a natural event. There are no exceptions to biological failure. Living systems are born, mature, age, and die. Death cannot be avoided, although life expectancy among humans has almost doubled during the last hundred years. In organisational systems, however, failure or death is not as certain or as regular. Some organisations (both profit and non-profit) manage to survive and prosper much longer than others, although until now no organisation has managed to avoid the effects of ageing and actual or relative decline. There are a few organisations whose life span extends more than a few centuries. Failure seems to be as natural among organisational systems as it is among living ones, although it does not show the same degree of regularity. Avoiding or delaying failure seems to be the exception rather than the rule. Large size, excellent management, and monopolistic or other advantages do not guarantee continued survival and actual or relative prosperity.
In an article entitled "It's Though Up There," Forbes concludes that only twenty-two of the one hundred largest companies in 1917 were also included in the 1987 list. Of the remaining seventy-eight, the majority had ceased to exist as companies, while the reminder had dropped well below the top hundred. For companies below the largest hundred on the list, survival becomes even tougher and prosperity more difficult, as smaller companies are swallowed by larger ones or fade away for lack of sufficient resources to attain economies of scale in production, marketing, and R & D.
In addition to a considerable turnover among firms, whole sectors and industries also are born, mature, age, and die. Until the turn of the century agriculture was the most successful sector. It was then replaced by manufacturing, which in turn is being overshadowed by services. Within sectors, there are also growing, maturing, and declining industries. In the last century small textile firms prospered. In the earlier part of this century mining and automobile companies did well, followed later by chemicals, steel, tool manufacturing, construction, aluminium, and aeroplane construction companies. Today the "best" industries are high-tech, including computer, pharmaceutical, and service industries. In the future the growth industries might be biochemical or genetic engineering, artificial intelligence, superconductors, high-speed trains, supersonic aeroplanes, or space industries. In the service sector, the growth industries might be entertainment, vacations, tourism, education, caring for the old, and research. As new technologies emerge, the growth patterns shift and new industries and firms appear and prosper. At the same time the older ones become less competitive and lose their real or relative advantages. Although many of the older industries can operate for a long time after new technologies appear or consumer attitudes change, they lose their dynamism and their potential to generate adequate returns on investments. As they eventually slow down, they are merged into other companies, are bought out, or stop operating anything. This S-curve pattern of birth, steep growth, plateau and eventual decline can be observed in a great many cases, including technologies, products, services, companies, and, as we have said, even industries and whole sectors. S curves, the equivalent of biological birth, maturity, old age, and death, seem inevitable unless something is done to reverse their natural course.
Western Union, mentioned earlier, is a perfect example of a failure brought about by "natural" causes. Western Union was unable to adapt to environmental changes. It became obsolete and basically died. As a group, the steel industry has also declined because of "natural causes," as new technological developments have provided cheaper and better quality substitutes for steel.
Organisational Arteriosclerosis
As organisations grow older, their managements and the organisations themselves usually become more conservative and more bureaucratic. Conservatism results in resistance to change established ways of doing things. That is particularly true for successful organisations whose founder or top management see little reason to change established goals and directions or the way the organisation operates. Henry Ford's insistence on continuing to manufacture the Model T when consumer preferences had changed is a prime example of the inability to recognise the need to alter goals and perceptions when the market or the economic environment has changed. In addition, increased size brings more bureaucracy, which diminishes individual initiative and emphasises control and formal procedures over effectiveness and efficiency. The examples of GM, AT&T, IBM, and many other large companies come readily to mind. Although formal policies and written procedures and necessary to improve control, overemphasising them hampers decision-making and results in diminished dynamism, which in turn becomes the point of departure for eventual relative or absolute decline.
Organisational arteriosclerosis accelerates the failure brought about by natural causes. Conservative and bureaucratic organisations often ignore technological or environmental changes by believing they are temporary fads that will not affect them. Exhibit 11-1 (omitted here) contains failures caused by an inability or unwillingness to innovate and compete effectively with companies using new technologies or new ideas. For instance, a common response of conservative, bureaucratic organisations is to wait until others innovate so as to determine whether or not there are economic benefits to be obtained by following the innovators. Although such a strategy is much better than ignoring changes altogether, it is not without potential long-term problems, as early innovators can accrue advantages and shape the market in desired directions. IBM's difficulties stem partly from its unwillingness to be a technological innovator, letting others play that role. As the cases of Cray and Digital Equipment in the mainframe market and Apple and Compaq in microcomputers have illustrated, such a strategy is full of long-term dangers. As Cray, Digital, Apple, and Compaq have established their reputation for technological excellence, they have been able to translate that reputation into higher sales. At the industry level, the steel companies lost their ability to innovate and let aluminium and other lightweight materials take away demand for steel. That could have been avoided had the steel companies started much earlier to compete actively with steel substitutes by reducing costs and innovating with new manufacturing processes and higher-quality products.
General Motors provides a good example of a company that is failing because of conservatism bureaucracy. GM, the biggest and most integrated of all the automobile companies, cannot effectively compete in today's fast-changing car market. Its decline, which started much earlier, has greatly accelerated during the last decade. GM's ambitious business strategy of redesigning each of its cars and modernising each of its factories failed miserably. Eight years and $70 billion later, GM is no longer the lowest-cost manufacturer among automobile companies but the highest-cost one. Its integrated factories and high technology are hardly more efficient than the old system, and all its cars look alike. Locked into heavy investment plans, GM continued spending in the expectation of profits and a recapture of its lost market share instead of questioning whether its modernisation strategy made sense. Today things are changing at GM, but whether they are changing in the right direction and fast enough to keep up with competition still remains to be seen. GM's bigness, bureaucracy, and conservatism have decreased it flexibility and have brought to this once-excellent company what I have been calling organisational arteriosclerosis.
Being Dazzled by New Technologies
Although some organisations are unable to innovate, others fail by attempting to innovate too much or too early. It can be done by introducing new products or new technologies that are not economically viable, Schnaars regards this as the main reason for what he labels managerial megamistakes: decision-makers seduced by the alleged wonders of new technologies and the potential profits they will bring if exploited faster than by competitors. Consumers are resistant if changes are not justified by lower prices or added benefits. But the advocates of new technologies (picturephones, moving sidewalks, three-dimensional TV, three-dimensional cameras, dehydrated foods) have tended to overestimate their concrete benefits in comparison with existing products while underestimating the costs, which depend heavily on the amount being sold. Demand cannot increase until prices go down, which creates a chicken-or-egg situation in which prices must decrease in order to demand to increase, but costs (and prices) cannot go down unless sales go up and thus reduce costs and decrease prices. Hence organisations must walk a tightrope. They must determine when it is profitable to innovate while at the same time guarding against premature or uneconomical technologies.
Once they are commercially profitable, new technologies increase demand and provide large opportunities for growth and profit. Such growth and profit potential inevitably attracts competition and causes many failures. In the computer industry alone more than 300 major firms have failed in the last twenty years. Today the computer industry is concentrated in a handful of firms, which hold large market shares and make huge profits. But failures have been legion. A good illustration of this point is Xerox.
In 1968 Xerox bought SDS (Scientific Data Systems) in an attempt to diversify into computers. It paid $900 million, ninety-two times the 1968 SDS earnings, to purchase the company. Poor management, inadequate resources, and open rivalry destroyed SDS's envisaged role and resulted in poor results. SDS lost considerable sums in 1970 and 1971. The losses increased in 1972, 1973, and 1974 (totalling more than $130 million). Xerox's venture into the computer business proved exorbitantly expensive. In July 1975 the board unanimously resolved that the purchase of SDS was "a mistake" and decided to get rid of its prominent investment. The write-off necessary to get rid of SDS amounted to just under $1.3 billion.
Taking Risks
Taking risks is usually necessary in order to succeed, particularly if success on a big scale is sought. At the same time, risk-taking can lead to financial and other difficulties and can result in big failures. New and smaller firms must do something different from established or larger companies if they want to establish themselves and gain advantages over their powerful competitors. This often involves trying new, untested technologies, investing in new markets, and taking higher risks than seasoned firms do. At the same time, new firms are usually hard-pressed for working capital (cash). Everybody is aware of the successes of Polaroid, Xerox, Compaq, or Apple today, but those companies had to take considerable risks and overcome huge obstacles at the initial stage. Large, profitable companies can also get into serious difficulty or even go bankrupt by taking risks, pursuing new products, or going after untested technologies. The pressure to maintain high growth rates is usually responsible for such risk-taking among large, successful companies.
Bank of America, once the dominant firms in the world banking system, also fell victim to too many unnecessary risks. Its management gave priority to size and growth at the expense of quality and soundness of investments. During the 1970s Bank of America reaped record profits by globalising its reach and lending to giant corporations and Third World countries. Gambling on a fall in interest rates during 1979 and 1980, it increased its mortgage sales. The rates rose, which resulted in a $3.5 billion loss. Unexpected loan losses, expensive computer breakdowns, unsuccessful take-over attempts, and employee involvement in consumer fraud cases all contributed to ethical problems and enormous overall losses. On top of that, many of the bank's loans to Third World countries had to be written off or discounted, which further increased its heavy losses. Today the bank's share of loan problems is still proportionately higher than that of most other big banks. The bank faced a $915-million loss for 1987 and continued having serious problems in 1988 and 1989.
Over-extending Resources and Capabilities
Initial success can lead to grandiose goals of uninterrupted success and rapid growth, which can either overextend the organisations resources and capabilities or lead to a situation of unmanageable growth, both of which can contribute to problems and eventual failure. The example of WOW, listed earlier in this chapter and several other failures listed in Exhibit 11-1 (omitted here) fall into this category. A prominent recent case in Carlo De Benedetti, the Italian financier, who launched an acquisition campaign in the 1980s using the booming European stock exchange to assemble a multi-billion-dollar empire. Using small equity holdings, he grabbed control of extensive assets, ranging from computers (Olivetti) to pasta (Buitoni). At the end of 1987 the sales of his empire were about $14 billion and its market value, despite the crash, was almost $10 billion. However, Benedetti's raid on Société Générale de Belgique, the Belgian holding company, which he hoped to make the centre of his vast European industrial holding, failed. Although he invested $1.6 billion, he emerged with only 45 percent of the company's shares, making him a minority shareholder with no board representation. A rival, Compagnie Financière de Suez, managed to take control of Société Générale. Benedetti misjudged his opposition. Some associates expressed the opinion that Benedetti had "spread himself too thin," and others said they felt he was overconfident. At the same time the European Corporate Community bitterly resisted his brash, American-style hostile take-over tactics. Rivals were surprised at how poorly the bid was executed, since he had a head start by beginning in January and by paying more per share than the stock market value. But he lost big in terms of management time, money, and prestige by overextending his resources and capabilities while underestimating his opponents.
Being Over-optimistic
Being overoptimistic is a common judgmental bias that can lead to serious problems, as difficulties are underestimated and future uncertainty ignored. Successful entrepreneurs often see themselves as gamblers and feel that they must take risks in order to succeed in situations where the odds are against them. Such success becomes a special reward of its own and an external recognition of their ability to recognise and exploit opportunities. Thus they can defend their unnecessary risk-taking with an overoptimistic outlook. They underestimate the dangers and overestimate the benefits. They say, otherwise they would never have attempted to take such high risks and built successful empires.
Genex was commonly believed to be destined for great success in genetic engineering. The idea was to use genetic engineering techniques to make specialised chemicals needed in the manufacture of consumer and industrial goods. The idea helped the firm to raise $50 million in venture capital. Genex's board of directors came from IBM, Scott Paper, Emerson Electric, and other leading companies. After going public in 1982 and becoming a "hot" stock to buy, Genex saw its market value fall from $300 to $30 million in a few months. Genex had hoped initially to sell to Searle Corporation the key ingredients of its sugarless sweetener in bulk quantities. By doing so, Genex expected to generate quick cash, which it could use for working capital while at the same time starting to work on other specialised chemicals for long-term profitability. But Searle decided to manufacture the sugarless sweetener itself, as Genex had not secured a patent for its new products and had also failed to secure a long-term supply contract from Searle. Without a buyer, Genex's sales fell 39 percent in 1985, and the firm lost $16 million. In 1986, burdened with idle capacity, Genex lost $12 million more on sales of only $3.3 million, all of which came from contract research. Using high technology to produce an unpatented commodity product that could be made just as easily and cheaply elsewhere proved to be overoptimistic behaviour.
Ignoring or Underestimatig Competition
Ignoring or underestimating competition can lead to serious problems and eventual failure. First it must be assumed that existing competitors will constantly attempt to gain market share or other competitive advantages, especially at the expense of successful, profitable firms. Second, it must be accepted that new competitors can enter the industry taking market share away from existing firms. Third, it must be recognised that technological developments (aluminium replacing steel, or plastics replacing aluminium) can allow substitution effects and in so doing change the boundaries of the market, thus bringing in new competitors from outside of what was considered to be a certain industry. Fourth, it must be acknowledged that foreign firms and the globalisation of trade can change competitive forces and patterns in fundamental ways.
Examples of companies that underestimated the response of their competitors abound; the Pepsi-Coke, McDonald's-Burger King, and Gillette-Bic wars are examples. Yamaha underestimated Honda's response when it decided to challenge Honda's leadership and become the world's top manufacturer of motorcycles. Honda counterattacked furiously by introducing many new models and slashing prices so drastically that the weaker Yamaha could not respond. When the war was over, not only had Yamaha gained nothing, but also it had lost its second position to Suzuki and become a distant third. Similar counteractions can be provoked even from much weaker opponents whose response is underestimated. The military defeat of the U.S. army in Vietnam and the forced Soviet "withdrawal" from Afghanistan were mostly due to an underestimation of an opponent's will to respond to superior force.
PREOCCUPATION WITH THE SHORT TEAM
Too much preoccupation with the short term can create serious problems in the long term that could lead to failure. Many critics mention this as the main reason for the decline of U.S. firms in relation to Japanese ones. Investing in people, improving the quality of products or services, nurturing long-term customer relationships, adequate R&D spending, introducing new technologies, and the like might reduce short-term profits and put a strain on cash flows, but they are necessary to maintain or improve long-term competitive advantages. Critics argue that there are areas emphasised by the Japanese which frequently become the critical determinants of their success. Along the same lines, critics charge that U.S. companies are too concerned with, and driven by, short-term financial performance and how Wall Street will react to their short-term earnings.
Revco D. S. is an illustration of how short-term motives can lead to failure. In the hope of improving short-term profitability, Revco's management embarked on an uncontrolled expansion drive and took too many risks. In 1983 its vitamins were blamed for the deaths of thirty-eight infants. In 1984 another company was bought to avoid a hostile take-over, but the take-over danger was not eliminated by its shortsighted actions. Revco's CEO was obliged to arrange a leveraged buyout, which greatly increased Revco's debt and eventually forced it to apply for Chapter 11 proceedings.
BELIEVING IN QUICK-FIXES
Many problems facing organisations cannot be corrected easily and quickly. Some of them are deeply rooted in the corporate culture. Others might involve managing and rewarding people, managerial skills, or the organisational structure and strategy, while others might stem from the fact that the firm is operating in a mature or declining industry. A belief that a new theory or a highly paid consultant can quickly correct such problems is naive and can even further aggravate them. Solving these problems requires a long-term outlook, persistence, and some fundamental changes in what Kilmann calls the five areas (organisational culture, management skills, team building, strategy-structure, and reward system) that determine organisational success or failure in the final analysis.
Pan American World Airways is just one example of the quick-fix's failure to work. Pan Am suffered huge losses as a result of the deregulation of the airline industry. Deep in debt and with little prospect of making a profit from its airline business, Pan Am chose to sell off most of its profitable assets, which included a centrally located New York building and the Intercontinental hotel chain. As its losses continued, it sold off some of its profitable routes to other airlines and was ultimately left with no non-airline assets and only highly competitive routes. Management failed to realise that selling the airline business might have been the best way of getting rid of losses and achieving long-term profitability.
BELIEVING IN BARRIERS TO ENTRY
Large, successful organisations believe that their size and financial might are adequate deterrents to competition. Firms with monopolistic or oligopolistic advantages also think they can keep competitors away. History has shown that no barriers can be effective in the long run, as competitors, attracted by high profits, will always find ways of overcoming them. IBM's great advantages and formidable barriers did not stop competition. The oligopolistic power of the U.S. automobile firms did not stop imports. OPEC did not manage to impose its will and maintain high oil prices, although it could control a large part of oil production.
OVER-REACTING
Once things start deteriorating and the prospect of failure becomes real, overreacting is a common response. The actions of AM International, described earlier, are typical of firms that suddenly realise the magnitude and severity of the problems facing them and attempt to solve them without thinking carefully about the consequences of their actions. In the same category are high-growth companies that see their growth flattening and the price of their stock suddenly falling because of forecasts predicting reductions in the future growth of their earnings. To reverse the trend, such companies often overreact by diversifying into high-tech industries or introducing new products aimed at exploiting new needs or creating new markets. Such actions often fail, however, because acquired companies are bought at a high price and new products do not live up to the expectations of the desperate managers looking for quick-fixes. The example of Xerox, mentioned earlier; the search for new high-growth, high-profit ventures made by ITT; the entrance of many companies into the computer market; and the expensive acquisition of biotech firms are typical of the urge to maintain high growth rates at any cost, often without proper consideration of the consequences.
THE PERSONALITY AND ABILITY OF THE CEO
In an extensive study of the decision-making process among top executives of large U.S. companies, R. B. Lamb explores the principal reasons why some of their decisions lead to failure. According to Lamb, the most crucial factor of all is the personality of the CEO and his ability to translate essentially simple ideas into workable strategies.
Some executives can destroy their organisations through autocratic management, which leads to high turnover among top executives (Lamb cites the example of James Dutt of the Beatrice company, who had a hand in changing three presidents in one division over a two-year period and three in another in a single year). Others cannot recognise or are incapable of changing the deeply rooted culture of their organisation (for example, John de Butts's attempt to change AT&T's culture after the deregulation of telecommunications in the late 1970s). Others can pursue unrealistic or misconceived strategies despite clear evidence that such strategies will lead to disaster.
Top management can also be responsible along with the CEO for failure. Groupthink and the inability to accept threatening evidence can lead to failure. The debacle of TV Cable Week is an illustration of involvement of the CEO and top management in a failure. TV Cable Week was the most heavily promoted magazine start-up in Time Inc.'s history. The company was planning to spend more than $100 million to make the project a big success. After five months of publication, Time Inc. closed the magazine. The direct cash flow loss was approximately $50 million, but the indirect damage was far greater: In less than two weeks the Time Inc. stock lost $750 million in market value. The magazine was developed in an effort to maintain high growth rates and earnings by pursuing new, potentially profitable, and high-growth projects. However, disconfirming evidence was ignored, as top management was not willing to accept the fact that its "pet" project was not going to be profitable. Grandiose goals were pursued. Top management rejected market testing and pushed hard to publish a magazine that had no chance of ever making a profit. In doing so, they transformed a failure into a disaster.
THE ROLE OF LUCK IN FAILURE
Such events as new technologies, new products, new competitors, recessions, changes in customers' preferences, political unrest, physical catastrophes, and the like that cannot be predicted can sometimes lead to failure. Because planning for such events is impossible or impractical, the failure they bring can be, at least partly, attributed to bad luck. Malcolm Mclean, the man who pioneered the concept of container shipping and changed the world of shipping with his company, Sea-Land Corporation, typifies what bad luck can do. He sold Sea-Land to RJR in 1969, created a holding company, Mclean Industries, and bought another company, "U.S. Lines." Betting on a rising demand for oil, Mclean bought twelve supertankers for $570 million. They were slower but more fuel-efficient vessels than his competitors were using. However, luck deserted him. The oil market collapsed starting in the middle of the 1970s, and oil prices increased, giving faster ships an advantage. Mclean Industries filed for Chapter 11 protection from creditors in late 1986, almost $1.3 billion in debt.
INCOMPATIBILITY
The fashion for diversification and large conglomerates that brought together diverse firms under a single corporate umbrella in the 1960s and early 1970s was reversed in the late 1970s and 1980s, when streamlining and restructuring to reduce costs became necessary. Examples of mergers and acquisitions that created incompatibility and thus led to failure are legion. The examples of LTV, ITT, and other monstrous conglomerates come easily to mind. Companies buying their way into the computer, aerospace, biotechnology, and other high-tech industries are also relevant examples of the inability to avoid failure through incompatible acquisitions. Diversification did not provide opportunities for synergy. Few benefits could be gained through these acquisitions. There was little or no know-how for running the firms being bought. If corporate top management interfered with the running of the acquired company, it had no expertise to contribute and could even make things worse. If it did nothing, no synergy could be gained, and its firms could go their own ways.
CAN FAILURE BE AVOIDED OR DELAYED?
Very few business and non-profit organisations have managed to survive for long periods. Most importantly, only a tiny percentage of them have maintained above-average performance for considerable spans of time. Organisations must therefore take concrete steps to reverse what seems to be the natural process leading to organisational arteriosclerosis and eventual failure. Some of those steps are described below.
UNDERSTANDING THE NATURE OF FAILURE AND THE FACTORS THAT CONTRIBUTE TO IT
Failure must be accepted as a natural process affecting all organisations unless some conscious efforts are made to avoid or delay it. That is not always easy too accept, as top executives tend to believe that their organisations are different from the majority and therefore cannot fail. Ways of rejuvenating organisations must be conceived and implemented. They should include fighting bureaucracy, continuously injecting dynamism into managerial and other personnel, and in general avoiding the factors that contribute to failure described in the preceding section.
RECOGNISING MISTAKES
Along with accepting the inevitability of failure, unless conscious efforts are made to halt its natural progress, mistakes must be recognised in order to avoid making similar ones in the future. Recognising mistakes is not an easy task. For one thing, in the Western culture mistakes are considered shameful and those making them rationalise them or hide their existence; for another, in many managerial decisions feedback is neither precise nor frequent, making it difficult to identify mistakes; finally, undesired outcomes do not always imply mistaken decisions, since unforeseen events and factors outside a company's control can be responsible. Learning about mistakes therefore requires an open attitude similar to that of managers in Japan, where mistakes are publicised so that others can learn to avoid them. Moreover, it must be accepted that those making them should not be penalised. Instead, procedures for evaluation of past decisions must be set in place and ways of learning from mistaken ones established.
Failure can result from the type of judgmental biases, which must also be recognised so that steps can be taken to eliminate or minimise their negative impact. The consequences of such mistakes (or judgmental biases) are amplified when committed by CEOs or top managers. In this case, recognising these mistakes is more difficult, for few people in the organisation are willing to tell top executives that they are wrong or that their judgement is faulty and biased.
DOES SUCCESS BREED ITS OWN FAILURE?
It is natural for success to produce arrogance and similar psychological attitudes among the executives of successful organisations. Such arrogance, in combination with the factors listed below, can slow down success, foster mediocrity, and eventually lead to failure.
· Inviting imitation. Successful companies must attract attention and become models for imitation by other firms in their industries, which attempt to reproduce their success and the factors that contribute to it.
· Motivating Competition. Successful companies earn higher than average profits, which attract new entrants on the markets and encourage the existing ones to increase their capacity or more forcefully compete for products and markets.
· Encouraging Segmentation. Existing competitors and new entrants might not be able or willing to compete directly, particularly if successful companies have accrued substantial advantages. They often choose instead the indirect approach of carving out a segment of the market in which they can specialise. Often such a segment is small and unimportant to the big company, but with time its importance grows or it serves as a base for obtaining experience and expertise, which are then used to expand to other segments and possibly the entire market.
· Stimulating Higher Fixed Costs and Possible Conservatism. Once organisations become successful, they must take several steps to maintain their advantage. Success might entail (1) paying higher salaries to keep their managerial and scientific personnel or hire new recruits; (2) investing more in R&D; (3) increasing fixed expenses by establishing structures and procedures to manage growth and maintain success; and possibly; (4) becoming more bureaucratic in order to be able to maintain and control their success.
· Cultivating Arrogance. Successful companies are often "impressed" by their own achievements, which tends to exaggerate their confidence in their ability to continue to be successful. It also leads them to underrate dangerously the capacities of their competitors to threaten or overtake them. They are likely to drop the low end of the market from strategic consideration as not profitable enough, which opens the door to segmentation as competitors move in to cater to the neglected part of the market.
Even when successful companies do not fail outright, there is a tendency toward average performance. Regression toward mediocrity is a historical fact that can be observed not only among business firms but also among non-profit organisations, the military, and, most notably, nations. To be avoided, it requires conscious, concerted efforts aimed at reversing the natural effects of organisational ageing and neutralising the other potentially negative factors discussed in this chapter.
THE PARADOXES OF FAILURE
1. At the societal level failure is a natural process allowing for renewal and continued dynamism, yet from an individual firm's standpoint failure leads to permanent problems and eventual bankruptcy or halting of operations, which must be avoided at all costs.
2. Organisations must adapt to environmental changes, yet they cannot be sure beforehand whether a change will be temporary or permanent.
3. Organisations must often take risks in order to succeed; yet risk-taking, by its very nature, can lead to failure. On the other hand, not taking risks can also lead to failure, as more aggressive competitors will be willing to take such risks and might succeed.
4. Organisations must innovate, yet premature innovation can lead to serious financial problems and other difficulties if the espoused innovation turns out to be uneconomical.
5. As organisations become successful and grow they have to become more bureaucratic to maintain adequate control, yet bureaucracy lessens individual initiative and hampers the effectiveness and efficiency of decision-making.
6. Organisations must use their accrued competitive advantages to achieve desired objectives, yet they should not overestimate their own importance or underestimate the ability of competition to overcome such advantages, especially over the long term.
THE CHALLENGE AHEAD
1. Reverse the natural tendency of organisations toward ageing and eventual decline.
2. Take calculated risks in order to succeed, but at the same time protect the organisation against failure.
3. Understand the major factors causing failure and take steps to avoid or delay their negative influences.
4. Overcome organisational resistance to change.
5. Avoid rigidity and bureaucracy without losing control.
CONCLUSION
Business executives must always walk a tightrope. Taking too many risks can be as bad as taking no risks at all. Failing to fend off competitive attacks might be as fatal as seeing danger everywhere. Delaying or preferably avoiding failure is a challenge of the highest order that must, along with success, strategy, and creativity, engage the time and efforts of top executives. The possibility of failure must not be ignored or downgraded just because it is an unpleasant subject. In my view failure requires as much consideration as strategy, creativity, and success. It is a natural process caused by organisational ageing and decline. History had clearly shown that organisational failure is almost inevitable unless something is actively done to delay or avoid it. Organisations must therefore constantly innovate and adapt. The greatest challenge facing executives is to know when and how fast to innovate and what changes to adapt to. Another serious challenge is overcoming the resistance to change present in most organisations so that the desired program can be implemented.___________________
