Business Failure: Business Success Can Breed Business Failure

Business Failure: Business Success Can Breed Business Failure

Tombstone-of-Successful-Company

“Corporate failure is never the results of a random set of events. It is normally a reflection of deep-seated corporate shortcomings.”

 (Chartered Institute of Management Accountants, 2012)

Business Success Can Breed Failure

We have all heard about the stories of companies that once dominated industry but later fell into business decline. There are many reasons for this. The usual suspects for business decline include becoming to dependent on existing customers, the inability to adapt business models to deal with destructive technologies, the lack of leadership, and focusing on short-term financial performance all have led to business demise. One reason not often mentioned for business decline is the hindrance of learning at both the individual and organizational levels about the true causes of business success. Success can breed failure (Edmondson, 2011). Learning enhances your capacity to face and respond to situations. However, from the business success perspective:

  • We draw wrong conclusions about the business success. We believe our success is because of the strategy, the talent, or the business model used is the cause of the success creating a false premise.
  • We fool ourselves developing an overconfidence bias. Although faith in ourselves strengthens our self-assurance to make a decision and execute a strategy, it can also breed closed mindedness and foster a “well if it worked before, it will work again” rational, which is not considering environmental changes and just plain luck.
  • We do not fully analyze the causes of the business success.  We will ferret the causes of a failure because we have to know why something bombed. However, we will not devote the time and resources to find out why the company was successful—again maybe because of false assumptions.

When companies catch the upward draft of success, the arrogance of the enthusiasm kicks in. Not surprisingly, the virus of success can become fatal in five or ten years (Kolind, 2006).  Think of Research In Motion (RIM) and AVON, companies in decline. The downdraft winds of business decline are a factor of the business life cycle.  The death cycle of business decline encompasses three factors: company size, company age, and company success.  One of these three factors can result in increase in:

  • The number of layers in management
  • The number of departments
  • The amount of formal procedures
  • The length in time the long-term planning process
  • The number of budget items
  • The amount of meetings
  • The quantity of reports

A problem is when the company loses its mojo. Success blinds management and causes lose touch with its customers.  Bureaucracy grows, information gets filtered and delayed, and arrogance breeds. Unfortunately, management will begin blaming others for performance slippage when the company begins to slide due to the downdraft of business failure.

Recommended actions include:

  • Question the causes of business success and failure.  Do not get stuck looking at the symptoms.
  • Do not get enamored at a cult personality be it CEO, advisor, leader or expert.  Question decisions and recommendations.  Remember, there is no such thing as a stupid question.  What is stupid is when you fail to ask the question.
  • Have strong, independent advisors and directors.
  • Complexity is the “fog of noise designed to hide reality.” Find and streamline to clarity.
  • Align pay and remunerations with risk.

References:

Chartered Institute of Management Accounting. (2012, February 15). Understanding the causes of corporate failure. Retrieved December 15, 2012, from Financial Management: http://www.fm-magazine.com/feature/depth/understanding-causes-corporate-failure

Edmondson, A. C. (2011). Strategies for learning from failure. Harvard Business Review , 89 (4), 48-55.

Kolind, L. (209). The second cycle: winning the war against bureaucracy. New York, NY: Pearson Prentice Hall.

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