Thursday, May 31, 2012

Why Do Companies Fail?

On May 27, 2002, FORTUNE Magazine ran a cover story on why companies fail. I kept that magazine and look at it every so often – which every corporate manager should do. It keeps me on my toes.

But perhaps some leaders need reminders. Thus, here are a few key points I plucked from that issue:

• Most companies founder for one simple reason: managerial error.

• The key sign – the litmus test – is whether you begin to explain away the brutal facts rather than to confront the brutal facts head on.

• Sometimes CEOs don’t get the information they need to make informed decisions. Subordinates are afraid to tell them the truth.

• Some companies simply live too close to the edge -- loading up too much risk at once.

• People are less likely to make optimal decisions after prolonged periods of success.

• Companies rarely bother to model what would happen if a key assumption — growth – disappears from the equation.

• Companies (e.g., Polaroid and Xerox) are slow to confront the changing world around them.

• Companies run out of cash.

• Too often CEOs succumb to an undisciplined lust for growth, accumulating assets for the sake of accumulating assets.

• Rotten corporate culture. Arthur Andersen, Enron and Salomon Brothers were all brought down (or nearly so) by the rogue actions of a tiny few.

• Even the most dramatic failures tend to be years in the making. What undoes companies is the familiar stuff of human folly: denial, hubris, ego, wishful thinking, poor communication, lax oversight, greed and deceit.

• Refusal to hear bad news immediately. Great companies don’t make excuses, including excuses about how they didn’t do well because the economy was against them or prices were not good.

The Chinese philosopher Lao Tse, who lived some 2,600 years ago, summed up the surest way to avoid these potential pitfalls. “People in their handlings of affairs often fail when they are about to succeed,” he wrote. “If one remains as careful at the end as he was at the beginning, there will be no failure.”

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