Reasons for failure of performing companies

Most successful companies become successful almost by accident. They succeed by being in the right market at an opportune time with the right offering, and continue to do well as long as the environment doesn’t change. Even as human life expectancy is rising, that of companies is dropping. Many good companies routinely decline and a large number fail outright.

Microsoft owes its very existence and subsequent success to a series of decisions made by IBM. In 1990, IBM was looking for an operating system (OS) for its planned personal computer. IBM approached Microsoft a tiny Seattle company only because the chairman of IBM and Bill Gates’ mother both served on the national board of the United Way. Microsoft had no OS to offer IBM, but was able to acquire unlimited distribution rights for an OS from another Seattle company for all of $25,000. It later paid an additional $50,000 for all product rights and proceeded to make billions by licensing it not only to IBM, but all PC makers, for $40 a machine.

The companies succeeded because of a combination of circumstances, they are likely to fail when conditions change, especially if they are unable or unwilling to adjust their culture, processes systems and structure.

Internal causes of failure:

For many companies, success breeds failure; they become complacent and even arrogant. They become highly rigid with their existing policies; procedures and culture that can create inertia for change. They accumulate costs during their growth phase that they are unable to reduce in tough times. They are often rife with infighting among functional departments which creates a negative impact on customers and employees.

Then there is lack of stakeholder orientation. Some companies become too focused on the interests of one or two stakeholders at the expense of others. The role of management is to ensure that a firm continues to satisfy the needs of all its primary (customers, employees, investors) and secondary stakeholders (community, suppliers, business partners) over a period of time. One signal that

a company is headed towards decline is when it loses emotional connection with its stakeholders.

External causes of failure:

Today’s company must embrace new technologies, outperform new competitors, and actively court new markets.

For years, everybody except GM and Ford have realized that with rising gas prices and heightened environmental concerns, buyers were moving away from all-wheel drive SUVs and other gas-guzzlers. Instead of developing more fuel efficient fleets, they offered generous rebates and no cost financing. But the new reality pushed buyers to more fuel-efficient competitors such as Toyota. Toyota’s US sales are now at pace with number two Ford, and its world wide sales will most likely surpass GM’s this year for the number one position.

The external environment of a company can change in the following ways:

1. Regulation: Sometimes, the deregulation of a regulated industry occurs too rapidly, leaving a company’s processes and people unprepared. Companies must learn how to anticipate, manage and respond to regulatory changes. They must work with their competitors to help craft forward-looking regulatory policies.

2. Investors: When investor sentiment changes toward a company, it does not have access to the equity market, and cannot therefore leverage its debt-to-equity ratio. Companies must continually assess their attractiveness to the investor community treating investors as customers.

3. Competition: The key issue here is the entry of “non-traditional� competitors. These often offer radically different (and usually superior) value propositions to customers. To continue to prosper in the face of such competition, companies have to be willing to make themselves obsolete.

4. Technology: New technology with superior performance cost ratio provides better customer value. Non-traditional competitors often enter an industry with new technology, though some may use the same technology that is widespread within the industry. Likewise, a firm’s “traditional� competitors may gain a significant first mover advantage by moving rapidly to embrace new technology.

5. Globalization: Industries inevitably go through a shakeout when they become global. The process is a gradual one and companies must develop effective offensive and defensive strategies to survive. Companies can position themselves to take advantage of the many new opportunities it opens up.

6. Customers: Some shifts in customer preferences can be traced to demographic changes such as aging, changing roles of women, or greater polarization of incomes. Others are due to cultural changes that may in turn be triggered by technology. Clearly, companies that fail to keep up with the changes their customers are going through will gradually lose them.

Companies that survive in the long-run are those that are able to dynamically adapt to these changing circumstances.

In conclusion companies must be dynamic to anticipate all environmental changes and prepare themselves to adapt to the changed conditions to be in the business and take competition in their stride. If a company is not geared up for this they are bound to fail leading to ultimate closure.