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.”

Talking About Yourself: The PR Impact

The impact of listening is stressed in a unique way in this blog, which appeared on the Institute for Public Relations website. I thought it was important enough to "reprint" below.


The blog was written by Frank Ovaitt, Executive Director of IPR, the leading research and education organization in the public relations industry.

Why do we get such a kick out of focusing on ourselves?


Thirty to 40 percent of human speech informs others about ourselves. Eighty percent or more of social media posts announce our own experiences or views. Nine-month-old babies already try to draw the attention of others to things they find important in their environments. Adults in all societies try to share their knowledge with others.

Humans are wired to disclose. In fact, a battery of studies by Diana Tamir and Jason Mitchell of the Department of Psychology at Harvard University found that talking about ourselves lights up the same brain pleasure centers as food, money and sex. We can't help talking about ourselves because it feels so good.

The full research article can be found in the Proceedings of the National Academy of Sciences.

If our brains so deeply enjoy it when we talk about ourselves, what are the implications for public relations? Sue Wolstenholme, chair-elect of the UK Chartered Institute of Public Relations (good friends but no relation to our own Institute for Public Relations), says, "We have to listen even more!"

Now you have an answer the next time a client or a senior executive wants to know why your social media strategy is less about pumping out company messages and more about hearing what your stakeholders have to say.

Identifying Company Influencers

Our partner public relations firm in Copenhagen, Kasper Westphal Pedersen, recently introduced me to a couple of principals from a management consulting firm there called INNOVISOR -- which has an interesting tool for identifying the most influential people and collaboration networks in companies. It is called Organizational Network Analysis (ONA) and it’s more effective than the traditional surveys used by many similar firms.


It was thus intriguing for me to see an example of ONA at work and how it really made a difference. ONA uncovers actual collaboration and influence networks across formal structures in the organization.

The situation, according to Jeppe Vilstrup Hansgaard, a leader of INNOVISOR, was the merger of two pharmaceutical companies to become one of the world's largest players. In its attempt to scale down, the new entity saw an opportunity for a 30 percent staff cut for economies in sales, admin and R+D, among other areas.

The objective was to retain key staff that people in the company preferred to collaborate with and those whose advice they sought when encountering professional challenges. ONA was applied to meet this objective.

The surprise? This amazing tool identified the most important influencers -- who were clearly not the five employees regarded as “critical change agents” by management of the pharma companies. ONA data revealed that those employees selected by management did not, in fact, have strong influence on colleagues.

Who was right? According to Jeppe, "The change agent identified by the ONA had seven times more influence among colleagues and, in addition, held a central 'broker position' between two clusters in the organization. Further analysis showed that none of the five management-appointed change agents were among the top 20 influencers."

This is a critical discovery for the future of the company and its productivity. It will influence work streams as well as how and to whom leadership and others communicate.

Rekindling an Affair

A May 15th New York Times editorial, "Ending An Affair?", noted that investors are shunning the stock market due in large part to market bubbles and the fact that investor trust has been destroyed as a result of scandals and reckless trading, including the recent $2 billion loss at JP Morgan Chase.


In the minds of some critics, the stock market has become nothing more than a huge global casino and, as in most casinos, the adage of the “house always wins” may apply. Remember: brokerage firms get paid when you buy or sell stock and now the issue of “rebates” (in which the exchanges pay brokers for referring business) comes to light via the editorial. The image of a casino and the gambler’s mentality that goes with it is reinforced by JP Morgan’s recent troubles. It is little wonder that people are turning away from the stock market in favor of more conservative fixed income investments.

Clearly, the nation’s various stock markets, most notably the NYSE and NASDAQ, need to do a better job at communicating the benefits of investing and how the markets work– not only for the individual, but for the nation as a whole. It should be remembered that the stock market serves a useful purpose and has funded railroads, technological breakthroughs, cures for diseases and so on. In an ideal world, a person invests in something that he or she researches carefully, with the expectation of a reasonable return. Sensible investing needs to be defined and the techniques communicated.

One of the interesting points in the Times editorial – that we face the risk of “a less robust market, with fewer companies opting to raise money by issuing shares…” — is particularly troubling to me. Fewer companies issuing shares equals less money for corporate expansion and, as we know, expansion helps create jobs which, in turn, help the economic picture. Apple, which celebrated its 36th anniversary last month, was at one time a small business started in a garage. Today, that company employs more than 60,000 people as well as hundreds of thousands more in various support or ancillary businesses.

Obviously, trust needs to be restored. The question is how. The typical response is more regulation. Is that the answer? We saw what more regulation did after the Enron and WorldCom scandals, which greatly impacted the willingness of companies to go public. Of course, regulation is necessary; however, it should be sensible as opposed to punitive. It is clearly time for the stock exchanges to defend themselves and make the case that they play an important part in America’s present and future.

Why Should Companies Blog?

There are LOTS of good reasons for one or more members of company leadership to blog. These include:

• Humanizing the company

• Enhancing visibility

• Building credibility and trust

• Establishing industry expertise

• Promoting products and policies

• Addressing important issues

• Generating leads … and business

• Defending the company against its critics

Who blogs? In all likelihood, your customers and competitors.

According to a recent survey by HubSpot.com, a marketing software company, businesses are now in the minority if they don’t blog. From 2009 to 2011 the percentage of businesses with a blog grew from 48% to 65%.

Increasingly, companies are recognizing the value of their blogs. Eighty-five percent of businesses rated their company blogs as “useful,” “important” or “critical.” A very significant 27% rated their company blog as “critical” to their business.

Therefore, it is not surprising that companies are allocating more resources to their social media initiatives. The average budget spent on company blogs and social media increased from 9% in 2009 to 17% in 2011.

Looking for Beacons of Trust

According to Edelman’s latest Trust Barometer study, over the past year, belief in the credibility of CEOs’ pronouncements has plummeted. Only 38% of respondents trust business leaders to tell them the truth…a huge 12 point drop over the course of just one year.


Trust is essential to a company’s bottom line. And you can’t just create trust; it has to be earned, one encounter at a time. Not surprisingly, therefore, the credibility of “a person like me” (cited by 65% of respondents) and “regular employees” (50%) is on the rise.

Every time a stakeholder has a good experience, it’s like a deposit in the “trust bank.” Every misstep is like a withdrawal. Rebuilding trust – a skillset that defines public relations – will increase the demand for our services in the coming years.

For the first time, the powerful and venerable investment bank, Goldman Sachs, provided more proof of the value of reputation in its form 10-K annual report when it added “adverse publicity” to the list of financial risks it faced in the years ahead.

As we all know, what’s inside is outside today. Everything that has anything to do with a company is a wide open book…everywhere in the world where there’s an internet connection. The Chubb Group of Insurance Companies now has public relations professionals on its list of approved vendors they recommend to clients in crisis situations – further proof of the importance of PR. That’s because increased exposure comes with greater liability, if you don’t actively monitor and manage it.

Is Technology Exceeding Humanity?

It takes a lot of chutzpah to say this … but I disagree with Albert Einstein. Specifically, I disagree with his quote: “It has become appallingly obvious that our technology has exceeded our humanity.”
On the contrary, there are lots of examples of technology that have unleashed our humanity. For example, members of the social network site, Reddit, raised $65,000 in less than 24 hours to protect the children and staff at the Faraja Orphanange in Nairobi from machete-wielding thugs.

Technology and the internet are part of nearly everybody’s lives today…not just members of the Millennial generation, nearly 95 percent of whom are Internet proficient.

Seventy-eight percent of U.S. adults — some 245 million of them — currently use the Internet; and that number is expected to grow. Last February, President Obama called for a National Wireless Initiative to make high-speed wireless services available to at least 98 percent of Americans. If he succeeds, it would mean that more Americans have internet access than own an electric coffee maker.

I would contend that as we increasingly become an extension of technology, the human connection becomes more — not less — important. We must not succumb to the lure of the PDA and mistakenly substitute that for the human-to-human relationship.

When it comes to certain technologies — for example, the development of new tools for warfare — Einstein was absolutely correct when he said, “Our technology has exceeded our humanity.” On the other hand, I hope it never becomes true in the case of communications technologies. If so, we will truly have lost a great opportunity for humankind … and our business.

CEOs: Getting Back To The Front Line

Today’s guest blogger is Andrew Goldberg, head of the change management practice at Makovsky + Company.

One of the more shocking bits of research I have come across was a study by the Boston Research Group, which surveyed thousands of employees at all levels across the US. The study showed that close to 97 % 0f employees felt they operated in top-down, command and control systems. Over half felt that their leadership attempted to be motivational—a carrot and stick approach to getting tasks done. Yet we know from plenty of experience that incentivizing the implementation of top down strategy is no substitute for growing a business through active engagement of the managers and employees who operate on the front line, the actual point of engagement with customers, employees and the other stakeholders of one’s business. Why, despite the reams of data and case studies, and incalculable numbers of management attention, is there still such a detachment between top management and the front line? What does it take to overcome this disconnection?


One main reason is that CEOs disconnect from their organizations, and focus more on financial engineering than on innovation. When companies stop innovating, their growth flat-lines; and then those companies enter into mergers that are designed to create new value. The problem is, most mergers to achieve significant returns for shareholders. As many as 80 % fail by this criterion.

This is more than a business problem. It’s a national competiveness issue, because financial engineering correlates to decline in key sectors. Take the example of manufacturing . M&A changed the terrain of tier 2 and 3 suppliers to the automotive, transportation, technology and energy sectors among others. During two decades of nearly consistent GDP growth, from 1985 - 2005 that sector actually contracted nearly 50% as a percentage of the US economy, from about 22 to 11.7 percent of GDP.

The research on disconnected employees shows that most CEOs are detached from the front line, which is ultimately a recipe for failure. The message to CEOs should be simple and clear: focus on innovation over financial manipulation to fuel value.

Innovation though isn’t something a CEO can command. It is about engaging with personnel, encouraging them to form networks, living on the front line of the company. It is time consuming. But even the busiest CEOs should and can find the time by re-prioritizing their commitments.

Let’s take the example of one of the toughest CEO jobs in the world—the war in Afghanistan.

General John Allen, the top commander, and his team lead and LEARN from the front line. Tremendous amounts of time are invested in direct presence with men in the field. New cyber-technologies are used to allow front line commanders to have direct and regular access to the top. Front line creativity and adaptability are prized by General Allen. According to Bing West, one of the nation’s foremost military analysts, Allen spends 30 percent of his time on the battlefield. “I learn something every time I visit a line unit”, Allen says,” truth be told, visiting troops in the field recharges my batteries”. Allen’s leadership style has been described by Colonel Mike Killion, in a wonderfully expressive phrase as “progressive elaboration”: you establish an operating framework where good ideas are actively solicited” when a better idea comes along he’ll grab it and refine his framework. He doesn’t get stuck due to pride of ownership.”

If a commander can make this commitment to innovation in one the toughest environments anywhere, business CEOs can surely do even more if they are fully committed to the longevity and growth of their organizations. More CEOs and their key managers should make this type of engagement their principal job focus. Boards should make this type of leadership a priority when evaluating CEO performance. Leading from the front line may be burdensome and time consuming; yet it is also a necessity for staying innovative in a ferocious, complex business environment.