source: http://findarticles.com/p/articles/mi_m0EIN/is_2002_May_13/ai_85888882/
Business Wire, May 13, 2002
NEW YORK--(BUSINESS WIRE)--May 13, 2002
Each month seems to bring the sound of another giant company crashing to earth: Enron, WorldCom, Global Crossing, Kmart, Polaroid, Arthur Andersen, AT&T, Xerox, and Qwest are recent examples of companies with huge assets and standing in the marketplace that have fallen in one way or another, some to never come back up again.
FORTUNE senior writer Jerry Useem and management guru Ram Charan take a critical look at this process in "Why Companies Fail," in the May 13 issue of FORTUNE, on newsstands May 20 and at www.fortune.com.
Why do companies fail? "Their CEOs themselves offer every excuse in the book," say Useem and Charan. "A bad economy, market turbulence, a weak yen, hundred-year floods, perfect storms, competitive subterfuge--forces, that is, very much outside their control. In a few cases, such as the airlines' post-Sept. 11 problems, the excuses even ring true. But a close study of corporate failure suggests that, acts of God aside, most companies founder for one simple reason: managerial error."
In the end, say Useem and Charan, managers fail because of "the familiar stuff of human folly: denial, hubris, ego, wishful thinking, poor communication, lax oversight, greed, deceit; it all adds up to a failure to execute." The authors present ten common examples of corporate folly:
1. Softened by success: A number of studies show that people make less optimal decisions after prolonged periods of success.
2. See no evil. Companies must face hard facts head-on and occasionally ask difficult questions about what might be needed to change course or alter a bad business model.
3. Fearing the boss more than the competition. Sometimes CEOs don't get the information they need to make informed decisions because subordinates are afraid to tell them the truth.
4. Overdosing on risk. Some companies live too close to the edge, and overdose on "execution risk" and "liquidity risk."
5. Acquisition lust. All too often
CEOs succumb to an undisciplined lust for growth, accumulating assets
for the
sake of accumulating assets.
6. Listening to Wall Street more than to employees. Top management needs to understand what Wall Street wants--but not necessarily give it to them--and to listen to what employees are saying.
7. Strategy du jour. When companies run into trouble, the desire for a quick fix can become overwhelming.
8. A dangerous corporate culture.
Either implicitly or explicitly, a company's cultural code is supposed
to equip
front-line employees to make the right decision without
supervision.
9. The death spiral. Questions are raised, wrongdoing is suspected, customers delay new orders, ratings agencies lower their debt ratings, employees head for the exit, customers defect.
10. A dysfunctional board. The sorry fact is that most corporate boards remain hopelessly beholden to management.
Failures, say Useem and Charan, usually involve factors unique to a company's own industry or culture, which is why companies die in different ways. Some, like Enron, go out in blinding supernovas. Others, such as AT&T, linger like white dwarfs. Still others, like Polaroid, fizzle out over decades. According to Useem and Charan, "failure is part of the natural cycle of business. Companies are born, companies die, capitalism moves forward...Capitalism's true genius is to weed out companies that no longer serve a useful purpose." Nonetheless, many failed companies could have lived long, productive lives with more enlightened management--in other words, "good companies were struck down for bad reasons."
Useem and Charan analyze how a company can slowly sink into the habits and practices that will eventually cause problems. Using NASA and the crashing of the space shuttle Challenger as an example, they report that there was no one moment when managers at NASA sat down and conspired to commit wrongdoing. Rather, the disaster occurred because of what one analyst calls "an incremental descent into poor judgment." A "success-oriented" culture, mind-numbing complexity, and unrealistic performance goals all mixed until the violation of standards became the standard. Nothing looked amiss from the outside until it was all over. Regarding such failures, say Useem and Charan, "even the most dramatic tend to be years in the making."
In an accompanying piece, "Three Quick Fixes," Useem and Charan
present three changes that, taken together, can serve as an
early-warning system against failure. No. 1 is to re-engineer the
board, which can be full of very capable people yet be totally
ineffective as a group. Directors need a forum where they can talk
frankly without the CEO, or better yet an annual retreat where the
board can assess its own performance as well as the CEO's. No. 2,
employees should be turned into corporate governors. Because regular
employees--not executives, not directors, not shareholders--have the
most to lose when a company fails, it follows that they have a greater
incentive than anyone to act as company watchdogs. No. 3, companies
should banish Ebitda (earnings before interest, taxes, debt, and
amortization). One thing that ultimately kills a company is lack of
cash. Yet managers are too preoccupied with measures like Ebitda and
return on assets to give cash much notice.