Many firms are successful. Some even achieve remarkable success. However, few firms can hang on to their success for long. Today’s average tenure of a company on the S&P 500 list is only half of what it was 50 years ago. The near-record number of CEO departures seen in 2018 further reflects the internal turmoil many companies are facing in the current shifting economic climate. Why do many once great companies ultimately stumble?
Gradually, then suddenly
The character in the Hemingway novel The Sun Also Rises, when asked ‘how did you go bankrupt’ replies: ‘two ways; gradually, then suddenly’. Indeed, a firm’s decline often begins with creeping stagnation – most often during periods of success. Nokia is an example. Once a global leader, it commanded a market share of 49.4% of the global smartphone market in 2007. By 2013; its share of the market had plummeted to an insignificant 3%. What then only surprised was the rapidity of its final plunge into oblivion.
Numerous possible factors contributing to a firm’s stumbling. Establishing definitive causality is always difficult. But we can identify some recurrent patterns - for example, patterns of decisions taken (or not taken, as the case may be) or patterns of evolving competitive stagnation.
What common patterns can we identify?
Overly complex structures, complacency and functional myopia
The reasons inevitably lie deep within the firm. The culprits tend to be organisational dysfunctionalities, the seeds of which are often sown during periods of success. These manifest themselves in a number of ways. We will examine three in particular: overly complex internal structures, management complacency and functional myopia.
Overly complex, obsolete internal structures
Large sprawling industrial conglomerates were once seen to be the winning formula. Today, those remaining are viewed as gentrified behemoths from another era whilst earning themselves no more than recognition as ‘last man standing’. American activist hedge funds have lead the way, but European investors are increasingly also clamouring for the dismantling of ungainly corporate structures. The rationale is simple: in view of shifting global competition, stream-lined businesses focused on doing one thing and one thing only have a distinct advantage.
ABB was celebrated in the early 1990s as the “prototypical post-industrial organisation”, the “new model of competitive enterprise” managed by “a new breed of super-humans”. While other conglomerates were consolidating and shedding units, ABB embarked on heady global acquisition sprees. By the late 90s it had evolved into a dysfunctional and fragmented multinational with no less than 576 ERP systems, 60 payroll systems, and over 700 software platforms – a “tired manufacturing firm mired in nineteenth-century assets” (FORBES) and on the brink of bankruptcy.
Thyssenkrupp and GE belong in this besieged league. Both are seeking to rid themselves of their legacy past that has locked them into complex, convoluted and obsolete corporate structures. Thyssenkrupp, a 200-year old German steelmaking conglomerate, strayed into businesses as diverse as submarine-building and elevators. Until its recent restructuring, alone its powerful head office in Essen consumed an astonishing 30% of its profits. All the while, the company’s share price lagged seriously behind its German compatriot multinationals, all of which have long since streamlined their portfolios into much simpler structures.
Management hubris and complacency
Besieged firms’ management usually recognise the threat early. However, past success tends to breed a sense of infallibility and adversity to taking prudent and timely decisions in response to changing competitive environments. Overly confident that what has worked in the past will continue to do so, firms get locked into their legacy trajectory. Inertia keeps the firm from breaking out of established patterns. The strategic thinking that led to the company’s success in the past is often replaced by a rigid devotion to the status quo. Tough questions are discouraged.
GE was once the greatest US industrial corporation, a constituent member of the DOW index when it was created in 1896 and a member continuously since 1907 until it was bumped from the index mid-year 2018. GE has lost of more than 80% of its market capitalization since 2000. GE’s penchant for botched acquisitions and its inability to respond effectively to a global economy that is shifting from industrials to consumer, finance and technology are seen as immediate flaws. Arguably, though, the fault-lines contributing to GE’s current problems had their origins in GE’s hugely successful Jack Welch era during which acquisition and diversification was viewed to be its winning formula.
Functional myopia compounds the problem. Functional myopia sets in when companies disconnect from their competitive environment and lose sight of their original strategic purpose and mandate. Management’s focus turns inward and reverts instead to sub-optimizing overall performance that drive short-term results. Numbers become more important than a clear sense of purpose. Strategy becomes obscured by bureaucratic structures that lock the firm into their downward spiral.
What lead to Nokia’s demise from its position world’s leading mobile company to near-annihilation in only a few short years? The short answer: Apple and Android crushed it. But the underlying reasons go deeper. After all, Nokia was hardly a technological laggard and had demonstrated remarkable adaptiveness, evolving from producing paper and rubber galoshes to a globally leading telecoms company. The more probable reason? Nokia’s demise derived from its obsession with technological devices and its failure to recognize and adapt to shifting consumer preferences that increasingly rewarded enhanced software-supported user experience over simply more technology. Instead of re-aligning its strategy accordingly, Nokia turned inward and redoubled its effort to develop physical devices oriented to short-term market demands.
Companies stumble for numerous possible reasons. The seeds of corporate demise are often sown during periods of remarkable success, when companies get locked into complex corporate structures are difficult to abandon when the economic environment shifts. Internal dysfunctionalities nurtured by management complacency and exacerbated by functional myopia then only serve to accelerate the decline.