Why Do Successful Companies Fail?

By John Wells on May 9, 2012

No financially successful firm wants to believe that failure could just be round the corner. But successful firms fail all the time, and they fail dramatically; years of stellar profit growth and then sudden collapse.

Once a firm hits the wall, it is difficult to recover. Turning round a large corporation takes great leadership, huge resources and a good deal of serendipity. A few, like IBM, come back from the brink and re-establish their leadership. Others, like Wang Laboratories, and instant photography king Polaroid simply disappear. But many such as Kmart, Circuit City or Kodak struggle on for years before they meet their end. It is a slow and painful death.

Inertia – A Fatal Disease

What is this fatal disease? Some try to blame external events such as the recent financial crisis, but Circuit City and General Motors were in trouble long before the financial meltdown; the crisis merely hastened their demise. The root cause of the problem is strategic inertia – these firms failed to adapt in a timely fashion to a changing competitive environment and their fate was sealed. Profits and stock prices continued to rise long after they had contracted the disease, creating a false illusion of success. By the time the financials turned down, it was already too late.

There are three main types of inertia. Strategic inertia is the failure of companies to change their strategies in a timely fashion. Structural inertia is suffered by firms that know they need to change but their structure gets in the way. Human inertia is the reluctance of individuals and groups to change even though they know they need to. Unless firms address all three they risk failure.

In Search of Strategic IQ

The capacity to adapt to a changing environment is a mark of intelligence; so why do firms demonstrate such low Strategic IQ? What causes inertia and why is it so deadly? Is a firm destined, like human beings, to a lifecycle which ultimately leads to death? If so, why is it that some firms are reborn many times? Surely, there is a way to develop sustainable returns? In a society where large company failure is so socially disruptive, is it not the responsibility of business leaders to find such a way?

Inertia is a complex phenomenon and purposeful intelligent change even more so. There are no simple answers. Firms must look to build smart, adaptive strategies, always striving to improve their current strategic model while testing new, radical ways to compete. To support this, they need smart structures that support strategic change, even drive it, rather than get in the way. But ultimately, the capacity of a firm to change is limited by the capacity and willingness of its people to change. Firms must understand why humans sometimes resist change when, properly motivated, they have an insatiable desire to adapt and learn. Unless leaders of tomorrow grasp all three dimensions, the end is inevitable. It is not a matter of “if” but “when”.