Dr. Jagdish N. Sheth wrote an excellent book on why good companies fail, called “The self-destructive habits of good companies and how to break them.” In it, I found that the average life of a company was about 14 years.
Sheth believes that there are at least six significant external contexts that become catalysts for failure or transformation:
- Customers seek change
- Technological advances force a change in direction
- Competition forges ahead
- Globalization forces expansion into new markets
- Capital markets (e.g., the dollar or interest rates go up or down)
- Regulation or deregulation from governing bodies
Competition generally overtakes an established company because it changes a traditional business model. Conventional business models are constructed using thought processes and technologies at a moment in time. New technologies can radically transform a traditional business model and enable a corporation to take the field.
Innovative companies bet big
Uber is now the largest taxi company in the world that does not own taxis. It facilitates people who have cars with people who need rides using mobile technology. They are now becoming one of the largest food distributors that have no restaurants, expanding their business by developing Uber Eats. And Uber could soon launch its autonomous vehicles program and could fundamentally transform the future of transportation.
Amazon started as an online bookstore. It challenged the general concept that a bookstore needed to be a building. It expanded its marketplace to sell things other than books. Soon it began to sell the computing technology that drove its online store and created Amazon Web Services. It is now the largest e-commerce marketplace and cloud computing platform in the world.
Airbnb challenged the conventional hotel industry by connecting people who owned properties with those who need short-term rentals. They are now one of the largest hoteliers in the world with revenues exceeding $1 billion. They own no hotels.
What do these three companies have in common? They exploited new technologies to challenge a conventional business model. Why did other companies not accomplish the achievements of Uber, Amazon, and Airbnb?
Dr. Sheth outlined the following ten reasons for why companies fail:
- Status quo management – Senior management doesn’t want to rock the boat. They have a “Let’s just do things the way we’ve always done it” mentality.
- Success breeds failure – Management becomes complacent and begins alienating their customers or doesn’t understand the changing market demands.
- Neglect of emerging markets
- Non-traditional competition – Niche players creating new markets (ie. Starbucks and the specialty coffee movement)
- Internal conflicts – Executive-level conflicts adversely affect the ability of the executive team to work effectively together,
- Cost inefficiencies
- Regulation barriers
- Rapid technology advances
- Rapid deregulation
- Unexpected events
Leadership is the reason why many of these ten reasons exist and why companies get left behind.
Why does this happen?
I thought back to a time when I worked in two small startups. There were a few common behaviors of the owners. Their heart was all in the business. They put in all their effort, all their thinking, all of their money to make the company happen and it consumed them. They developed eyes for quality to ensure that their products were excellent and that they were using cutting edge technology.
Sometimes when entrepreneurs become successful, their focus changes from putting in their heart to just putting in their time. And it is usually at this point the company begins to have trouble.
I think back upon an interview I had with one of my customers. I asked him how life was going and he told me, “Bill, I’m just riding out my time ‘til I get to retirement.” It was clear to me that this person had already retired.
Unfortunately, this behavior and mentality are all too common. I’ve run into many people who won’t take risks as they approach retirement because it might cause their retirement package to be compromised. But if your heart’s not in it anymore, let someone else take on the challenge to drive innovation.
The key to digital innovation is not about technology. It’s about innovative leadership that looks at what is possible using new technology. Business models must always evolve, like a shark always swimming to keep alive. Their business models need to align with the ever-changing market. It’s the actions that their leadership takes to keep that evolution in the right direction that can determine success or failure.