Just watching a business fail is painful. Being part of the shut-down team is downright brutal, or so I’m told by those who have had to chain the gates at some point in their careers. Shut-downs take as much effort as start-ups, only with no sense of accomplishment on the horizon.
I’ve been a spectator for several of these over the years. Many were mostly preventable.
There are, in the end, only two reasons businesses fail. One is placing the wrong bet. The other is a weak board.
Here’s how wrong bets happen:
A key executive responsibility is figuring out if the current business model has legs or not. It takes crystal-ball gazing at its finest.
The best leaders anticipate future threats and opportunities, and place their bets now so that when the next wave comes they can ride it instead of watching it roll on past.
And, they don’t bet the farm on a single possible future, either. They make a portfolio of bets so that even if only one or two pan out, the company has new revenue streams if a future that invalidates the current business model has the bad taste to arrive.
These exemplary business leaders are, sad to say, an apparent minority. The more usual scenario is that revenue takes a hit for a year or two, leaving the company’s decision-makers where California’s policy makers found themselves a few years back: Figuring out whether the drought was a blip or a fundamental change in the [business] climate.
It’s a tough call and a hard bet to make. For blips, the best answer is probably to ride it out, doing some diversification for bet-hedging but using most of the company’s reserves to keep things intact until the temporary downturn upturns.
If, on the other hand, it’s climate change in action, failing to use the company’s reserves to invest in new business models designed to address the fundamentally changed marketplace is disastrous: By the time the change stops being a guess and becomes an inescapable reality, it’s usually too late.
Making a portfolio of bets sure looks like the clear winning alternative, doesn’t it? Interesting that it’s the polar opposite of the popular-with-Wall-Street strategy of “concentrating on the core,” as McDonald’s did when it sold the fast-growing Chipotle to concentrate on its tired, aging fast-food brand.
For the most part I sympathize with businesses … especially smaller businesses … that find themselves on the horns of the changing-marketplace dilemma. Often, their business is what it is, with no obvious opportunities for diversification that can leverage the business existing capabilities.
Sympathize, but not to the point of accepting helplessness as a reason for their eventual failure. Because they aren’t helpless, unless you count a weak board as helpless.
With few exceptions, mostly in the non-profit arena, boards pay their CEOs well. Boards generally pay themselves well, too, and for not all that much work, either. In the end boards have just one responsibility: Making sure the CEO is the right person for the job, and if not, replacing him or her with a new CEO who is the right person for the job.
All the other things boards do, like reviewing large proposed capital expenditures, they do because they don’t trust the company’s executive team to make prudent decisions. Why? Re-read the previous paragraph.
Here’s one that’s a perfect example: For the better part of a decade this failing company’s CEO treated his position as an opportunity for personal enrichment and self-aggrandizement. The board was composed of his cronies, who were delighted to participate in the sham in exchange for getting paid to do, for all practical purposes, nothing at all.
The company’s products sold through exchanges, so it had no control over pricing. Its best bet was to produce its products with relentless discipline and efficiency. But given that the CEO couldn’t even be bothered to visit its factories, and was publicly profligate in spending the company’s money besides, relentless discipline and efficiency just weren’t going to happen.
By the time the board finally did terminate him, easily five years after the need to do so was abundantly clear to any impartial observer, the situation was close to irretrievable even before the price for the product it sells took a major hit.
The economist Joseph Schumpeter coined the phrase “creative destruction” to describe results like this and called it “the essential fact about capitalism.”
If so, then by inference bad management, aided and abetted by weak boards, must be an equally essential fact about capitalism.
But this isn’t a fact. It’s a choice.
Great column.
There is so much meaning in the last sentence, which certainly applies to boards, but also to the culture among this very insular group of people.
A choice, or a series of choices, some good and some bad, with a net negative result. With six or seven billion consumers in a globally connected economy, it gets harder to kill a business with just one bad choice. One must work at it, diligently.
Short-sighted self-interest can be countered by those with long-term collective interests, e.g., income-dependent equity holders and employees. However, its not enough to just empower these constituents in the process because they are too easily co-opted in service of the short-sighters or become such themselves. On the other hand, one company’s demise is either the result of or an opportunity for another’s ascendance. The real tragedy of capitalism is that workers, if they are to protect themselves, have to be as agile as shareholders in finding the right place for their capital to profit them.
Once upon a time, I worked for a startup funded by an R&D Partnership put together by an experienced CEO, and founder of a then successful computer company. The intial and secondary funding were successful in keeping a small development team employed to design and build a prototype product and demonstrate it at an industry trade show. We needed more funding to build inventory and prepare for the product launch into a hostile market where we were filled with new concepts that would upset the established order. We actually had taken orders from a key customer. This last stage of investment was to come from private capital sources, the lead amount from the investment arm of our leading customer. We thought it was “in the bag.” But, No – the lead investor declared No Interest, and we went bankrupt. Our CEO had no backup strategy or exit plan. We just faded away along with many of our pending patents. Failure is not pretty.
> Business fail for lots of reasons
> watching a business fail
Now you’re gonna think I’m stalking you 🙁
On the contrary – I enjoy your insights *immensely*.
But if you’re going to choose ‘a’ (singular) as the definite article in item 2, then your 1st sentence should read ‘Businesses’ (plural) or ‘fails’ should be the verb…
Fixed – thanks.