What Causes Big Companies to Fail?
The recent demise of Thomas Cook has shocked many people, both in the UK and further afield, and attracted its fair share of articles and analyses about what exactly went wrong.
We decided to take a wider look at the issue of big company failure. While it is clear that crippling debts, failed investments and adverse market conditions play their part, many of these are symptoms of more fundamental failings.
We looked at some of the highest profile corporate collapses and identified several causes including a failure to innovate, short-sighted planning, cultural conflict and simply taking too long to change.
We look at each of these factors in turn.
Failure to innovate
As technologies such as cloud computing and mobile communications have helped to level the playing field, industries across the business spectrum have seen a wave of disruptors entering the market. These startups are not just creating new products and services, they are creating new ways to do business.
From Uber and Tesla to Airbnb and Netflix, these companies are united by an ability to innovate and do things differently. Thomas Cook may have blamed the UK heatwave and Brexit for their troubles, but a more fundamental problem was with their business model.
Thomas Cook stuck to the traditional package holiday model despite the fact that the high streets were empty and much of their customer base had switched over to booking their holidays online. With little in the way of physical assets to fall back on, Thomas Cook were in a vulnerable position and the weather merely acted as the final straw.
As Tim Jeans, a former Monarch and MyTravel executive put it, the company was following an ‘analogue business model in a digital world.’
Lack of future-proofing
Some companies are prepared to innovate but are caught out because they have failed to put the systems in place to execute future changes.
Blockbuster have been criticised for failing to adapt to the change in viewing habits of their customers but, in fairness, CEO John Antioco did realise his company needed to change after Netflix’s mail order model took off. He decided to risk heavy losses by ending Blockbuster’s practice of charging late fees and investing in a digital platform ‘Total Access.’
Unfortunately, his vision was not shared by everyone and the company structure wasn’t ready to execute his changes. When Jim Keys took advantage of a financial scandal to take over at the top, he reversed his predecessor’s changes – and sealed the fate of Blockbuster.
A lack of planning meant that Blockbuster were vulnerable to cultural clashes at the top. Cultural conflict and a lack of technical innovation combined to severely damage another iconic firm: Nokia.
With $4b operating profit in 1999, Nokia’s mobile phone division seemed untouchable at the turn of the century and even when a little upstart called Apple took 5% market share in 2007, the Finnish company thought that their Nokia N97 ‘iPhone killer’ would be enough to protect their position.
When Apple’s rise led to Nokia’s collapse and sale of its mobile division to Microsoft, the toxic culture of fear at the firm was revealed. Unlike Apple, Nokia’s executive bench was not blessed with engineers and couldn’t keep up with Apple’s development. The firm responded by piling unrealistic pressure on managers who began hiding facts, plunging the company into darkness.
Nokia has since recovered and have even re-entered the mobile phone market; hopefully they have learnt from their mistakes.
Some companies can innovate, have a strong culture and make clear plans for the future but fail to take advantage of their strengths, delaying their entry into a new market until it’s too late. A classic example from recent corporate history is Kodak.
Kodak were among the pioneers of digital photography, building the first ever example back in 1975. But rather than accepting the change in its customers’ behaviour, the established American firm doubled down on its established identity as a film supplier and lost out when digital photography took over.
What can we learn about high profile failures?
Taking heed of the high-profile failures above can help businesses avoid falling into similar traps.
The first key message we should take from the above examples is that innovation is fundamental to business success. We need to encourage and reward innovation at all levels to create the fertile conditions for creating the products, services and business models of the future.
Second, we need to prepare for the future by having a clear vision but adapting our strategy based on data from real market research. We need to have a strong recruitment function to ensure the leaders of the future are in the pipeline ready to continue the innovative momentum.
Third, we need to work on establishing a culture of openness and experimentation. There is no point in employing innovative people and making grand plans if those at the top fear the market and drive middle management into hiding the truth – even when it hurts.
Fourth, we need to act. It’s not enough to sit on our laurels and wait for our business to evolve naturally. By launching a minimum viable product and preparing to fail in order to learn, we can seize a competitive advantage.
And finally, but perhaps most importantly, the above examples should serve as a warning. Be humble and never take success for granted because no business, no matter how big, is ever too big to fall.
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