Why Do Good Companies Fail?

By March 9, 2005 February 15th, 2019 Opinion
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Published: Mar 09, 2005 in Knowledge@Emory

Last month, SBC Communications announced its plan to acquire AT&T, the venerable 100+-year-old telecommunications company. The idea that an industry stalwart could fall prey to a former “Baby Bell” leaves many to question just how well the nation’s largest and oldest companies are managing in today’s marketplace.

Jagdish Sheth, the Charles H. Kellstadt professor of marketing at the Emory University’s Goizueta Business School, says that the life expectancy of American companies is declining, and that even some of America’s most respected firms are susceptible to failure. What is it that can bring America’s most revered and oldest companies to their knees? In an interview with Knowledge@Emory, Sheth discussed why success too often breeds failure. As a well-known business strategist and the founder of the Center for Relationship Marketing (CRM) at Emory University, Sheth is the winner of the 2004 American Marketing Association’s Charles Coolidge Parlin Award, in addition to the 2004 American Marketing Association/Irwin/McGraw-Hill Distinguished Marketing Educator Award. His most recent book—The Rule of Three: Surviving and Thriving in Competitive Markets, co-authored by Rajendra Sisodia, altered the current notions on competition in business.

K@E: What was the genesis of your research on why good companies fail?

Sheth: The journey began in 1991 when I was asked the most insightful question. I had been advising this company for some time, and a senior officer of a large company had become the group CEO. When he was the CEO of the core business, he had read Tom Peters’ book In Search of Excellence and loved it. When he became the group CEO, he reread the book and suddenly he got very uneasy. In less than five or six years, many of the companies praised in Peters’ book were in serious trouble—companies like IBM, Xerox, and Sears. He believed the tenets in the book—the ways for companies to be the best. He asked me, “Do you know why good companies fail?” I had never thought about this before, and I became curious.

K@E: What were some of your initial findings into the failure of once highly successful companies?

Sheth: I did archival research and began to understand why some companies didn’t survive. I interviewed the people from the companies directly, and that is how I developed a framework. I found out that the life expectancy of companies was declining. That was very surprising. I was taught that institutions were immortal and humans were mortal. Today, however, we are living longer and the company’s life expectancy is dropping. For example, a corporation’s life expectancy is only about 14 ½ yrs and declining, because of mergers and acquisitions or Chapter 11 protection.

K@E: Can you break down the situations or factors that lead to failure for a successful company? I understand that you categorize these into six separate areas.

Sheth: Yes. In my research, I identify the six externalities that bring about a change. They are regulation, capital markets, competition, technology, globalization and customers. When any of these external contexts changes radically and the company is either unable or unwilling to change, it often results in failure.

K@E:Are there one or two of the six externalities that stand out as more likely to factor into the failure of a company?

Sheth: The fastest moving externalities are regulation, competition, and capital markets, while the slowest moving ones are technology, customers, and, globalization. Regulation, in particular, is the most influential. With the stroke of a pen, you can change a whole industry’s nature. Many companies are simply unable to adapt, as is evident in the airline and telecommunications industries and other deregulated industries. In fact, it was the inability of AT&T to manage regulation at the state level against the Baby Bells, as well as the emergence of non-regulated Internet, which led to its decline in market share.

K@E: You note that, strangely enough, success breeds failure. What do you think was the most surprising finding in your research related to this?

Sheth: I began to learn that most companies come into existence by being opportunistic—call it entrepreneurial opportunity. They take all the credit, but it’s partly the environment and partly the individual. Company success is very much like human behavior—a result of nature and nurture. But managers refuse to say that they were blessed from above, and so they take all the credit for themselves. They succeed as long as the environment doesn’t change. The underlying theory is that many people in business succeed by accident and not by plan.

K@E: Going with that thought, what then keeps company managers and executives from moving ahead and learning from the mistakes of others. What makes them unwilling to adapt?

Sheth: When you succeed by accident, you often latch on to your belief system much more than before. You become superstitious in a way. Next to baseball players, the most superstitious people in the world are entrepreneurs. They pull out the rabbit’s foot and the special pen. Some of that is good in a way. Superstition gives you an inner strength. You are able to psych yourself up much easier, just like an athlete does before a major event. But, unfortunately, people end up believing what they do will succeed forever, and then they become resistant to change. They get locked into one paradigm or one way of life, like Digital, for example. The founder destroyed the company himself since he was bent on his belief in the continued success of the mini computer. He held on to that belief even when the personal computer became the standard, and he destroyed the company in the process. Similarly, many airlines failed after rapid deregulation in the late seventies because they could not change fast enough to meet or resist competition. Examples include Pan Am, TWA and Eastern Airlines.

K@E: It sounds as if complacency and ego both factor into the failure process. Can you explain your approach to resolving this?

Sheth: Unfortunately, change management is most effective when the company is in crisis. It shouldn’t be that way, but it is, just like in our daily life. The best wake up call is often after a mild heart attack or discovery of a chronic disease, such as diabetes.

There are three dimensions to change management. The first is mindset change. This is usually accomplished by leadership programs, such as the famous “workout” program at General Electric. The second is some form of reorganization. This includes eliminating or restructuring leadership’s responsibilities and restructuring the organization. HP went from a country-by-country profit & loss organization to, for example, global product management reorganization. Finally, the most critical change is the reward system. I am on the compensation committees of several public company boards, and I am amazed at how much the CEO and his direct reports are obsessed with compensation issues: we all are! For successful change management, it is important that these three dimensions of change are coordinated and executed in parallel.

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