Adapt or Die: Most Corporate Failures are Self-Inflicted

January 15, 2013

What do the American mastodon, Woolly mammoth, and Arizona jaguar all have in common? Here’s a hint: they all suffered similar fates to Hostess Brands, Circuit City, and Blockbuster. Yes, they all went away. Extinction. Vanished. Disappeared. But I think the companies could all take a lesson from the animals that died before them: organizations – much like animals – that live in an ever-changing environment need to be aware and responsive to their changes so that they continue to survive, sustain, and grow. Otherwise, the slow, inflexible, bureaucratic organizations will face similar extinctions as the dinosaurs.

I recently came across a three-year study by Bain & Company that evaluated businesses’ ability (and inability) to sustain profit and adapt in a period of uncertainty and accelerating change. Three statistics jumped out at me.

First, nearly two-thirds of companies today destroy shareholder value…

Of the 70,000 companies studied by Bain, more than 42,000 earned shareholder returns BELOW inflation. Which is to say: they eroded shareholder value. Yes, there were major disasters over the last 20 years that contributed to these failures (think General Motors, AIG), but there were also thousands of small businesses that simply did not create wealth for their shareholders. In fact, the Bain study calculated that small businesses alone destroyed at least $16 trillion (yes, with a “T”) of value.

Second, only 9% of the 70,000 companies achieved even a modest level of sustained and profitable growth. To quote from the study: “In the past decade, the percentage of companies achieving even 5.5% real revenue and profit growth and earning their cost of capital has steadily declined. Yet almost every business aspires to do this.” That means that 91% of companies are either stagnant or shrinking.

And finally, only 100 companies (out of 70,000) accounted for $10 trillion in net returns, which is more than half of the overall $19 trillion in returns for the whole group of 70,000. Think about that for a second: 100 companies generated $10 trillion in returns, while the other 69,900 companies generated $9 trillion. Talk about the Pareto Principle!

So what was the secret of those 100 companies? That’s the million dollar (or 10 trillion dollar) question!

According to Bain, about 25 of them benefited from sharp increases in commodities prices like oil and agriculture. But the other 75 seemed to have found a way to replicate their successes. According to the study: “although some lost their way temporarily, all are characterized over the long term by their simple focus on their historic core, which allowed them to continuously grow their profit pools…” as well as tap into new ones. Some of those companies include American Express, AB InBev (owners of Anheuser-Busch), and Toyota – companies that are usually associated with long-term, sustained performance.

Bain’s research was able to explain between 40-50% of performance variation due to just three factors. These three success factors represent best practices for any leader in any organization to consider.

First, successful companies have a strong, well-differentiated core. In other words, these companies focus on their greatest strengths – on what they have that others don’t. Organizations can differentiate through superior cost (like Wal-Mart), through unique product features (like Apple), or through a differentiated distribution system (like Microsoft). And having a strong, well-defined core should allow for sustained growth over time – either from offering new products that relate to the core, expanding current products into new market segments (still remaining true to the core), and/or acquiring other businesses related to the core.

Second, successful companies have clear non-negotiables. In other words, they have the ability to “translate their strategy into a few simple values and prescriptions that people throughout the organization can understand and use to shape actions and decisions.” They have built intolerance for excess complexity in favor of simplicity and focus. Yes, markets change. Yes, technology changes. But, according to Bain’s data, it’s the unnecessary INTERNAL complexity – the inefficient or ineffective communication, the extra approval layers that delays decision making, the preference to study things incessantly but not take action (we call that “analysis paralysis”) – that turns companies into lumbering dinosaurs.

And third, successful companies have systems for closed loop learning. In the face of rapid changes – marketplace, customer preferences, technology, competition, and so forth – successful companies seem to react faster than their competitors. They use data from various sources to understand what’s changing in their environment: they learn from customers; they learn from their own operational data; they learn from their workforce, partners, and suppliers; they learn from industry (and out-of-industry) role models. They have robust listening posts to understand how things are changing, which gives them the ability to adapt quickly. In some ways, these organizations can see around corners: they have the ability to anticipate changes before they occur.

In the words of Rupert Murdoch: “The world is changing very fast. Big will not beat small any more. It will be the fast beating the slow.”

In summary, successful companies – those that grow and produce a consistent return – seem to do (at least) three things very well: they focus on their strengths, they favor simplicity over complexity, and they systematically gather data from a variety of listening posts to better anticipate how and when to change.

On the contrary, companies that fail to grow and/or generate sustained value usually struggle in at least one of those three areas. But they don’t have to. In the words of the study’s authors: “the extinction of once-great innovative companies is less often caused by technological or market evolution and more often by self-inflicted wounds and slow cycles of decision and adaption.” I wonder which path companies like Apple, which has enjoyed a wonderful run and are now dealing with new challenges (or more locally: Best Buy, which is facing competition from new distribution channels) will take. I wonder what path your organization will take.

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Yours in Performance Excellence,

Brian S. Lassiter
President, Performance Excellence Network (formerly Minnesota Council for Quality)