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Why do successful companies fail?

Tea with Mussolini, a Franco Zefirelli´s film, describes a group of sophisticated English women that did not want to accept the deterioration of democracy in Italy in the years before the II World War. The behavior of the ladies that meet for tea every afternoon resembles the ones of GM, Kodak, Polaroid, Blockbuster, Chrysler, Delta, American Airlines, Texaco, RadioShack, Yahoo, AOL, Motorola, Xerox, HP, and Blackberry, to name a few. All these companies have been substantially reduced in size, fallen from a leadership position, or even declared bankruptcy, but not because their senior executives were dishonest or fool. On the contrary, many CEOs were smart, hardworking, well-intentioned professionals trying to make the right call. However, the hell is paved with good intentions and no company, regardless its size and past profitability, survives to a cocktail of bad managerial decisions such as the pursuit of undisciplined growth, severe risk-taking policies, and lack of aggressiveness regarding innovation, to name a few. Their failure was not always the result of taking the wrong daily actions. RadioShack, for instance, developed expertise in many key activities for a retailer of electronic gadgets, however, one single decision – ignoring the emergence of smartphones – killed its business model.


We tend to think big companies like ubiquitous juggernauts that never fail, unstoppable giants nominated to lead the world or organizations that will last for generations and yet some fail in a matter of a few years. How can such large companies fall so quickly? Game-changing events rarely have only one root cause and company failures are no exception to this rule.  So, why do big companies fail? There are several reasons that explain why once-mighty firms fail and many happen simultaneously. Business literature shows that there are firm, industry (or systemic), and country-specific causes for the decline and even extinction of organizations. Here comes a humble effort to describe all of them.

Firm-specific reasons
Senior executives make mistakes as anyone does, but corporate failures reflect gigantic miscalculations that are caused by wrong calls from leaders.  The list of “what can go wrong” for firms is quite extensive: bad managerial decisions, poor timing, slow decision-making process, yes-sir mentality, irrational decision-making, slow action-taking, for instance.  Companies that have failed often knew what was happening but chose not to do much about it. Sometimes they even do something, but often their actions are too little too late. Other times no one has the guts to challenges the status quo to ask the tough questions. Fear of the unknown and pushbacks from the organization can develop, affecting how companies handle key their future.

Sheer size is another firm-specific reason for failures. Large companies have a relatively poor record of accomplishments in innovation because of their slow decision-making processes since decisions need to be filtered by several managerial layers. Therefore, they do not quickly react to changing environments, resulting in their falling behind. Kodak provides the best examples of firm-specific reasons for failure because the company let digital cameras drive a once powerful industrial giant into the penny-stock territory.

Industry-specific reasons
Blockbuster´s top managers, for instance, denied the market reality of the rise of streaming while the idly watched Netflix destroy its business, therefore did not explore some partnerships with streaming providers.  This company is a good example of a company that ignored a disruptive threat. According to the influential book Innovator´s Dilemma, written by Clay Christensen, disruption occurs when entering companies focus on the lower end of the market. Traditional leaders largely ignore disruptors due to entrant´s low margins and low profits because entrants do not focus on the customer base focused on by large companies. Disruptions are then industry-specific technological changes that transformed once ignored entrants into industry leaders. The automotive industry in the US in the 80´s is an example of the denial of threats by newcomers. Yahoo also provides a textbook example of failure due to non-recognition of the death of web portals and the birth of social media.

Overall, large/traditional/established companies tend to fail because they do not pay attention to disruptive technology and only focus on their customer base, leading to a decline in sales. It is surprising to realize that many firms keep driving toward inevitable disaster at top speed.


Country-specific reasons
Walmart´s failure in Germany provides an example of a highly successful behemoth in many countries which failed in a country due to local idiosyncrasies. First, German consumers tend to prefer small neighborhood stores rather than an impersonal chain (although Germany´s Aldi is quite successful in that country). Second, Germans have taste and deep pockets for well-designed, something deeply contrary to the simple look-and-feel of all Walmart´s store. Finally, Walmart could not replicate the low-cost structure in Germany, mostly due to country´s strict and higher minimum wages policies.

Disneyland Paris, formerly known as Euro Disney, presents additional country-specific differences that explain unexpected failures. Competition with tourism in Paris and attention to wrong details proved that Disneyland Paris was acting on an American view of Europe rather than a native view. Location matters when it comes to understanding business success.

Is there a solution for big companies to avoid failure?
Research in management suggests that failure or irrelevance may be avoided. A multitude of consultants and business schools help big firms to dribble potential disastrous fates; their suggestions generally include the creation of an independent branch outside the company to allow it to make quick decisions without the influence from headquarters and stockholders. The explanation for the segregation large companies-innovative startups comes from the concept that disruptive business model cannot be under the scrutiny of short-term results.

Another solution is the acquisition of small companies that might be considered disruptive. However, Mergers & Acquisitions cause problems for large companies on their own because of the poor history of successful integration between well-established and small, innovative startups.


How did successful companies deteriorate from greatness to mediocrity?
James “Jim” Collins, in his book How the Mighty Fall: And Why Some Companies Never Give In” describes the five steps followed by some companies on their way to mediocrity. Step one consists of companies that attribute their success to their own superior qualities. This is a problem because firms fail to question their relevance when conditions change. Step two happens when firms overreach or move into industries or growing to a scale where the factors behind their original success no longer apply. Step three has to do with denial of risk. Warning signs mount, but the firm’s headline performance remains strong enough for bosses to convince themselves that life is still good. Excuses arise, and problems are invariably blamed on external causes. In step four the problems are clear enough that firms start grasping for salvation. Rather than returning to the fundamentals that made them great, they gamble on a new, charismatic savior-boss, dramatically change strategy, make a supposedly transformational acquisition, or fire some other supposedly silver bullet. Finally, step five deals with irrelevance or death of the company.

It may be a cliché, but managers and business analysts forget that no company will avoid downturns. Sometimes problems start from within, sometimes technology causes disruption and a few times customers´ habits and regulation change a lot from one company to another. Big firms´ crumbles are so poorly understood albeit well-documented. In fact, even the road to mediocrity is well-mapped. The challenges that CEO face are huge, and we see no reason to be easier in the future.







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