Self-Destructive Habits: Why Do So Many Good Companies Fail?

by Bryan Lane Berson, Esq.

Many good companies fail. Whether you own a business, are employed by one, or have invested in one it is very disconcerting because your career and financial security are at stake.

To be successful, it is important to avoid failure. In The Self-Destructive Habits of Good Companies and How to Break Them, Dr. Jagdish Sheth explores common causes of failure and proposes means of addressing them.

Frequently, the financial press publishes lists of “excellent” companies. Within a decade or so, some of these companies become mediocre. Others merge out of existence. Some go bankrupt. The business environment is dynamic, and good companies will fail if they cannot or will not change.

While great companies are becoming great, they may acquire bad habits that could eventually destroy them. Sheth discusses several such habits, but he highlights denial of a new reality and the territorial impulse (or “turf wars”) as the most dangerous ones.

Denial

Denial is disbelief in the existence or reality of something. It is a psychological defense mechanism used to reduce anxiety over things that people find consciously intolerable.

Most successful companies began humbly. Some succeeded through a fortuitous accident. Perhaps the founder was in the right place at the right time or a major customer discovered the product. There is nothing wrong with either circumstance, but some people wrongly attribute their success entirely to skill.

After the founders are gone, executives may tell a romanticized myth about the company’s preordained success. The reality is that demanding consumers do not care about such stories. If the industry changes significantly, those indoctrinated with the corporate orthodoxy may respond with denial.

Sheth describes how Xerox began humbly before xerography became a major industry. Its engineers invented sensational new technologies including the graphical user interface, Ethernet LAN, and laser printer. Without its founder, the company became rigid and ignored these technologies. When the market shifted from copiers to printers, the company suffered.

American companies used to dominate the automobile industry. GM’s executive committee would not believe that a Toyota plant needed half as many workers to produce a car as a GM plant did. Japanese automation reduced the size of their workforce whereas GM’s had a much larger workforce. Its burgeoning pension costs became its Achilles’ heel.

Denial has warning signs. A company’s culture may assert that it’s different. Managers may reject ideas that are not their own. Management may ignore problems, rationalize them, or assign blame. They do not address the underlying problems. Breaking this bad habit requires explicit recognition of the problem in order to deal with it.

Territorial Impulse

Another deadly habit is the territorial impulse. Many large businesses are organized into functional or geographic silos. Their respective managers may focus on unit goals at the expense of organizational goals. Disputes among units result in distracting turf wars and sub-optimization.

Sheth describes the situation where a company’s culture is dominated by a functional specialty or department. In the mid-1990s, Motorola controlled about one third of the global cell phone market. In about five years, its market share fell 14%, whereas Nokia’s rose from 22% to 35%.

During the decline, Motorola’s culture was dominated by engineering, and it was not responsive to its customers. In contrast, Nokia focused on sales, design, and customer-satisfaction. By listening to and responding to supplier and customer needs, Nokia improved at Motorola’s expense.

The territorial impulse exists where there are multiple strong-willed managers who want to follow their own strategy and the absence of strong leader who can rein them in, make key decisions, and curtail conflict. Sometimes, a company may be so bureaucratic that it cannot respond to a dynamic environment. The workforce may feel that due to a turf war or inertia, management cannot turn around the company. The company’s culture may be toxic.

Breaking this habit requires a respected leader who can sell his vision and change the company’s culture. If a company is organized into functional or geographic divisions, rotating personnel among divisions can help them appreciate the issues that their colleagues face. It may be useful to reorganize such companies around products or customers.

While it is difficult, one must investigate self-destructive habits and continuously work at correcting them to succeed.

About the Author:  Bryan L. Berson, Esq. is an attorney at The Berson Firm, P.C., a law firm that handles commercial and business matters, litigation, probate, estate planning, elder law, real estate, and landlord-tenant matters.  His e-mail is bberson@bersonfirm.com.  His phone number is (631) 517-1055.  Connect with The Berson Firm on Facebook and Bryan L. Berson on LinkedIn.  The firm’s website is www.bersonfirm.com.

Disclaimer:  Constructive Knowledge is published by The Berson Firm, P.C. (the “Firm”).  The information contained in this column is provided for informational purposes only.  It is not tax or legal advice on any subject matter.  No readers, clients or otherwise, should act or refrain from acting on the basis of any content without seeking appropriate legal or other professional advice with respect to one’s particular circumstances.  This column reflects a general discussion of the law in New York.  It may not accurately reflect the law of other states.  The content is general information and may not reflect current legal developments, verdicts, or settlements.  The Firm expressly disclaims all liability with respect to acts taken or not taken based on any or all content of this column.  This column is Attorney Advertising.  IRS Circular 230 Legend:  Nothing in this column is intended to be used and cannot be used to avoid U.S. federal, state, or local taxes.  It was not written to promote, market, or recommend any tax planning strategy or action.  Copyright:  All rights reserved.  No part of this publication may be reproduced without prior written consent.  Readers may share this column through, but not limited to, social networks.

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