It happens regularly: but why do once successful companies fail? What goes wrong?
Much is written about the demise of companies which once seemed unassailable. Companies that enjoyed brand recognition, market dominance, product leadership, scale, distribution muscle – and all of the attributes that should have made it relatively simple for them to continue their leadership position.
I’m not talking about the Enrons of this world – but the household names like Kodak – once so dominant that the Kodak brand was essentially a proxy for the category – until they had their own ‘Kodak moment’. From ‘hero to zero’ in two decades, and one wonders why do companies fail in such spectacular ways?
And whatever happened to PanAm, or TWA? Just look at the struggle many of the world’s former leading ‘flag carrier’ airlines are having. Or the telco’s – once monopolies across the voice and data communication landscape but all over the world struggling to compete against new companies and new technology. Surely they have smart and perceptive people. Capital. Reserves. Brand recognition. Assets. Loyal customers. In fact don’t they have everything that would ensure their success?
Yet time after time something happens and they slip from prominence – often saved from the ignominy of closing their own doors by being acquired by someone just as likely to repeat the same process a few years later. Why to large companies fail? Why do once successful companies fail? What is the common denominator – if indeed there is a common denominator?
Why do once successful companies fail: the reasons appear obvious
Ostensibly, the reasons why once successful companies fail are quite obvious. Changes in technology or other key market dynamics have changed, and these companies were not able to change quickly enough to stop from being ‘leapfrogged’. Maybe they should have had greater foresight; may there was little they could do given the speed of change that would have been required. But that’s about where most theory stops – and fails to close the loop on the most powerful, underlying factor that carries with it an almost mystical ‘law of nature’ as it appliesÂ not only in the world of business but in many other areas.
More than just the ‘tipping point’
Malcolm Gladwell’s ground-breaking and popular book “The Tipping Point” brought the concept of a sudden watershed being reached of critical mass which defined the point at which there was a dramatic change in the rate of change or adoption in an issue. For example it may take a company 3 years to reach sales of 1,000 widgets per year and it seems very slow in customer acceptance.
But suddenly half way through the fourth year the ‘tipping point’ is reached and sales for the next year grow at an exponential rate to reach 10,000 per year. But the point of change actually occurs in a very short time period – perhaps as little as 2-3 months. So in April ‘business as usual’ is 1,000 widgets a year but come July widgets are selling at the rate of 10,000 a year. Exciting – but scary in a lot of ways. Especially if widgets have a lead time of more than 3 months to produce, and the company doesn’t have a lot of additional lazy capital to fund inventory growth!
As a result we can identify a point at which this point of change occurs – but like a balloon bursting, this single point is simply an event that is the result of pressure that has grown up over time, and is not an event that occurs in isolation.
Goodbye Tipping Point – Hello Inversion Point. A new perspective on why do once successful companies fail
The Inversion Point concept takes the ‘tipping point’ into a new direction and that is toÂ hypothesize the rate of decline of a company’s fortunes follows a similar trajectory (in reverse), where steady – perhaps manageable decline all of a sudden reaches the point of being uncontrollable and it accelerate to an inevitable conclusion that is really beyond the ability of anyone or anything to stop it.Â
Perhaps the fall and fall of Lehman Brothers in 2008/9 is a good example of how this can suddenly accelerate and become an out of control train – until the inevitable train wreck. I believe there is a name for the point at which this occurs, and this signifies what is occurring to the underlying assets of the business. It’s the Inversion Point – the point at which the assets of a business (brand, product, people, or whatever) not only erodes to zero … but in fact what previously were assets become liabilities. When a company reaches this point, it is very difficult for them to find a way out – assuming they have sensible shareholders.
If your former assets are now liabilities, there is a cost of liquidating those liabilities before the business is in a position to then invest in repositioning to meet the new market challenges. But with the erosion of value in this way, the company is not in the best position to fund this ‘double whammy’ of investing the capital to simply get back to the starting line, and then some more. And why should the shareholders, if they are totally dispassionate, wish to back this rather than starting with a new entrant who at least is at the starting line, not a mile back.
Once a company (and we all can recite a list of these) reaches the point where shareholders no longer have the confidence to ‘throw good money after bad’, the death spiral is confirmed and terminal, and the best advice is to enjoy the rise as long as you can. With that clue, the mystery of the relevance of Dr Strangelove should become apparent to those movie buffs and fans of the late Peter Sellers. To those who remain mystified by this reference, hopefully it will make sense at some point.
A multi purpose business website
InversionPoint.com is more than the platform for a new paradigm in looking at how ideas develop, grow, and then decline. For some ideas or companies or individuals that occurs in a bright but brief flash of a meteor passing – if you weren’t looking you missed it. For others it proceeds with the predictable and measure pace of a monarch’s funeral – andÂ for others there are all forms of ways of this working out in practice.
For some, good luck or good management enables them to reposition and ‘bounce’ – Microsoft being a good example in the current environment. On the way to understanding and explaining the InversionPoint concept nothing is off limits, nothing is sacrosanct, and nothing is of itself irrelevant. So that is why you may see a post entitled “The man next door ate my dog”, or “The worst example of sportsmanship the world has ever seen’. Because they might – just might – be relevant in some way in shining a light on the question why do once successful companies fail. And if not, they might simply be a pleasant diversion.