In the business world, we are more interested in success than in failure. It’s a shame because failures are often more instructive than successes! Gilbert Probst and Sebastian Raisch studied the 50 biggest bankruptcies (Enron, Worldcom, Swiss Air…) and the 50 biggest “crashes” (ABB, Time Warner, Vivendi Universal…) of American and European companies between the end of the 1990s and the early 2000s. They spotted two ways to run a business into the wall.
70% of companies owe their failure to a “burn out”. This syndrome manifests as follows:
• Excessive growth. On average, the turnover of businesses victims of “burnout” increased by 30% per year before their failure. The turnover of a company like Enron, for example, increased by 2,000% in the five years preceding its bankruptcy;
• Uncontrolled change. Companies that are victims of burnout change too quickly. This was the case with Vivendi for example. In just a few years and through acquisitions, Jean-Marie Messier has completely transformed a company specializing in water, energy and waste management into a media and entertainment specialist;
• Megalomaniac leaders. Companies that are victims of burnout often have megalomaniac leaders. The CEO of ABB (Percy Barnevik) was nicknamed “the godfather”, that of Tyco (Dennis Kozlowski) “the Roman emperor” and that of Ahold (Cess van der Hoeven) the “Dutch Napoleon”…;
• A corporate culture that puts too much pressure on employees. Companies that are victims of burnout also tend to put such pressure on their employees that they often end up slipping. To achieve unattainable goals, the leaders of Enron have thus crossed the “yellow line” by disguising the company’s accounts.
The “premature aging” syndrome explains the failure of the rest of the companies. It takes several forms:
• Growth at half mast. On average, the turnover of companies that are victims of premature aging increased by 3% per year before their failure. In companies like Kmart, Kodak or Xerox, it has even stagnated or regressed;
• A change that is too timid. Businesses that are victims of premature aging tend not to scale fast enough. The best-known example is undoubtedly that of Kodak, which for a long time ignored digital photography so as not to compromise its historical activity (film photography);
• Leaders who are too timorous. Companies that are victims of premature aging often have leaders who remain too much in the background. For example, Motorola’s CEO (Christopher Galvin, the founder’s grandson) has long refused to make the harsh but necessary reforms to get the company back on track;
• A corporate culture that does not put enough pressure on employees. In companies suffering from premature aging syndrome, the pressure is generally insufficient to motivate employees. Result: the company stagnates.
As in many fields, everything is a question of balance. To be successful, you have to grow…but not too fast. You have to change… but not permanently. It takes ambitious leaders … but not too much. Finally, you need a culture that puts some pressure on employees… but not too much either.
Source : Probst, G., & Raisch, S. (2005), “Organizational crisis: The logic of failure”, Academy of Management Executive, 19(1), 90-105.
