Why do Companies Fail and Managers Avoid Strategic Choices?
In one of my previous posts Strategy 101: Back to the Basics, I explored key basic concepts of strategy, and the importance of strategic positioning and trade-offs to deliver long-lasting outstanding performance. If that is really the basics of strategy, why do so many companies fail to have a strategy? Why do managers avoid making strategic choices?
The Failure to Choose:
When many companies work from the productivity frontier, it can seem that a well-run company should be able to beat its rivals on all dimensions, and trade-offs appear unnecessary. When this behavior is prolonged for years and years, managers start even believing that making trade-offs is even a sign of weakness. Additionally, the fear of missing out on new technology developments leads managers to imitate their competitors and chase every technology for its own sake. The famous “digital revolution” that every company seems to have been through in the past years. If all of them are going through it, how much of a revolution is it though?
The pursuit of operational effectiveness is concrete, and actionable, making it very seductive for managers who have been under high pressure to deliver tangible and measurable improvements. Also often, managers would use “customer focus” to suggest they should serve every need of all customers, without thinking about the positioning and losing their strategic focus.
The Growth Trap:
For many years, entrepreneurs and managers got used to an environment of abundant capital in which trade-offs and limits appear to constrain growth. Choosing to serve a few groups of customers and exclude others, seems to place a limit on revenue growth and worse the feeling that if they don’t serve a certain customer, the competition will.
Pressure to grow or saturation of the targeted market lead managers to broaden their position by extending product lines, adding new features, matching processes, serving new customer segments, or making acquisitions.
Compromise and inconsistencies in the pursuit of growth erode competitive advantage. Attempting to compete in several ways at once will create confusion and deviate organizational focus and affect motivation. Profits decline, but revenue growth is seen as the only valid metric. Ultimately, competitors imitate to not fall behind until desperation breaks the cycle resulting in mergers or downsizing to the original positioning.
The Role of Leadership:
In many companies, leadership has degenerated into orchestrating operational improvements and making deals. But the general manager is more than stewardship of individual functions or political discussions, it is about providing the discipline to decide which industry changes and customer needs the company will respond to while avoiding organizational distractions.
💡 One of the leader’s jobs is to teach others in the organization about strategy and how to say no. Strategy requires constant discipline and clear communication.
A Practical Case - Disney and the Streaming Service
A great example to follow looking forward is Disney and its growth in the streaming service business. One key question the company is facing is: How far can Disney extend its content offering without diluting or degrading the Disney brand, which ultimately stands for wholesome family entertainment? On the one hand, to build a streaming service that appeals to all members of the house and drives as much engagement as possible, you need a lot of variety but they will need to balance that with maintaining a brand promise and it might not have the same edginess or is not as provocative as some shows in Netflix for example. Executives will have to make important choices on how to choose contents that are comprehensive and consistent with the values of the Disney brand.
The Five Stages of Decline
I remember when I was starting my career as a management consultant I read a few great books by Jim Collins. Most of them are about the common success factors behind great companies, but one of the most insightful and challenging ones was “How the Mighty Fall”. In this book, Jim shows that no matter how established or successful a company is, it can fail, and he also draws the most common path to failure. These are the 5 stages of decline by Jim Collins:
Stage 1: Hubris from Success. Stage 1 starts when people become over-confident, and forget the true foundations of their success. People start to take success for granted, lose the hunger for learning, and get distracted by non-core areas. The result is excessive pride or arrogance.
Stage 2: Undisciplined Pursuit of More. The arrogance from Stage 1 leads the company to overstretch, jumping into areas where it can’t be great, or pursuing growth without the right people or resources. They become obsessed with growth, lose focus and discipline, and make the fatal error of growing faster than they can get the right people.
Stage 3: Denial of Risk and Peril. At this stage, the company is still delivering results, but there are growing signs of danger. Unfortunately, leaders view the data through colored lenses and neglect the threats. Leaders play up the positives, play down the negatives, read ambiguous data favorably, and attribute problems to external factors.
Stage 4: Grasping for Salvation. At this phase, the decline becomes undeniable. But, the organization’s death is not yet imminent. Leaders’ responses at this point determine if the organization sinks or swims. Those who panic and seek quick salvation (e.g. bringing in an external “Savior”, or jumping into drastic, untested changes) will accelerate their fall to Stage 5. Revival is only possible with a return to fundamentals (Back to the basics).
Stage 5: Resignation to Downfall. The longer an institution stays at Stage 4, and the more its people try to find magic solutions, the faster its downward decline. Eventually, the financial resources dry up and people run out of steam. At this point, there are usually 2 paths a company can take: (a) give up and sell the company, or (b) keep going until it exhausts its options.
I’m a practical person and prefer to learn by experience or “learn by doing”, but when it comes to learning about failure, I rather learn from others’ experiences, avoid their same mistakes and make my own.