Why Good Companies Fail

If you ask 10 CEOs why good companies fail, you’re likely to get 10 different answers. They’ll say companies are like complex, modern-day sports car engines. They have so many moving parts it isn’t funny. Any one of them could go haywire and, next thing you know, you’re heading off a cliff somewhere.

Indeed, modern companies have a tough job. They have to create innovative products that delight customers. They have to invent breakthrough technology. They need insanely great marketing. They’ve got to manage complex supply chains. And they operate in highly competitive global markets.

Did I forget anything? Oh yeah. They have executive management teams that are in charge of everything.

And therein, lies the rub. The reason why you’re likely to get so many different answers about why companies fail is that you’re not likely to find many executives who will just walk right over to the mirror and say, “That’s why.”

You see, companies aren’t just faceless entities that make products and build brands. They’re organizations that are run by people. And those people are responsible for making all the important decisions that make or break companies. That’s right, every single one of them.

Now, some management consultants love to talk about all sorts of neat concepts like competency, strategy, performance, vision, planning, effectiveness, core values, execution, company culture, and change management. They’ve got all sorts of jargon, buzz words, and management fads.

I look at management a bit differently. When you cut through all the BS, it always comes down to one thing. People. If you observe the people in charge, ask some good questions, and poke around a bit, you can usually figure out what’s really going on. And what’s really going wrong.

At the core of every company in trouble is usually a management team that’s not as competent as it needs to be, more complacent than it should be, and more dysfunctional than it can get away with.

If you look under the hood of once-great companies that have stalled or even crashed in recent years -- companies like Research in Motion (NASDAQ:RIMM), Nokia (NYSE:NOK), Sony (NYSE:SNE), H-P (NYSE:HPQ)  and Yahoo (NASDAQ:YHOO) -- that’s exactly what you’ll find: leaders who drove them into the ground or, in some cases, off a really high cliff.

And while bad leadership affects everything from corporate strategy and decision-making to product differentiation and organizational effectiveness, if you want to do anything about it, you’ve got to treat the cause, not the effect. And the way to do that is to recognize some of the more common warning signs:

They think they have all the answers. When you stop questioning and listening, that’s when you stop learning and adapting. When you’re sitting on top of the heap and you think you’ve got it all figured out, that’s when you’re in the most trouble. That’s because your competitors are looking for all sorts of innovative ways to bring you down. And sooner or later, they will.

They’re pushing a grandiose vision. Tell me if you’ve heard this one before: There once was a CEO with a huge ego and a grandiose vision. There were new board members, highly paid cronies, acquisitions, strategic imperatives, and the next thing you know, the company loses billions, shareholders lose their shirts, and employees lose their jobs. Ironically, the more grandiose the vision, the better the CEO is at selling it.

They believe in the status quo. When you start hearing phrases like, “That’s not how we do it here” or “That’s how we did it before and it worked great,” that should be a red flag. We live in an ever-changing world. Markets change. Innovation happens. Competition happens. As they say in investing, past performance is no guarantee of future results. It’s also true in the business world. Complacency, conventional wisdom, the status quo, call it what you want, it kills companies.

They breathe their own fumes. I remember when Apple launched the first iPhone and Google Android phones appeared, the response from BlackBerry-maker RIM’s co-CEOs was disbelief and mockery. They didn’t think a multi-touch display and virtual keyboard would catch on with users. How’d that work out for them?

They surround themselves with yes-men. Countless times we’ve seen leaders surround themselves with incompetent fools who sugar-coat the truth and tell them what they want to hear to cover their own you-know-whats and gain favor. There will always be weak-minded yes-men, but it’s the executives who hire and listen to them that are the real problem. When delivering bad news, constructive conflict, and honest debate are in any way discouraged, that’s a recipe for disaster.

They’re afraid to lose what they have. The flipside of taking huge risks with other people’s money is unwillingness to take risks because you’re afraid to fail and lose what you have. After being diagnosed with pancreatic cancer and facing mortality, Steve Jobs realized the folly of the latter approach, "Remembering that you are going to die is the best way I know to avoid the trap of thinking you have something to lose."

On a more positive note, here are 10 Things Really Effective Leaders Do.

Steve Tobak is a Silicon Valley-based strategy consultant and former senior executive of the technology industry. Contact Tobak; follow him on Facebook, Twitter, or LinkedIn.