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Why a highly successful business that outperforms the stock market by 6.9 times for over a decade, all of a sudden, become irrelevant and fail? What are the reasons for business failure?

What causes business failure and how to avoid it

Jim Collins’ book, “How the Mighty Fall” takes a detailed look at companies that were big companies as defined by Collins’ previous book “Good to Great” but fell to irrelevance.

Collins defines a big company as one that had to significantly outperform the market for at least 15 years in a row.

On average, the companies that Collins studied as big companies outperformed the general stock market by at least 6.9 times.

. . . And then, they failed!

There was quite a list of big companies that were studied for this book but some of the more dramatic failures include:

  • Ames – an American chain of discount stores started in 1958, expanding to 700 stores and then closing to bankruptcy in 2002.
  • Circuit City – an America multinational consumer electronics company that was founded in 1949 and then liquidated in 2009. At the time it was liquidated, it was the second largest US electronics retailer.
  • Zenith Electronics – was founded in 1918 and was a preeminent designer and manufacturer of electronics in the US. They began to run into trouble in the 1980’s and then by 1999, after filing for bankruptcy, LG bought out the company.

What are the root causes of these dramatic failures?

Collins determined that there are five stages of business decline which lead to failure.

Generally speaking, business failure happens when companies take their eye off what made them successful.

This loss of focus leads to a slide through the 5 stages which ultimately ends in irrelevance or death!

Stage 1: Hubris born of success

When a business becomes a big company, it is easy to take this success for granted!

This can lead to arrogance and entitlement which in turn can lead to loss of focus on the company vision or the reason “Why” the business exists in the first place.

This is the first sign of a business headed for disaster!

Stage 2: Undisciplined pursuit of more

The pressure for a business to continue to grow, gain market share, post record profits while outperforming competitors can cause the business leaders to go after markets that are not in alignment with the business’ vision.

This can cause loss of focus, market confusion, power struggles and a host of other destructive outcomes.

Stage 3: Denial of risk and peril

If the hypothetical big company has become arrogant and is stuck in the undisciplined pursuit of more then it is easy to understate the potential risk of business strategy and market positioning.

The actual risk, if incurred, can be catastrophic.

Stage 4: Grasping for salvation

The business has gone through stages 1 to 3 and is in trouble. It is now desperately trying to stay alive.

This results in the organization urgently looking for a silver bullet to save itself. Panic, haste and silver bullets rarely end well and typically precede massive failure.

Stage 5: Capitulation to irrelevance or death

This is the final stage of failure. At this point, the big company has proceeded through the previous four stages of decline and is unable to recover or reinvent itself. The organization capitulates to irrelevance or death.

How to avoid business failure

Step 1: Acknowledge that there is a problem

Failure to acknowledge that a problem exists will result in a continual slide through the 5 stages of decline.

Step 2: Define your hedgehog

This is Collin’s advice from Good to Great, his previous book about what made big companies great.

Basically, you articulate the components that define the reason “Why” your organization exists and what you will do about that “Why”. This is essentially your vision and mission. Define what:

  • What are you passionate about?
  • What drives your economic engine?
  • Can you be best in the world at?

Step 3: Make sure your values, strategy, and goals are in alignment with your hedgehog

Is your whole organization focusing on achieving the compelling reason “Why”?

See the following blog posts for more information on this:

Step 4: Communicate Step 2 and Step 3 to the organization tirelessly

Vision leaks! Therefore you need to communicate it tirelessly to ensure that your business continues to move in the correct direction.

See the blog post Did Your Organization’s Vision Leak? for more information.

Step 5: Measure your results and fine tune the execution

Nothing will ever be perfect. As a result, you must continuously measure and analyze your results.

Fine tune the execution so you are always striving in the right direction.

See the blog post How Do You Measure Success for more information.

Evaluate your organization

Do any of the Five Stages of Decline appear in your business? If so, take action now and get your business back on solid ground!

Rigorously follow the advice outlined above and download and follow the advice in 12 Steps to Business Transformation and get your business back on track.

Incorrect assumptions lie at the root of every business failure. Have the courage to test your assumptions” Brian Tracy

Leave a comment on your experiences with business failure and how you were able to avoid it, recover from it, or succumb to it!

Download a free copy of my new Ebook: 12 Steps to Business Transformation. If you would like a business assessment to help kick off your business transformation, contact me at info@thinkingbusinessblog.com or at 587-227-5179.

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