How to Avoid Business Destroying Failure
You can’t avoid failure completely because sometimes you’re going to make mistakes, and if not you, someone will make them for you, says contributor Willian Cohen. Some failures are in fact very valuable to help you avoid similar future situations. However, there is one entirely avoidable type of failure that can put you out of business. Here's how to spot it.
The Success Paradox
Drucker taught that if you continue to do what made you successful in the past, you would eventually fail. This has been true in all times and in every field including not only business, but war and politics and even in your personal life. Companies, industries, and even countries and individuals failing to understand this single principle litter history.
In recent years we have seen failures of financial organizations so powerful that we would never have thought it possible. Lehman Bros., AIG, Merrill Lynch, Fannie Mae and Freddie Mac, Washington Mutual and many others have collapsed, been taken over by the government, been acquired by others or are coping with serious problems brought on by their failures. In every case, they were following strategies that had previously been successful, sometimes for years. Unfortunately as you read this hundreds of formerly successful organizations, big and small, are proceeding down the same primrose path to failure in blissful ignorance that disaster awaits just around the corner. Sure the strategies are different, but as Andrew Ross Sorkin, the author of Too Big to Fail pointed out, future financial failure is certain, even though the strategies these institutions now use are completely successful. This is not even due to the present recession although we’ll continue to see plenty of failures due to it too in other industries before the current financial problems are over. However, I’m talking about organizations which aren’t even in danger now. They operate and follow the same, formerly successful ways of the past. Drucker would say that that this is a very predictable mistake.
Of course the failures in the ongoing financial crisis are placed at the doorstep of derivative loans gone bad and the collapse of the housing industry. Yet financial organizations exist which took Drucker’s advice and changed course before it was too late. That is, those that realized that while risk is a part of business and marketing, no success lasts forever. Kenneth D. Lewis became CEO of the U.S. largest bank in 2001. He looked at the derivative loans owned by the bank, and though it was pointed out to him that these were profitable and highly successful, he ordered Bank of America to divest them. Lewis may have made other mistakes, but this wasn’t one of them. Such few but wiser financial institutions got out early, but got out in time. So it is possible to avoid the problem of following past successful means into failure.
Horror Stories of Trying to Ride Success Forever
Classic business cautionary tales of those ignoring this concept include the demise of the buggy whip industry and everything having to do with equestrian transportation. After the automobile industry was well established, a very successful Ford Motor Company lost its market leadership to General Motors for fifty years or more when founder Henry Ford failed to notice or acknowledge that customers were prepared to ignore the mighty Model T in a single color, black, and pay a lot more for a variety of colors and other options.
The railroad, that great 19thcentury invention helped win the American west and in the process helped to create some of the wealthiest men in America. From Europe to Asia the railroad caused major changes in the history of the world over the next hundred years. Yet the legendary and mighty companies which were the industry’s stalwarts shrank to tiny shadows of their former eminence when airline transportation became wide spread. The entire billion-dollar vinyl record industry vanished almost overnight and vinyl record manufacturers lost millions when they failed to prepare for the growing threat from the development of compact disc technology. Slide rules, were once carried by engineers worldwide. Their market disappeared in months with the introduction of the handheld calculator.
I could go on, but you get the general idea. The point is, like a light bulb which burns its brightest just prior to complete failure, many of these companies and industries were at their best just a few years or in some cases just a few months prior to their bankruptcy. This is true of products and services as well as strategies and concepts. Remember the explosion of software stores of the 80’s? Where are these stores today? Even mighty Sear Roebuck & Company one of the first mail order companies, the company that created "the Wish Book" throughout America essentially was forced out of the catalog business with losses in 2003 after over a hundred years of successful operation.
What Goes Wrong?
Why do these failures occur? Why can’t a company, an organization, or you as an individual continue to do what has made you successful in the past? This is not the case of a mistake. What happens is that the environment changes or is different in some critical way that invalidates all the old rules that caused previous success. For example:
Technology --- something new like the automobile comes along and downgrades the horse from a basic means of transportation to a sport or pastime.
Economics or Business Conditions --- the economy falls into depression or becomes inflationary. One condition might cause potential customers to hold on to their money; the latter to spend more freely and in a much shorter period of time.
Social Change --- bathing suits covering the entire body go out of fashion. Prior to the 1950’s, almost all men wore hats. Now they’re relegated to specialty stores.
Politics, Laws, and Regulations --- what was once legal becomes illegal and visa versa. Prohibition on the sale of alcoholic beverages becomes illegal, or becomes legal (both happened in the 1920’s in the U.S.) and causes major changes in the spirits industry, and even criminal behavior.
Actions of Competitors --- a competitor is successful in an action that you have not anticipated and allowed for. Apple Computer started the personal computer industry. But IBM’s strategy of encouraging rather than restricting others in making compatible software gave IBM PCs the edge.
Unexpected major events - the terrorist attack on 9/11 leads to increased air travel restrictions and much greater security. A major earthquake or a war can affect the environment similarly.
Not only the Enterprise, but the Individual
Worse, Drucker’s concept of eventual failure out of success applies to the individual professional as well. As the environment changes, new opportunities open up. However, equally true, others disappear. Like it or not some jobs go and never return. We may spend years developing our abilities in a certain area and become highly successful. Yet, any one of infinite changes can occur and cause us to lose our job, even our profession. In other cases it will be years before conditions return to what they were, if ever. If you are one of those who have encountered this phenomenon, you won’t much like it, I guarantee it! None of us does. However, when this happens, we must re-invent ourselves and move on. Even better, we should anticipate when to prepare to abandon success, either as an individual, or an executive leading an organization with this type of threat on the horizon.
How to Know When to Abandon Success
There is a challenge for those wishing to adopt Drucker’s advice on abandoning former success. For example, It would be foolish, even dangerous to abandon successful products or services without thought as to their future replacement. So it is important to be able to recognize that a significant environmental change is approaching and that we must immediately take action with our products, services, or means of operating to be ready. Here are a few suggestions for knowing when to abandon a former "good thing":
- Know what’s going on, not only in your industry, but in the world. Familiarize yourself not only with new products, but with anything that could remotely affect your operations. This means a regimen of continual reading, trade journals, newspapers, and other relevant media. You can never stop this as a process.
- Ask yourself not what will happen, but what can happen based on current developments.
- Play a "what if" game with yourself. What would you do if …
- Watch trends and new developments closely. If sales drop over several quarters find out why. Do not automatically assume that everything will "return to normal." There is no normal.
- Recognize that nothing lasts forever, prepare yourself mentally for change and take immediate action when necessary, regardless of your previous investment in time, money, or resources.
- While you should not change just for the sake of change, establish a program of continual review of every product, strategy, tactic and policy. Aggressively seek opportunities to change and use change to stay ahead of the competition.
- Obsolete your own products, services, and strategies and look for better ways to meet demands.
Drucker not only told us we can avoid this type of failure. He also said, "The best way to predict the future is to create it." I have modified his words slightly in creating the motto for a new startup graduate school for executives we are developing in California: "Tantum Vos Can Partum Posterus" or in English, "Only you can create the future." And so we must to avoid major failure.