Successful businesses grow. Through better products and processes, they win the favour of customers, increasing their volume and margins. That success often translates into further advantages as they invest in new and better equipment, develop expertise and gain bargaining power with suppliers.
So it’s curious that so many successful businesses fail. Today, in fact, only 13% of the original Fortune 500 companies from 1955 are still around. Once great firms like Bethlehem Steel and RCA no longer exist and others, such as General Motors and IBM have had near death experiences.
The typical story for why good firms fail is that they somehow lost their way, but as Clayton Christensen explained in The Innovator’s Dilemma, that’s not really true. Yet while he attributes the problem to disruptive innovation, the broader truth is that the likely cause of your business’s future failure is a factor in its success today. Here are 3 things to look out for:
1. Your Business Model
Every business has a model, even if it isn’t clearly stated. A business model is how an enterprise creates, delivers and captures value. Any significant shift in the viability of any of those three areas and your business is in trouble. The problem is that it’s often hard to change an area that has historically been a crucial part of your success.
Consider the case of Xerox. Chester Carlson first developed his copy machine in the 1930’s, but couldn’t find a way to commercialize it. While it was a vast improvement over existing products, it was also expensive. Nobody, not even large firms, was making enough copies to justify the expense.
Joe Wilson, President of Haloid Corporation, found a solution. Rather than try to sell the copiers, he leased them cheaply and charged per copy. Once customers started using the product, they soon found themselves making more copies then they ever thought they would. Tons more, in fact. Haloid changed its name to Xerox and became a runaway success.
Yet as Xerox continued to improve its product, making bigger and faster copiers, low priced Japanese copiers entered the market. They weren’t as good as Xerox’s, but they were good enough to serve the market and were much cheaper and more convenient. Within ten years, Xerox’s market share dropped in half. It never really recovered.
2. Your Culture
When the GM ignition switch scandal hit in 2014, people were appalled. A faulty part, costing less than $10 wholesale, led to the deaths of nearly 100 people. Worse, it soon became clear that the company knew about the problem for at least a decade. It was, to all appearances, a particularly egregious case of being penny smart and pound foolish.
Yet as Rana Foroohar explained in an article in Time, there’s more to the story than meets the eye. The problem with the ignition switch was, in fact, relatively minor. What made it lethal was that the airbags—designed by another team—didn’t deploy when the car was switched off. So each team was making decisions that were independently sensible, but collectively disastrous.
So the root of the problem was not callousness, but a culture engineered to deliver within narrow parameters. The ignition team was striving to—and compensated for—produce the best product at the lowest cost, as was the airbag team. Everybody stayed in their lanes and did the job they were tasked with. Nobody, however, was looking after the system as a whole.
Culture, in the final analysis, is a double edged sword. Strong cultural alignment allows an enterprise to get things done, yet excessive alignment makes it hard for an organization to adapt to outside information. What makes a culture strong is not how “aligned” it is, but how it instils a sense of mission and values.
3. A Linear View Of Technology
In The Second Machine Age, Erik Brynjolfsson and Andrew McAfee tell a story about the invention of chess. As legend has it, the emperor was so impressed with the game that he invited its creator to name his reward. As they described, the inventor’s request seemed modest, he simply told the Emperor:
‘All I desire is some rice to feed my family.’ Since the emperor’s largess was spurred by the invention of chess, the inventor suggested they use the chessboard to determine the amount of rice he would be given. ‘Place one single grain of rice on the first square of the board, two on the second, four on the third, and so on,’ the inventor proposed, ‘so that each square receives twice as many grains as the previous.’
For the first half of the chessboard, the emperor had to pay 232 grains of rice, or about the equivalent of one field, but as the doubling continued, the total amount owed far exceeded all the rice that existed in the world. That, in essence, is the concept of accelerating returns. When growth is exponential, even seemingly insignificant trends can become predominant.
Today, the emperor’s dilemma has become all too real. Our technology no longer follows an orderly, linear path. For instance, we can expect our computers to be 100 times more powerful in ten years, 1000 times more powerful in fifteen years and a million times more powerful in thirty years. We are also beginning to see similar trends in gene sequencing and solar, as well as other fields.
The phenomenon of accelerating returns compounds the effects of business model and culture. The “first half of the chessboard” tends to reinforce the status quo. Existing business models continue to prosper and that gives credence to cultures that support them. When the second half of the chessboard hits, it’s already too late to adapt.
Why Agility Trumps Strategy
Running a business is a very tough job. You have to run operations efficiently to stay competitive and, at the same time, you need to plan for the future. You constantly have to make decisions with incomplete information in a compressed time frame that will affect thousands of people, including employees, customers and other stakeholders.
There are also no shortage of pundits, analysts and other observers who think they can do the job better. They point to alternative approaches, emerging trends and other factors which you fail to account for. Of course, even if you did follow their advice, you would run afoul of others who stress the importance of a different set of approaches, trends and factors.
The truth is that you probably won’t see trouble coming, because whatever threatens to kill your company in the future is most likely a source of its strength today. There is no set of strategies or processes that will change that simple fact. You can be right a thousand times, it is the one thing that you get wrong that will put you in hot water.
That’s why it’s important to build to master the art of the shift, because today agility trumps strategy. Even the most complete success carries the seeds of its own destruction. We never really get it right, but must become less wrong over time.
Image via flickr